Asian Insights SparX - DBS Bank [PDF]

Asian Insights SparX

ASEAN Grocery Retail DBS Group Research. Equity

Will online grocery retail take off in ASEAN? 

Modern grocery retail continues to penetrate ASEAN-5



Although online grocery retail is growing at a faster rate, profitability remains an issue



Retailers are incentivised to enhance operating scale, takeover by online giants may beckon



Top picks are SSG, DFI, CPALL, RHHI

Modern grocery retail expected to grow further. Modern grocery retail (MGR) has increased penetration in ASEAN-5 over the past two years. Overall value of MGR penetration in ASEAN-5 (US$) has increased to 30% of total grocery retail sales (from 29.6% in 2015). MGR growth in ASEAN-5 is projected by Euromonitor to be at a five-year CAGR of 7.4%, reaching US$93b by 2021. Larger players to strengthen scale. Larger players in ASEAN have the advantage of gaining further operating scale, in our view. Players with efficient operations and backend logistics could present themselves as an attractive target for takeover. Amazon’s buyout of Wholefoods is testament that store network and backend logistics are important for the online model. Online grocery retail faces challenges. Within ASEAN, online grocery retail has grown exponentially in Singapore, but challenges abound. RedMart remains unprofitable and faces challenges which include the convenience of shopping in traditional stores, expensive last-mile delivery, an entrenched lifestyle of grocery shopping, and consumers’ preference to physically pick the fresh produce in stores.

Refer to important disclosures at the end of this report

18 Jul 2017 STI : 3,298.24 SET : 1,574.09 PCOMP : 7,934.50

KLCI : 1,755.19 JCI : 5,841.00

Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected] Namida ARTISPONG +66 2657 7833 [email protected] Tiesha PUTRI +6221 30034931 [email protected] Regional Research Team [email protected] STOCKS Price LCY

Dairy Farm Sheng Siong Group CP ALL Robinsons Retail Puregold Price Club Matahari Putra 7-Eleven Bison Consolidated

12-mth Mkt Cap Target Price Performance (%) US$m LCY 3 mth 12 mth

US$8.21 11,104 US$9.96 S$0.99 1,087 S$1.20 Bt61.00 16,304 Bt75.00 P87.00 2,375 P101 P46.80 2,551 P41.90 Rp650 263 Rp450 RM1.30 337 RM1.58* RM2.40 174 RM2.02*

(5.2) 1.0 0.8 10.2 10.1 (33.0) (23.1) 13.2

17.3 9.4 17.9 (1.0) 1.9 (59.5) (3.0) N.A

Rating

BUY BUY BUY BUY HOLD FV NR NR

* Potential Target Source: Bloomberg Finance L.P., DBS Bank, DBSVI, DBSVT Closing price as of 17 Jul 2017

Our top picks are SSG, DFI, CPALL, RHHI. Our stock universe currently trades at a prospective PE of 22x, at -0.5SD of their 25x historical average. Top picks are SSG, DFI, CPALL, and RHHI. All are expected to post earnings growth led by margin expansion, with potential of re-rating when earnings outperform.

ASIAN INSIGHTS ed: JLC / sa: JC, YM, PY

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Asian Insights SparX ASEAN Grocery Retail

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

Table of Contents Executive Summary

4

Online grocery retail is growing but they won’t be a threat to retailers as yet

6

      

Online penetration for retail in Southeast Asia is small, let alone for grocery retail Singapore’s consumers are the most digitally ready Singapore has the key factors for online grocery retail to grow Although online grocery retail has grown exponentially, players are unprofitable as the market is in its infancy In contrast, other countries with more developed online MGR markets have profitable online players Singapore will be a test bed for future ASEAN online MGR We believe online grocery retail will not be a threat to retailers over the next two years.

Online players in Singapore remain unprofitable as challenges abound         

RedMart remains unprofitable despite rapid topline growth Supermarket shopping is very convenient in Singapore and people are still shopping in stores Online retail targets a certain consumer profile Market needs to get used to paying for delivery cost or online retailers will need to subsidise Groceries face a lower risk of disruption by online retail than non-food items Flexibility options for customers add to costs Click-and-collect may be more viable for now How some online grocers failed Last-mile logistics is expensive - Zyllem has closed

Retailers will continue growing while online grocery shopping finds its feet   

Retailers will increase their store network Scale drives down costs, improves margins Staff costs will reduce with handpay, self-checkouts, and cash collection technology in stores

Macro fundamentals support the growth of MGR     

The ASEAN grocery retail market has grown by 1.3% CAGR in the past two years Convenience stores have led ASEAN’s MGR growth in the last two years Industry-critical factors support growth of MGR in ASEAN-5 5-Year CAGR of 7.4% for MGR in ASEAN-5 till 2021 Convenience stores to drive MGR growth by 4% CAGR over the next five years

Companies with scale are the players in the sweet spot     

Companies with a store network Companies with a logistics network Smaller players to play catch-up A sizeable network and logistics chain may attract a takeover bid from an online player Top picks are DFI, SSG, RHHI, CPALL

ASIAN INSIGHTS

6 6 7 7 8 10 11

12 12 13 14 15 16 16 16 17 17

18 18 18 19

22 22 22 23 25 25

27 27 27 28 28 29

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Asian Insights SparX ASEAN Grocery Retail Appendix – Players in online grocery retail     

Opentaste Honestbee - Online concierge and delivery service HappyFresh GoFresh FreshDirect

Country profiles     

Singapore Indonesia Malaysia Thailand The Philippines

Stock profiles        

Dairy Farm International Sheng Siong Group CP All Pcl Robinsons Retail Holdings Pure Gold Price Club Matahari Putra Prima 7-Eleven Malaysia Bison Consolidated

ASIAN INSIGHTS

32 32 33 34 35 35

37 37 40 43 46 49

52 53 61 73 80 88 96 105 112

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Asian Insights SparX ASEAN Grocery Retail

Executive Summary The changing face of modern grocery retail provides opportunities for its retailers Modern grocery retail in ASEAN continues to penetrate in emerging markets… Urbanisation and modernisation in developing markets are changing the way people buy their groceries. Developing markets, as they progress, will embrace modern grocery retail (MGR) even more, as evidenced by the increase in penetration of MGR to 30% of total grocery retail sales from 21.7% a decade ago. Modern store formats are penetrating grocery retail beyond the traditional channels. We believe the rising middle class and each ASEAN government’s quest for economic development and progress will help drive the growth and penetration of MGR in these countries for a foreseeable future. … as well as in developed markets. By the same token, developed nations or cities in ASEAN which have seen a higher element of modern grocery retail is evolving as well. MGR in developed markets such as Singapore have seen new online channels and formats developing. MGR retailers are competing on services, pricing, selection, and efficient backend operations to drive down costs. Brick-and-mortar modern grocery retail in ASEAN is not dead. While few people can consume meals at foodservice outlets perpetually, consumers will somehow make use of the food retail channels, whether modern or traditional, as a source of their food supply. Grocery retail is therefore not dead and in fact never will die, in our view. Consumer needs and wants are ever-changing. This therefore is the cornerstone of modern grocery retail’s evolution. Modern grocery retailers that are able to identify areas of consumer demand will be the biggest beneficiaries. Consumers’ changing needs present opportunities for MGR retailers. The modern grocery retail market is dynamic. Consumers’ needs and demands for food are ever-changing, more so in a globalised world where physical and virtual connectivity are enabling consumers to be more demanding about food choices and at desired price points. These trends provide opportunities for retailers to meet consumers’ expectations and, in the process, get ahead of the competition. Consumer sophistication, exposure to global products, rising wealth, and preference for healthier choices, are driving demand for better food products.

ASIAN INSIGHTS

Industry-critical factors support growth MGR in ASEAN Industry-critical factors are playing out in ASEAN. Industrycritical factors of urbanisation, as well as a rising middle class and population in ASEAN-5, are supporting MGR penetration growth. The growth of MGR has outperformed that of traditional grocery retail at 1.3% vs -0.8% (CAGR) over the past two years. MGR penetration is now 30% in ASEAN-5, up from 2015 (29.6%) and from 21.7% in 2007. Our differentiated view on online grocery retail in ASEAN incentivizes larger players to grow Online grocery retail is not a threat but rather an opportunity to brick and mortar retailers to scale efficiently. We hold the view that online grocery retail over the next two years will not be a significant threat to ASEAN retailers. Retailers will continue growing. Urbanisation and a rising middle class will support proliferation of grocery retail stores. Meanwhile, retailers will be incentivised to build up their scale, including their logistical supply chains for extracting operating leverage, as well as the potential of being taken over by an online player in the future. E-commerce will co-exist with MGR stores Online grocery retail is here to stay. Even though online grocery retail is still at its infancy and has several obstacles to overcome, we expect it to gain traction. As the government continues to emphasise the use of technology in people’s daily lives – and a younger generation gets increasingly tech-savvy online grocery retail has the potential to be a popular channel in the future. This presents an opportunity for current brickand-mortar grocers to jump on the bandwagon as they adapt to evolving consumer behavior. Teething problems exist during online retail’s infancy in ASEAN. Online players in Singapore remain unprofitable as challenges abound. Based on filed financial records, RedMart remains unprofitable compared to brick-and-mortar grocery retailers because it lacks scale in both topline and cost. Besides, shopping is very convenient in Singapore and people are still shopping in stores. The proliferation of HDB and mall supermarkets has driven shopping convenience. Many Singaporeans do not live off the beaten path with the need for delivery. Even though housing units are densely packed, last-mile logistics is expensive and reducing delivery cost is key

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Asian Insights SparX ASEAN Grocery Retail

to profitable last-mile fulfillment. Fresh groceries have less disruption impact compared to non-food items in online sales and consumers still want to choose their own food. Catalysts for the sector Retailers must strive to gain scale and efficiency. With the evolution of the sector and potential threat of online players, it is then up to brick-and-mortar grocery retailers to reduce operating costs to offer/deliver these food items to consumers in a more profitable manner. We see an incentive for retailers to gain scale and operate efficiently. Better scale and operational efficiency can boost margins, thanks to lower costs, higher sales, and cashflow matrices. Operational scale could offer higher product margins on bulk volumes and defrayment of fixed operational/logistics costs, while efficiency could improve sales per store/square feet matrices/headcount, inventory and cashflow matrices. We believe larger listed companies are at the forefront to grow their scale further as opposed to smaller players which lack resources to implement initiatives to gain competitive advantage. Operating an efficient distribution chain, for example, drives down operating expenditure and may attract a takeover bid by online grocery players. A possible takeover by internet giants await. While it remains unclear why Amazon bought Wholefoods for US$13.7b, we believe online retailers could be going the omni-channel route in MGR. Listed Asian companies which are well operated, with some scale and efficiently-backed operations, could be potential acquisition targets of internet retailers.

ASIAN INSIGHTS

Top picks are DFI, SSG, CPALL, and RHHI We remain positive on the sector. The food retail sector is generally defensive and has an attractive ROE from 10% to over 30%. Companies are projected to remain on a growth trajectory, with earnings growth outpacing revenue growth in our forecasts. We project two-year earnings CAGR of our stock universe range from 5-21%, mainly driven by store openings and margin expansion. ASEAN grocery retail is trading at >20x PE. Valuations of ASEAN grocery retail stocks are not cheap at >20x prospective PE, compared to global grocery retail peers. Nonetheless, they offer investors defensive earnings of a noncyclical nature, net cash balance, cash generation capabilities, earnings growth and dividend yield for selected stocks. There is also potential for some of these stocks to re-rate should earnings outperform. Our top picks are SSG, DFI, CPALL, RHHI. Our picks for the sector are SSG and DFI in Singapore, CPALL in Thailand, and RHHI in the Philippines. Earnings growth is expected to outpace revenue growth on margin expansion. Margin expansion trend for SSG is expected to continue on a shift to more fresh food and better supplier rebates. We expect DFI’s margin to post improvement on rationalisation of loss-making stores, especially in Singapore. RHHI’s margin is also expected to trend up on price adjustments and closure of loss-making stores. CPALL has both network and margin expansion, fuelled by penetration in Thailand and the discontinuation of discount coupons to big-basket customers.

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Asian Insights SparX ASEAN Grocery Retail

Online grocery retail is growing but it won’t be a threat to retailers as yet Online penetration for retail in Southeast Asia is small, let alone for grocery retail Southeast Asia’s online retail market is fast growing but remains small. According to Bain & Company (Bain), the online retail market is worth US$6b in Southeast Asia but represents just 3% of total retail sales. Southeast Asia’s online retail market is not as developed as those in markets such as China and USA, where online retail accounts for 14% of total retail, and is worthUS$293b and US$270b, respectively. However, Bain projects that online retail sales in Southeast Asia will grow exponentially to US$70b by 2020. Even though there are about 250m smartphone users aged 16 and above in Southeast Asia, only 100m engage in online transactions, Bain estimates. Majority of consumers in Southeast Asia are not yet digital-ready Digital consumers who search for products online and purchase online 25%

Singapore’s consumers are the most digitally ready Singapore has the highest proportion of digital consumers. The highest proportion of digital consumers amongst its population in ASEAN can be found in Singapore. Singapore boasts high internet and mobile broadband penetration rates. This, along with various e-commerce websites, have fueled the growth of e-commerce in Singapore. Proportion of online consumers in ASEAN % of digital consumers 60% 50% 40% 30% 20% 10% 0% Indonesia

Philippines

Vietnam

Thailand

Malaysia

Singapore

Source: Bain & Company, DBS Bank

Digital consumers who search for products online but do not purchase online 13%

High internet and mobile broadband penetration rates in Singapore Consumers who are not yet digital 62%

Source: Bain & Company, DBS Bank

ASEAN is not yet ready for online retail. Most of Southeast Asia is showing signs of early-stage e-commerce adoption, according to Bain. Southeast Asia’s diversity is a challenge for e-commerce success; different ethnicities, languages, consumer preferences, and regulations are some of the challenges hindering the growth of e-commerce. Most of Southeast Asia is still lacking a solid regional payment and logistics infrastructure necessary for the proliferation of e-commerce. Consumers continue to distrust e-commerce platforms, are concerned about the lack of touch and, feel inherent in digital commerce, and have trouble locating the products they want.

ASIAN INSIGHTS

Internet penetration Indonesia

Mobile Broadband penetration

34%

65%

Philippines

53%

65%

Thailand

60%

131%

Malaysia

68%

104%

Singapore

81%

146%

Vietnam

52%

40%

Source: Nielsen, GSMA Intelligence, DBS Bank

Singapore has high online shopping adoption rate. According to the Singapore government's open data portal – the Annual Survey on Infocomm Usage in Households conducted by IDA since the 1990s – showed that the proportion of Singapore residents who bought or ordered goods and services or conducted transactions over the Internet before was 57% in 2013 and 47% in 2014. About 75% of those between the age of 25-34 years are online shoppers.

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Asian Insights SparX ASEAN Grocery Retail

Close to 40% of Singapore aged 15 and above shopped online in 2014

Market factors for online grocery retail success Internet and mobile penetration rates

100% 90%

High Internet adoption, especially among young Gen-Z and Millennials, will help online MGR gain traction

80% 70%

Population density and wealth

60%

Densely-populated, centrally- located urban areas enable better cost efficiency for deliveries (labour and transit costs)

50% 40%

Immense growth potential in e-grocery development in areas with increasingly affluent populations

30% 20% 10%

Consumer preference and lifestyle

0%

Desire for convenience and efficiency because of long working hours and busy lifestyles

15 to 24 years 25 to 34 years 35 to 49 years 50 to 59 years 60 and above Online shoppers

Rest of age group

Source: data.gov.sg, DBS Bank

Source: DBS Bank

Singapore has the key factors for online grocery retail to grow

Although online grocery retail has grown exponentially, players are unprofitable as the market is in its infancy

Factors affecting growth in online grocery penetration. We see three key factors driving the growth of online grocery retail: 1) Internet and mobile penetration rates; 2) population density and wealth of countries; 3) consumer preferences and lifestyle.

Online grocery retail’s share of the market projected to grow to 5% by 2020, from 3% in 2016. Euromonitor estimates that Singapore’s online grocery retail market was worth S$96m in 2016. Based on Singapore’s MGR market size of S$4.3b in 2016, online grocery retail’s market share of total grocery retail sales is 3%. The online grocery retail market has grown at a CAGR of 38% over the past five years. According to The Institute of Grocery Distribution’s (IGD) projection, online grocery sales is forecast to reach S$500m by 2020.

A high Internet adoption and mobile penetration rate, especially among young Gen-Z and Millennials, should help online grocery gain traction. Countries with high population density in urban areas will enable better cost efficiency for deliveries (especially for labour and transit costs). We believe there is growth potential in e-grocery development in areas with an increasingly affluent population as well. A society’s desire for convenience and efficiency – because of long working hours and busy lifestyles – will also drive the increase in online grocery retail. The Singapore market has all of the above.

Singapore online grocery retail market was S$96m in 2016 S $m

Cold Storage

NTUC Fairprice

RedMart

Sheng Siong

100 80 60 40 20 0 2010

2011

2012

2013

2014

2015

2016

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

Online grocery retail is at its infancy in Singapore. Singapore’s largest online player RedMart only started four years ago and has yet to turn in a core profit. The online business model, in our view, is still trying to find the right balance between gaining market share and becoming profitable. Core losses as at FY16 stood at S$51m for RedMart, based on financial records filed.

In contrast, other countries with more developed online MGR markets have profitable online players According to data from Kantar Worldpanel, markets with the highest grocery penetration rates are South Korea, Japan, France, and the UK. South Korea has clearly led the way with high connectivity, strong digital infrastructure, and free delivery.

Even Ocado took 15 years to break even. The UK’s leading online grocery retailer Ocado, which was founded in 2000 and delivered groceries for Waitrose, took 15 years to break even. It recorded £12.5m headline losses in FY13 but showed headline profit turnaround of £7.2m in FY14, followed by £12m each for FY15 and FY16. If not managed properly, online grocers can fail, as seen by the examples of HomeGrocer and Webvan.

Online grocery penetration rate by country

Source: Kantar Worldpanel

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

Why some countries are more successful in online grocery retail 1) South Korea South Korea has a highly digitised economy. As seen in the chart, South Korea has the highest online grocery retail penetration at 16.6%, with almost 100% of consumers aged between 10 and 40 shopping online. South Korea’s online business is robust, with consumers paying low delivery costs. This is largely due to its highly digitalised economy which is constantly developing new technologies. South Korea boast one of the highest Internet speeds in the world, has a high smartphone penetration rate of 85%, and leading financial payment systems that make online purchases easier and safer for both retailers and consumers. Koreans are tech-savvy and known to be extremely willing to adopt the latest technologies. The capital Seoul is densely populated with 25.6m South Koreans – out of the country’s total of 51m – living in the Seoul Metropolitan area, creating a critical mass for online grocery retail. There are no wet markets unlike Singapore which makes for easier transition from shopping at supermarkets to online channels. Household clusters are also getting smaller at 2.37 persons per household in 2016 compared to 2.91 in 2000, based on statistics by the Seoul Metropolitan Government. Smaller households, especially single-person households, would buy less bulk items while seeking shopping convenience. Lastly, Koreans are used to shopping from home, having an already established TV home shopping market (introduced in 1995). There are at least five major players and excellent logistics/parcel delivery services to support shopping from home. South Korea’s online retailers use a myriad of strategies to increase their sales. These include setting up online chat-rooms; reaching out to consumers with enewsletters and promotions through email; as well as placing advertisements on social media channels. The Korea Online Shopping Association (KOLSA) reported that mobile shopping sales grew 45.7% y-o-y to 35.5t won (US$30.9b) in 2016.

2) Japan Japan’s smartphone penetration is high and the country has a robust online environment. Japan has the second-highest online grocery retail penetration of 7.2%. The country’s smartphone penetration is also rising. As at the end of 2014, 64.2% of all households in Japan have a smartphone. Thanks to robust online channels, consumers have access to information which can help them make purchase decisions. Retailers are able to reach out to consumers through these online channels as well, fuelling online grocery retail penetration. There are at least nine online grocery retail players in Japan including HealthyTokyo.com, SuperOrganic Foods, Hilo Market, Tengu Natural Foods, Japan Square, The Flying Pig, Enoteca, The Meat Guy, and the Foreign Buyers’ Club. 3) France The drive-through model is popular with the French. France’s online grocery retail penetration of 5.3% is largely driven by the increase in popularity of the Click-and-Drive model. The Click-and-Drive format has grown at a CAGR of 98% – from 96 stores in 2010 to 2,903 in 2016 - according to data by Nielsen. Nielsen also observed that 80% of French households have access to a Click-and-Drive less than 15 minutes from home, against 75% for hypermarkets. Consumers make their purchases online and collect the items by driving through the physical stores. Consumers like to shop at hypermarkets as they sell a large range of products and the Click-and-Drive model makes shopping at hypermarkets more convenient for consumers at no extra cost. This model is more popular among families with young children. Number of Click-and-Drive/Services Drives in France 1137 Click & Drive

642

591

555

Services Drives

467 168

83

70

Source: Nielsen TradeDimensions, DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

4) UK The UK has a very developed MGR scene. With a population of 64m in the United Kingdom, the grocery retail scene is very developed and competitive. There are more than eight established chain-store grocers across different formats including discounters and online channels. However, while the online penetration of market in the UK may be the thirdlargest globally, the environment is challenging for online retailers to operate in. Online retailers struggling with delivering products in a profitable manner. As a result, online retailers have imposed minimum spending and delivery fees on consumers. It is vital for retailers to improve the delivery logistic issue for online retailing to take off. Several online retailers including Sainsbury’s, AmazonFresh, and Chop Chop currently provide same-day delivery in a bid to attract more consumers. The UK has an online MGR penetration of 6.9% (7.3% in 2017).

Key online players in ASEAN Online grocery players/portals

Is online grocery shopping popular with consumers?

Singapore

Cold Storage, NTUC Fairprice, Sheng Siong, RedMart, Opentaste, Honestbee, Gofresh

Gaining some traction, but most still shop in the stores

Malaysia

HappyFresh, Tesco, PasarTap Delivery, Redtick, BIGbox Asia, SAM’s Groceria

Serve very niche market as brick-and-mortar grocery shopping continues to be favoured by most

Thailand

BIG C, Makro, Tesco Lotus

Gaining popularity but may take time to be a big hit. Current contribution to sales is <5%.

Indonesia

HappyFresh, Klikindomaret.com, Ngemart, Go Mart, Hypermart Online, Kesupermarket.com

Contribution to total grocery sales is small but growing rapidly, including the online-to-offline (O2O) channel.

Philippines

PureGold, Walter Mart

The proportion of online grocery shopping in the Philippines is small. Product assortment, as well as areas serviced are still very limited

Key online grocery retailers USA

FreshDirect, Peapod, Relay Foods, Walmart, AmazonFresh, Instacart, Google, Soap.com, Postmates

Europe

Tesco, Carrefour, LeShop.ch, Ahold, mySupermarket, ShopWings

UK

Ocado

Japan

HealthyTokyo.com, SuperOrganic Foods, Hilo Market, Tengu Natural Foods, Japan Square, The Flying Pig, Enoteca, The Meat Guy, The Foreign Buyers’ Club

Korea

E-mart, Home plus

Australia

Coles, Aussie Farmers Direct, Woolworths, GroceryRun,

India

Localbanya.com, PepperTap, Flipkart, Grofers, zopnow, Snapdeal, Bigbasket,

China

Chaoshi.tmall.com, JD.com, Taobao

Source: DBS Bank

Singapore will be a test bed for future ASEAN online MGR While Singapore is ready for online MGR, the market is small. Singapore has a very small addressable market of 5.5m people for online players. This is less than 1% of the entire Southeast Asian population. Comparatively, the UK, where Ocado has found success, has a population of 64m, equivalent to Thailand’s population. Therefore, Singapore, while small, is most ready for online grocery retail in Southeast Asia.

ASIAN INSIGHTS

Source: Companies, DBS Bank

The addressable market for MGR is huge outside Singapore, but the rest of ASEAN is not ready for online grocery retail. However, neighbouring ASEAN markets which are larger will require time for online grocery retail to develop and adoption to take off. There are more than 630m/460m people in Southeast Asia/ASEAN-5 outside of Singapore. Total MGR value, including traditional channels in ASEAN-5 ex Singapore, is worth US$217.7b. These countries are generally not ready for online grocery retail as factors such as Internet/mobile penetration rates; population density; and consumer preferences and lifestyle are yet to be in play. Markets like Vietnam and Malaysia are still in their infancy and only have online grocery penetration of under 1%.

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Asian Insights SparX ASEAN Grocery Retail

ASEAN-5’s population grew 2.2% last year 2015

2016

% chg

Indonesia

255

258

1.2%

Philippines

100

103

3.0%

Thailand

65

68

4.6%

Malaysia

30

31

3.3%

Singapore

5.5

5.6

1.3%

ASEAN-5

455.5

465.6

2.2%

Vietnam

92

95

3.3%

Myanmar

54

57

5.6%

Cambodia

15.6

16

2.6%

Laos

6.8

7

2.9%

Brunei

0.42

0.44

4.8%

East Timor

1.2

1.3

8.4%

Total SEA

625.52

642.34

2.7%

Source: CEIC, CIA World Factbook, Singstats, DBS Bank

ASIAN INSIGHTS

We believe online grocery retail will not be a threat to retailers over the next two years. Online grocery retail is here to stay… Even though online grocery retail is still in its infancy and has several obstacles to overcome, we expect it to gain traction. As the government continues to emphasise the use of technology in people’s daily lives – and thanks to an increasingly tech-savvy younger generation - online grocery retail has the potential to be a popular channel in the future. This presents an opportunity for current brick-and-mortar grocers to jump on the bandwagon as they adapt to evolving consumer behavior. …but will take time to develop in Singapore. We maintain our view that online grocery retail will take time to become prevalent and overtake grocery retail stores, at least in Singapore.

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Asian Insights SparX ASEAN Grocery Retail

Online players in Singapore remain unprofitable as challenges abound RedMart remains unprofitable despite rapid topline growth High fulfillment costs. Profitability is a challenge for online grocery retailers due to the high fulfillment costs. Online grocery retailers are burdened with additional costs stemming from the handling, selling, and delivery of the products. Consumers do not welcome the idea of paying high delivery fees as they can easily purchase the products on their own from the many supermarkets and convenience stores dotted around the island. Online grocery retailers can compete on delivery cost charged to consumers by either searching for ways to improve efficiency or absorb the cost. RedMart is unprofitable, compared to retailers, despite growing revenues by 41x over 4 short years. Based on financials filed with Singapore’s ACRA, RedMart has exponentially grown its revenue base by 41x to S$82m (FYE Jun’16) over 4 short years. Conventional wisdom would point to profitability on the back operating leverage especially with such phenomenal topline growth trajectory. It is however not a profitable operation. Operating losses also ballooned from S$2m to S$50m over the same period. It may be gaining ground in Singapore’s grocery retail scene, but it has yet to turn profitable. RedMart’s financials Jun S$m Revenue Gross profit Operating profit Net profit Net profit (Pre-ex) Gross margin (%) Wkg cap cashflow Operating cashflow

2013 2.0 0.4 (2.0) (2.6) (2.0) 17.9 0.0 (1.9)

2014 12.9 2.3 (10.1) (40.3) (10.1) 18.1 1.4 (7.5)

2015 34.6 5.3 (26.8) (95.6) (25.8) 15.4 2.1 (23.4)

2016 82.0 13.9 (50.2) 47.7 (49.1) 17.0 10.8 (37.4)

Opex % sales Distribution Marketing & Selling Technology Admin Avg. Collection days Avg. Payment days Avg. Inventory days

118% 37% 19% 12% 50% n/a n/a n/a

97% 34% 11% 8% 44% 10.0 79.1 52.0

94% 44% 7% 14% 29% 7.6 69.9 30.5

79% 35% 7% 11% 25% 30.7 253.8 109.5

*note: Avg collection/ Payment/ Inventory days based on starting and closing balance of respective items. Source: RedMart ACRA filings, DBS Bank

ASIAN INSIGHTS

RedMart requires operational scale in both topline and cost. RedMart’s annual revenue of S$82m implies daily sales of S$225,000, compared to NTUC Fairprice’s S$9.4m and Sheng Siong’s S$2.2m. It has relatively lower gross margins (of below 20%), way behind NTUC Fairprice (22%), Sheng Siong (26%), and Dairy Farm (30%). Cost structure of NTUC, SSG, and DFI Admin and others 15%

Staff costs 38%

Selling and distribution 13%

Rental costs 27%

Depreciation & amortisation 7%

Source: Companies, DBS Bank

RedMart’s topline run rate needs to improve. Ocado takes 230,000 orders and makes 176 deliveries per week with average order size of £108.1. In contrast, we estimate that RedMart currently receives just over 70,000 orders per week, with an average order size of S$100. We believe building ecommerce scale will drive down costs and improve profitability which is currently insufficient to cover costs. Cost structure of RedMart Operating leases 9% Admin and others 15%

Selling and distribution 7%

Staff costs 52%

Technology costs 15% Depreciation & amortisation 2%

Source: Companies, DBS Bank

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Asian Insights SparX ASEAN Grocery Retail

RedMart has significantly higher cost structure. Our cost analysis of RedMart against the three incumbent supermarket operators in Singapore (NTUC Fairprice, Sheng Siong, and DFI) shows that due to a lack of scale, RedMart’s cost is relatively higher. Most cost categories are higher as a percentage of sales and insufficient to cover gross profit. Scenario analysis: RedMart needs revenue of S$260m to S$380m to achieve breakeven. Assuming RedMart’s operating cost remains constant at S$65m and gross margins remain at 17%, it would take revenue of c.S$380m for RedMart to achieve operating- profit breakeven. However, if gross margins were 25%, it would need S$260m in revenue to breakeven at operating costs of S$65m. We estimate that implies about 3.2x to 4.6x from its FYE Jun’16 revenue of S$82m.

up grocery items whenever they want. Needless to say, those with their own private transportation can pick up grocery items wherever they are or travel convenient locations to pick up grocery items. Supermarkets and convenience stores everywhere. According to Euromonitor International, there was a staggering 946 supermarkets, hypermarkets, and convenience stores in this small island as of 2016. It is convenient for consumers to purchase their groceries as either a supermarket or convenience store is just round the corner. Consumers do not see the need to make their grocery purchases online, saving on delivery fees, as they can simply grab the groceries from the physical stores on their way home from work or school. An exception will be the purchase of bulky items such as packaged rice and cooking oil, which consumers would prefer to purchase online and have them delivered.

RedMart cost as a % of sales vs incumbents in Singapore NTUC, SSG, DFI

932 convenience stores and supermarket outlets in 2016

Redmart

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% COGS

Staff costs Depreciation Rental costs Selling and distribution costs

Admin and Technology other costs costs

Source: Companies, DBS Bank Source: Euromonitor, DBS Bank

Supermarket shopping is very convenient in Singapore and people are still shopping in stores Grocery shopping is very convenient in Singapore. Singapore is a compact city with an efficient transport system. Most commuters are able to travel to most parts of the island conveniently, thanks to a robust and improving public transport system. As such, people have high mobility. Singapore’s public rail system, based on LTA’s statistics, sees an average of 2.9m commuters travelling within its network every day. By the same token, grocery retail outlets of various formats are conveniently located near public transport hubs, thanks to the Housing & Development Board’s (HDB) plans to have supermarkets at their commercial properties located in suburban town centres and suburban malls always having a supermarket element in their tenant mix. Commuters travelling through these town centres can conveniently pick

ASIAN INSIGHTS

Proliferation of HDB and mall supermarkets makes shopping convenient. HDB constantly makes supermarket shops available for businesses to lease. Apart from providing public housing to 80% of Singaporeans, HDB also leases commercial real estate to businesses, which enhances amenities for residents in these areas. HDB consistently puts up properties – minimart, supermarket, eating houses, and shops – in residential estates for bidding. HDB’s township planning ensures that there are sufficient amenities for residents, especially food-related ones, in new and old estates which it develops. The needs of residents of every age are catered to, regardless of the residents’ tech-savviness. Grocery shops, supermarkets, and minimarts are hence conveniently located in the heartlands for residents to visit.

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Asian Insights SparX ASEAN Grocery Retail

Close to 10 HDB properties (for grocery retail) are available for lease in the next 6 months S/N

Estate

Precinct Name

Block

Street Name

Commercial Units Minimart

Supermarket

1

Bukit Batok

Skyline @ Bt Batok

296A

Bukit Batok Street 22

1

-

2

Punggol East

Waterway Sundew

660A

Edgedale Plains

-

1

3

Queenstown

Ghim Moh Edge

224A

Ghim Moh Link

-

1

4

Sembawang

EastLace @ Canberra

115

Canberra Walk

1

-

5

Sengkang

Anchorvale Parkview

338

Anchorvale Crescent

-

1

6

Sengkang

Fernvale Riverwalk

417

Fernvale Link

-

1

7

Woodlands

Admiralty Flora

691

Woodlands Drive 73

-

1

8

Woodlands

Woodlands Glen

573

Woodlands Drive 16

-

1

9

Toa Payoh

Toa Payoh Crest

131

Lorong 1 Toa Payoh

1

-

3

6

Total

Source: Place2lease, DBS Bank

Supermarket shopping a lifestyle. MGR stores in Singapore dominate online grocery retail, boasting sales of S$4.3b compared to the latter’s S$96m. Evidently, even though there are online platforms, consumers in Singapore continue shopping in stores. Many people still see grocery shopping in supermarkets as an activity that they enjoy doing on a daily or weekly basis. Shopping in a supermarket allows them to touch, feel, and inspect the product before purchase, and this is important, especially for fresh produce. These is an experience that online retail cannot offer. Online retail targets a certain consumer profile Online customers have a certain profile. We scope out the profile of grocery shoppers who are open to using online channels as a means to shop. These consumers typically already know what they want – with no need to browse and select items especially fresh food –, can afford to await delivery, do not mind paying a delivery charge, are buying heavy or bulky items, live off the beaten path, and have no time or choose not to get out of their house. Pros and cons of online grocery shopping

Many do not live off the beaten path in Singapore with the need for delivery. Singapore is an urbanised country with a high MGR density and Singapore has an efficient public transport system for people to do grocery shopping in stores. As many as 80% live in HDB flats which are conveniently located, with no need for grocery delivery. It is convenient to shop at the physical stores and they get to save on the delivery fees as well. Online grocery retail does appeal to consumers who do not have the time to make their way down to the physical stores, stay far away from the nearest grocer, enjoy the convenience of online retailing, or have heavy and bulky purchases to make – water, beer, rice etc. Profile of online shoppers differs from store shoppers Online shoppers

Store shoppers

Selection

Consumers already know what they want

Choice and freedom to choose all selection especially fresh food

Wait time

Can afford to await delivery

Get purchase immediately

Delivery charge

Do not mind paying a delivery charge if any

No delivery charge applicable

Positives

Negatives

Shop any time

Hassle of signing up/in

Heavy or bulky items

Wants delivery to do the heavy lifting

More difficult to manage bulky or heavy items

Time savings

Website navigation

Location

Chore avoidance

Trouble with substitutions/returns

Live off the beaten path

Have a store nearby or at a conveniently located place along the way

Wide range of product options

Delivery coordination

Convenience

No time or do not want to get out of the house

Love or do not mind supermarket shopping

Worries about freshness

Source: DBS Bank Source: DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

Market needs to get used to paying for delivery cost or online retailers will need to subsidise Delivery cost an issue. Delivery cost is a major obstacle preventing many consumers from purchasing groceries online. Consumers may baulk at the idea of paying for delivery cost when purchasing groceries online as they can easily pick up groceries from a nearby supermarket. They may also be concerned with proper storage of chilled food items during delivery, preferring to pick up these items in nearby grocery stores as these are usually low-ticket items and easy to transport. This is in contrast to shopping for big items at, say, IKEA where the consumers have no choice but to pay for delivery. As for online retailers such as Taobao and Qoo10, they offer a wide variety of products at lower prices with no freshness limitations. Consumers therefore do not see the need to head down to the stores as they can simply purchase the products with a click. Online grocery retailers, on the other hand, will have to look into reducing delivery costs to entice more consumers to switch to online grocery retailing. Delivery is not free

intact. To this end, online grocers throw in discounts, promotions, and bundle offers to increase basket sizes. That will, however, eat into an online grocer’s margins unless it is able to seek further rebates from its suppliers. Somebody needs to subsidise fulfillment costs. The difference between online retailing and store retailing is in last-mile logistics. The former is fulfilled by the seller, while the latter is borne by the consumer. Logistics costs and unfavourable economics, including orders, pricing, and ticket sizes can make online players like Ocado remain unprofitable for a long time. For some supermarket operators, leveraging on their store network and fulfilling delivery from individual stores can be more profitable than delivering from a central distribution centre. Pure-play online grocery players will not have this benefit since they have no stores or have outsourced coldchain locations for a hub-and-spoke arrangement. Meanwhile, logistics costs will continue to play a key role in the profitability of online grocery retail. Delivery to home still the preferred means of fulfillment. A recent survey by Nielsen, showed that 85% of grocery shoppers who are already using or are willing to shop through online channels prefer delivery to their homes as their preferred choice of fulfillment. In fact, delivery to homes is the most preferred choice of fulfillment for online grocery shoppers. All alternate means of fulfilment were significantly lower amongst the sample of online grocery shoppers surveyed.

Online grocery retailers

Delivery fees

RedMart

≤ S$49  S$7 delivery fee > S$49  Free delivery

NTUC Fairprice

< S$99  S$7 delivery fee ≥ S$99  Free delivery

Giant

< S$60  S$12 delivery fee ≥ S$60  S$7 delivery fee

Cold Storage

< S$60  S$12 delivery fee ≥ S$60  S$7 delivery fee

OpenTaste

< S$35  S$4.95 delivery fee ≥ S$35  Free delivery

E-mart

< S$30  S$3 delivery fee ≥ S$3  Free delivery

90%

Ocado

< £75  £2.99 - £6.99 delivery fee ≥ £75  Free delivery

70%

< S$60  S$15 delivery fee ≥ S$60  Free delivery

50%

Gofresh

Source: Companies, DBS Bank

Most online grocery shoppers prefer delivery to their homes 100%

80%

60%

40% 30% 20%

Minimum online purchase to discourage low value orders. In order to keep online grocery retailing profitable, many online grocery retailers have imposed minimum purchases for consumers to qualify for free delivery or lower delivery fees. These retailers recognise that delivering single items or lowvalue purchases will erode their margins and be unprofitable for their online business. Imposing minimum orders will ensure that their fulfillment costs are covered and their profitability

ASIAN INSIGHTS

10% 0% Deliver to home

Pick up inside store

Already using

Drive through

Willing to use

Pick up outside store

Unwilling to use

Source: Nielsen, DBS Bank

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Asian Insights SparX ASEAN Grocery Retail

Cold-chain logistics will be relatively more expensive. Service providers need cold-chain management to preserve freshness, adding to costs. Non-fresh grocery items such as water, detergent, canned food, pasta, toiletries, etc with no requirement for refrigeration have longer shelf life. Frozen and fresh food however remains a challenge and cold-chain logistics is necessary to preserve freshness. Unlike non-food items in e-commerce, product failure in fresh food has some impact on food safety. Service providers need to prevent food products from being contaminated during delivery. Delivery costs will hence be more significant to for online grocery players. Logistics costs will be higher for online players in cities that sprawl across a large area and/or have an expensive transport system. Groceries face a lower risk of disruption by online retail compared to non-food items The challenge is in preserving freshness. Shoppers want to choose their own fresh groceries. Nielsen’s Global Connected Commerce Survey in 3Q 2016 showed that grocery items rank among the lowest for online purchase amongst 18 durables and consumables product and service categories. Fresh groceries rank the highest, with 44% of shoppers preferring to buy more often in-store. Evidently, grocery consumers rank the ability to select their own fresh products highly. Online players will hence have to gain shoppers’ trust and prove that they can deliver fresh grocery items to customers or risk losing sales in this product category. For this reason, we believe that fresh food will face less online disruption than non-food items.

Flexibility options for customers add to costs Online players are currently in a catch-22 situation. Customer service includes sales guarantees and replacements, flexibility for immediate and appointed delivery times; otherwise, consumers may be reluctant to buy online. These promises add to costs, including that for double delivery, until the business gains scale. It is then up to the businesses to execute efficiently. With scale, online players are then able to provide such customer services profitably. Click-and-collect may be more viable for now Customers undertake delivery costs under “Click-and-collect” model. “Click-and-collect” is a grocery retail model highly popular in France and the UK. Under this model, consumers submit their orders online and collect their purchases from a collection point. The collection point may or may not be at the grocery retail store. It may be a more viable model for businesses because it slashes delivery costs for the online retailer. This model is being considered by supermarkets as it is more viable for profitability and helps reduce the costs incurred for preserving freshness, logistics, fuel, traffic, cold trucks, etc. Carrefour Drive pick-up point in Belgium

Consumers most averse to purchasing fresh groceries online % 70 60 50

69

62

58 49

45 45

40 30

41 38 38 37 35 33 33 30 29 26 25 23

20 10

Source: Nielsen, DBS Bank

0

Source: Nielsen, DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

Baby and family items dominate Click-and-Drive in France (Click-and-Drive weight of each product category) 14.0% 12.0%

13.1%

12.2%

11.5% 11.2% 11.2% 10.0% 9.9%

10.0%

9.8%

9.0%

8.7%

8.0% 6.0%

Servicing the wrong area. Webvan expanded into cities with low population density, which resulted in relatively high delivery costs that made fulfilment unprofitable. Its trucks were making trips to areas with low order count/ticket size. These made delivery trips and trucking costs inefficient, leading to poor profitability.

Source: Nielsen, DBS Bank

Owned infrastructure, no leverage on third parties. Webvan had its fully owned infrastructure from warehousing to the picking of orders, delivery and customer service. It didn’t leverage on third-party suppliers such as brick-and-mortar grocery stores and concentrated their resources on the delivery and customer service aspects. Grocers such as Ocado and Peapod leverage on grocery stores and started warehouses when it made economic sense.

How some online grocers failed

Last-mile logistics is expensive - Zyllem has closed

Webvan operated for five years. Webvan was an online grocery retailer founded in the USA in 1996 but made several mistakes which contributed to its downfall – including moving into online too early – and eventual bankruptcy in 2001. In the process, Webvan drained c.US$800m in venture capital and IPO proceeds.

Last-mile logistics is expensive. Last-mile logistics firm Zyllem stopped providing delivery services on 7 September 2016 in Singapore. Zyllem had up to 5,000 drivers and was growing at a double-digit rate month-on-month. Costly delivery services, which led to poor profitability, resulted in its closure. The delivery services market in Singapore is competitive and players compete on every measure, from prices to delivery time. High logistics cost including vehicle and labour costs, along with the competitive market pricing, pose challenges to logistics players Similarly, high logistics costs will pose a challenge for online grocery players when they try to make their business profitable.

4.0%

4.0% 2.0% 0.0%

Wrong pricing and target audience. By offering a wide range of high-quality goods at low prices, as well as home delivery services, the company turned in low profit margins. The low prices failed to attract upmarket consumers and it was left with consumers who bought low-margin products. Over-expansion. Webvan expanded quickly into nine cities within 18 months and had aggressive plans for new cities before it was successful in its first market. It even had plans to expand into 26 more cities by 2001, the year it went into bankruptcy. It built several warehouses with a US$1b investment.

ASIAN INSIGHTS

More viable for retailers with own backend logistics to deliver to online consumers as stores are already profitable. MGR retailers with their own logistics abilities already have resources to fulfil deliveries – from distribution centres to stores. Deploying a truck or dedicating a hub store to fulfil last-mile delivery will be more viable for profitability than pure-play online players with backend logistics dedicated solely for online purchases.

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Asian Insights SparX ASEAN Grocery Retail

Retailers will continue growing while online grocery shopping finds its feet Retailers will increase their store network Larger players are growing their store network and operational scale. ASEAN’s largest listed grocery retail players continue to drive growth and topline with store openings. This is a common theme regardless of whether grocery markets are well developed or not. Even in densely-populated Singapore, proliferation of stores at every corner will drive convenience and purchase frequency. Operators in ASEAN are growing store count

from suppliers. Due to their smaller store network, suppliers cannot penetrate the market overnight by putting up their new products with the smaller retailers. They are unable to collect listing fees as well. Smaller MGR players in Singapore have therefore tried to build up their store networks recently. HDB rents have been tendered at aggressive rates of c.S$20psf because smaller players have been trying to win more shop spaces to build up economies of scale. With an additional outlet or two, retailers will enjoy better economies of scale and profitability for volume discounts and rebates, provided that rental rates are economically sensible.

Store growth strategy Sheng Siong

Targets 50 stores and beyond island-wide eventually and in places where it has no presence

Dairy Farm

Has started to expand store count after store rationalisation exercise

NTUC Fairprice

Continues to bid for shop spaces

7-Eleven Malaysia

Management maintains its new store expansion plan (about 200 stores/annum)

Bison Consolidated

The group has planned to open 70 new stores per year in FY17- 18

CP All

Plans to open at least 700 stores p.a. in the next five years

Matahari Prima Putra

Targets to open 22 hypermarkets and supermarkets in 2017 with focus in underpenetrated ex-Java cities. This will bring MPPA’s hypermarket and supermarket store counts to over 210

Pure Gold Price Club

Targets to open 25 Pure Gold and two S&R stores every year till 2020.

Robinsons Retail Holdings

Plans to roll out 150 new stores nationwide for 2017. This would bring total store count to 3,665 and could translate to a growth of 8-10% in gross floor area

Source: Companies, DBS Bank

Smaller players have incentives to build up their network or consolidate to build scale. Smaller MGR players have a disadvantage in terms of scale and should look to scale up to build a competitive advantage. Extremely small or independent grocery retailers typically have lower sales volumes and obtain lower discounts/rebates and poorer credit terms – often cash terms – from suppliers. Compared to larger players with centralised sourcing and distribution functions, smaller players also do not have volume discounts and bulk handling discounts

ASIAN INSIGHTS

Successful HDB rental tender rates have gone up as smaller players have been bidding aggressively S $ psf 22 20 18 16 14 12 10

Source: Place2lease, DBS Bank

Scale drives down costs, improves margins Ways to drive down costs. The grocery retail business has thin net margins of <10% and players are always working to drive down costs. The few ways to improve margins include direct sourcing, house brands, centralising and insourcing distribution and logistics functions from suppliers, as well as bulk purchasing. 1) Distribution centres and centralisation of logistics – Larger players are also incentivised to build distribution centres. Distribution centres have sprung up recently with all three players in Singapore building distribution centres. Dairy Farm has built a fresh distribution centre while NTUC Fairprice has opened a new distribution centre in Joo Koon. Sheng Siong is expanding its current distribution centre by 10%, which will be fully operational by FY19. There will be better supplier discounts for centralised logistics and volume discounts product-wise, as suppliers only need to send products to the

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Asian Insights SparX ASEAN Grocery Retail

assigned distribution centres instead of to the stores. Distribution centres also have capacity for higher volume purchases, enabling the retailers to enjoy more volume discounts. There will be more leverage on fixed warehouse operating costs when the distribution centre breaks even. Efficient distribution chain management will drive down opex. 2) Direct sourcing – Cutting off the middlemen will improve margins, but bears higher risks. If resources permit, supermarkets can source directly from the producers to obtain better pricing, subject to producers’ terms such as minimum order etc. Products can be procured or imported directly from sources such as poultry, fruit, and vegetable farms. This will cut off the middlemen and eliminate the traders’ margin. Supermarkets are increasingly sourcing for their own food products to build differentiation and product exclusivity to drive sales. However, without suppliers for some of their SKUs, supermarkets lose the credit terms extended by distributors that they enjoy unless they can negotiate similar terms with the producers. They may have little or no recourse if these fresh perishables delivered to them become stale. If managed well, retailers will enjoy better product margins on these products. 3) House brands – House brands have lower product cost. House brands are a separate category targeted at the costconscious shopper. Retailers go directly to manufacturers to have their brands stamped on products such as tissue/toilet paper, snack food, cereals, frozen food etc. Products can be priced at a discount to branded products, enabling the retailer to enjoy strong product margins as there are no middlemen involved. Similar to direct sourcing, there are no supplier rebates that supermarkets can enjoy. House brands remain a small part of the overall supermarket strategy, accounting for about 10% of sales or lower.

iCash collection system at NTUC Fairprice

Source: DBS Bank

Self-payment system at Cheers convenience store

Staff costs will reduce with handpay, self-checkouts, and cash collection technology in stores 4) Reduction in manpower costs – Self-checkout counters reduce manpower costs. Staff costs is a significant of operating costs – at 11% of sales - and supermarkets are trying to reduce operating cost by employing self-checkout technologies. These are aimed at reducing staff costs at the checkout areas. These self-service checkouts can potentially replace cashiers and manpower needs can be better utilised by redeploying excess labour to other functions such as stock keeping.

Source: DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

7-Eleven Signature - First unmanned convenience store in Korea. Korea’s first unmanned convenience store has opened st in May 2017 on the 31 floor of Lotte World Tower in southeastern Seoul. Known as 7-Eleven Signature, it is a smart store featuring a host of new technologies – refrigerators that open and close automatically by detecting human movement; 360-degree scanners that scan all items, regardless of where the barcodes are facing, on the conveyor belt; a smart CCTV system capable of reporting fires and collecting data on customers; a Smart Safe Cigarette Vending Machine that is able to verify the age of the customer; and Handpay, by which customers can make payment with their palms.

Customers use their hands to enable payment

7-Eleven Signature, unmanned self-service store format

Source: The Digital Times, DBS Bank

Labour cost savings for retailers. With a host of new technologies being tested out, such as the 360-degree barcode scanner, the smart CCTV system, the Smart Safe Cigarette Vending Machine, and Handpay, retail stores in the future can be run without any need for employees if these technologies are successful. Eventually, the 360-degree barcode scanner will be upgraded with artificial intelligence that recognises a product by its shape, weight and volume, making barcodes obsolete. This technology will be helpful when purchasing fruits and vegetables. Source: Korea JoongAng Daily, DBS Bank

Handpay technology. Customers have to register by scanning their palm and entering their credit card details at the store. They can then make payment by scanning the palm that they have registered. Only registered customers will be allowed to enter the unmanned 7-Eleven. Customers’ palm information is saved by Lotte Card and the Korea Financial Telecommunications & Clearings Institute while the store keeps a history of its visitors in the system. Returning customers can save time by not having to register a second time. Handpay makes purchases more convenient for customers as they do not need to bring their credit cards or phones around while making purchases. Handpay is valid only for use with Lotte credit cards. Users of Handpay will currently have to be Lotte credit-card holders. Korea Seven, which runs the 7-Eleven franchises in Korea, is in the process of making more cards compatible with Handpay.

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A customer’s bank data is linked to his/her handprint

Source: The Korea Herald, DBS Bank

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Asian Insights SparX ASEAN Grocery Retail

Serves only locals as the store will require your biodata

Source: Trendhunter, DBS Bank

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

Macro fundamentals support the growth of MGR The ASEAN grocery retail market has grown by 1.3% CAGR in the past two years The growth of grocery retail in ASEAN. Modern grocery retail in ASEAN-5 markets has grown by 1.3% to US$218b over the past two years and is forecast by Euromonitor to grow by a CAGR of 4.5% to US$278b over the next five years. Amongst ASEAN-5 MGR markets, the Philippines has grown the fastest at 5%, driven by supermarkets, while Malaysia declined, dragged by hypermarkets.

The MGR markets of Thailand, Indonesia, and the Philippines are the biggest in the ASEAN-5 markets Singapore 7% Indonesia 27%

ASEAN-5 MGR market has grown in the past two years Local currency

2014

2016

CAGR%

Singapore (SGD mn)

5423.3

5969.7

4.9%

Indonesia (IDR tn)

193.16

235.01

10.3%

Malaysia (MYR bn)

25.12

25.57

0.9%

Philippines (PHP bn)

522.39

607.59

7.8%

Thailand (THB bn)

762.54

847.54

5.4%

63.49

65.19

1.3%

ASEAN-5 (US$)

Source: Euromonitor, DBS Bank

MGR continues to increase in share of total grocery retail. Market penetration of MGR has improved by 1ppt in the ASEAN-5 markets, reducing contribution of traditional grocery retail channel’s share of total grocery retail sales. Modern grocery retail in 2016 made up about 30% of ASEAN-5’s grocery retail market. ASEAN-5 grocery retail market was worth US$217b in 2016 US$b

Modern

Traditional

Total

Penetration

Singapore

4.34

1.71

6.05

72%

Indonesia

17.40

83.93

101.33

17%

Malaysia

6.28

8.78

15.06

42%

Philippines

12.99

29.87

42.86

30%

Thailand

24.17

28.20

52.37

46%

ASEAN-5

65.19

152.49

217.68

30%

Philippines 20%

Malaysia 9%

Thailand 37%

Source: Euromonitor, DBS Bank

Convenience stores have led ASEAN’s MGR growth in the last two years Over the past two years, MGR has generally outgrown traditional grocery retail. The growth of MGR in the ASEAN-5 markets grew 0.9%-10.3% in local currency terms. Indonesia was the best performing MGR market, with CAGR of 10.3%from 2014-16, led by convenience stores and forecourt/petrol-station formats, which came from a low base. The best-performing format was convenience stores, with developing ASEAN-5 markets growing 7.8-17.1% CAGR. Hypermarkets in Singapore increased 18% on the opening of Big Box in Jurong. Malaysia’s hypermarkets declined as shoppers switched to convenience stores. Convenience stores continued to expand throughout developing ASEAN-5, leading to the format’s strong growth in the last two years.

Source: Euromonitor, DBS Bank

The largest modern grocery retail markets remain Thailand, the Philippines, and Indonesia. Thailand, the Philippines, and Indonesia are the three largest markets for modern grocery retail among the ASEAN-5, in line with their population size. Indonesia remains underpenetrated with a big population (c.250m population) but its MGR market is significantly smaller than traditional grocery retail.

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail

2-Year CAGR: Growth of MGR in ASEAN-5 generally outgrew traditional grocery retail 2014-16 CAGR% Local currency

Singapore

Indonesia

Malaysia

Philippines

Thailand

Supermarkets

3.4%

Hypermarkets

19.7%

Convenience stores

-2.6%

Others MGR

Total (US$)

5.3%

2.2%

7.4%

4.9%

0.7%

1.6%

-2.0%

7.0%

3.2%

-2.5%

17.1%

7.8%

16.6%

8.1%

6.2%

0.4%

14.6%

2.2%

9.4%

2.8%

-2.6%

4.9%

10.3%

0.9%

7.8%

5.4%

1.3%

Traditional

-1.6%

7.1%

2.4%

2.9%

1.2%

-0.8%

Total (US$)

-1.2%

0.9%

-8.8%

1.6%

-0.8%

-0.2%

Source: Euromonitor, DBS Bank

Industry-critical factors support growth of MGR in ASEAN-5 Urbanisation is driving demand for and penetration of grocery retail. Urbanisation has been a key trend for MGR. Urbanisation rates of the ASEAN-5 countries increased 1.2ppt in 2016, translating to an additional 11m in their urban population. Urbanisation makes it easier for MGR to expand into new areas and grow in terms of value due the higher selling prices in urbanised areas. Urban consumers usually have higher disposable income and are thus more likely to purchase better-quality products. The urbanisation rate in ASEAN-5 has generally increased US$b

2014

Singapore

100%

2016 100%

Indonesia

53%

54.47%

Malaysia

74.01%

75.37%

Philippines

44.49%

44.29%

Thailand

49.17%

51.54%

ASEAN-5

52.52%

53.73%

*The urbanisation rate in Philippines declined because total population was outgrowing urban population. Source: The World Bank, DBS Bank

→ ↗ ↗ ↘ ↗ ↗

The rise of the middle class is expected to drive demand for better-quality products. According to Euromonitor, the number of middle-class households—, defined as those earning an annual disposable income between US$15,000 and US$25,000 - in most ASEAN-5 countries has increased. This growing middle class is expected to fuel changes in consumer behaviour, including higher purchasing power and stronger demand for consumer goods, both domestic and imported goods. These consumers, with higher purchasing power, are expected to shift towards purchasing better-quality products from MGR instead of traditional formats. MGR players are expected to continue their expansion in the ASEAN-5 countries, particularly in emerging and underserved areas, according to Euromonitor. MGR penetration in ASEAN-5 countries is forecast to increase 3ppt to 33% by 2021. Developing ASEAN-5’s middle-class households 2008 Households

2014 Households

Indonesia

19m

17m

Malaysia

1.3m

1.6m

Philippines

4.6m

5m

5m

6m

Thailand

↘ ↗ ↗ ↗

Source: Euromonitor, DBS Bank

Population growth drives MGR indirectly. ASEAN-5’s population grew 2.2% in 2016, an increase of approximately 10m people. This growth is jointly driven by Indonesia, the Philippines, and Thailand. Population growth is a fundamental driver of food demand, for both traditional and modern retail. Overall population growth will be positive for MGR and provides opportunities for MGR to penetrate into both urbanised and upcountry areas across ASEAN.

ASIAN INSIGHTS

VICKERS SECURITIES Page 23

Asian Insights SparX ASEAN Grocery Retail

ASEAN-5’s population grew 2.2% last year 2015

2016

% chg

Indonesia

255

258

1.2%

Philippines

100

103

3.0%

Thailand

65

68

4.6%

Malaysia

30

31

3.3%

Singapore

5.5

5.6

1.3%

ASEAN-5

455.5

465.6

2.2%

Vietnam

92

95

3.3%

Myanmar

54

57

5.6%

Cambodia

15.6

16

2.6%

Laos

6.8

7

2.9%

Brunei

0.42

0.44

4.8%

East Timor

1.2

1.3

8.4%

Total SEA

625.52

642.34

2.7%

Source: CEIC, CIA World Factbook, Singstats, DBS Bank

Modern grocery retail’s penetration in ASEAN-5 has increased by 1ppt in each market

46%

30%

42%

72% 17%

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 24

Asian Insights SparX ASEAN Grocery Retail

5-Year CAGR of 7.4% for MGR in ASEAN-5 till 2021

CAGR growth of 7.4% for ASEAN-5 MGR over the next five years

MGR’s penetration in ASEAN-5 is expected to increase by 3ppt to 33% in 2021. MGR’s penetration in the Philippines and Thailand is forecast to increase by 5ppt, the largest jumps among ASEAN-5 countries, to 35% and 51% in 2021, respectively. Expansion of convenience stores, coupled with Internet retailing for both supermarkets and hypermarkets, is expected to be the main driver for the increase in MGR’s penetration in Thailand. The increase in the Philippines is expected to be attributable to higher demand and purchasing power as well as expansion by players into areas outside key urban zones with low MGR penetration. Singapore and Indonesia are forecast to post an increase in MGR penetration by 2021 while no changes are expected in Malaysia. MGR’s penetration in ASEAN-5 (2021) estimated at 33% 2021 US$b

Modern

Traditional

Total

2021 MGR Penetration

Singapore

4.91

1.82

6.73

73%

Indonesia

22.53

97.45

119.98

19%

Malaysia

8.95

12.29

21.24

42%

Philippines

21.98

40.62

62.69

35%

Thailand

34.65

33.10

67.75

51%

ASEAN-5

93.01

185.28

278.29

33%

Source: Euromonitor, DBS Bank

Philippines expected to post fastest growth among ASEAN-5 MGR over the next five years US$ bn 40 35 30

7.5% CAGR

25

5.3% CAGR

20

11.1% CAGR

15

7.3% CAGR

10 5

2.5% CAGR

0 Thailand

Indonesia

Philippines 2016

2021

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

Malaysia

Singapore

US $ billion 100

7.4% CAGR 80

60

40

20

0 2016

2017F Thailand

2018F Indonesia

Philippines

2019F Malaysia

2020F

2021F

Singapore

Source: Euromonitor, DBS Bank

Convenience stores to drive MGR growth by 4% CAGR over the next five years 9.3% CAGR growth for convenience stores from 2016-21. Convenience stores are expected to be the fastest-growing format from 2016-21 in ASEAN-5 countries with a CAGR of 9.3%. ASEAN-5 is expected to post high positive convenience stores growth in its respective countries, with the exception of negative growth in Singapore. Supermarkets are expected to grow the fastest in Singapore for the next five years as supermarkets remain a popular grocery retail format. Convenience stores are expected to grow the fastest in Indonesia, Malaysia, the Philippines, and Thailand from 201621. In Indonesia, leading convenience stores players are expected to expand their outlets into less saturated areas outside of Java despite the law limiting the expansion; In Philippines, convenience stores’ players are expected to expand into business districts and local neighborhoods. Convenience stores are the most suitable format due to smaller available retail area. Consumers also value the convenience and accessibility that the convenience stores offer. In Thailand, growth of convenience stores is driven by aggressive outlet expansion into metropolitan and provincial areas, making them a convenient platform for grocery purchases due to their proximity to residential areas. In Malaysia, convenience stores are expected to expand their outlet count to cater to the higher demand for convenience stores. This demand is driven by the increasingly busy lifestyles in Malaysia and consumers value the convenience (24-hour operation and quick meal solutions) offered by these convenience stores.

VICKERS SECURITIES Page 25

Asian Insights SparX ASEAN Grocery Retail

In Singapore, supermarkets have room to grow; negative growth expected for convenience stores. Convenience stores are expected to decline by 1.9% CAGR from 2016-21 largely due to the increased competition from supermarkets. Supermarkets are expected to be the fastest-growing format for the next five years with a CAGR of 3% with the HDB’s constant supply of shop space for supermarkets driving growth. The convenience of visiting supermarkets and lower prices compared to convenience stores make supermarkets a popular format in Singapore. Supermarkets are opening smaller outlets and expanding into residential districts. CAGR growth of 7.4% for MGR in ASEAN-5 over the next five years, led by the Philippines and convenience stores 2016-21 CAGR% (US$)

Singapore

Indonesia

Malaysia

Philippines

Thailand

Total

3.0%

2.5%

6.3%

9.7%

6.4%

6.6%

Hypermarkets

2.4%

1.6%

5.8%

13.3%

5.2%

6.0%

Convenience stores

-1.9%

7.8%

14.2%

19.4%

9.8%

9.3%

Others

1.9%

3.8%

6.7%

10.9%

6.7%

6.7%

MGR

2.5%

5.3%

7.3%

11.1%

7.5%

7.4%

Traditional

1.2%

3.0%

7.0%

6.3%

3.3%

4.0%

Total

2.1%

3.4%

7.1%

7.9%

5.3%

5.0%

Supermarkets

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 26

Asian Insights SparX ASEAN Grocery Retail

Companies with scale are the players in the sweet spot Scale is a natural barrier to entry. We see operating scale as a natural barrier to entry. Companies with reasonable scale have the resources to grow. Their economies of scale have already taken care of their fixed operating costs and are helping them leverage their existing resources (by securing more sales and squeezing out more operating leverage). They can readily invest to reduce cost and gain operating efficiencies (selfcheckout, cash recycling, cash payment systems) and enjoy a high level of leverage such as credit financing, payment terms, and bulk discounts from suppliers due to their volumes. Grocery retailers with scale have the ability to help suppliers reach a large target audience in a short space of time. Companies with a store network Larger players have sufficient scale to strengthen their position. We like listed grocery retail players in ASEAN as they are well positioned to grow over the next few years. The players have sufficient cash resources, a sizeable store network, bargaining power with suppliers, cash generation capability, and a strong logistics network to help them grow going forward. Where profitability and cash generation is not an issue, they could implement new stock-keeping, online shopping, storecheckout technologies, more aggressive marketing and promotions etc in stores to strengthen their position and get ahead of the competition. Singapore’s three key MGR players who already have strong economies of scale through their store network, for example, are operating very efficiently, way ahead of the regional average.

Companies with a logistics network Larger players with a logistics network have an advantage in supply chain management. Bigger players which already have a supply chain definitely have an advantage in scale and cost. These players with their network of stores, already have a sizeable market share. Distribution centres facilitate supplier delivery to their facility, alleviating the need for suppliers to make multiple deliveries to various stores. This drives down product costs and improves gross margins, along with bulk discounts. Players who want to establish a distribution centre to gain such scale have to build up their store network in order for the warehouse to be adequately utilised. The cost of establishing a warehouse is not cheap and goes into the millions of dollars (at over S$100 psf of construction cost). Allowable financing can be over 10 years, depending on the property. They are entitled to bulk and volume discounts, as well as better credit terms (as opposed to cash on delivery for smaller players) due to their higher sales turnover. ASEAN-5’s key players have set up sizeable distribution centres

Singapore had the highest MGR average sales (psf) among ASEAN-5 in 2016 Ave rage sales ps f (US$) 900 800 700 600 500 400 300 200 100

1

0 Singapore

Thailand

Philippines

Malaysia

Indonesia

DFI Sheng Siong NTUC Fairprice RedMart MPPA MPPA MPPA 7-Eleven Bison Bison Sub DC Makro Makro Makro Makro CPALL CPALL CPALL CPALL CPALL CPALL CPALL BIG C BIG C BIG C BIG C

Location Tampines Mandai Joo Koon Fishery Port Balaraja Surabaya Cibitung Shah Alam Rawang Johor Bahru Ayudhaya Ayudhaya Bangna Mahahai Bangbuatong Suvarnabhumi Surathani Khonkaen Lampoon Mahachai Chonburi Thanyaburi Ladkrabang Ayudhaya Bang Plee

Cost S$40m S$65m S$350m n/a n/a n/a n/a n/a n/a RM3.9m n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Completed Size sqft 2006 260,000 2011 500,000 2015 730,000 2015 100,000 n/a 449,996 2014 172,998 1 2016 87,026 Leased 90,000 2013 125,000 20172 9,800 2008 107,639 2009 215,278 2014 236,806 2015 247,570 <2010 269,098 <2010 236,806 <2010 129,167 <2010 129,167 <2010 182,986 2014 215,278 2015 107,639 n/a n/a n/a n/a n/a n/a n/a n/a

relocated & expanded; 2purchased end of 2016 Source: Companies, DBS Bank

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 27

Asian Insights SparX ASEAN Grocery Retail

A sizeable network and logistics chain may attract a takeover bid from an online player

Smaller players to play catch-up Smaller players, in order to compete, will have to gain scale by opening more stores. However, they are limited by resources including finances. It will be slightly harder for them to implement cost reduction measures such as installing cash machines and increasing rebates given by suppliers. One of the ways is to outbid incumbents with a slightly higher rental rate to win stores, which has resulted in high rental rates for shop space in Singapore. Having more stores will give them more bargaining power when negotiating credit/financing terms with suppliers. These will improve operating leverage and overall margins and profitability of their business. Although smaller stores are gaining traction in terms of store wins, their higher-than-market store rental rates would mean lower profitability and higher operating efficiencies is expected turn in better profitability.

Acquisitions abound in the grocery retail space. Grocery retailers have been busy acquiring and selling over the past two years. Notable transactions in ASEAN include Casino Group’s €3.3b disposal of BIG C to the TCC Group in 2016 and the sale of RedMart, Singapore’s online grocery retailer, to Lazada for US$30-$40m. Valuations for the transactions have been priced between 0.5-1.8x sales and 10-33x EV/EBITDA. Amazon has already bought Wholefoods, undertaking an online-to-offline strategy. Amazon announced in June that it was acquiring the 431-store upscale US brick-and-mortar grocery retailer Whole Foods Market for US$13.7b. Whole Foods will give Amazon an instant national physical presence and a network of mini distribution points for fresh produce, alleviating the challenge of perishability of fresh food in the online grocery business.

Valuations of M&A transactions in ASEAN (save for Wholefoods by Amazon) Target

Acquiror

Implied EV

Date

PE

P/Sales

EV/EBITDA

Carrefour TH

Big C

US$1.2b

2010

n/a

1.2x

13x

Carrefour ID

CT Corp

US$1.1b

2012

n/a

0.9x

n/a

Siam Makro

CP All

US$6.4b

2013

56.7x

1.7x

33.3x

AS Watson’s

Temasek

US$22.7b

2014

22.6x

1.2x

12.5x

Big C TH

Berli Jucker

US$6.2b

2016

31x

1.7x

17.1x

Big C VN

Central Group

US$1.1b

2016

n/a

1.8x

20.4x

RedMart

Lazada

US$30m

2016

n/m

0.5x

n/m

Wholefoods

Amazon

US$13.7b

2017

27.1x

0.9x

9.9x

Remarks 60% stake for US$672m 25% stake for US$5.6b

Operating and net losses

Source: Mergermarket, DBS Bank

A store network will be valuable to Amazon. Amazon will also take over Whole Foods’ 365 house brand. The acquisition will provide Amazon with a ready pool of suppliers for fresh and packaged food, a network of stores close to customers as well as a supply chain platform for its online business to grow. This is similar to Amazon’s bookstore business, which has both online and offline/store presence in the USA. Having both online and offline channels will facilitate delivery to customers with a hub-and-spoke logistical model and a “Click-andCollect” mode of fulfillment.

ASIAN INSIGHTS

VICKERS SECURITIES Page 28

Asian Insights SparX ASEAN Grocery Retail

Top picks are DFI, SSG, RHHI, CPALL

Our ASEAN grocery retail universe trades at a PE of 22x (x)

Our ASEAN grocery retail universe is trading at 22x PE. Valuations of ASEAN grocery retailers are not cheap, compared to global grocery retail stocks. Nonetheless they offer investors defensive earnings of a non-cyclical nature, net cash balance, cash generation capabilities, earnings growth, and dividend yield (for selected stocks). Our top picks are SSG, DFI, CPALL, RHHI. Our picks for the sector are SSG and DFI in Singapore, CPALL in Thailand, and RHHI in the Philippines. Earnings are expected to outpace revenue growth on margin expansion. SSG is expected to continue expanding its margin as it shifts to more fresh food and better supplier rebates. We expect DFI’s margin to improve after rationalising loss-making stores, especially in Singapore. RHHI’s margin is also expected to trend up on price adjustments and closure of loss-making stores. CPALL expanding both its network and its margin, fuelled by penetration in Thailand and the discontinuation of discount coupons to big-basket customers.

ASIAN INSIGHTS

40.0 35.0

+2sd: 34.9x

30.0

+1sd: 29.9x

25.0

Avg: 25x

20.0

-1sd: 20x -2sd: 15.1x

15.0 10.0 Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Source: ThomsonReuters, DBS Bank

VICKERS SECURITIES Page 29

Asian Insights SparX ASEAN Grocery Retail DBS’ ASEAN grocery retail stock universe Stock call

DFI

SSG

CPALL

PGOLD

RHHI

BISON

SEM

MPPA

BUY

BUY

BUY

HOLD

BUY

NR

NR

FV

Current price

US$8.21

S$0.99

Bt61.00

P46.80

P87.00

RM2.40

RM1.30

Rp650

TP

US$9.96

S$1.20

Bt75.00

P41.90

P101

RM2.02

RM1.58

Rp450

Upside

21%

21%

23%

-10%

16%

n/m

n/m

-31%

Our investment thesis

Core valuation ex Yonghui is cheap at 20x PE

Expansion of distribution centre will support margin expansion in the form of higher volume discounts from suppliers and fresh-food mix

Defensive play, business resilience, continuous network expansion success. Margin expansion from improving product mix, as well as lower interest cost on debt repayment and refinancing

Facing direct competition from Landers. Inflation negative on low end customers, rising inventories, lower margins from suppliers

Targets higher-end customers who are immune to inflationary pressures. Margin expansion on higherpriced product mix

Successfully established a feasible business model with earnings track record, but at 30x FY17 PER, we believe that the stock is fairly valued at this juncture

Offers one of the best exposures to a potential consumption recovery story, but high operating expenses from new store expansion could weigh on earnings

Competition against hypermarkets and minimarkets would continue to put MPPA’s revenue growth and margin under pressure

Risk

Improvement of backend operations may fail to reduce operating cost and raise margin

Margin expansion is over as it could not squeeze more margins from operations

Delays in store expansion, weak consumer confidence, and intense competition

Competition from both big chain and smaller players continues to place pressure on growth

Possibility of more store closures this year may be detrimental to margins

Inability to secure strategic locations with high foot traffic

Higher-thanexpected operating expenses and execution risks with regards to its store expansion plan

MPPA’s valuation could be supported if sale by major shareholders fetches a premium

Earnings outlook

Margins to expand on closure of lossmaking stores, backend efficiencies

Product margins expected to improve on expansion of distribution centre and fresh-food mix

Revenue led by softer competition for cash and carry and margin expansion driven by convenience stores’ improving product mix

Stable margins but slower growth against backdrop of rising inflation and on less pronounced impact of new store roll-outs

One-off costs on store closures. Margins set to normalise

Double-digit earnings growth driven by new outlet openings and gradual recovery in consumer sentiment

Aggressive new store expansion plan supporting topline growth, but expect high operating expenses from new store expansion to weigh on earnings

Price-cutting strategy should put margin under pressure in the near term

Two-year EPS CAGR

6.5%

7.2%

20.6%

-2.4%

13.6%

28.0%

10.7%

2.6%

Fwd PE multiple

21.1x

20.6x

22.7x

19.7x

19.3x

24.4x

20.3x

n/m

Source: Companies, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 30

Asian Insights SparX ASEAN Grocery Retail Peer Comps Company

Rat ing

12-mth TP

M ark et Cap (S$m)

Px L ast

PE (A c t )

PE (Y r 1)

PE(Y r 2)

P/BV (x )

P/Sales (x )

ROE (%)

Operat ing M argin (%)

Net M argin (%)

Div idend Y ield (%)

Rev enue (US$m)

Gross M argin

Net debt t o equit y

Operat ing c ashf low s

Inv ent ory day s

Pay able day s

Collec t ion day s

CCC

Sout h East A sia Ret ailers Dairy F arm Intl CP ALL Big C Supercntr Siam Makro Puregold Robinsons Retail Sumber Alfaria Matahari Putra PSC Sheng Siong Hero Supermarket Bison Cons 7 Elev en Midi Utama ID

BUY 9.96 BUY 75 NOT RATED n/a NOT RATED n/a HOLD 41.90 BUY 101 NOT RATED n/a FULLY VALUED 450 NOT RATED n/a BUY 1.20 NOT RATED n/a NOT RATED 2.02 NOT RATED 1.58 NOT RATED n/a

15,136 8.21 22,227 61 7,451 223 6,950 35.75 3,501 46.80 3,260 87.00 2,989 700 359 650 2,074 167 1,481 0.99 452 1,050 237 2.40 461 1.30 276 930 Regional av erage

23.9x 33.0x 28.4x 29.7x 23.6x 24.9x 47.8x 90.8x 66.5x 23.6x 24.2x 40.0x 24.9x 13.3x 35.3x

22.8x 27.3x 24.1x 27.6x 21.6x 21.6x 35.3x nm 21.6x 29.8x 23.6x 19.4x

21.1x 22.7x 22.8x 25.5x 19.7x 19.3x 30.7x 86.3x 20.6x 24.4x 20.3x 28.5x

6.5x 8.2x 3.5x 9.9x 2.7x 2.3x 5.5x 1.5x 15.9x 5.7x 0.8x 4.3x 30.5x 2.9x 7.2x

0.9x 1.1x 1.6x 1.0x 1.1x 1.0x 0.5x 0.2x 2.7x 1.8x 0.3x 2.2x 0.6x 0.3x 1.1x

30% 33% 13% 35% 13% 11% 12% n/m 24% 27% 3% 15% 148% 24% 30%

4.1% 6.6% 7.0% 4.1% 7.1% 5.3% 2.3% n/m 6.1% 9.0% 1.6% 9.4% 3.7% 5.0% 5.5%

4.2% 4.1% 5.5% 3.1% 4.9% 4.7% 1.1% n/m 4.1% 8.5% 1.1% 7.4% 2.6% 2.3% 4.1%

2.8% 1.8% 0.9% 2.4% 0.6% 0.9% 0.6% 0.0% 0.4% 4.2% n/a 0.6% 3.4% 2.2% 1.6%

11,201 12,873 3,274 4,802 2,224 2,080 4,165 1,015 570 582 1,015 62 490 631 3,213

30.2% 21.9% 22.0% 10.7% 16.5% 21.9% 10.7% 16.3% 24.5% 25.7% 26.1% 35.8% 30.7% 25.6% 22.7%

cash cash 0.3 0.4 cash cash 1.2 cash 0.1 cash (0.0) cash cash 2.1

543 1,123 72 253 53 122 156 44 56 57 31 5 18 52 185

46.09 28.51 46 31 58.41 54.41 43 89.27 32 36.16 72 56.97 57.88 50 50

112.40 71.34 79 56 38.49 71.86 43 75.31 40 71.54 51 79.00 113.91 51 68

8.54 0.79 8 4 10.64 6.52 12 1.26 15 5.07 9 32.19 17.20 12 10

(58) (42) (26) (20) 31 (11) 12 15 6 (30) 31 10 (39) 11 (8)

0.7

Int ernat ional Peers Tesco PLC Carrefour SA

25,508 26,509

173.50 21.77

n/m 20.5x

n/m 14.1x

n/m 12.7x

2.2x 1.6x

0.3x 0.2x

1% 8%

1.2% 2.5%

0.1% 1.0%

0.0% 3.2%

69,700 82,815

5.4% 22.8%

0.8 1.1

2,466 3,476

16 40

33 87

33 37

17 (11)

Kroger Co Woolworths Ltd Ocado Group PLC Koninklijke Ahold Delhaize NV

28,310 36,636 3,130 34,422

23.01 26.46 280.10 17.20

13.8x 50.8x n/m 20.2x

11.6x 22.5x n/m 13.3x

11.3x 20.3x n/m 11.9x

3.4x 3.7x 6.1x 1.3x

0.2x 0.6x 1.3x 0.4x

25% 7% 4% 9%

3.0% 2.8% 1.7% 3.2%

1.7% 3.4% 0.9% 1.7%

2.2% 2.9% 0.0% 3.3%

115,337 43,462 1,585 52,245

22.4% 26.8% 34.2% 26.9%

2.1 0.4 0.6 0.2

4,272 1,758 121 3,041

26 40 15 25

24 42 35 41

5 3 14 9

8 1 (6) (7)

J Sainsbury PLC Delhaize Le Lion De Leeuw SCA

9,660 245.70 16,021 102.80 Regional av erage

14.9x 24.0x

n/m 15.4x

n/m 14.0x

0.8x 2.7x

0.2x 0.4x

5% 9%

2.4% 2.7% 2.4%

1.4% 1.5% 1.5%

4.2% 1.8% 2.2%

31,912 26,493 52,944

6.2% 24.3% 21.1%

0.2 0.1

1,403 1,384

0.7

2,240

20 28 26

35 46 43

36 10 18

21 (8) 2

48,832 4,520 12,841 275.00 13,560 6.71 10,677 6.30 9,021 7,380 9,667 6,260 868 2,424 8,267 238,000 683 3.42 46 750 87 606 164 2.21 Regional av erage

41.3x 28.1x 43.3x 20.5x 19.9x 33.0x n/m 17.6x 94.4x 12.9x 29.4x 34.0x

20.8x 26.9x 40.7x 21.8x 21.1x 33.3x n/m 16.1x nm 26.7x 20.3x

18.0x 24.8x 32.8x 20.0x 20.2x 25.5x n/m 13.8x 76.3x 21.6x 28.1x

1.7x 9.1x 3.4x 2.4x 2.7x 1.5x 1.2x 0.9x 1.4x 1.7x 1.8x 0.5x 2.4x

0.7x 1.3x 1.3x 0.5x 1.2x 0.9x 0.4x 0.4x 0.0x 0.1x 0.2x 0.0x 0.6x

9% 48% 10% 18% 22% 9% 1% 7% -8% 8% 18% 8% 12%

3.7% 4.8% 3.0% 3.9% 9.5% 3.9% -0.7% 3.7% -0.8% -0.4% 1.6% 2.1% 2.9%

1.7% 4.6% 2.5% 2.6% 5.8% 2.2% 0.1% 2.5% -1.7% 0.3% 0.9% 0.2% 1.8%

2.0% 2.9% 1.8% 3.8% 3.4% 1.8% 1.9% 0.6% 0.0% 1.3% 0.0% 2.6% 1.8%

52,158 6,682 7,084 14,453 5,642 7,542 1,760 12,235 3,837 263 297 1,710 9,472

38.3% 32.8% 20.1% 23.9% 72.4% 62.7% 37.6% 28.1% 14.8% 30.2% 30.2% 20.0% 34.3%

(0.0) (0.9) (0.5) (0.3) 0.6 0.7 0.0 0.5 (2.4) 1.7 0.3 1.8

4,579 734 277 1,000 896 745 85 616 15 5 0 85

0.1

753

21 30 45 67 38 41 8 32 47 9 13 63 35

42 54 54 93 234 184 73 30 64 4 42 47 77

28 9 13 7 66 68 33 8 8 9 5 66 27

6 (15) 3 (19) (130) (75) (32) 11 (8) 13 (24) 82 (16)

Nort h A sia peers Sev en & i Holdings Co Ltd President Chain Store Corp Yonghui Superstores Co Ltd Sun Art Retail Group Ltd Lawson Inc F amily Mart UNY Holdings Co Ltd Ministop Co Ltd E-Mart Inc Lianhua Supermarket Holdings Co Ltd CV S Bay Area Inc Poplar Co Ltd Beijing J ingkelong Co Ltd

Source: ThomsonReuters, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 31

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Appendix – Players in online grocery retail Opentaste aims to undercut retailer margins

Opentaste Food direct from farms delivered within 36 hours. Customers order fresh food such as fruits, vegetables, and dairy on Opentaste. They have the option to purchase from different producers. The orders are subsequently consolidated at a Social Aggregating Centre (SAC) until a cut-off time before the orders are sent to the respective producers in the various countries. The producers, upon receiving the orders, harvest, pack, and pass the food to a freight forwarder. The food will be delivered to a major airport and depart for Singapore. When the food arrives in Singapore, Opentaste packs the food according to the customers’ orders at its receiving center in Jurong. If necessary, the food is packed in insulated bags. The food will be delivered at a time specified by the customers. Opentaste strives to deliver the food items within 36 hours of the customer’s order. Opentaste’s online model

Source: www.opentaste.sg

Listing food on Opentaste. Besides being a customer, people can be sellers on Opentaste as well and get access to a larger market. Listing food on Opentaste is free and sellers gets to set their own prices. Opentaste will deduct a processing and delivery fee from the seller when an item is sold. The sellers have the option to cash out their earnings to their respective bank accounts or to use it to purchase food on Opentaste. Types of food that can be listed on Opentaste

Source: www.opentaste.sg

What makes Opentaste stand out? Fresher and tastier food. Opentaste claims that their food items are typically fresher and tastier as their farmers only harvest the food upon order by the customers. The food items are also sold at better prices as Opentaste does without intermediaries such as exporters, importers, and distributors. They also reduce waste in the process as farmers know the exact amount of food to harvest.

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Source: www.opentaste.sg

Free delivery for purchases of S$35 and above. Customers are charged a S$4.95 delivery fee with purchases under $35. For purchases of S$35 and above, customers get to enjoy free home delivery. Opentaste’s drivers are paid S$25 an hour and they are required to deliver up to 12 orders within a two-hour window.

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Asian Insights SparX ASEAN Grocery Retail

Honestbee - Online concierge and delivery service Same-day 1-hour delivery. Customers order from the many grocery stores (NTUC Fairprice, Mmmm!, Gastronomia, etc.) listed on Honestbee. Honestbee enters into revenue-sharing agreements with all its partner merchants. The stores available for selection to the customers are dependent on the delivery address. Orders from multiple stores are possible. Once the orders are made, a concierge shopper hand-picks the products and passes them to a delivery bee. The products can be delivered within an hour of the order.

Out of stock?

Honestbee’s online model

Source: www.honestbee.sg

Source: Honestbee app

Convenience is the selling point for Honestbee. Honestbee caters to people who are providentially hindered from shopping for products on their own. These people may range from housemakers to breadwinners to the physically impaired. These people can shop at their fingertips, and coupled with same-day 1-hour delivery, Honestbee is the ideal platform for these people to purchase their necessities fuss-free. Compared to the individual grocery retailer’s online platform (Fairprice Online, Cold Storage Online, etc.), Honestbee allows the customers to make purchases from many retail stores at one go.

How are the prices like on Honestbee? Several products on Honestbee are labeled “Today’s best price”. These products are sold without a mark-up and are the same as in-store prices on the day the order is made. The other products are priced higher than in-store. Delivery/concierge fees. Honestbee offers free delivery with orders of S$50 from Fairprice and S$40 from Specialty and Farm to Table stores. Customers that do not satisfy the minimum spending will have to pay a S$10 delivery fee. Customers may also have to pay a peak fee if they select a time slot during which the delivery bees are busy. Peak fee ranges from S$0.50 to S$2. On top of the delivery fee, customers have to pay a concierge fee of S$3.99 per store for most stores. Peak fees

Out of stock? If a product is out of stock, Honestbee offers 3 options to the customer. 1) Let the concierge shopper suggest alternatives. The customer has 10 minutes to approve the purchase of the alternative product. The product will not be purchased without the customer’s approval; 2) The customer chooses the substitute product at the point of order; 3) The customer can opt not to have the product substituted as well. Customers pay for the final list of products only upon delivery.

Source: www.honestbee.sg

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Shopper/delivery bees. Shopper bees are paid up to S$11 an hour, which is based on a fixed hourly rate and a variable bonus. Delivery bees receive a fixed hourly rate and a bonus for the number of drops that they make, translating to a maximum of S$22.20 an hour. HonestBee has worked out a revenue-sharing agreement with all its partner merchants, all of whom pay HonestBee for bringing in new customers.

Grocery shopping on many platforms

HappyFresh HappyFresh serves 3 countries. HappyFresh is available in Indonesia, Malaysia, and Thailand. Customers shop for their groceries from the wide range of stores available on the HappyFresh website or mobile app. The stores available for selection is dependent on the delivery location of the customer. Once the orders are made, the groceries will be by a Grocery Courier. In Indonesia, HappyFresh ties up with 4 hypermarkets (Transmart/Carrefour, Lotte Mart, and Grand Lucky), 5 supermarkets (Ranch, Farmers Market, Superindo, Loka, and Lotte) and some specialty stores (pet shops, organic food stores, liquor shops). Coverage is limited to Greater Jakarta and the city center of Surabaya and Bandung (Java). HappyFresh’s online model

Source: www.happyfresh.com

Three ways HappyFresh makes money. There is a minimum spend and a delivery fee. Some of the merchandise are priced higher than its offline price to cover the service fee. 1) Delivery fee. Delivery fee differs among the countries HappyFresh serves. Customers pay IDR 20,000 for delivery during all delivery slots in Indonesia. In Malaysia, the delivery fee is RM 10 for next-hour time slots and RM 8 for other time slots. If the delivery address is outside of the normal coverage area of the store, customers will be charged an additional RM 1 per km. As for Thailand, delivery during regular hours is 60 THB for the first 0-10 km and 12 THB/km from 11 km onwards. Delivery during peak hours is 80 THB for the first 010 km and 12 THB/km from 11 km onwards. 2) HappyFresh takes a fee from its retail partners. 3) HappyFresh operates an analytics and data business, HappyData. It is a platform on which retailers can promote their products and services. As for payment, there are two methods: credit card and cash-ondelivery.

Source: www.happyfresh.com

Out of stock? If a product is out of stock, the customer has 3 options. 1) The Personal Shopper will suggest a similar item and call the customer for approval. 2) Customers can choose specific alternatives for any product when they make their orders. 3) Customers can opt for no replacement for any outof-stock products as well.

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GoFresh

FreshDirect

Wide product range. GoFresh offers a wide product range comprising seafood, meat, fruits, and vegetables which are sourced directly from fishermen, farmers, and artisans around the world. The products are offered to customers either fresh or frozen. The freezing process is industry standard and the products are cry-vac-packaged to preserve the freshness and flavor of the food. Before customers place their orders on GoFresh’s online store, GoFresh provides suggested cooking methods, recipes as well as tips for the products. Next-day doorstep delivery is available for orders made before 3pm from Sundays to Fridays. Orders placed on Saturdays and public holidays will be delivered on the next work weekday. The products are delivered in ice-packed, insulated boxes.

Supplier of fruits and vegetables to commercial kitchens. FreshDirect is a grocer that serves commercial kitchens, supplying to restaurants, cafes, hotels, and supermarkets all over Singapore. FreshDirect’s product portfolio comprises mainly fruits and vegetables. They ensure the quality of their products by conducting regular farm audits and product inspections. FreshDirect also claims to have the best cold-room technology. Customers can place their orders through phone, email or fax. The order form is available on FreshDirect’s website. Orders have to be made before 3pm for next day delivery and before 12pm on Saturday for Monday delivery. FreshDirect do not deliver on Sundays and public holidays.

100% guarantee. GoFresh is committed to delivering fresh produce and each purchase comes with a Freshness Guarantee. Customers will be able to replace or ask for a refund for any products that are not delivered fresh if they notify GoFresh within two days of delivery.

Pre-cut fruits and vegetables, ready to cook and eat products. Kitchenomics is a premium service provided by FreshDirect. Customers can opt to have their fruits and vegetables pre-cut and tailored to their needs. This request will have to be made three working days in advance. Furthermore, FreshDirect serves ready-to-heat soups as well. With ready-to-cook and ready-toeat products, customers can save on their food preparation and manpower.

GoFresh 100% guarantee FreshDirect’s premium service - Kitchenomics

Source: www.miseenplaceasia.com Source: www.gofresh.com.sg

Delivery fee. GoFresh delivers island wide and has a minimum order of S$40. Purchases above S$60 are entitled to free delivery. Standard delivery fee is S$15.

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More innovative online grocery retailers. Innovative online grocery retailers are set to continue offering many new services and experiences to cater to different consumer needs. OpenTaste offers consumers fresh food directly from the farms through the online channel. This service meets the needs of consumers who highly value freshness of their food. Furthermore, several products are offered at better prices compared to supermarkets as this model do without intermediaries such as exporters, importers, and distributors.

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Asian Insights SparX ASEAN Grocery Retail

Brick and mortar players have been partnering online players Year

Brick & Mortar and online player partnerships

Note

2000

John Lewis Partnership and Ocado

• John Lewis Partnership took a 40% stake in Ocado for £35m • After a series of private capital raisings by Ocado, the stake was reduced to 29% in 2008 and transferred to John Lewis Pension Fund. • John Lewis Pension Fund divested a portion of the stake in 2010 and the remainder in 2011 for a total £255m

2000

Waitrose and Ocado

• Ocado entered into a deal to deliver Waitrose’s products and to use the Waitrose brand • The agreement was renegotiated in 2008 and extended for a further ten years in 2010 with a break clause

2001

Ahold Delhaize and Peapod

• Ahold acquired a 51% stake in Peapod in 2000 and subsequently the outstanding 49% in 2001 • The total privatisation cost is approximately US$108m

2011

Morrisons and FreshDirect

• Morrisons acquired a 10% stake for US$50m to gain insight into FreshDirect’s online model • Morrisons sold the stake for c.US$58m in 2016 after setting up its own online grocery retail channel in

2011

Walmart and Yihaodian

• Walmart took a minority stake in 2011 and raised their stake in Yihaodian to 51% in 2012. Walmart

exercisable in 2017

2013 subsequently bought out the remaining shares in 2015.

• In 2016, the entire stake was sold to JD.com, China’s second largest online retailer behind Alibaba, in exchange for a 5% stake in JD.com, valued at approximately $1.5b 2013

Tesco and Lazada

• Tesco acquired a 19.6% stake in Lazada for £124m • In April 2016, 8.6% stake in Lazada was sold to Alibaba for £90m • After the sale and issuance of new shares, Tesco’s stake in Lazada was reduced to 8.3%

2013

Morrisons and Ocado

• Under a 25-year deal, Morrisons agreed to buy Ocado’s distribution centre and technology license for £170m • Ocado will assist in the technology, logistics and distribution aspects of Morrisons’ new online grocery retailing

2017

Whole Foods Market and Amazon

• AmazonFresh, Amazon’s online grocery platform, was launched in 2007 • Amazon announced that it was acquiring Whole Foods Market for US$13.7b

Source: DBS Bank

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Asian Insights SparX ASEAN Grocery Retail

Singapore • • • •

High MGR penetration, 5-year CAGR projected at 2.5% led by supermarkets Increasing smaller format supermarkets seen, and at the expense of convenience stores Increasing focus on fresh produce and reining in operating expenses to improve margins Key stock picks are Sheng Siong and Dairy Farm

MGR forecast to grow at 2.5% CAGR, led by supermarkets S GD million 7000 6000 5000 4000

Market size and growth

3000

US$6b grocery retail market, US$4.3b MGR, 72% MGR penetration. Grocery retail in Singapore had a market size of approximately US$6b in 2016, a slight decrease from US$6.2b in 2014 due to a shrinking traditional grocery retail market. Grocery retail declined 1.2% CAGR from 2014-16 due to a decrease in traditional grocery retail sales as more people shifted from traditional to MGR purchases. MGR penetration increased to 72%; hypermarkets had the highest growth of 14.9% CAGR from 2014-16, driven by strong sales of daily essentials under the private-label brands at supermarkets. Market size of MGR is expected to reach US$4.9b in 2021 US$b

Modern

Traditional

Total

Penetration

2000 1000 0 2011

2012

Supermarkets

2013

2014

6.20

69%

2016

4.34

1.71

6.05

72%

CAGR%

0.7%

-5.6%

-1.2%

2014-16

2021

4.91

1.82

6.72

73%

2.1%

2016-21

Convenience stores Others MGR

4.28

1.2%

2.5% CAGR for MGR from 2016-21. This trend is expected to reverse with a growth of 2.1% CAGR for the next five years. MGR growth is expected to increase to 2.5% CAGR, driven by the emergence of more supermarkets. Traditional grocery retail is forecast to increase at a 1.2% CAGR from 2016-21 as people shift towards MGR purchases.

Forecourt retailers

Supermarkets are expected to grow the fastest going forward

1.92

2.5%

2017F 2018F 2019F 2020F 2021F

3% CAGR for supermarkets from 2016-21. Supermarkets are expected to post the highest growth of 3% CAGR for the next five years. Convenience stores are forecast to continue its decline, albeit at a slower pace due to the emergence of more supermarkets.

4.28

CAGR%

2016

Convenience stores

Source: Euromonitor, DBS Bank

2014

Source: Euromonitor, DBS Bank

2015

Hypermarkets

US$b

2014

2016

2014-16 CAGR%

2016-21 CAGR%

Supermarkets

3.23

3.18

-0.8%

3.0%

Hypermarkets

0.53

0.70

14.9%

2.4%

0.44

0.39

-5.9%

-1.9%

0.083

0.077

-3.7%

1.9%

4.35

0.7%

2.5%

Source: Euromonitor, DBS Bank

MGR dominates grocery retail Convenience stores 6%

Forecourt retailers 1%

Hypermarkets 12% Supermarkets 53%

Traditional 28%

Source: Euromonitor, DBS Bank

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VICKERS SECURITIES Page 37

Asian Insights SparX ASEAN Grocery Retail Singapore’s MGR is dominated by supermarkets Convenience stores 9%

Forecourt retailers 2%

Hypermarkets 16%

Supermarkets 73%

Source: Euromonitor, DBS Bank

Singapore’s MGR market players Big Box Singapore Pte Ltd 4%

Other MGR 6%

Sheng Siong Group Ltd 13% NTUC FairPrice Cooperative Pte Ltd 47%

Dairy Farm International Holdings Ltd 30%

Source: Euromonitor, DBS Bank

Singapore’s grocery retail market players Traditional 28%

NTUC FairPrice Cooperative Pte Ltd 34%

Other MGR 4% Big Box Singapore Pte Ltd 3% Sheng Siong Group Ltd 9%

Source: Euromonitor, DBS Bank

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Dairy Farm International Holdings Ltd 22%

Developments Smaller outlets. With increasing affluence and interest in home cooking, Singaporeans are spending more on groceries. Grocery retailers are constantly offering deals and benefits such as discounts and loyalty programs to entice consumers to spend more at stores. Supermarket retailers are opening smaller outlets, expanding their footprint into residential districts, and extending their operating hours to 24 hours a day. For example, NTUC opened six new small outlets in residential districts which offers daily essentials at low prices to cater to the lower-income group. NTUC also expanded its range of private label products to fresh produce to target budget-conscious consumers. Technology in the grocery store. Modern grocery retailers are incorporating technology into their business through the use of self-service checkouts, increasing payment options as well as having efficient logistics management to ensure the quality and safety of the grocery products. Online grocery retailing is picking up as Singaporeans are increasingly tech-savvy and value the convenience that it is able to offer. Although consumers would still prefer to visit the physical stores to purchase fresh produce and perishable food, bulky goods such as rice and oil are popular purchases through the online channel. Good customer service and attractive discounts and rewards are important aspects valued by online consumers. This has attracted the attention of global e-commerce market players such as Amazon and Tesco which have plans to expand their business into Southeast Asia, starting with Singapore. Varying strategies employed. With regards to the market strategies of the local players, NTUC has expanded its range of fresh food and daily staples while Giant and Sheng Siong have seen strong sales of daily essentials under their respective private labels, which are priced lower. Convenience stores have taken a hit from the growing presence of supermarkets but they are continuing to innovate and are expanding into consumer food service, widening their product ranges, and offering value-added services such as cash withdrawals, e-commerce payments, and collection points for online retailing orders. 7-Eleven, for example, has introduced seating areas, new ranges of fresh food items and chilled ready meals, and are offering more premium products.

VICKERS SECURITIES Page 38

Asian Insights SparX ASEAN Grocery Retail Key sector trends

Stock picks

Singapore’s consumers have been downtrading. Over the past year, the weak economy has seen consumers trading down from higher-end supermarkets to the mass-market segment. This has led Dairy Farm, which operates higherend supermarket Cold Storage, to close some non-profitable stores in Singapore in CY2H16.

Sheng Siong (SSG SP, BUY TP S$1.20). We remain positive on Sheng Siong on the back of better visibility of higher margins. We believe expansion of its distribution centre will grow and sustain gross margins going forward. Margins remain on the uptrend, supported by the increase in direct sourcing, bulk handling, and fresh mix, contributing to earnings growth. The stock is trading attractively at 20.4x FY18F PE, compared to historical average of 23x since listing. Yield remains attractive at 4.4%. Our target price for Sheng Siong is S$1.20, based on 25x FY18F PE. The valuation is pegged at +1SD of its historical mean since listing and is below regional peers' average of 30x PE.

Store profitability remains very much in focus going forward for larger players. We expect same-store sales growth to track at 0-5%, but earnings improvement will be driven by operating leverage and margins. Cost management will be key to earnings growth. Supplier rebates, sales mix of fresh and non-fresh food, rent, wages, direct sourcing, and house brands will all be sources of earnings growth. Smaller players are trying to increase their store network by bidding for shop space at higher rates. The online business is growing, with RedMart, Tesco, and the imminent entry of Amazon Prime. But new online businesses currently face a market-share tussle with physical supermarkets, which are conveniently located across Singapore. The cost of online fulfilment currently remains high, with RedMart still recording losses and low concentration of grocery retail incumbents in the online space. We hold the view that grocery online retail will eventually take off. But for now, profitability is not expected in this space. More players that could come in in the future include Tesco Online Ventures and Amazon Prime. Grocery retail real estate especially for HDB estates is intensifying. Recent bidding of supermarket shop space in HDB estates have risen to S$15-20 per square feet. While HDB’s supply of new supermarket outlets remains robust, higher rental rates – if they persist – will increase operating costs and lead to lower margins.

ASIAN INSIGHTS

Dairy Farm (DFI SP, BUY TP US$9.96). We maintain our BUY rating on Dairy Farm (DFI) with a higher SOTP-based TP of US$9.96. Current share price ex-Yonghui values DFI’s core business at just 21.4x forward PE, below the regional peer average and its 9-year historical average forward PE of 25x. We see growth supported by more margin improvements ahead. It delivered stronger 2H16 earnings, driven by better operating efficiencies as anticipated. We continue to be positive on further cost efficiencies from enhanced operational processes through distribution centres, procurement and IT systems. In line with growth traction, we also expect DPS to increase in FY17F based on c.60-56% payout ratio, leading to slightly higher dividend yield. Our target price of US$9.96 is derived from sum-of-parts valuation methodology. We value DFI's core business at US$9.34 based on DCF and the 20% stake in Yonghui, based on the market value of US$1.09 and net debt of US$0.47 per share.

VICKERS SECURITIES Page 39

Asian Insights SparX ASEAN Grocery Retail

Indonesia •

Low MGR penetration at 17%, 5-year CAGR projected at 5.3% led by convenience stores Government controlling MGR expansion locations Sluggish household spending while competition remains keen Negative on MPPA on weak demand, competition and higher opex

• • •

Market size and growth US$101b grocery retail market, US$17b MGR, 17% MGR penetration. Indonesia’s US$101b grocery retail market was the biggest in 2016 among the five SEA countries. The market size increased marginally from 2014. Grocery retail was largely dominated by traditional grocery retail as it has a far-reaching presence into all parts of the country, rural areas in particular. MGR penetration increased by one percentage point to 17% in 2016, driven by outlet expansion and the adoption of unique selling points such as fresh produce by supermarkets and hypermarkets. Market size of MGR is expected to reach US$23b in 2021 US$b

Modern

2014

16.27

83.23

99.50

2016

17.40

83.93

101.33

17%

CAGR%

3.4%

0.4%

0.9%

2014-16

2021

22.53

97.45

119.98

19%

3.4%

2016-21

CAGR%

Traditional

5.3%

Total

3.0%

Penetration 16%

Source: Euromonitor, DBS Bank

3.4% CAGR for grocery retail from 2016-21. Grocery retail grew at a rate of 0.9% CAGR from 2014-16 and the growth is expected to increase to 3.4% CAGR for the next five years, driven by traditional grocery retail. MGR and traditional grocery retail are also expected to grow at a faster pace at 5.3% and 3% CAGR, respectively. MGR forecast to grow at 5.3% CAGR, led by convenience stores

9.8% CAGR growth for convenience stores from 2014-16. Convenience stores posted the highest growth among MGR from 2014-16. It is expected to continue doing the same from 2016-21, with a CAGR of 7.8% as people value the convenience and close proximity to residential districts that they offer. Both supermarkets and hypermarkets declined from 2014-16 in US$ terms due to exchange-rate differences. These two segments are forecast to grow at a CAGR of 2.5% and 1.6%for the next five years, led by outlet expansions. Convenience stores are expected to grow the fastest going forward US$b

2014

2016

2014-16 CAGR%

2016-21 CAGR%

Supermarkets

5.34

5.20

-1.3%

2.5%

Hypermarkets

3.28

3.00

-4.4%

1.6%

Convenience stores

7.62

9.18

9.8%

7.8%

Others

0.036

0.041

6.7%

3.8%

MGR

16.28

17.42

3.4%

5.3%

Source: Euromonitor, DBS Bank

Traditional grocery retail dominates the grocery retail market Supermarkets 5%

Hypermarkets 3%

Convenience stores 9%

Traditional 83%

Source: Euromonitor, DBS Bank

Indonesia’s MGR is dominated by convenience stores

IDR trillion

Supermarkets 30%

400 350 300

Convenience stores 53%

250 200 150 100

Hypermarkets 17%

50 0 2011

2012

2013

Convenience stores

2014

2015

Supermarkets

2016

2017F

Hypermarkets

2018F

2019F

2020F

Forecourt retailers

2021F

Source: Euromonitor, DBS Bank

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 40

Asian Insights SparX ASEAN Grocery Retail Indonesia’s MGR market players Indomaret 27%

Other MGR 31%

Dairy Farm International Holdings Ltd 5% Matahari Putra Prima Tbk PT Trans Retail 6% Indonesia PT 7%

Alfamart 24%

Source: Euromonitor, DBS Bank

Indonesia’s grocery retail market players Indomaret 5%

Alfamart 4% Trans Retail Indonesia PT 1% Other MGR 7%

Traditional 83%

Source: Euromonitor, DBS Bank

Developments Outlet expansion outside key urban areas. Many Indonesians enjoy visiting hypermarkets to replenish their grocery supplies. However, due to their increasingly busy lifestyles, many are preferring convenience stores and forecourt retailers as they are closer to their homes. This is helped by the aggressive outlet expansion of convenience stores, which includes expanding into third-tier cities across the country and the addition of new products besides groceries. For example, Indomarco Prismatama PT launched cheaper and easier franchise agreements and schemes as well as a Take Over scheme to aid their outlet expansion plans. Indomarco also embarked on its online retail plans and diversified into several brand extensions, namely Indomaret Point, Indomaret Fresh, and Indomaret Plus to increase its actual sales. Hypermarkets and supermarkets have also increased their outlet counts and supermarkets are reaching out to consumers in second-tier cities such as Solo.

ASIAN INSIGHTS

Consumers’ are now more demanding. Supermarkets are focusing on grocery products and unique selling points such as fresh produce. Hypermarkets, on the other hand, are focusing more on the sales of non-grocery products due to the higher profit margins. Consumers also enjoy purchasing non-grocery products from hypermarkets due to the aggressive promotions offered by retailers. Pricing is key for grocery retail as consumers wants to obtain the maximum value from their grocery purchases. In addition to price, consumers are also considering other factors such as quality, customer service, store location, and presence of value-added services when making their purchase decisions. Online grocery retail sprouting. Online grocery retailing is growing as many Internet retailers have added grocery products to their product portfolio. Many special events and promotions were also held to entice consumers to switch to online retailing. Traditional grocery retailers taking on the challenge by MGR. Despite the growth of modern grocery retailing, traditional grocery retailing still prevails due to the deep penetration into many areas in the country, especially the smaller and more remote areas where modern grocery retailers are unable to reach. Traditional retailers have also made efforts to compete with modern retailers by renovating and providing home delivery services. The Indonesian government are also starting to control the locations where new modern grocery retailers can expand to and has stopped issuing licenses for the opening of new convenience stores to protect traditional retailers. However, with the limited enforcement of laws and the opportunity present in in less saturated areas outside Java, modern retailers are still expected to continue with their outlet expansion plans. One interesting development is GoJek from Gojek Indonesia PT. Consumers can utilise Go-Jek riders to purchase groceries and have them delivered. This has been well-received because of the traffic jams in large cities which makes travelling by cars time-consuming. Key sector trends Household spending remained sluggish in 1H17. Retailers indicated weak sales during the Lebaran season with the Food and Beverage Association reporting that the industry’s sales fell by 10% from last year’s Lebaran season. While prices of Indonesia’s key export commodities (rubber, coffee and Crude Palm Oil) trended up in 2H16, the rally was not sustainable, hence it has not been able to support consumers’ spending power ahead of Lebaran. In addition, the delay in payment of civil servants’ extra salary in June also exacerbated the weak spending. We note that the listed grocery retailers saw their sales growth decelerating in 1Q17, with flattish to negative SSSG. Some of them did not to see any meaningful improvement approaching Lebaran season.

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Asian Insights SparX ASEAN Grocery Retail Better demand outlook in 2H17 but competition remains tight. Despite the weak 1H17, we expect the momentum of economic recovery to continue in 2H17, supported by an increase in the government’s spending and steady electricity tariffs. Nonetheless, we expect consumers to continue shifting away from hypermarkets to minimarkets, as the latter has continued to expand rapidly by adding around 3,000 stores annually over the country. We see pressure on hypermarket’s margin to persist as operators try to compete on price against minimarkets as well as regional supermarkets.

ASIAN INSIGHTS

Stock picks Matahari Putra Prima (MPPA IJ, FULLY VALUVED TP Rp450). We continue to see earnings risk on the horizon as MPPA embarks on its new strategy to capture market share by cutting prices, aiming to narrow the gap between itself and competing regional supermarkets and minimarkets. Earnings should come under pressure on weak demand and increase in opex through the write-off of supplier rebate receivables.

VICKERS SECURITIES Page 42

Asian Insights SparX ASEAN Grocery Retail

Malaysia • • • •

Moderate MGR penetration at 42%, 5-year CAGR projected at 7.3% led by convenience stores Convenience store expanding and gaining popularity Competition, costs and weak consumption dampening the sector No stock calls on earnings risk and high valuation

Market size and growth US$15b grocery retail market, US$6.3b MGR, 42% MGR penetration. Malaysia’s grocery retail market fell to US$15b in 2016 from US$18b in 2014 due to softening economic conditions in Malaysia in 2016 which dampened consumer confidence. The market is expected to pick up for the next five years and is forecast to reach US$21b in 2021. MGR penetration remained unchanged and there is no expectation of any changes in 2021 as well. The MGR market is expected to reach US$9b in 2021 US$b

Modern

Traditional

Total

Penetration

2014

7.68

10.43

18.11

42%

2016

6.29

8.78

15.07

42%

-9.5%

-8.3%

-8.8%

2014-16

2021

8.95

12.29

21.24

42%

CAGR%

7.3%

7.0%

7.1%

2016-21

CAGR%

14.2% CAGR for convenience stores from 2016-21. All the segments in MGR fell from 2014-16. Hypermarkets posted the biggest decline as the leading players engaged in aggressive price competition and supermarkets and convenience stores posed competition. Supermarkets and hypermarkets are expected to grow during 2016-21. Similarly, convenience stores are forecast to grow at a 14.2% CAGR for the next five years due to outlet expansion and the convenience they are able to offer to busy consumers. Overall, MGR is expected to grow at a 7.3% CAGR from 2016-21. Convenience stores are expected to grow the fastest going forward US$b

2014

2016

2014-16 CAGR%

Supermarkets

2.46

2.07

-8.3%

6.3%

Hypermarkets

3.67

2.83

-12.2%

5.8%

Convenience stores

0.89

0.83

-3.4%

14.2%

Others

0.66

0.56

-7.9%

6.7%

MGR

7.68

6.29

-9.5%

7.3%

Source: Euromonitor, DBS Bank

Traditional grocery retail is 58% of total grocery retail

Source: Euromonitor, DBS Bank

7.1% CAGR grocery retail growth for the next five years. Grocery retail declined by a staggering 8.9% CAGR for the past two years but is expected to grow at a 7.1% CAGR from 2016-21, approximately equally contributed by both MGR and traditional grocery retail. MGR and traditional grocery retail declined for the past two years but they are forecast to grow at a 7.3% and 7% CAGR, respectively for the next five years. MGR forecast to grow at 7.3% CAGR, led by hypermarkets

2016-21 CAGR%

Convenience stores 5%

Forecourt retailers 3%

Supermarkets 14%

Hypermarkets 19%

Traditional 59%

Source: Euromonitor, DBS Bank

Malaysia’s MGR is dominated by hypermarkets

M YR million 35000

Forecourt retailers Discounters 8% 1% Convenience stores 13%

30000 25000 20000

Supermarkets 33%

15000 10000 5000 0 2011

2012

2013

2014

2015

2016

Hypermarkets

Supermarkets

Forecourt retailers

Discounters

2017F 2018F 2019F 2020F 2021F

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

Convenience stores

Hypermarkets 45%

Source: Euromonitor, DBS Bank

VICKERS SECURITIES Page 43

Asian Insights SparX ASEAN Grocery Retail Malaysia’s MGR players Dairy Farm International Holdings Ltd 30%

Other MGR 40%

Tesco Plc 17%

Econsave Cash & AEON Group Carry Sdn Bhd 7% 6%

Source: Euromonitor, DBS Bank

Malaysia’s grocery retail market players Dairy Farm International Holdings Ltd 13% Tesco Plc 7% AEON Group 3% Econsave Cash & Carry Sdn Bhd 3%

Traditional 58%

Other MGR 16%

Source: Euromonitor, DBS Bank

Developments Aggressive promotions. More grocery retail brands are entering the Malaysian market and consumers are increasingly interested in getting the best deal from the many options. Many grocery retailers provide frequent price promotions, with hypermarket retailers registering negative performances because of the aggressive price promotions. For example, Mydin, a discounter chain, has been drumming up strong demand among low-income groups by selling daily essentials at competitive prices. In addition, Mydin has been able to expand rapidly due to its active advertising campaigns. Convenience stores are preferred among consumers. Convenience stores are gaining popularity because they have comprehensive product portfolios and are located close to residential areas, making them very convenient for consumers. Convenience stores have also introduced quick meal solutions as well as instant noodles and hot drinks to cater to the busy consumers. Consumers on the whole prefer supermarkets and convenience stores to hypermarkets due to the faster checkout queues and lower consumer traffic within each store. To this end, hypermarkets are focused on selling non-grocery products to cater to different consumer needs. Modern retailers are putting in more effort to provide better packaging and rebate vouchers to boost the sales of private-

ASIAN INSIGHTS

label products as these products are usually perceived as lowquality goods. With regards to online grocery retailing, it is still in its infancy as there are limited players. Many elderly shoppers still prefer to purchase groceries from physical stores, whereas young and tech-savvy consumers are more supportive of online grocery retail due to the convenience it offers. MGR have an advantage over traditional grocery retailers. Traditional grocery retailers are still generating higher value sales because of their strategic locations, which are usually walking distance to the homes of the consumers. However, modern grocery retailers do have the advantage of having comprehensive product portfolios, longer opening hours as well as the ability to provide a more comfortable shopping experience. Pricing is important and many retailers offer aggressive price discounts on a weekly or bi-weekly basis. For example, GCH Retail (M) Sdn Bhd retained its top position in grocery retail through strategic marketing plans and its investments in several different outlet formats. GCH Retail (M) Sdn Bhd also offers the lowest priced products as well as weekly promotions. Major retailers are expected to engage in outlet expansions and to extend their daily operating hours to 24 hours. Key sector trends Keen competition, weak consumption dampening the sector. Consumer spending remains unexciting, with the Malaysian Institute of Economic Research’s Consumer Sentiments Index for 1Q17 at 76.6 points, significantly below the 100-point threshold and pointing to a sluggish recovery. In addition, intensified competition in the sector, particularly from new comers such as Lulu Hypermarket and aggressive expansion by convenience store operators, has led to heavier price discounts. Although potential election goodies could help temporarily create ‘feel good’ sentiment, we do not expect it to be a significant re-rating catalyst for the sector. Convenience stores continued to see strong expansion. Malaysians’ increasingly frantic lifestyles have also resulted in rising demand for convenience stores, which continue to see strong expansion into the untapped market. As such, we are not surprised that the management of 7-Eleven Malaysia has maintained its new store expansion plan at about 200 stores/annum, while Bison Consolidated has plans to open 70 new stores per year in FY17- 18. Margin may come under pressure. We also expect margin to come under pressure in view of (1) increased cost, partly driven by a higher minimum wage and more expensive imported products due to a weak Ringgit, and, (2) increased competition in the sector, which restricts retailers’ ability to pass on higher costs.

VICKERS SECURITIES Page 44

Asian Insights SparX ASEAN Grocery Retail Stock pick 7-Eleven Malaysia (SEM MK, NR, Potential Target RM1.58). Although the group offers one of the best exposures to a potential consumption recovery story in Malaysia – being the largest operator in the standalone-convenience store segment (82% market share) with an aggressive new store expansion plan (about 200 stores/annum) to support topline growth – we are concerned that high operating expenses arising from new store expansion could weigh on its earnings. Furthermore, a slow recovery in consumer sentiment could cap its near-term earnings growth. Our fair value for 7Eleven (M) stands at RM1.58, based on 29x PE, which is in line with its regional peers’ average PE.

ASIAN INSIGHTS

Bison Consolidated (BISON MK, NR, Potential Target RM2.02). Bison has posted an impressive profit CAGR of 15.7% over FY13-FY16 despite the challenging retail environment. We believe that the group has successfully established a feasible business model in Malaysia’s retail space. With its upcoming new outlet openings and gradual recovery in consumer sentiment, we are optimistic that the group will continue to record double-digit earnings growth at CAGR of 24.7% over FY17-19. Despite its bright growth prospects, we believe it is fairly valued at this juncture. We have derived a TP of RM2.02, pegging at 25x FY17F PE, which is a 20% discount to its regional peers’ average PE, after taking into account its smaller size (relative to peers).

VICKERS SECURITIES Page 45

Asian Insights SparX ASEAN Grocery Retail

Thailand •

Moderate MGR penetration at 46%, 5-year CAGR projected at 7.5% led by convenience stores Convenience store growing with more products, services Margins to expand on product mix, cost management Positive on CPALL on easing competition, margin expansion

• • •

Market size and growth US$52b grocery retail market, US$24b MGR, 46% MGR penetration. Thailand’s grocery retail market size decreased to US$52b in 2016 due to exchange-rate differences but it is expected to reach US$68b in 2021. MGR penetration increased to 46% in 2016, driven by convenience stores and is forecast to continue increasing to 51% in 2021. Sales of traditional grocery retail has been declining for the past two years, due to exchange-rate differences, but is expected to make a turnaround to post growth of 3.3% CAGR for the next five years. Market size of MGR is expected to reach US$35b in 2021 US$b

Modern

Traditional

Total

Penetration

2014

23.47

29.70

53.17

2016

24.17

28.20

52.37

46%

CAGR%

1.5%

-2.6%

-0.8%

2014-16

2021

34.65

33.10

67.75

51%

CAGR%

7.5%

3.3%

5.3%

2016-21

9.8% CAGR for convenience stores from 2016-21. Convenience stores posted the strongest growth from 201416 of 4% (CAGR), due to outlet expansion by leading players. All segments of MGR are expected to grow over the next five years, with convenience stores posting the strongest growth of 9.8% CAGR on the back of continuing aggressive outlet expansion by players into metropolitan and provincial areas. Supermarkets and hypermarkets are expected to be driven by Internet retailing in the long term. Overall, MGR is forecast to grow at a CAGR of 7.5%. Convenience stores are expected to grow the fastest going forward US$b

2014

2016

2014-16 CAGR%

2016-21 CAGR%

Supermarkets

4.63

4.72

1.0%

6.4%

Hypermarkets

8.08

7.97

-0.7%

5.2%

Convenience stores

9.11

9.86

4.0%

9.8%

Others

1.66

1.62

-1.2%

6.7%

MGR

23.48

24.17

1.5%

7.5%

Source: Euromonitor, DBS Bank

44%

Traditional grocery retail is 54% of total grocery retail Forecourt retailers 3%

Supermarkets 9%

Source: Euromonitor, DBS Bank

Grocery retail to grow at a 5.3% CAGR from 2016-21. Grocery retail declined 0.8% CAGR from 2014-16 but is forecast to grow at a 5.3% CAGR for the next five years, driven by MGR. MGR is expected to grow at a faster pace than traditional grocery retail, with a 7.5% and 3.3% CAGR, respectively, as consumers prefer buying from convenience stores to traditional formats.

Hypermarkets 15% Traditional 54%

Convenience stores 19%

Source: Euromonitor, DBS Bank

MGR forecast to grow at 7.5% CAGR, led by convenience stores

Thailand’s MGR is dominated by convenience stores

T HB billion

Supermarkets 21%

1400 1200 1000

Convenience stores 44%

800 600 400 200

Hypermarkets 35%

0 2011

2012

2013

Hypermarkets

2014

2015

Convenience stores

2016

2017F

Supermarkets

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

2018F

2019F

2020F

Forecourt retailers

2021F

Source: Euromonitor, DBS Bank

VICKERS SECURITIES Page 46

Asian Insights SparX ASEAN Grocery Retail Thailand’s MGR market players Other MGR 21% CP All - 7-Eleven 33% FamilyMart Uny Holdings Co Ltd 2% Central Group 4%

Big C Supercenter PCL 14% Tesco Plc 26%

Source: Euromonitor, DBS Bank

Thailand’s grocery retail market players CP All - 7-Eleven 15%

Tesco Plc 12% Traditional 54%

Big C Supercenter PCL 7% Central Group 2% Other MGR 10%

Source: Euromonitor, DBS Bank

Developments Convenience stores, hypermarkets and supermarkets serve different consumer needs. The interest in convenience stores among consumers stems from the convenience of parking, the modern and attractive stores, their proximity to their residential areas, and the variety of food which they can purchase anytime during the day. Convenience stores also provide special promotions to entice consumers. Hypermarkets are already present in key target areas and thus the outlet expansion might be slower. Hypermarkets offer promotions to consumers, especially since most of their consumers are low and middle-income groups which were badly hit by the drought and the economic slowdown in 2016. Supermarkets, having a consumer base comprising mostly middle and high-income group, focus on providing healthier products such as organic food as their consumers are increasingly concerned about quality.

ASIAN INSIGHTS

Innovation in online grocery retailing. Online grocery retailing is gaining traction as it is a convenient platform for consumers to do their grocery shopping. As a result, grocery retailers have launched many services and promotions. For example, Tesco Lotus introduced many new services in 2016; it offers a variety of channels to deliver their products, and consumers can order online and pick up the products at any Tesco Lotus branch using “Click-and-Call”. Similarly, customers can order online and receive the products at several condominium lockers in Bangkok using ShopBox24. Alternatively, HappyFresh delivers Tesco Lotus products to consumers within two hours. Besides delivery services, Tesco also incorporated iBeacon, by which customers will receive special privileges or discounts when they walk pass the beacon points in Tesco if they have installed the Tesco Lotus application on their smartphones. Convenience stores are also innovating. Convenience stores are focusing on food. For example, 7-Eleven launched the Food place business model to sell fresh food and a wide variety of food products. The food products are offered at reasonable prices largely because 7-Eleven has the economies of scale to do so. Apart from selling food, 7-Eleven is looking towards outlet expansion as well as offering laundry services and opening restaurants at their stores. 7-Eleven also offers many special promotions during the year. Another convenience store retailer that is gaining attention is Lawson 108. Lawson 108 focuses on selling Japanese products and is looking to extend its footprint across the country using both franchises and its own investment. Its main target group is urban dwellers. Growth strategies include online, ready-to-eat food and store expansion. Convenience stores will be expected to be aggressive in expanding their outlets into metropolitan and provincial areas. They will also seek to provide more food and drinks intended for instant consumption as well as improve the prices and quality of their products. As for online grocery retail, logistic is an important area of focus as consumers will expect to receive their products on time. Online marketing should also be considered.

VICKERS SECURITIES Page 47

Asian Insights SparX ASEAN Grocery Retail Key sector trends

Stock picks

Food retail held up despite weak outlook. The sentiment overall in Thailand is dull as there hasn’t been a near-term catalyst that would boost the economy so far. Quarter-todate statistics for Thailand’s retail sector hasn’t been exciting amid a challenging environment. Additionally, there was impact from the high base in April last year caused by the government’s stimulus measure and different weather conditions (hot and drought last year vs a lot of rain this year). Accordingly, SSSG of most of the retailers QTD, including food and discretionary ones, have been in negative territory. However, the food retailers such as CPALL did better than peers with milder negative SSSG.

CPALL (CPALL TB, BUY TP Bt75.00). We maintain our BUY rating as we like CPALL for its business resilience, continuous success in expanding their network, margin expansion from an improving product mix, and lower interest expense on debt repayment and refinancing. We believe the cash-andcarry business will no longer be an earnings drag to the group this year, as its revenue growth and gross margin expansion will be fueled by softer competition following BIGC’s business strategy to discontinue giving discount coupons to big-basket customers. Coupled with convenient stores’ continuous aggressive expansion plan, resilient SSSG, and its efforts to boost gross margin via a product-mix strategy, we expect the group to deliver 21% y-o-y growth for FY17F earnings. Additionally, we are not concerned about market saturation as we think that the CVS market in Thailand still has room to grow. Despite aggressive store rollouts, average customer visits per store have been maintained at above 1,200 customers per store per day, the highest among global 7Eleven store operators. Given its small-sized CVS store format, we believe its aggressive plan for outlet expansion is achievable, even in Bangkok, in view of the upcoming new mass transit lines.

Expect margin expansion. Despite a slowing sales outlook, we still expect positive FY17F earnings growth for the sector, driven by margin expansion. Earnings growth of all retailers has been positive YTD and we expect this to continue for the rest of the year. The factors that have been widening margin are product mix, cost management, and smaller interest expense (from lower cost of debt and outstanding debt). We note that there will be a cremation ceremony for Thailand’s late King Bhumibhol in October this year. We believe Thailand might face another period of slower consumption as people will be in mourning once again. However, the length and the magnitude will be much less than in October last year as the event has been in the calendar for a year.

ASIAN INSIGHTS

VICKERS SECURITIES Page 48

Asian Insights SparX ASEAN Grocery Retail

The Philippines •

Moderate MGR penetration at 30%, 5-year CAGR projected at 22% led by convenience stores Online still unpopular, convenience stores are gaining traction Demand resilient despite higher inflation Positive on RHHI, Neutral on PGOLD

• • •

Market size and growth US$43b grocery retail market, US$13b MGR, 30% MGR penetration. The Philippines’ grocery retail market increased from US$41.5b in 2014 to US$42.9b in 2016, driven by MGR. MGR penetration has also increased to 30% on the back of outlet expansion and gradual shifting of preference for quality products from MGR. Traditional grocery retail continues to be popular due to its proximity to residential areas and consumers’ familiarity with the it. Looking forward, the market size is expected to reach US$62.6b and penetration, 35% in 2021. Market size of MGR is expected to reach US$22b in 2021 US$b

Modern

Traditional

Total

Penetration

2014

11.77

29.71

41.48

28%

2016

12.99

29.87

42.86

30%

CAGR%

5.1%

0.3%

1.6%

2014-16

2021

21.98

40.62

62.60

35%

CAGR%

11.1%

6.3%

7.9%

2016-21

19.4% CAGR for convenience stores from 2016-21. Convenience stores grew at the fastest pace from 2014-16 at 13.5% CAGR due to their convenience and accessibility especially for urban workers. The format is expected to continue to post the fastest growth from 2016-21, with a CAGR of 19.4%. Supermarkets and hypermarkets are forecast to continue their growth as players look to expand into areas that have low MGR penetration – rural and emerging markets. MGR is expected to grow at a 11.1% CAGR for the next five years. Convenience stores are expected to grow the fastest going forward US$b

2014

2016

2014-16 CAGR%

2016-21 CAGR%

Supermarkets

8.81

9.66

4.7%

9.7%

Hypermarkets

2.27

2.47

4.3%

13.3%

Convenience stores

0.59

0.76

13.5%

19.4%

Others

0.088

0.10

6.6%

10.9%

MGR

11.76

12.99

5.1%

11.1%

Source: Euromonitor, DBS Bank

Traditional grocery retail dominates the grocery retail market Convenience stores 2%

Hypermarkets 6%

Source: Euromonitor, DBS Bank

Higher growth for grocery retail from 2016-21. Grocery retail growth is expected to increase from 1.6% CAGR for the past two years to 7.9% CAGR from 2016-21. Both MGR and traditional grocery retail are forecast to post much higher growth of 11.1% and 6.3%, respectively, over the next five years as consumers needs and purchasing power increases. MGR forecast to grow at 11.1% CAGR, led by supermarkets PHP billion

Supermarkets 22%

Traditional 70%

Source: Euromonitor, DBS Bank

Philippines’ MGR is dominated by supermarkets Convenience stores Others 1% 6%

1000 900 800 700

Hypermarkets 19%

600 500 400 300 200 100 0 2011

2012

2013

2014

2015

2016

Supermarkets

Hypermarkets

Forecourt retailers

Discounters

2017F 2018F 2019F 2020F 2021F

Source: Euromonitor, DBS Bank

ASIAN INSIGHTS

Supermarkets 74%

Convenience stores

Source: Euromonitor, DBS Bank

VICKERS SECURITIES Page 49

Asian Insights SparX ASEAN Grocery Retail The Philippines’ MGR market players SM Retail Inc 22%

Other MGR 42% Puregold Price Club Inc 13%

JG Summit Holdings Inc Metro Retail 8% Stores Group Rustan Group of Seven & I 3% Cos Holdings Co Ltd 8% 4%

Source: Euromonitor, DBS Bank

The Philippines’ grocery retail market players SM Retail Inc Puregold Price 7% Club Inc 4% JG Summit Holdings Inc 2% Rustan Group of Cos 2% Other MGR 15%

Traditional 70%

Source: Euromonitor, DBS Bank

Developments Convenience stores are gaining popularity. Convenience and accessibility, due to the lack of free time as well as poor traffic conditions, are important considerations for consumers. Therefore, grocery retailers are focusing more on opening smaller store formats such as convenience stores in residential areas and business districts closer to consumers, as well as providing grocery delivery services and online grocery services to consumers. Convenience stores appeal to young and independent workers who enjoy eating out or purchasing take-away. These convenience stores usually have bright and cool interiors, a wide product selection, and are efficient. Consumers usually look to traditional grocery retailers located within their neighborhoods when they want to purchase food for immediate consumption and to convenience stores to satisfy their needs for a simple meal or a quick snack.

ASIAN INSIGHTS

Worsening traffic conditions and busy lifestyles are driving online grocery retailing. Hypermarkets remain popular among consumers as they carry an extensive selection of grocery and non-grocery products. Meanwhile, supermarkets are popular among consumers for groceries and household consumables. Hypermarkets and supermarkets continue to focus more on grocery products due to the higher demand and sales. Online still unpopular. Online grocery retail continues to be unpopular as many consumers still prefer to visit the physical stores to do their grocery shopping to ensure the quality and affordability. Consumers are also not confident to transact through online means. However, with worsening traffic conditions and lack of time, consumers are starting to explore the online alternative. Online retailers, Metromart and Robinsons Retail Group and SM Retail, utilize both desktop and mobile applications, which focus on convenience, security, and reliability, to reach out to more consumers. MGR expected to continue outlet expansion plans. Traditional grocery retailers continue to reign because they are able to capture the underdeveloped and emerging markets, which modern grocery retailers have been unable to penetrate; they have been able to form close personal relationships with the consumers and provide perks and discounts from time to time. However, some consumers prefer modern grocery retailers due to the quality and quantity of their product selection, especially those of imported brands. Both modern and traditional grocery retailers position themselves according to price segments, altering their prices, products, and location of their stores accordingly. Modern grocery retailers are expected to engage in outlet expansion to reach out to more consumers, focusing mainly on convenience stores as business districts and residential neighborhoods usually have smaller spaces available. For example, multiformat operator SM Retail maintains its strong market position by opening new outlets in locations that are more accessible to consumers. Philippine Seven Corp leveraged its operational network and has also opened new outlets in new and emerging markets.

VICKERS SECURITIES Page 50

Asian Insights SparX ASEAN Grocery Retail Key sector trends

Stock picks

Demand remains resilient post-election and in the face of higher inflation. Consumer confidence was elevated in 2Q17 and grocery retailers under our coverage have been experiencing solid SSSG – despite the high base last year. Demand is underpinned by a constructive industry backdrop, rising household disposable income, manageable inflation, and robust economic activity. Should Package 1 of the proposed tax reform package (which includes lower income tax rates) comes through, there could be a boost in grocery spend of households. While SSSG remain solid at 3%-4%, the impact of new store rollouts to sales is becoming less pronounced because the growth of stores’ net selling area is slowing, due to a high base. Gross margins are still expanding, albeit at a slower pace. Expenses are being suppressed to offset the impact of end of contractualisation. Hence, profit margins are expected to remain stable but with room for an uptick.

Puregold Price Club (PGOLD PM, HOLD TP P41.90). We are projecting net profit growth of 9.2%/9.7% for FY17F/FY18F. The slower earnings growth is due to diminishing impact of new stores on revenue growth, higher inflation, and competition. The cash conversion cycle (CCC) will continue to deteriorate on rising inventory and management preference to pay suppliers early to avail discounts. The industry’s outlook remains bright and PGOLD’s long-term earnings prospects are attractive. However, we anticipate better entry points ahead. Our TP is P41.90, based on SOTP valuation methodology. This implies PE of 19x FY17F and 18x FY18F earnings.

The cash conversion cycle problem. Retailers under our coverage continue to experience longer cash conversion cycles. Inventory is rising while payable days continue to shrink. Based on our channel check, retailers are paying early to be prioritised and avail of discounts offered by larger suppliers. We believe suppliers have gained the upper hand in bargaining, given the competition between the big three retailers (SM Retail, Puregold, and Robinsons Retail). Inventory management will be key in balancing margins and cash conversion cycle days.

ASIAN INSIGHTS

Robinsons Retail Holdings (RHHI PM, BUY TP P101). We continue to have BUY rating on Robinsons Retail Holdings (RRHI) with a SOTP-based TP of P101.00. While our forecast reflects the lower end of management’s GFA guidance, we see ample room for upside as demand has remained resilient post-elections and in the face of rising inflation. Margins could expand or at least remain stable on fewer store closures of non-performing stores, mitigating the adverse impact of end of contractualisation (ENDO). With its large war chest and better inventory management, RRHI is able to alleviate deterioration of it its cash conversion cycle (CCC) days brought about by from fewer payable days. The stock is inexpensive, trading below historical average and its regional peers. Our TP of P101.00 has an implied FY18F PE of 22.4x – which is slightly above the stock’s historical forward PE 21.8x.

VICKERS SECURITIES Page 51

Asian Insights SparX ASEAN Grocery Retail

Stock Profiles

ASIAN INSIGHTS

VICKERS SECURITIES Page 52

Singapore Company Guide

Dairy Farm Version 5

Refer to important disclosures at the end of this report

| Bloomberg: DFI SP | Reuters: DAIR.SI

DBS Group Research . Equity

6 Mar 2017

BUY

Efficient operations to drive growth

Last Traded Price ( 3 Mar 2017): US$8.51 (STI : 3,122.34) Price Target 12-mth: US$9.96 (17% upside) (Prev US$7.18) Potential Catalyst: Earnings turnaround, margin recovery Where we differ: In line Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New 

2H16 and FY16 results above, driven by margin recovery



Final DPS of 14.5 UScts declared



Expect more operational efficiencies to be realised



Maintain BUY, TP raised to US$9.96

2H16 results ahead. Earnings came in at US$270m (+16% y-o-y) led by margin expansion, with revenue growth of just 1.7% y-oy (US$5.6bn). Revenue growth was driven strongly by North Asia, largely its HK Supermarkets and HK & China convenience stores, Health & Beauty, and Home Furnishing segments. Store rationalisation in Singapore and Indonesia helped to improve margins in supermarkets/hypermarkets segment though the closure of loss making stores. There was also improved contribution from Maxim’s and Yonghui at the associate level.

Price Relative US$

Relative Index

14.0 13.0

206

12.0

186

11.0

166

10.0

146

9.0

126

8.0

106

7.0

86 66

6.0 5.0 Mar-13

Mar-14

Mar-15

Dairy Farm (LHS)

Forecasts and Valuation FY Dec (US$ m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (US cts.) EPS Pre Ex. (US cts.) EPS Gth Pre Ex (%) Diluted EPS (US cts.) Net DPS (US cts.) BV Per Share (US cts.) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

Mar-16

46 Mar-17

Relative STI (RHS)

2015A 11,137 732 503 424 428 (14.3) 31.3 31.7 (14) 31.3 20.0 102 27.2 26.9 16.4 16.5 2.4 8.4 0.3 30.2

Earnings Rev (%): Consensus EPS (US cts.): Other Broker Recs:

2016A 11,201 784 555 469 463 8.1 34.7 34.2 8 34.7 21.0 111 24.5 24.9 21.2 15.6 2.5 7.6 0.4 32.6

2017F 11,642 831 580 486 486 4.9 35.9 35.9 5 35.9 23.0 126 23.7 23.7 13.4 14.3 2.7 6.7 0.1 30.2

2018F 12,297 895 634 524 524 7.9 38.8 38.8 8 38.7 23.0 142 22.0 22.0 21.8 13.2 2.7 6.0 0.1 28.9

2 37.4 S: 1

1 41.6 H: 2

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

ASIAN INSIGHTS ed: JS / sa:JC, PY

Maintain BUY, on track for better profitability. We maintain our BUY rating on Dairy Farm (DFI) with a higher SOTP-based TP of US$9.96. Current share price ex-Yonghui values DFI’s core business at just 21.4x forward PE, below the regional peer average and its 9-year historical average forward PE of 25x. We see growth supported by more margin improvements ahead. 2H16 results delivered stronger earnings driven by better operating efficiencies as anticipated. We continue to be positive on further cost efficiencies from enhanced operational processes through distribution centres, procurement and IT systems. In line with growth traction, we also expect DPS to increase in FY17F based on c.60-56% payout ratio, leading to slightly higher dividend yield.

Valuation: SOTP valuation methodology. Our target price of US$9.96 is derived from sum-of-parts valuation methodology. We value DFI's core business at US$9.34 based on DCF and the 20% stake in Yonghui based on the market value at US$1.09 and net debt at US$0.47 per share. Key Risks to Our View: Significant earnings disappointment. We expect earnings growth to accelerate into FY17F as management rings in better operating efficiencies. We believe that earnings would have to disappoint significantly to derail our positive bias on the stock. Nonetheless, our earnings forecast is conservative.

At A Glance Issued Capital (m shrs) 1,352 Mkt. Cap (US$m/US$m) 11,509 / 11,509 Major Shareholders (%) Jardine Matheson Holdings 77.6 Free Float (%) 22.4 3m Avg. Daily Val (US$m) 2.8 ICB Industry : Consumer Services / Food & Drug Retailers

VICKERS SECURITIES Page 53

Company Guide Dairy Farm

WHAT’S NEW Results review 2H16 & FY16 results ahead. FY16 core earnings was US$463m (+8.1% y-o-y), led by margin expansion, with revenue growth at just 0.6% y-o-y (US$11.2bn). Revenue was driven by North Asia, convenience stores, Health & Beauty, and Home furnishing segments. Closure of underperforming stores and business units in Singapore and Indonesia supermarkets/hypermarkets helped EBIT margins improve to 4.0% (+0.1ppt y-o-y). The variance to our estimates came from lower opex, which is a direct result of these store closures. Yonghui and Maxim’s associate/JV income for the full year was US$118m, in line with our US$120m estimate. DFI declared a final DPS of 14.5 UScts, in line with our estimate. On a half yearly basis, 2H16 earnings were US$270m (+16% y-o-y) on the back of US$5.6bn (+1.7% yo-y) revenue. Store closures helped to deliver 3.9% y-o-y operating profit growth for FY16 North Asia leads revenue growth but profit margins were lower. FY16’s headline sales growth was led by North Asia (US$6.6bn, +6.3% y-o-y) compared to sales declines in South and East Asia. Growth was driven by Hong Kong Supermarkets, and Hong Kong & China convenience stores. As rents in Hong Kong however rose, North Asia’s FY16 operating profit (US$416.4m) margins declined by 0.3ppt to 6.3%. Store rationalisation in supermarket/hypermarkets led to operating profit margin increase. The absence of nonperforming stores in the supermarket/hypermarket segment boosted segment margins. Store rationalisation in Singapore and Indonesia saw segment operating margin increase by 0.4ppt to 3.1%. However, a net reduction of 8 stores in this segment was a drag on segment revenue (US$6.2bm, -1.6% y-o-y). Convenience stores continue to grow. Convenience stores’ revenue grew (US$1.95bn, +3.7% y-o-y) as a result of same store sales growth (SSSG) and an increase in store numbers (+46) particularly in China. Ready to eat food (RTE) operations in Hong Kong, Macau, Singapore and China, private labels, and post rationalisation of stores in Singapore also helped to lift its FY16 operating profit margins to 3.8% (+0.4ppt). Costs a drag on Health & Beauty margins. Health and Beauty segment posted good revenue growth (US$2.4bn, +2.7% yo-y) in FY16 driven by Hong Kong, China, Singapore and Philippines sales, despite a reduction of 100 stores from Indonesia and Hong Kong. Segment operating profit margin shrank by 0.6ppts to 7.2% y-o-y on higher rents in Hong

ASIAN INSIGHTS

Kong, lower gross margins and poor performance in Malaysia due to competition and its weak economy. IKEA continues to grow. Home furnishing segment continues to grow in FY16 with revenue growing by 5% y-o-y to US$597m with the same store count of nine. IKEA delivered high operating margins of 11-12%, way above group operating margins of 4%. Even though it only contributed 5% to revenue in FY16, it contributed a much higher c.16% of operating profit. A continued improvement in sales mix from this segment should help to lift operating margins going forward Sales growth in focus Store expansion, multi-channel experience, differentiated products and positioning to drive sales growth. DFI’s 2017 focus will be on sales growth. Post store rationalisation, it plans to drive sales growth through store network expansion that include IKEA Tsuen Wan in Hong Kong (2H17), a second store in Jakarta, and the scaling up of more 7-eleven convenience stores in Guangzhou, China. There is still room for product expansion such as skin care products in Health & Beauty and building up private labels. Meanwhile, it is developing e-commerce and increasing pickup points at IKEA, Wellcome and Marketplace to enhance multi-channel experience and fulfillment options. DFI will also strengthen backend logistics to improve in-store availability of products through the setting up SAP merchandising system and establishment of new distribution centres in Malaysia and Philippines. Its new SAP merchandising system would also help in understanding its customers purchasing behavior and anticipating new trends. We see margins expanding going forward Distribution centres will increase the level of bulk handing and cost savings. There are improvements underway at DFI’s back end operations, which should help to establish a more efficient supply chain. Malaysia and Philippines will add two new distribution centres going forward following the opening of a new distribution centre in Singapore last year. We anticipate that these fresh food distribution centres if managed well, have the potential to drive down purchase cost through bulk handing and higher supplier rebates. Direct sourcing into its own distribution centres saves payment costs to middlemen. There are plans to move into direct sourcing as well. With the new distribution centres, it will be easier to source, warehouse and carry out direct sourcing activities. Direct sourcing cuts off the middlemen to

VICKERS SECURITIES Page 54

Company Guide Dairy Farm

realise better margins. Cooperation on joint sourcing with Yonghui for fresh food should develop as well to enhance margins going forward. In addition, a new team has been put in place for procurement of products among the different business units. Higher economies of scale from these activities will help improve margins going forward. Valuations still compelling DFI’s core business currently valued below peers and average PE. Based on Yonghui’s current market valuation, DFI’s core business is valued at 21.4x forward PE. This is lower than its historical 9-year forward PE and peer average of 25x. Given that margins have the potential to increase in the longer term to drive earnings growth, we raise our valuation on DFI’s core business based on DCF to US$9.34, which implies 25x forward PE, in line with its historical valuation and peers. Maintain BUY with higher SOTP-based TP of S$9.96. DFI’s core business is worth US$9.34, which implies 25x FY17F PE. Net debt is US$0.47 per share based on end-FY16 figures, while Yonghui at current market price is worth US$1.09 per share. Maintain BUY for 17% upside.

Core business valued at 21.4x forward PE Component DFI's share price Yonghui's 20% stake per DFI share Core share price ex Yonghui

US$ 8.51 1.09 7.42

Note 1 2 3=1-2

Earnings FY17F Yonghui contribution to DFI P&L Interest expense on Yonghui loan Core earnings ex Yonghui

486 38 22 469

4 5 6 7=4-5+6

EPS ex Yonghui PE ex Yonghui

0.35 21.4

8=7/1,352 shares 3/8

Source: Company, DBS Bank SOTP valuation Component EV ex cash Net debt per share Value of Yonghui TP

US$ 9.34 -0.47 1.09 9.96

Basis DCF FY16’s balance sheet Market value

Source: Company, DBS Bank

Interim Income Statement (US$m) FY Dec

2H2015

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc

1H2016

2H2016

% chg yoy

% chg hoh

5,544

5,562

5,639

1.7

1.4

(3,891)

(3,914)

(3,901)

0.3

(0.3) 5.4

1,653

1,648

1,737

5.1

(1,419)

(1,451)

(1,482)

4.4

2.1

235

197

256

8.9

29.9

0

0

0

nm

nm

Associates & JV Inc

53

47

72

34.5

54.2

Net Interest (Exp)/Inc

(8)

(9)

(13)

(60.0)

(42.2)

Exceptional Gain/(Loss)

(4)

0

6

nm

nm

Pre-tax Profit

276

234

321

16.3

36.9

Tax

(45)

(37)

(48)

6.0

27.5

Minority Interest

2

2

(3)

nm

nm

232

199

270

16.1

35.3

Net profit bef Except.

237

199

264

11.4

32.2

EBITDA

288

243

327

13.7

34.5

Net Profit

Margins (%) Gross Margins

29.8

29.6

30.8

Opg Profit Margins

4.2

3.5

4.5

Net Profit Margins

4.2

3.6

4.8

Source of all data: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 55

Company Guide Dairy Farm Number of outlets

CRITICAL DATA POINTS TO WATCH 5408.9

Earnings Drivers: Building a more efficient business model to drive sales and improve margins. DFI’s management strategy is to build an eccentric business model, leverage on presence and scale, deliver greater convenience for customers, invest in modern, efficient supply chain and build people capability in Asia. These targets span across its merchandising, operations, supply chain, IT and quality assurance functions. Initiatives include 1) implementing IT systems that will enhance processes and business analytics; 2) product range innovation to enhance assortment and local relevance including ready to eat products and corporate brands; 3) establishing fresh distribution centres for more efficient backend logistics; 4) increase direct sourcing to simplify supply chain; 5) improving convenience through ecommerce in food, health & beauty, IKEA and pickup points; 6) consolidation of sourcing to improve economies of scale. We see these initiatives driving revenue and margins going forward.

5220

5222

5160

5244

5355

2014A

2015A

2016A

2017F

2018F

4636.2 3863.5 3090.8 2318.1 1545.4 772.7 0.0

Sales per store blended 2.3

2.11

2.13

2.17

2.22

2014A

2015A

2016A

2017F

2.3

1.9 1.4 0.9 0.5 0.0

Higher margins through fresh food and private labels. Concentration towards more fresh food has started, especially in Indonesia, in a bid to deliver higher margins. There will be more cooperation with Yonghui for more fresh food to be brought into Singapore, the Philippines and Malaysia. The private label programme will support higher margins in Health & Beauty and supermarket & hypermarket segments, and at the convenience stores, more ready-to-eat meals. In Singapore, DFI opened a 75,000 sqft fresh distribution centre in May 2016. This will enhance sales mix of its fresh products and help to bring in higher margins through more supplier rebates and higher bulk discounts. Fresh distribution centres have been planned for Malaysia and the Philippines in 2017.

2018F

Segment revenue 2016 Home furnishing stores 5% Health & beauty stores 22%

Food 73%

Segment revenue 2016

Strengthening operations. We see DFI strengthening its operations regionally for the long term, with much of the focus geared towards improving operating efficiencies. The areas include e-commerce, IT infrastructure, supply chain, and food and product safety. Growth will be supported by its private label programme, and more distribution centres across its markets. It has already opened a fresh distribution centre in Singapore and plans to open new distribution centres in Malaysia and Philippines, slated for operations in 2017 These will help drive higher margins going forward. Synergies with Yonghui taking shape. We expect more synergies with increased collaboration in the sharing of food supplies. These include sharing suppliers and accessing Yonghui’s fresh food (e.g. fruits, etc.) supply chain for its stores in Singapore, Malaysia, Hong Kong and the Philippines. Sale of private label products within Yonghui stores (which do not have health and beauty offerings), and the opening of Mannings stores within Yonghui will be another area of cooperation.

South Asia 20%

North Asia 59%

East Asia 21%

EBIT margin (%) 5.5

5.0

4.5

4.0

3.5

3.0 2013A

2014A

2015A

2016A

2017F

2018F

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 56

Company Guide Dairy Farm

Balance Sheet: Higher net debt. DFI’s net debt increased to US$641m as at end FY16. This is largely due to drawdown of US$500m bank loans to refinance the initial US$800m of loans used to purchase 19.99% of Yonghui in 2015. DFI added another US$190m of debt on its balance sheet in 2H16 to finance an additional investment in Yonghui (announced in August 2015). DFI’s business generates strong operational cash flows of over US$500m a year. We believe that DFI will be more than capable of paring down debt in the next few years. Share Price Drivers: Earnings turnaround. We believe share price upside will be driven by earnings recovery. Our view on the stock is based on DFI’s ability turn in a more efficient operations going forward that will drive earnings growth. Key indicators are higher contribution by Yonghui and margin expansion of core business through better cost management and margin enhancement initiatives (ie distribution centres). IT and backend enhancement initiatives should also support a better cost structure in terms of centralised procurement, logistics and other operations etc. Cooperation with Yonghui may drive long-term share price. We are positive on DFI’s Yonghui investment because the partnership with Yonghui provides a good platform to scale up DFI’s business in China. Longer-term opportunities include exposure to China’s modern grocery retail consumption, more Mannings stores and better supply of products to each other.

Leverage & Asset Turnover (x) 2.7 0.70 2.6

0.60 0.50

2.5

0.40

2.4

0.30 2.3 0.20 2.2

0.10 0.00

2.1 2014A

2015A

2016A

2017F

Gross Debt to Equity (LHS)

2018F

Asset Turnover (RHS)

Capital Expenditure US$m 300.0 250.0 200.0 150.0 100.0 50.0 0.0 2014A

2015A

2016A

2017F

2018F

Capital Expenditure (-)

ROE (%) 35.0% 30.0% 25.0% 20.0% 15.0% 10.0%

Key Risks: Profitability susceptible to rental and labour costs. As a retailer, labour and rental costs are key operating cost components. Significant changes in these components will affect earnings growth. Higher rental and labour costs were seen in Hong Kong, Singapore and Indonesia in FY15-16, which resulted in lower margins.

5.0% 0.0% 2014A

2015A

2016A

2017F

2018F

Forward PE Band (x) (x) 38.0

+2sd: 36.3x 33.0

+1sd: 30.8x

Competitive pressure. Grocery retail customers can be price sensitive and may switch to retailers which offer more promotions. This can be a risk to market share, sales and earnings growth. In times of weaker consumer sentiment, customers may trade down from high-end supermarkets to the mass-market segment. DFI has plans to strengthen its marketing to the mass market segment and target specifically local consumers. COMPANY BACKGROUND Dairy Farm is a Pan Asian retailer, operating over 6,400 supermarkets, hypermarkets, health and beauty stores, convenience stores, home furnishing stores and restaurants under well-known brand names in Hong Kong, Taiwan, China, Macau, Singapore, India, the Philippines, Cambodia, Brunei, Malaysia, Indonesia and Vietnam.

28.0

Avg: 25.4x 23.0

‐1sd: 19.9x 18.0

13.0 Mar-13

‐2sd: 14.5x Mar-14

Mar-15

Mar-16

PB Band (x) (x) 15.5 13.5

+2sd: 13.57x

11.5

+1sd: 11.17x

9.5

Avg: 8.77x 7.5

‐1sd: 6.37x 5.5 3.5 Mar-13

‐2sd: 3.97x Mar-14

Mar-15

Mar-16

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 57

Company Guide Dairy Farm

Key Assumptions FY Dec Number of outlets Sales per store blended

Segmental Breakdown FY Dec Revenues (US$m) Food Health & beauty stores Home furnishing stores Support office/others Total Operating profit (US$m) Food Health & beauty stores Home furnishing stores Support office/others Total Operating profit Margins Food Health & beauty stores Home furnishing stores Support office/others Total Income Statement (US$m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2014A

2015A

2016A

2017F

2018F

5,220 2.11

5,222 2.13

5,160 2.17

5,244 2.22

5,355 2.30

2014A

2015A

2016A

2017F

2018F

8,109 2,402 497 N/A 11,008

8,197 2,373 568 N/A 11,137

8,168 2,436 597 N/A 11,201

8,350 2,622 671 N/A 11,642

8,708 2,835 754 N/A 12,297

299 219 50.7 (43.8) 524

236 186 63.6 (49.6) 435

267 176 70.6 (60.7) 453

279 184 79.3 (63.1) 479

292 198 89.1 (66.6) 512

3.7 9.1 10.2 N/A 4.8

2.9 7.8 11.2 N/A 3.9

3.3 7.2 11.8 N/A 4.0

3.3 7.0 11.8 N/A 4.1

3.3 7.0 11.8 N/A 4.2

2014A

2015A

2016A

2017F

2018F

11,008 (7,717) 3,291 (2,767) 524 0.0 68.9 (1.9) 9.70 601 (93.3) 1.40 0.0 509 499 796

11,137 (7,852) 3,285 (2,850) 435 0.0 85.0 (13.6) (4.2) 503 (84.5) 5.80 0.0 424 428 732

11,201 (7,815) 3,386 (2,933) 453 0.0 118 (21.8) 6.20 555 (85.1) (1.1) 0.0 469 463 784

11,642 (8,173) 3,469 (2,990) 479 0.0 125 (24.7) 0.0 580 (99.3) 5.00 0.0 486 486 831

12,297 (8,608) 3,689 (3,176) 512 0.0 144 (22.8) 0.0 634 (109) (1.3) 0.0 524 524 895

6.3 1.1 0.0 5.3

1.2 (8.0) (17.0) (14.3)

0.6 7.0 4.0 8.1

3.9 6.0 5.9 4.9

5.6 7.7 6.9 7.9

29.9 4.8 4.6 37.6 12.3 25.8 61.1 275.9

29.5 3.9 3.8 30.2 9.3 17.1 63.8 32.0

30.2 4.0 4.2 32.6 9.4 14.9 60.5 20.8

29.8 4.1 4.2 30.2 9.0 14.1 64.1 19.4

30.0 4.2 4.3 28.9 9.1 14.0 59.3 22.5

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 58

Company Guide Dairy Farm

Quarterly / Interim Income Statement (US$m) FY Dec 2H2014 1H2015 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

2H2015

1H2016

2H2016

5,709 (3,996) 1,714 (1,435) 279 0.0 47.3 (3.4) (0.7) 322 (49.4) 2.60 275 276 326

5,593 (3,962) 1,632 (1,431) 201 0.0 31.7 (5.6) 0.0 227 (39.5) 4.30 192 192 232

5,544 (3,891) 1,653 (1,419) 235 0.0 53.3 (8.0) (4.2) 276 (45.0) 1.50 232 237 288

5,562 (3,914) 1,648 (1,451) 197 0.0 46.5 (9.0) 0.0 234 (37.4) 2.30 199 199 243

5,639 (3,901) 1,737 (1,482) 256 0.0 71.7 (12.8) 6.20 321 (47.7) (3.4) 270 264 327

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

7.7 22.3 13.7 17.8

(2.0) (28.8) (28.1) (30.5)

(0.9) 24.0 17.0 21.3

0.3 (15.5) (16.1) (14.2)

1.4 34.5 29.9 35.3

30.0 4.9 4.8

29.2 3.6 3.4

29.8 4.2 4.2

29.6 3.5 3.6

30.8 4.5 4.8

Balance Sheet (US$m) FY Dec

2014A

2015A

2016A

2017F

2018F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

1,291 388 707 662 1,011 252 5.30 4,316

1,141 1,292 948 259 937 234 11.2 4,821

1,100 1,462 951 324 983 291 19.4 5,129

1,089 1,587 934 699 1,030 255 19.4 5,613

1,074 1,731 917 709 1,085 320 19.4 5,856

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

93.4 2,413 59.2 93.8 135 1,429 93.8 4,316

730 2,355 66.6 10.6 204 1,376 79.4 4,821

370 2,328 73.4 595 184 1,505 74.1 5,129

370 2,575 114 595 184 1,707 69.1 5,613

370 2,594 123 595 184 1,920 70.4 5,856

(1,204) 475 7.7 114.7 48.3 2.7 0.8 0.4 CASH CASH 144.1 5.7

(1,239) (482) 8.0 113.9 46.5 2.4 0.5 0.2 0.3 0.4 34.9 4.7

(1,108) (641) 8.5 112.4 46.1 2.3 0.6 0.2 0.4 0.4 20.6 4.5

(1,385) (266) 8.6 112.6 46.2 2.2 0.7 0.3 0.1 0.2 20.6 4.4

(1,293) (256) 8.5 112.7 46.1 2.1 0.7 0.3 0.1 0.1 21.4 4.4

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 59

Company Guide Dairy Farm

Cash Flow Statement (US$m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (US cts.) Free CFPS (US cts.)

2014A

2015A

2016A

2017F

2018F

601 203 (93.8) (68.9) (17.4) 52.2 676 (270) 0.0 (91.4) 0.0 (71.3) (433) (311) 20.5 0.0 (2.5) (293) (5.0) (54.6) 51.3 30.0

503 212 (90.2) (85.0) 73.0 87.5 700 (259) 0.0 (918) 0.0 (189) (1,365) (311) 573 0.0 15.7 278 (12.1) (400) 46.4 32.6

555 213 (95.3) (118) (134) 122 543 (199) 0.0 (197) 0.0 (32.1) (428) (270) 238 0.0 (9.7) (42.5) (6.5) 65.9 50.0 25.4

580 226 (58.6) (125) 236 0.0 858 (199) 0.0 0.0 0.0 0.0 (199) (284) 0.0 0.0 0.0 (284) 0.0 375 46.0 48.7

634 238 (99.3) (144) (101) 0.0 528 (207) 0.0 0.0 0.0 0.0 (207) (311) 0.0 0.0 0.0 (311) 0.0 10.1 46.5 23.7

Source: Company, DBS Bank Target Price & Ratings History

US$

12- mt h T arget Rat ing Pric e

8.55

S.No.

Dat e of Report

Closing Pric e

8.05

1:

04 Mar 16

6.09

7.03

2:

10 Mar 16

5.90

7.03

BUY

3:

01 Aug 16

6.60

7.18

BUY

7.55

BUY

7.05 6.55

3 6.05

2 1

5.55 Mar-16

May-16

Jul-16

Sep-16

Nov-16

Jan-17

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank Analyst: Alfie YEO Andy SIM CFA

ASIAN INSIGHTS

VICKERS SECURITIES Page 60

Singapore Company Guide

Sheng Siong Group Refer to important disclosures at the end of this report

Version 9 | Bloomberg: SSG SP | Reuters: SHEN.SI

DBS Group Research . Equity

20 Jun 2017

BUY

Margin expansion not over yet

Last Traded Price (19 Jun 2017): S$0.975 (STI : 3,230.42) Price Target 12-mth: S$1.20 (23% upside) (Prev S$1.20) Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New •

We expect margin improvement to continue on upcoming warehouse expansion

•

Expanded warehouse will realise higher margins from volumes, SKUs and fresh food

•

Store network expected to grow on more supply of HDB shops available for bidding

•

Maintain BUY; S$1.20 TP

Price Relative

Forecasts and Valuation FY Dec (S$ m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

2016A 797 80.0 76.2 62.7 62.7 10.4 4.17 4.17 10 4.17 3.75 16.8 23.4 23.4 18.8 17.6 3.8 5.8 CASH 25.3

Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

2017F 807 87.6 82.7 68.6 68.6 9.4 4.56 4.56 9 4.56 4.10 17.2 21.4 21.4 19.9 16.1 4.2 5.7 CASH 26.9

2018F 828 92.2 86.9 72.0 72.0 4.9 4.79 4.79 5 4.79 4.31 17.7 20.4 20.4 13.6 15.1 4.4 5.5 CASH 27.4

2019F 878 101 92.2 76.5 76.5 6.2 5.08 5.08 6 5.08 4.57 18.2 19.2 19.2 15.0 13.6 4.7 5.4 CASH 28.3

0 4.50 B: 7

0 4.60 S: 1

4.80 H: 2

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

ASIAN INSIGHTS ed: TH / sa:SM, PY

Maintain BUY TP S$1.20, more positive on margins. We remain positive on Sheng Siong on the back of better visibility for higher margins. We believe expansion of its distribution centre will grow and sustain gross margins going forward. Margins remain on the uptrend supported by the increase in direct sourcing, bulk handling, and fresh mix, contributing to earnings growth. Stock is trading attractively at 20.4x FY18F PE compared to historical average of 23x since listing. Yield remains attractive at 4.4%. Where we differ. The market is concerned with competition for shop space, closure of key stores (Verge and Woodlands), online threat, and threat of gross margins being unsustainable. However, we have found that the critical factor driving Sheng Siong’s stock price is margins. We believe margins should continue expanding as its distribution centre is being expanded, driving earnings growth. Potential catalyst. We see added warehousing capacity supporting its margins over the next few years from its warehouse expansion. Higher volume rebates, higher fresh mix, economies of scale, more stock keeping units (SKUs), and better leverage to support more stores in the future will likely improve margins from current levels. With the HDB opening up new estates and putting up more commercial shop spaces for supermarkets, we see more scope for store network expansion going forward, contributing to growth. Valuation: Our target price for Sheng Siong is S$1.20 based on 25x FY18F PE. The valuation is pegged at +1SD of its historical mean since listing and below regional peers' average of 30x PE. Key Risks to Our View: Store openings, price competition. Revenue growth will be led by new store openings. Excessive discounts and promotions in the market by competitors will ultimately result in lower margins. At A Glance Issued Capital (m shrs) 1,504 Mkt. Cap (S$m/US$m) 1,466 / 1,055 Major Shareholders (%) SS Holdings 29.85 Lim Family 33.99 Free Float (%) 36.16 3m Avg. Daily Val (US$m) 1.5 ICB Industry: Consumer Services / Food & Drug Retailers

VICKERS SECURITIES Page 61

Company Guide Sheng Siong Group

WHAT’S NEW More margin expansion on the cards More catalyst in warehouse expansion Background of the KTM land. When Sheng Siong constructed its present distribution centre at Mandai in 2009, a part of the land next to which the building sits on belonged to the current rail corridor (former KTM railway land). The current 2.32 hectares of land which JTC awarded to Sheng Siong as a result, is constructed in a U shape instead of a regular rectangle. This is due to the nature of land ownership when the land was awarded. Last year, the JTC resolved the rights to the former KTM railway land and Sheng Siong can now utilise the former KTM land. This means that the current U-shaped layout can be flushed into a regular rectangular-shaped building, essentially expanding the distribution centre’s capacity. Sheng Siong to expand Mandai Link warehouse by another 10%. The current distribution centre’s capacity is 500,000 sqft. Flushing the building into a regular rectangle from a Ushaped layout will add another 50,000 sqft to the warehouse capacity. With all systems clear and heavy equipment already on site, construction is due to start in June 2017 and is expected to complete in 2018. Sheng Siong will incur S$19m in construction cost with the bulk amounting to c.S$13m to be incurred in 2018, all internally funded. The warehouse will have storage capacity for both chilled and regular storage products.

What does this mean for Sheng Siong? Beneficial to margins and better economies of scale. A bigger distribution centre will increase warehouse throughput and support volumes for new stores in the future. Besides, margin expansion will be supported by higher fresh food mix, volume discounts from suppliers and scope for higher-margin SKUs (stock keeping units). More cold storage capacity built into the expanded area will support higher mix of fresh food. We do not see any significant increase in manpower and delivery costs for now as its current human resources have scope to increase productivity further. Higher margins through fresh mix. Sheng Siong is increasing its proportion of fresh offering in stores. Its fresh food mix is currently higher than that of key competitors Dairy Farm and NTUC Fairprice. The higher-margin nature of fresh food over non-fresh grocery items will lead to higher gross margins.

ASIAN INSIGHTS

Better margins from higher volume discount and highermargin SKUs. The existing warehouse space is running at close to full capacity that supports 43 stores currently. Following the expansion, Sheng Siong’s warehouse space will increase by another 10%. Higher volume orders from suppliers and increase in higher-margin SKUs will support margin expansion. These will come from better discounts from bulk orders, essentially creating better economies of scale. Capacity to support more stores in the future. Higher throughput in the future will support a larger store network as well. HDB is constantly putting out commercial shop spaces for supermarkets in various areas. We believe Sheng Siong will eventually increase its store count from the 43 stores currently. A higher warehousing capacity, throughput and higher store count in the future would ultimately help to defray fixed operating costs and support margins.

Consensus is mixed on Sheng Siong, but we are positive on margin expansion What is the market concerned with? Consensus is generally concerned about competition and Sheng Siong’s ability to open new stores. Store opening has been a function of HDB’s available supply for shop space and the competition in bidding for them. Competition for shop space has been keen over the past few months, with smaller players winning shop space at aggressive bids. This has fuelled concerns on Sheng Siong’s inability to grow store network and open new stores. Besides, there also concerns that two of its stores are due to close in Woodlands (41,500 sqft) in August 2017 and the Verge (45,000 sqft) in June 2017. Our critical factor for the stock is margin, not top line. We believe consensus has placed too much emphasis on Sheng Siong’s top-line growth. This is where we differ and offer our differentiated view from the market in our analysis process. We have found that the correlation for Sheng Siong’s stock price to margin is strong (very close to 1) at a reading of 0.9. Hence, earnings growth and margins are driving Sheng Siong’s stock price rather than top-line growth. Singapore’s grocery retail growth is typically unexciting at 0-5% for top line, yet the stock price has risen in tandem with margin expansion and earnings growth. We are positive on continued margin expansion backed by the higher warehouse capacity we have aforementioned.

VICKERS SECURITIES Page 62

Company Guide Sheng Siong Group

Cost management is a critical factor in preserving margins which Sheng Siong is always mindful of. Sheng Siong has >40 stores islandwide with more than 400,000 sqft of selling space. In our opinion, being the third largest supermarket player in Singapore with a Mandai distribution centre, Sheng Siong has both critical mass and economies of scale. We believe focus has been on cost management rather than driving sales. If Sheng Siong’s focus was to drive sales, it would be bidding aggressively against the smaller players regardless of price. However, it emerged as the winning bidder in only one out of six supermarket bids this year, at a reasonable S$15 psf, lower than c.S$20 psf bids in 4Q16. Market is concerned that top line is slowing, but we believe it is short term and see store network increasing eventually. We refute the argument that outlook is unexciting because Sheng Siong has not been winning new shop space. Instead, we believe the market should focus on the rental levels that Sheng Siong is securing new stores, rather than short-term headwinds of two store closures and not winning new stores. Sheng Siong also recently won one 11,000-sqft new store in Woodlands St 12. Meanwhile, the Tampines Central store expansion will add 15,000 sqft to its store network space. These will mitigate the impact of store closures. Also, we believe that footfall for the Verge and Woodlands has been tapering and well accounted for in recent quarters results due to news of their imminent closure. Negative short-term impact should therefore be minimal. With HDB continuing to put up shops earmarked for supermarkets for tender in existing and new estates, there are ample opportunities to secure more stores going forward. Growing through operating efficiencies. Store count is not the only factor that drives growth. Higher store efficiencies can supplement growth as well along with greater focus on cost. These include running more promotions, quicker checkout process, store layout, new SKUs, higher-margin products to generate greater stock turnover, sales volumes and better profitability. Online is not a real threat for now. We do not see online business as a significant threat for now. There are

ASIAN INSIGHTS

supermarkets located across Singapore, making it convenient to pick up groceries. HDB has put up properties earmarked for supermarket over the years and as such, supermarkets are now conveniently located across Singapore. Online businesses although gaining traction, remain in an unprofitable state. Pureplay online grocery retailer Redmart’s business remains in core operating losses and negative free cash flow. It has less than S$100m of revenue in a S$6bn Singapore grocery retail market after four years of operation. HDB will release six supermarket and two minimart properties in the next six months, not forgetting future supermarket properties in new estates such as Biddadari. Scope for growing store network abound over the long term. We believe this will give online a run for its money as it remains convenient for consumers to pick up groceries. About 80% of people living in Singapore live in HDB estates (which have planned amenities including grocery shops) and do not live “off the beaten path” to really warrant grocery delivery in our view.

Financial impact Internally funded. Sheng Siong will internally fund the warehouse expansion to the tune to S$19m comprising construction and fit out. As of 1Q17, Sheng Siong had S$68.3m cash on its balance sheet with no debt. Sheng Siong generates c.S$70-80m in operating cashflow each year, more than sufficient to fund the expansion. There is no further cashflow burden on past property purchases as previous cashflow strain on the purchases of Tampines property (2014, S$65m), Bedok property (2016, S$55m) and Junction 9 (2013, S$55m) have all already been expensed.

Valuation Maintain BUY, TP S$1.20. We maintain our BUY recommendation on Sheng Siong. We like Sheng Siong for its steady earnings growth, net cash, growing margins and strong dividend yield. Our TP of S$1.20 is derived from 25x FY18F PE.

VICKERS SECURITIES Page 63

Company Guide Sheng Siong Group

Sheng Siong’s U-shaped layout and location of warehouse expansion

Rail corridor

Not Sheng Siong’s building

Ex-KTM railway land

Source: Google map, DBS Bank

Trades below peers’ average of 30x PE M ark et Cap (S$m)

Px L ast

PE (A c t )

PE (Y r 1)

PE(Y r 2)

P/BV (x )

P/Sales (x )

ROE (%)

Operat ing M argin (%)

Net M argin (%)

Div idend Y ield (%)

Company

Rat ing

Count ry

Sheng Siong

BUY

SGX

1,489

0.98

26.2x

23.7x

21.7x

5.9x

1.9x

25%

8.2%

7.9%

3.8%

SGX SET

15,294 22,598

8.02 61.75

25.8x 40.5x

23.9x 33.4x

22.8x 27.6x

7.3x 10.1x

1.0x 1.3x

33% 36%

4.0% 6.5%

4.2% 3.8%

2.6% 1.5%

7,461 222.00 6,986 35.75 3,448 45 428 760 2,439 565 2,033 160 518 1,200 3,375 88 546 1.37 234 2.33 24 50 264 880 Regional av erage Ex - Indonesia av erage

26.6x 29.7x 25.0x 22.5x 38.9x 63.7x 27.7x 28.1x 35.7x 36.6x nm 12.6x 29.5x 35.3x

23.1x 27.4x 22.7x 53.3x 29.3x NaN 26.1x 25.2x 31.2x 29.3x NaN NaN 29.5x 27.0x

20.3x 25.5x 20.8x 21.0x 25.7x NaN n/a 21.8x 28.0x 23.4x nm NaN 20.3x 24.2x

3.5x 9.9x 2.9x 1.6x 4.5x 14.1x 0.9x 2.6x n/a 4.4x 0.2x n/a 5.2x 8.0x

1.5x 1.0x 1.1x 0.3x 0.4x 2.5x 0.4x 1.2x 0.8x 2.5x 0.3x n/a 1.1x 1.3x

16% 45% 14% 3% 14% 37% 3% 11% 148% 12% -3% 31% 29% 47%

8.2% 4.1% 7.2% 1.3% 2.3% 6.1% 1.6% 5.2% 3.5% 8.9% 6.7% 5.0% 5.0% 5.7%

6.3% 3.1% 4.9% 0.5% 1.1% 4.1% 1.1% 4.6% 2.5% 6.9% -4.8% 2.3% 2.9% 4.1%

1.3% 2.4% 0.7% 0.7% 0.8% 0.3% na 0.8% 1.7% 0.6% na 2.3% 1.3% 1.5%

Sout h East A sia Peers Dairy F arm Intl CP ALL

BUY BUY

Big C Supercntr Siam Makro Puregold Matahari Putra Sumber Alfaria PSC Hero Supermarket Robinsons Retail 7 Elev en Bison Cons Modern Internasi Midi Utama ID

F ULLY V ALUSET NOT RATED SET HOLD PSE F ULLY V ALUIDX NOT RATED IDX NOT RATED PSE NOT RATED IDX BUY PSE NOT RATED KLSE NOT RATED KLSE NOT RATED IDX NOT RATED IDX

Closing as of 19 Jun 2017 Source: DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 64

Company Guide Sheng Siong Group

There are 6 HDB supermarkets up for bidding in the next 6 months S/N

Estate

Precinct Name

Block

Street Name

Commercial Units Minimart

Shop

Supermarket

Eating house

1

BUKIT BATOK

Skyline @ Bt Batok

296A

Bukit Batok Street 22

1

1

-

-

2

JURONG WEST

-

990

Jurong West St 93

-

-

-

1

3

PUNGGOL EAST

Waterway Sundew

660A

Edgedale Plains

-

5

1

1

4

PUNGGOL WEST

Matilda Edge

224A

Sumang Lane

-

5

-

-

5

QUEENSTOWN

Ghim Moh Edge

29A

Ghim Moh Link

-

4

1

-

6

SEMBAWANG

EastLace @ Canberra

115

Canberra Walk

1

4

-

-

7

SENGKANG

Anchorvale Parkview

338

Anchorvale Crescent

-

9

1

1

8

SENGKANG

Fernvale Riverwalk

417

Fernvale Link

-

9

1

1

9

WOODLANDS

Admiralty Flora

691

Woodlands Drive 73

-

4

1

1

10

WOODLANDS

Woodlands Glen

573

Woodlands Drive 16

-

8

1

1

2

49

6

6

Total

Source: Place2lease, DBS Bank

SSG won one new 11,000-sqft store in Woodlands St 12 at
Bidder

Rental/mth bid

Rate $14.65

1

SHENG SIONG SUPERMARKET PTE LTD

$161,000

2

U Stars Supermarket Pte

$159,000

$14.47

3

Heng Wei Ming

$152,700

$13.89

4

SHENG SIONG SUPERMARKET PTE LTD

$145,200

$13.21

5

Lukas Lee

$138,000

$12.56

6

NTUC Fairprice Co-operative Limited

$132,000

$12.01

7

To be confirmed

$131,200

$11.94

8

COLD STORAGE SINGAPORE (1983)

$99,000

$9.01

9

ANG MO SUPERMARKET PTE LTD

$83,100

$7.56

10

Hao Mart Pte Ltd

$74,200

$6.75

Source: Place2lease, DBS Bank

Bid prices have corrected from S$21psf last year to S$13-15psf this year Date

Address

Winning bidder

Floor space (Sqft)

$/sqft

Rental/mth

Dec 2016

Tampines Avenue 8

Yes Supermarket Pte Ltd

3,100

21

S$64,000 S$58,350

Dec 2016

Compassvale Drive

Raymond Chan

3,400

17

19 Jan 2017

Blk 507 Yishun Avenue 4

U Stars Supermarket Pte Ltd

3,750

18

$67,200

2 Mar 2017

Blk 410A Sin Ming Ave

NTUC Fairprice Co-operative Limited

5,800

13

$75,500

31 Mar 2017

Blk 878C Tampines Avenue 8

U Stars Supermarket Pte Ltd

3,100

15

$46,000

20 Apr 2017

Blk 116 Jalan Tenteram

Cold Storage Singapore (1983)

5,400

14

$77,000

12 May 2017

Blk 4 Woodlands Street 12

Sheng Siong Supermarket Pte Ltd

11,000

15

$161,000

Source: Place2lease, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 65

Company Guide Sheng Siong Group

Market consensus vs DBS’s view Market’s concerns

Our differentiated view

1

Cautious on outlook as competition for new stores is keen and Sheng Siong has been outbid by competitors for new HDB properties

Sheng Siong did not open any new stores for two years from FY13 to FY14, but core earnings grew at a CAGR of 23% due to better operating efficiencies including margin expansion and higher sales psf. We find more operating efficiencies to be realised from upcoming warehouse expansion where economies of scale have scope to improve further. Our critical factor analysis on Sheng Siong has never been on the top-line growth, but margin expansion and earnings growth. It is well noted in the market that grocery retail sales growth is within single-digit levels and SSSG is typically 0-5%. Instead, the correlation between share price appreciation and gross margin expansion is high at 0.9. Players can bid for stores aggressively. But if the aggressive rental bid results in low store ROE, it will ultimately disappoint shareholders. Sheng Siong has a track record of not overpaying rental to secure new stores. Earnings and margins remain key, less on top-line growth.

2

Key big stores such as the Verge and Woodlands are closing

Sheng Siong recently won one 11,000-sqft new store in Woodlands St 12. The Tampines Central store expansion will add 15,000 sqft to its store network space. These will mitigate the impact of store closures. For store closures, we believe that footfall for the Verge and Woodlands has been tapering and well accounted for in recent quarters' results due to news of their imminent closure. Negative short-term impact should therefore be minimal. With HDB putting up shops earmarked for supermarkets for tenders in current and new estates, there are opportunities to secure more stores. The question should be on the rental levels at which new stores are secured, not short-term headwinds two store closures.

3

Online is a threat

Online is not a threat for now. About 80% of people living in Singapore live in HDB estates and do not live “off the beaten path” to warrant grocery delivery, while supermarkets are conveniently located for shoppers to pick up groceries. Redmart’s is penetrating the market but remains in core operating losses and negative free cash flow. HDB will release more supermarkets in the next six months and more when new estates are built. Scope for growing store network abound over the long term. We believe this will give online a run for its money as it provides convenience for consumers to pick up groceries.

4

Gross margin expansion may not sustain

Warehouse expansion will have more scope for operating efficiencies to improve. We see increased catering to new SKUs and throughput, resulting in higher volume discounts from suppliers. Sheng Siong is still pushing for higher fresh food mix which will improve gross margins, especially in stores where fresh food mix have room to improve. The expanded warehouse will be completed by FY18F, which secures margin expansion trend beyond that.

Source: DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 66

Company Guide Sheng Siong Group Rev per sqft

CRITICAL DATA POINTS TO WATCH Critical Factors Store expansion. Sheng Siong currently operates 43 stores (including Loyang Point which is under renovation). Compared to the other local operators, it has scope to expand its store network, particularly in areas such as Serangoon, Hougang and Seng Kang, where it has a low presence. Management targets to ultimately operate 50 stores islandwide. In the past six years, 0-8 stores were opened annually, largely a function of supply of HDB shop space available for tender and Sheng Siong’s ability to win the tenders. Sheng Siong mainly operates in HDB estates.

Operation Area (sqft)

Gross margin expansion through better sales mix. The gross margin for fresh products is estimated to be >30%, and close to 20% for non-fresh grocery items. Sheng Siong’s product mix stands at approximately 40% fresh vs 60% non-fresh. We see headroom for sales mix to improve to 50% for each as it skews its store offerings more towards fresh products. Mandai Distribution Centre to expand. The Mandai Distribution Centre allows Sheng Siong to perform direct sourcing and bulk handling. This effectively drives down input costs, resulting in cost savings and better margins. We estimate that the facility is currently running at only 90% of capacity and a new warehouse adjacent to the current one is expected to start construction in FY17F. It will be able to secure more suppliers and products to trade through the distribution centre to effectively enjoy more bulk handling and higher supplier rebates. Margins are expected to trend up as utilisation increases towards full capacity. Margin expansion through direct sourcing. Sheng Siong is increasingly sourcing directly from suppliers such as farms instead of from middlemen. The company has the resources to place large orders, which is welcomed by producers. Generating more same-store-sales growth (SSSG) to increase revenue. Sheng Siong has been able to maintain positive SSSG since 4Q13 (excluding 4Q15, 1Q16) through longer operating hours and renovation of older stores, offering the correct products and effective marketing. SSSG from 3Q16 to 1Q17 has been affected partly by the renovation of the Loyang store. The SSSG would have been positive had Loyang store performed similar to the previous year and was not shut down for renovation. Maintaining positive SSSG will support earnings growth.

Number of stores

SSSG (%) 6.0% 5.0% 4.0% Affected by SG50 promotion and discounting

3.0% 2.0%

Weak demand conditions, store renov ations

1.0% 0.0% -1.0%

3Q & 4Q would be negativ e 1.2% & 2.7% if include Loy ang store renov ation

-2.0% -3.0% 1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

Gross Margins (%) 27.0 26.5

Kunming store in China to open in 2017. Its first store in Kunming (40,000 sqft) is expected to commence operations in 2017. Downside for the JV is limited to US$6m paid-up capital which is sufficient to open 2-3 new stores.

26.0 25.5 25.0 24.5 24.0 23.5 23.0 22.5 22.0 1Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q17

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 67

Company Guide Sheng Siong Group

Appendix 1: A look at the company's listed history – what drives its share price? Correlation of stock price to gross margin improvement is strong at 0.9

1.20

S$

Share price (LHS)

Gross margins (RHS) Gross margins expanded from 20.8% to 23.2%

1.00

%

30 28

0.80

25

0.60

23

Gross margins at all time high of c.26%

0.40

20

Gross margins expanded from 23.8% to 25.2%

Feb-17

Aug-16

Feb-16

Aug-15

Feb-15

Aug-14

Feb-14

Aug-13

Feb-13

Aug-12

Feb-12

18

Aug-11

0.20

Source: DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 68

Company Guide Sheng Siong Group

Balance Sheet: Net cash of over S$68m or c.4 Scts per share. The excess cash allows for strategic store acquisitions if suitable real estate arises for it to expand its store presence in the future. The business generates positive working capital. Inventory is purchased on credit, and quickly turned into cash. Over the past seven years, the business has generated between S$20-75m of operating cash flow each year. Dividend payout is attractive at 90%. We expect this to be maintained as long as there is no significant requirement for cash funding.

Leverage & Asset Turnover (x)

Capital Expenditure

Share Price Drivers: Strong earnings growth performance. Sheng Siong’s financial performance has consistently met our expectations, delivering earnings growth (5-year CAGR of 18.1% since FY11) through a combination of margin expansion, store growth and SSSG. We believe continued delivery of consistent performance and profit growth will support a strong share price. China to be a wildcard. We believe Sheng Siong’s JV in China is a wildcard. If operations prove to be successful, in time to come, China can provide an alternate source of growth. There is scope for the number of stores to increase should Sheng Siong’s business model work. Downside remains limited to US$6m for now should the JV fail.

ROE (%)

Key Risks: Revenue growth limited by store openings. Store expansion in Singapore is largely dependent on the supply of new supermarket retail space released by HDB and its ability to secure the tenders.

Forward PE Band (x)

Excessive discounts and promotions may erode margins. Heavier discounts and promotions vis-a-vis competitors would drive sales revenue, but this could be gained at the expense of margins. Company Background Sheng Siong is the third largest supermarket operator in Singapore, behind NTUC Fairprice and Dairy Farm International.

PB Band (x)

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 69

Company Guide Sheng Siong Group

Key Assumptions FY Dec Rev per sqft Operation Area (sqft) Number of stores Segmental Breakdown FY Dec Revenues (S$m) Singapore Total Operating profit (S$m) Singapore Total Operating profit Margins Singapore Total Income Statement (S$m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2015A

2016A

2017F

2018F

2019F

1,892 431,000 39.0

1,848 450,000 42.0

1,850 455,664 45.0

1,816 485,664 48.0

1,808 515,664 51.0

2015A

2016A

2017F

2018F

2019F

764

797

807

828

878

764

797

807

828

878

57.2

65.1

72.5

76.7

84.3

57.2

65.1

72.5

76.7

84.3

7.5

8.2

9.0

9.3

9.6

7.5

8.2

9.0

9.3

9.6

2015A

2016A

2017F

2018F

2019F

764 (576) 189 (132) 57.2 9.26 0.0 1.22 0.0 67.7 (10.9) 0.0 0.0 56.8 56.8 70.6

797 (592) 205 (140) 65.1 10.5 0.0 0.57 0.0 76.2 (13.5) 0.0 0.0 62.7 62.7 80.0

807 (597) 210 (137) 72.5 9.58 0.0 0.64 0.0 82.7 (14.1) 0.0 0.0 68.6 68.6 87.6

828 (610) 218 (141) 76.7 9.60 0.0 0.58 0.0 86.9 (14.8) (0.1) 0.0 72.0 72.0 92.2

878 (645) 233 (148) 84.3 7.20 0.0 0.78 0.0 92.2 (15.7) (0.1) 0.0 76.5 76.5 101

5.3 12.1 9.7 20.8

4.2 13.3 13.7 10.4

1.3 9.5 11.3 9.4

2.5 5.2 5.8 4.9

6.1 9.3 9.9 6.2

24.7 7.5 7.4 23.6 15.9 19.8 92.7 NM

25.7 8.2 7.9 25.3 16.6 21.3 89.9 NM

26.0 9.0 8.5 26.9 17.7 23.1 89.9 NM

26.3 9.3 8.7 27.4 18.0 23.8 89.9 NM

26.5 9.6 8.7 28.3 18.1 25.4 89.9 NM

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 70

Company Guide Sheng Siong Group

Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 2Q2016 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

3Q2016

4Q2016

1Q2017

209 (158) 51.0 (35.4) 15.6 3.82 0.0 0.34 0.0 19.8 (3.4) 0.0 16.4 16.4 23.0

189 (139) 49.4 (33.3) 16.0 2.14 0.0 0.20 0.0 18.4 (3.2) 0.0 15.2 15.2 22.1

202 (150) 52.5 (35.6) 16.9 2.21 0.0 0.02 0.0 19.1 (3.4) 0.0 15.7 15.7 22.8

197 (145) 51.8 (35.3) 16.5 2.37 0.0 0.01 0.0 18.9 (3.5) 0.0 15.4 15.4 22.6

217 (163) 54.3 (36.3) 18.0 2.53 0.0 0.02 0.0 20.6 (3.5) 0.01 17.1 17.1 24.3

11.5 16.6 9.9 12.4

(9.5) (4.0) 2.5 (7.6)

7.2 3.3 5.2 3.3

(2.7) (1.1) (1.9) (1.5)

10.2 7.7 9.0 11.0

24.5 7.5 7.9

26.1 8.5 8.0

25.9 8.3 7.7

26.3 8.4 7.8

25.0 8.3 7.9

2015A

2016A

2017F

2018F

2019F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

178 0.0 0.0 126 52.5 11.8 0.0 368

252 0.0 0.0 63.5 61.9 10.4 0.0 388

254 0.0 0.0 58.1 61.3 12.1 0.0 386

262 0.0 0.0 77.6 62.6 11.0 0.0 414

256 0.0 0.0 95.8 66.2 11.6 0.0 430

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

0.0 109 12.6 0.0 2.24 244 0.0 368

0.0 118 13.0 0.0 2.45 252 2.79 388

0.0 108 14.1 0.0 2.45 259 2.79 386

0.0 127 14.8 0.0 2.45 266 2.89 414

0.0 135 15.7 0.0 2.45 274 2.99 430

(57.1) 126 5.4 66.4 31.0 2.1 1.6 1.1 CASH CASH N/A 10.0

(58.3) 63.5 5.1 71.5 36.2 2.1 1.0 0.6 CASH CASH N/A 9.3

(48.3) 58.1 5.1 70.6 38.6 2.1 1.1 0.6 CASH CASH N/A 9.9

(68.5) 77.6 5.1 72.1 38.0 2.1 1.1 0.6 CASH CASH N/A 8.8

(72.9) 95.8 4.7 76.1 37.4 2.1 1.2 0.7 CASH CASH N/A 8.8

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (S$m) FY Dec

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 71

Company Guide Sheng Siong Group

Cash Flow Statement (S$m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

2015A

2016A

2017F

2018F

2019F

67.7 13.4 (10.7) 0.0 2.54 0.52 73.5 (30.4) 0.0 0.0 0.0 1.22 (29.2) (48.9) 0.0 0.0 0.0 (48.9) 0.04 (4.5) 4.72 2.86

76.2 14.9 (12.6) 0.0 0.77 (1.2) 78.1 (89.3) 0.0 0.0 0.0 0.57 (88.7) (54.8) 0.0 0.0 2.59 (52.2) 0.40 (62.4) 5.14 (0.7)

82.7 15.1 (13.0) 0.0 (11.0) 0.0 73.7 (17.5) 0.0 0.0 0.0 0.0 (17.5) (61.7) 0.0 0.0 0.0 (61.7) 0.0 (5.5) 5.64 3.74

86.9 15.5 (14.1) 0.0 19.5 0.0 108 (23.5) 0.0 0.0 0.0 0.0 (23.5) (64.7) 0.0 0.0 0.0 (64.7) 0.0 19.6 5.87 5.61

92.2 16.4 (14.8) 0.0 3.50 0.0 97.4 (10.5) 0.0 0.0 0.0 0.0 (10.5) (68.8) 0.0 0.0 0.0 (68.8) 0.0 18.2 6.25 5.78

Includes S$13m warehouse capex Includes S$7m warehouse capex

Source: Company, DBS Bank Target Price & Ratings History

Source: DBS Bank Analyst: Alfie YEO Andy SIM CFA

ASIAN INSIGHTS

VICKERS SECURITIES Page 72

Thailand Company Guide

CP ALL Refer to important disclosures at the end of this report

Version 5 | Bloomberg: CPALL TB | Reuters: CPALL.BK

DBS Group Research . Equity

4 May 2017

BUY

Sustainable growth

Last Traded Price ( 3 May 2017): Bt61.00 (SET : 1,564.12) Price Target 12-mth: Bt75.00 (23% upside) Potential Catalyst: Positive SSSG despite slow domestic economy, aggressive store expansion Analyst Namida ARTISPONG +66 2657 7833 [email protected]

Decent earnings growth despite slowing SSSG in 1Q17F. Consumer spending was sluggish but food retailers are still defensive plays. We expect CPALL’s convenient store operations (CVS) to deliver SSSG of 1.5%, vs a contraction in 4Q16 while its cash-and-carry business should post much stronger SSSG from solid demand from HORECA and softer competition following BIGC’s business strategy to discontinue giving discount coupons to big-basket customers. Overall, we estimate CPALL’s 1Q17F revenue to rise by 8.8% y-o-y and earnings to grow by 11.5% to Bt4.5bn. CVS’s improving product mix and softer competition for cash and carry are expected to cause earnings growth to outpace sales growth.

What’s New 

Expect decent 1Q17F earnings growth despite slowing SSSG



To reach 13,000 stores by 2021, with no sign of saturation



Flexible product mix to cater to changing consumer trends

Price Relative Bt

Relative Index 221

69.5 64.5

201

59.5

181

54.5

161

49.5

141

44.5 121

39.5

101

34.5 29.5 May-13

May-14

CP ALL (LHS)

May-15

May-16

81 May-17

Relative SET (RHS)

Forecasts and Valuation FY Dec (Bt m) 2015A 2016A 2017F 2018F Revenue 391,817 434,712 490,697 551,182 EBITDA 32,554 36,473 41,481 47,187 Pre-tax Profit 16,884 20,142 24,390 30,443 Net Profit 13,682 16,677 20,094 24,165 Net Pft (Pre Ex.) 13,687 16,599 20,094 24,165 Net Pft Gth (Pre-ex) (%) 39.3 21.3 21.1 20.3 EPS (Bt) 1.52 1.86 2.24 2.69 EPS Pre Ex. (Bt) 1.52 1.85 2.24 2.69 EPS Gth Pre Ex (%) 39 21 21 20 Diluted EPS (Bt) 1.52 1.86 2.24 2.69 Net DPS (Bt) 0.80 0.90 1.12 1.34 BV Per Share (Bt) 4.16 6.14 7.45 8.79 PE (X) 32.9 27.3 22.7 40.1 PE Pre Ex. (X) 40.1 33.0 27.3 22.7 P/Cash Flow (X) 17.4 14.4 14.9 13.0 EV/EBITDA (X) 22.1 19.4 16.8 14.6 Net Div Yield (%) 1.3 1.5 1.8 2.2 P/Book Value (X) 14.7 9.9 8.2 6.9 Net Debt/Equity (X) 4.0 2.6 2.0 1.6 ROAE (%) 40.2 36.0 32.9 33.1 Earnings Rev (%): Consensus EPS (Bt): Other Broker Recs:

B: 25

0 2.18 S: 0

0 2.59 H: 2

Source of all data on this page: Company, DBSVTH, Bloomberg Finance L.P

ASIAN INSIGHTS ed: CK / sa:CS, PY

Maintain BUY. We like CPALL for its business resilience, continuous network expansion success, margin expansion from improving product mix, and lower interest expense on debt repayment and refinancing. Thus, we expect earnings growth of c.20% in the next three years. CPALL is now trading below its 5year average PE of 30x, which is justified by our 3-year earnings growth forecast of 20%.

No sign of saturation despite aggressive expansion. As at endFY16, CPALL operated 9,542 stores nationwide. It plans to open at least 700 CVS stores p.a. in the next five years, implying that CPALL will reach its previous target of 10,000 within this year. Its next store network target is 13,000 stores in five years and 15,000 in seven years. We are not concerned about market saturation as we think that the CVS market in Thailand still has room to grow. Despite aggressive store rollouts, average customer visits per store have been maintained at above 1,200 customers per store per day, the highest among global 7-Eleven store operators. We believe its aggressive outlet expansion is achievable given its small-sized CVS store format, even in Bangkok in view of the upcoming new mass transit lines. Valuation: Our TP of Bt75 is based on DCF valuation (WACC 10.4%, terminal growth rate 2%). Key Risks to Our View: Key risks are (i) delays in store expansion, (ii) weaker-thanexpected consumer confidence, and iii) intense competition. At A Glance Issued Capital (m shrs) 8,983 Mkt. Cap (Btm/US$m) 547,969 / 15,860 Major Shareholders (%) C.P. Merchandising (%) 30.5 Charoen Pokphand Group (%) 10.2 Thai NDVR (%) 4.8 Free Float (%) 58.3 3m Avg. Daily Val (US$m) 24.0 ICB Industry : Consumer Services / Food & Drug Retailers

VICKERS SECURITIES Page 73

Company Guide CP ALL

WHAT’S NEW Sustainable growth Decent earnings growth despite slowing SSSG in 1Q17F. Consumer spending was sluggish but food retailers are still defensive plays. We expect CPALL’s convenient store operations (CVS) to deliver SSSG of 1.5%, vs a contraction in 4Q16 while its cash and carry business should post much stronger SSSG from solid demand from HORECA and softer competition following BIGC’s business strategy to discontinue giving discount coupons to big-basket customers. Overall, we estimate CPALL’s 1Q17F revenue to rise by 8.8% y-o-y and earnings to grow by 11.5% to Bt4.5bn. CVS’s improving product mix and softer competition for cash and carry are expected to cause earnings growth to outpace sales growth. No sign of saturation despite aggressive expansion. As at end-FY16, CPALL operated 9,542 stores nationwide. The company plans to open at least 700 CVS stores p.a. in the next five years, implying that CPALL will reach its previous target of 10,000 within this year. Its next store network target is 13,000 stores in five years and 15,000 in seven years. We are not concerned about market saturation as we think that the CVS market in Thailand still has room to grow. Despite aggressive store rollouts, average customer visits per store have been maintained at above 1,200 customers per store per day, the highest among global 7-Eleven store operators. We believe its aggressive outlet expansion is achievable given its small-sized CVS store format, even in Bangkok in view of the upcoming new mass transit lines. CPALL: 1Q17F earnings preview FY Dec (Btm) Revenue COGS Gross Profit SG&A Other opt. Inc. Opt. Profit Non-opt. Inc./Exp. Int. Inc. EBIT Extra Gain/(Loss) Pretax Profit Tax MI Net Profit Norm Profit EPS Gross Margin SGA % Sales EBIT Margin Net Margin Eff. Tax Rate %

Source of all data: Company, DBSVTH

ASIAN INSIGHTS

Flexible product mix to support consumer trends. CPALL’s strategy is to add new products or services to the stores every week. Its main concept revolves around offering the bestquality, exclusive products at its 7-eleven stores, as well as being the first to sell newly-launched products. Meanwhile, the product mix in each store is different from another and the company frequently changes its product mix to meet changing consumer preferences. Maintain BUY. We like CPALL for its business resilience, continuous network expansion success, margin expansion from improving product mix, and lower interest expense on debt repayment and refinancing. Thus, we expect earnings growth of c.20% in the next three years. CPALL is now trading below its 5-year average PE of 30x, which is justified by our 3-year earnings growth forecast of 20%.

1Q16

4Q16

1Q17F

104,969 (82,253) 22,716 (19,420) 3,713 7,009 0 46 7,055 59 5,059 (960) (34) 4,065 4,006 0.45 21.6% (18.5%) 6.7% 3.9% (19.0%)

111,103 (86,800) 24,303 (21,513) 4,336 7,126 0 75 7,202 (17) 5,053 (714) (38) 4,301 4,318 0.48 21.9% (19.4%) 6.5% 3.9% (14.1%)

114,206 (89,423) 24,783 (21,357) 4,203 7,629 0 51 7,680 0 5,569 (1,002) (34) 4,532 4,532 0.50 21.7% (18.7%) 6.7% 4.0% (18.0%)

Chg. y-o-y 9% 9% 9% 10% 13% 9% nm 12% 9% nm 10% 4% (1%) 12% 13% 12%

Chg. q-o-q 3% 3% 2% (1%) (3%) 7% nm (32%) 7% nm 10% 40% (9%) 5% 5% 5%

VICKERS SECURITIES Page 74

Company Guide CP ALL Same-store-sales (%)

CRITICAL DATA POINTS TO WATCH

5

5

2017F

2018F

5.1

Earnings Drivers: Aggressive outlet expansion. As at end-2016, CPALL had a total of 9,542 outlets nationwide, with 44% in Bangkok and surburban areas, and the remaining in provincial regions. Despite the slow domestic economy recovery, CPALL will continue to aggressively expand its network. It targets to add at least 700 outlets p.a. and has a milestone to reach 13,000 stores in the next five years. Of the total additional 700 stores p.a., 90% of the new stores would be on a standalone basis while another 10% will be at PTT gas stations. Furthermore, more than half of new outlets would be in provincial areas as there is ample potential demand with a much higher population per store compared to Bangkok.

3.9 2.8

2.4

1.7

0.9

0.5 -0.6 -1.7 -2.9

-2.6 2014A

2015A

2016A

Spending per ticket (Bt) 68.2

63

63

64.3

65.5

66.9

2014A

2015A

2016A

2017F

2018F

54.6 40.9

SSSG in positive territory. Amid weak consumption sentiment, Thai consumers are now more cautious and are spending on smaller-ticket items and making more frequent shopping trips. This trend is favourable for convenience stores and minisupermarkets formats. CPALL has been delivering positive SSSG, outperforming other retailers who have mostly registered negative growth. As c.71% of its product mix is generated from food (ready-to-eat meals, processed foods, bakery, snacks, beverages, etc.) which is a staple, we expect CPALL’s operations and SSSG to be resilient. Solid gross margin. We expect economies of scale from outlet expansion and larger contribution from higher-margin products to support CPALL’s margins. With a larger network, CPALL will be leveraging its high bargaining power on supply contracts. The group will continue to add high-margin product lines like ready-to-eat meals and from the health and beauty category which yield higher margins than other products. Lower financing expenses. Although CPALL has launched aggressive promotion campaigns amid weak consumption, an increase in other income should more than offset rising SG&A to total sales. Meanwhile, electricity charges which account for 10% of its SG&A expenses were lower due to the decline in oil prices. Additionally, the expenses related to the acquisition of MAKRO such as financial management fees and forex costs should also decline. CPALL completed its loan refinancing in 2Q15 by issuing debentures to replace high-cost bank loans.

27.3 13.6 0.0

Customers/store/day 1305.61

1252

1261

1267

1274

1280

2014A

2015A

2016A

2017F

2018F

698

705

710

700

700

2014A

2015A

2016A

2017F

2018F

1044.49 783.37 522.24 261.12 0.00

New Stores

573.7 430.3 286.8 143.4 0.0

Total stores at year end 10942

11051.4

10242 9542

8841.1

8832 8127

6630.9 4420.6 2210.3 0.0 2014A

2015A

2016A

2017F

2018F

Source: Company, DBSVTH

ASIAN INSIGHTS

VICKERS SECURITIES Page 75

Company Guide CP ALL

Balance Sheet: Expect gearing to decline. Following the MAKRO acquisition, CPALL’s net gearing surged to 4.9x in FY13. Nonetheless, its net gearing dropped to 2.6x as at end-FY16, thanks to the nature of its business – being cash generative and providing good levels of free cash flow. Share Price Drivers: Resilient SSSG. Despite the weak domestic economy, CPALL’s SSSG momentum is expected to remain positive, thanks to its leading position in the convenient store market and attractive products and sales promotions. Consumers tend to spend on small-ticket items and making more frequent shopping trips which are favourable for convenience stores and minisupermarkets formats. Going forward, domestic consumption should improve slowly, supported by the government’s stimulus packages and public infrastructure spending.

Leverage & Asset Turnover (x) 1.6 1.6

5.00

1.5 1.5

4.00

1.4 3.00

1.4 1.3

2.00

1.3 1.2

1.00

1.2 1.1

0.00 2014A

2015A

2016A

2017F

Gross Debt to Equity (LHS)

2018F

Asset Turnover (RHS)

Capital Expenditure Btm 19,500.0 19,000.0 18,500.0 18,000.0 17,500.0 17,000.0 16,500.0 16,000.0 15,500.0

Key Risks: Weak consumer confidence. CPALL’s business may suffer if consumer confidence (as measured by the Consumer Confidence Index) in Thailand weakens because of an economic slowdown or domestic political unrest. In any case, CPALL tends to adjust its product mix in response to changing economic conditions.

15,000.0 14,500.0 2014A

2015A

2016A

2017F

2018F

Capital Expenditure (-)

ROE (%) 40.0% 35.0% 30.0% 25.0%

Unfavourable weather conditions. Customer traffic at CPALL’s stores mostly involves walk-ins. Unfavourable weather conditions could deter walk-in customers. CPALL normally registers softer sales during the rainy season.

20.0% 15.0% 10.0% 5.0% 0.0%

Company Background CP ALL PCL was established in 1988 and is a flagship company of Charoen Pokphand Group’s marketing and distribution business. It is the leading operator of convenience store chains (7-Eleven) in Thailand with the highest market share. Additionally, it also operates other related businesses such as bill payment collection service, manufacturing and sales of frozen foods and bakery, etc.

2014A

2015A

2016A

2017F

2018F

Forward PE Band (x) (x) 43.1

38.1

+2sd: 38.5x

33.1

+1sd: 33.9x Avg: 29.3x

28.1

‐1sd: 24.7x 23.1

‐2sd: 20.2x 18.1 May-13

May-14

May-15

May-16

May-17

PB Band (x) (x) 15.7 14.7

+2sd: 14.63x

13.7

+1sd: 13.13x

12.7 11.7

Avg: 11.64x

10.7

‐1sd: 10.15x

9.7 8.7 7.7 May-13

‐2sd: 8.65x May-14

May-15

May-16

May-17

Source: Company, DBSVTH

ASIAN INSIGHTS

VICKERS SECURITIES Page 76

Company Guide CP ALL

Key Assumptions FY Dec

2014A

2015A

2016A

2017F

2018F

Same-store-sales (%) Spending per ticket (Bt) Customers/store/day New Stores Total stores at year end

(2.6) 63.0 1,252 698 8,127

0.90 63.0 1,261 705 8,832

2.40 64.3 1,267 710 9,542

5.00 65.6 1,274 700 10,242

5.00 66.9 1,280 700 10,942

Income Statement (Btm) FY Dec

2014A

2015A

2016A

2017F

2018F

357,766 (281,443) 76,323 (55,830) 20,493 0.0 0.0 (8,281) 377 12,589 (2,270) (119) 0.0 10,200 9,823 26,802

391,817 (306,519) 85,299 (60,030) 25,269 0.0 0.0 (8,381) (4.2) 16,884 (3,066) (135) 0.0 13,682 13,687 32,554

434,712 (339,688) 95,024 (66,746) 28,278 0.0 0.0 (8,213) 77.1 20,142 (3,323) (143) 0.0 16,677 16,599 36,473

490,697 (382,132) 108,565 (76,259) 32,306 0.0 0.0 (7,916) 0.0 24,390 (4,127) (169) 0.0 20,094 20,094 41,481

551,182 (428,575) 122,607 (85,398) 37,209 0.0 0.0 (6,766) 0.0 30,443 (6,089) (190) 0.0 24,165 24,165 47,187

31.4 35.5 35.9 (10.7)

9.5 21.5 23.3 39.3

10.9 12.0 11.9 21.3

12.9 13.7 14.2 21.1

12.3 13.8 15.2 20.3

21.3 5.7 2.9 34.3 3.2 6.8 72.1 2.5

21.8 6.4 3.5 40.2 4.2 8.2 52.5 3.0

21.9 6.5 3.8 36.0 4.9 9.1 48.5 3.4

22.1 6.6 4.1 32.9 5.6 9.9 50.0 4.1

22.2 6.8 4.4 33.1 6.6 11.1 50.0 5.5

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

Source: Company, DBSVTH

ASIAN INSIGHTS

VICKERS SECURITIES Page 77

Company Guide CP ALL

Quarterly / Interim Income Statement (Btm) FY Dec 3Q2015 4Q2015

1Q2016

2Q2016

3Q2016

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

96,364 (75,068) 21,296 (15,276) 6,020 0.0 0.0 (2,031) 25.5 4,015 (718) (38.6) 3,258 3,232 7,906

102,608 (80,191) 22,417 (15,710) 6,707 0.0 0.0 (2,035) 25.7 4,697 (790) (30.2) 3,877 3,851 8,410

104,969 (82,253) 22,716 (15,707) 7,009 0.0 0.0 (2,009) 58.6 5,059 (960) (34.5) 4,065 4,006 8,949

109,998 (86,035) 23,962 (16,877) 7,086 0.0 0.0 (2,048) 7.69 5,046 (817) (32.6) 4,196 4,188 9,127

108,642 (84,600) 24,042 (16,985) 7,057 0.0 0.0 (2,100) 28.1 4,985 (832) (38.0) 4,115 4,087 8,997

(1.0) 1.0 (0.3) 1.8

6.5 6.4 11.4 19.1

2.3 6.4 4.5 4.0

4.8 2.0 1.1 4.5

(1.2) (1.4) (0.4) (2.4)

22.1 6.2 3.4

21.8 6.5 3.8

21.6 6.7 3.9

21.8 6.4 3.8

22.1 6.5 3.8

2014A

2015A

2016A

2017F

2018F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

80,201 0.0 181,525 33,436 22,167 910 8,170 326,410

89,447 0.0 182,663 22,921 25,072 854 8,126 329,083

99,127 0.0 183,242 34,819 26,705 1,026 7,349 352,268

106,735 0.0 183,156 30,805 31,895 1,159 8,084 361,833

113,472 0.0 183,074 25,817 35,827 1,301 8,893 368,384

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

19,701 59,312 13,002 178,779 20,558 30,782 4,276 326,410

23,803 62,624 14,705 165,684 20,593 37,349 4,326 329,083

31,554 66,959 15,305 157,552 21,295 55,196 4,407 352,268

31,869 75,325 16,783 145,199 21,295 66,911 4,451 361,833

31,547 84,480 18,405 129,168 21,295 78,994 4,496 368,384

(41,066) (165,044) 0.9 75.6 27.9 1.1 0.7 0.4 4.7 5.4 8.1 2.4

(43,276) (166,566) 0.8 74.4 28.8 1.2 0.6 0.2 4.0 4.5 10.0 2.5

(47,184) (154,287) 0.8 71.3 28.5 1.3 0.6 0.3 2.6 2.8 8.6 2.6

(50,970) (146,263) 0.8 69.6 28.7 1.4 0.6 0.3 2.0 2.2 9.3 2.8

(56,864) (134,897) 0.8 69.7 29.5 1.5 0.5 0.2 1.6 1.7 10.2 3.0

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Btm) FY Dec

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Source: Company, DBSVTH

ASIAN INSIGHTS

VICKERS SECURITIES Page 78

Company Guide CP ALL

Cash Flow Statement (Btm) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (Bt) Free CFPS (Bt)

2014A

2015A

2016A

2017F

2018F

12,589 6,310 (2,270) 0.0 3,850 0.0 26,371 (16,019) (182) 0.0 0.0 242 (15,958) (8,085) 12,798 0.0 (7,543) (2,830) (10.6) 7,572 2.51 1.15

16,884 7,285 (3,066) 0.0 5,065 0.0 31,419 (19,010) (68.3) 0.0 0.0 1,669 (17,409) (7,186) (9,177) 0.0 (8,416) (24,780) 83.9 (10,686) 2.93 1.38

20,142 8,195 (3,322) 0.0 8,060 0.0 37,939 (16,263) 27.4 0.0 0.0 (2,559) (18,794) (8,085) (779) 0.0 1,631 (7,233) 12.5 11,925 3.33 2.41

24,390 9,175 (4,126) 0.0 3,733 0.0 36,688 (16,450) 0.0 0.0 0.0 (2,610) (19,060) (9,742) (12,038) 0.0 0.0 (21,780) 0.0 (4,152) 3.67 2.25

30,443 9,978 (6,088) 0.0 5,839 0.0 42,041 (16,450) 0.0 0.0 0.0 (2,662) (19,112) (11,715) (16,353) 0.0 0.0 (28,068) 0.0 (5,139) 4.03 2.85

Source: Company, DBSVTH Target Price & Ratings History

Bt

12 63.70

6 8

58.70

7

10 11 9

13

53.70

4

5

2

48.70

1 3 43.70 May-16

Jul-16

Sep-16

Nov-16

Jan-17

Mar-17

May-17

12- mt h T arget Rat ing Pric e

S.No.

Dat e of Report

Closing Pric e

1:

12 May 16

48.00

60.00

BUY

2:

24 May 16

47.75

60.00

BUY

3:

25 May 16

48.25

60.00

BUY

4:

02 J un 16

49.00

60.00

BUY

5:

03 Aug 16

52.00

60.00

BUY

6:

31 Aug 16

62.25

75.00

BUY

7:

06 Sep 16

60.50

75.00

BUY

8:

03 Oct 16

61.00

75.00

BUY

9:

20 Oct 16

60.75

75.00

BUY

10:

04 Nov 16

60.75

75.00

BUY

11: 12: 13:

10 Nov 16 06 Jan 17 24 Feb 17

63.00 63.75 59.75

75.00 75.00 75.00

BUY BUY BUY

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBSVTH Analyst: Namida ARTISPONG THAI-CAC Corporate Governance CG Rating 2016

Declared n/a

THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorised into: Corporate Governance CG Rating is based on Thai Institute of Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

ASIAN INSIGHTS

Score Declared Certified Score 90-100

Description Companies that have declared their intention to join CAC Companies certified by CAC. Range Number of Logo

80-89

Description Excellent Very Good

70-79

Good

60-69

Satisfactory

50-59 <50

No logo given

Pass N/A

VICKERS SECURITIES Page 79

Regional Company Guide

Robinsons Retail Holdings Refer to important disclosures at the end of this report

Version 6 | Bloomberg: RRHI PM | Reuters: RRHI.PS

DBS Group Research . Equity

17 July 2017

BUY

In a stronger position

Last Traded Price ( 17 Jul 2017): P87.00 (PCOMP : 7,934.50) Price Target 12-mth: P101 (16% upside) (Prev P93.00)

Maintain BUY, TP raised to P101.00 as we roll over our valuation base to FY18F. Robinsons Retail Holdings' (RRHI) growth profile remains bright backed by long-term positive industry data and robust economic activity. There is ample room for growth as the Philippine modern retail industry remains underpenetrated and could get a boost from the government’s planned infrastructure spending. With its aggressive expansion plan and large war chest, RRHI is our top pick for broad exposure in the Philippines’ growing modern retail industry. Our TP of 101.00 has an implied PE of 22.4x – undemanding given it is just slightly above historical mean valuations.

Potential Catalyst: Faster store rollout, M&A, and margin recovery Where we differ: FY17/18F earnings are above consensus estimates Analyst Regional Research Team [email protected]

What’s New 

More upside than downside



Better balance sheet and inventory controls



Maintain BUY, TP raised to P101.00

More upside risk earnings potential than downside. 1.) Passage of the tax reform packages could provide tailwinds to our conservative sales forecast of 11% (CAGR FY17F-FY19F). The lowering of income tax rates should result in positive wealth effect to middle-income households – RRHI’s target market. 2.) Margins are set to improve as the slack from the closure of nonperforming stores is expected to fade in FY18F. RRHI reported lower operating margins in the past two years mainly due to closing costs of non-performing stores. 3.) Future M&As, which are not factored in our estimates could provide further earnings upside.. Since its IPO, RRHI has consistently delivered on EPSaccretive acquisitions.

Price Relative

Forecasts and Valuation FY Dec (P m) 2016A 2017F 2018F 2019F Revenue 105,293 118,035 130,948 144,264 EBITDA 7,964 8,955 10,022 11,139 Pre-tax Profit 6,667 7,493 8,380 9,365 Net Profit 4,830 5,576 6,236 6,968 Net Pft (Pre Ex.) 4,830 5,576 6,236 6,967 EPS (P) 3.49 4.03 4.50 5.03 EPS Pre Ex. (P) 3.49 4.03 4.50 5.03 EPS Gth (%) 11 15 12 12 EPS Gth Pre Ex (%) 11 15 12 12 Diluted EPS (P) 3.49 4.03 4.50 5.03 Net DPS (P) 0.68 0.75 0.87 0.97 BV Per Share (P) 34.4 37.6 41.3 45.3 PE (X) 24.9 21.6 19.3 17.3 PE Pre Ex. (X) 24.9 21.6 19.3 17.3 P/Cash Flow (X) 19.5 22.7 13.5 12.1 EV/EBITDA (X) 14.7 13.1 11.3 9.8 Net Div Yield (%) 0.8 0.9 1.0 1.1 P/Book Value (X) 2.5 2.3 2.1 1.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 10.6 11.2 11.4 11.6 Earnings Rev (%): Consensus EPS (P): Other Broker Recs:

0 3.8 B: 10

0 4.3 S: 0

0 4.8 H: 2

Better balance sheet and inventory management in the face of rising bargaining power of suppliers. RRHI's high net cash position provides cushion against a backdrop of declining payables days. Moreover, RRHI’s superior inventory management has helped it maintain negative cash conversion cycle (CCC) days despite acquiring businesses with longer inventory days. Valuation: BUY, TP at P101.00, based on SOTP valuation methodology. Our TP implies FY18F/19F PEs of 22x/20x. Key Risks to Our View: Key risks to our forecast are: 1) competition intensifying more than assumed; 2) fewer number of new store rollouts; and 3) more closures of non-performing stores. At A Glance Issued Capital (m shrs) Mkt. Cap (Pm/US$m) Major Shareholders (%) JE Holdings Sdn Bhd Gokongwei Lance Yu Free Float (%) 3m Avg. Daily Val (US$m) ICB Industry : Consumer Services /

1,385 120,495 / 2,380 35.0 7.7 45.7 1.7

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

ed: TH / sa: AS

Page 80

Company Guide Robinsons Retail Holdings GFA growth %

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Growth via organic GFA expansion and margin expansion. Due to the higher number of non-performing stores that were closed in FY15 (48 stores closed), RRHI’s store network grew by only 179 stores, representing a 9.7% increase in gross floor area (GFA) in FY15. This resulted in slower revenue growth (from 19.5% y-o-y in FY14 to 13% y-o-y in FY15), and operating margins contracted by 4bps in FY15. In FY16, RRHI continued to close down non-performing stores but to a lesser extent relative to FY15. As a result, margins stabilised. Moving into FY17F/FY18F/FY19F, we expect fewer store closures and GFA to expand 8.0%/7.4%/6.8%. These should support revenue growth and steady/improve operating margins. Consumer confidence is key. RRHI reported robust SSSG of 6.7% y-o-y in FY16 – underpinned by still strong consumer confidence post elections. We do not think the strong SSSG figures reported in FY16 can be sustained in FY17F. SSSG should normalise to 3-4% as the boost from election-related spending wears off. Consumer confidence will be key post elections. Given the high approval rating of President Duterte amid his controversial war on drugs and anti-western comments, we see no reason for consumer confidence to deteriorate in the near-to-medium term. Furthermore, the stronger post-election GDP and the likely approval of the tax reform proposal (likely to be implemented in 2H17) should underpin higher consumer confidence. Against this backdrop, RRHI is best positioned to benefit given its broad and countrywide exposure in the Philippine modern retail space. Acquisitions and expansion into other retail formats. RRHI continues to be on a lookout for value-enhancing acquisitions and opportunities to expand its retail format. So far, only one acquisition in 2016 has been announced (51% of The Generics Pharmacy). We see RRHI announcing at least one acquisition in FY17F. RRHI has a large war chest that is more than enough to fund a large and high-profile M&A. Our FY17F-19F earnings do not take into account any acquisitions. Industry backdrop is conducive for growth. Low penetration of modern retail (25% overall and 30% grocery based on Euromonitor data as of end-2016); rising household disposable income (6.2% CAGR in FY00-16)– which is underpinned by jobs growth, low inflation, and increase in compensation of government employees moving forward; and favourable demographics, are factors supporting store expansion in the Philippine modern retail space. We think Duterte’s administration will allocate more resources to Visayas and Mindanao. These are areas where modern retail is very much underpenetrated and where RRHI is ahead relative to its main competitors.

Same-store-sales growth %

Source: Company, DBS Bank

Page 81

Company Guide Robinsons Retail Holdings Leverage & Asset Turnover (x)

Balance Sheet: Inundated with cash. RRHI has been in a net cash position since its IPO. Even with its aggressive expansion plans, capex can be funded with internally generated cash. Its cash conversion cycle had turned positive as at 9M16 due to consolidation of TGP and inventory build-up ahead of the holiday season. However, RRHI ended FY16 with negative cash conversion cycle days (-8.5 days). Share Price Drivers: Operating margin turnaround. We expect closures of nonperforming stores to taper off in FY17F and FY18F. Operating margins appear to have stabilised in the last five quarters. Having said this, we project operating margins to gradually improve in FY17F and FY18F.

Capital Expenditure

Valuation to catch up. The counter has performed well so far this year. Despite this, there is still headroom for further upside. RRHI is trading at 19x FY18F PE, which is undemanding relative to its historical valuation. Key Risks: Expansion constraints plus competition. Availability of space (right size and location), rent cost, and securing business permits (especially in areas where local retailers have deep roots within the community) are critical factors to the success of RRHI’s expansion plans. The current level of competition, stemming from big-chain players and local mom-and-pop retailers, pose extra challenges to RRHI's expansion plans. Closure of non-performing stores erodes margins. There is the possibility of more store closures in FY17F, especially in RRHI’s weaker segments - department stores, convenience stores, and specialty stores. Significant markdowns and closing costs are detrimental to margins.

ROE (%)

Forward PE Band (x)

More restrictions on liquor and cigarette consumption are likely to be imposed under the Duterte administration. We see limited impact on RRHI’s supermarkets. However, sales may deteriorate at its convenience store segment. Liquor and cigarettes accounted for 12% for Ministop sales in FY16.

Company Background Robinsons Retail Group (RRHI) is a holding company which is involved in and solely focused on retailing. The company operates retail outlets in various channels such as supermarkets, department stores, DIY outlets, convenience stores, drugstores, and specialty stores.

PB Band (x)

Source: Company, DBS Bank

Page 82

Company Guide Robinsons Retail Holdings Key Assumptions FY Dec GFA growth % Same-store-sales growth Segmental Breakdown FY Dec Revenues (P m) Supermarket Department Store Hardware Convenience Store Drug Store Specialty Stores Adjustments Total EBIT (P m) Supermarket Department Store Hardware Convenience Store Drug Store Specialty Stores Adjustments Total EBIT Margins (%) Supermarket Department Store Hardware Convenience Store Drug Store Specialty Stores Adjustments Total

2015A

2016A

2017F

2018F

2019F

9.70 4.10

7.30 6.70

8.00 3.00

7.40 3.00

6.80 3.00

2015A

2016A

2017F

2018F

2019F

43,238.7 14,906.0 9,871.8 5,493.0 8,069.5 10,358.6 (1,055.1) 90,883

48,465.1 15,827.5 11,128.6 5,665.5 11,934.2 13,416.1 (1,143.7) 105,293

54,609.5 17,681.8 12,775.4 6,227.7 13,473.6 14,563.3 (1,296.2) 118,035

60,320.7 20,034.9 14,445.5 6,784.1 15,350.6 15,450.2 (1,438.0) 130,948

66,318.8 22,385.6 16,173.5 7,354.9 17,224.0 16,391.1 (1,584.2) 144,264

2,380.22 919.10 747.73 6.11 311.48 373.54 (9.34) 4,729

2,706.86 844.10 841.96 (54.79) 628.11 535.72 (9.08) 5,493

3,077.34 951.84 985.72 (57.11) 715.87 581.53 (10.34) 6,245

3,459.49 1,098.54 1,136.25 (55.43) 830.94 616.94 (11.71) 7,075

3,869.82 1,249.82 1,288.35 (52.74) 949.58 654.51 (13.16) 7,946

5.5% 6.2% 7.6% 0.1% 3.9% 3.6% 5.5% 5.2

5.6% 5.3% 7.6% -1.0% 5.3% 4.0% 5.6% 5.2

5.6% 5.4% 7.7% -0.9% 5.3% 4.0% 5.6% 5.3

5.7% 5.5% 7.9% -0.8% 5.4% 4.0% 5.7% 5.4

5.8% 5.6% 8.0% -0.7% 5.5% 4.0% 5.8% 5.5

At the low end of management’s guidance

Source: Company, DBS Bank

Page 83

Company Guide Robinsons Retail Holdings

Income Statement (P m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2015A

2016A

2017F

2018F

2019F

90,883 (71,134) 19,749 (15,020) 4,729 295 40 784 0 5,848 (1,271) (235) 0 4,342 4,342 6,712

105,293 (82,267) 23,026 (17,533) 5,493 331 103 741 0 6,667 (1,471) (366) 0 4,830 4,830 7,964

118,035 (92,092) 25,943 (19,698) 6,245 331 103 813 0 7,493 (1,653) (263) 0 5,576 5,576 8,955

130,948 (102,023) 28,925 (21,850) 7,075 331 103 870 0 8,380 (1,849) (294) 0 6,236 6,236 10,022

144,264 (112,250) 32,013 (24,067) 7,946 331 103 982 1 9,365 (2,066) (328) 0 6,968 6,967 11,139

13.0 14.2 5.4 21.9

15.9 18.7 16.2 11.2

12.1 12.4 13.7 15.4

10.9 11.9 13.3 11.8

10.2 11.1 12.3 11.7

21.7 5.2 4.8 10.4 7.1 8.0 16.8 NM

21.9 5.2 4.6 10.6 6.8 7.9 19.4 NM

22.0 5.3 4.7 11.2 7.1 8.0 18.7 NM

22.1 5.4 4.8 11.4 7.5 8.3 19.3 NM

22.2 5.5 4.8 11.6 7.6 8.6 19.3 NM

Conservative gross margin assumptions relative to historical

Source: Company, DBS Bank

Page 84

Company Guide Robinsons Retail Holdings Quarterly / Interim Income Statement (P m) FY Dec 1Q2016 2Q2016

3Q2016

4Q2016

1Q2017

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

22,696 (17,891) 4,805 (3,901) 904 (45) 26 187 0 1,073 (239) (49) 785 785 1,329

25,638 (20,051) 5,587 (4,192) 1,396 98 27 176 0 1,697 (365) (94) 1,238 1,238 2,022

25,479 (19,904) 5,575 (4,235) 1,340 146 34 197 0 1,716 (354) (83) 1,278 1,278 2,006

31,481 (24,422) 7,059 (5,206) 1,853 132 15 181 0 2,182 (513) (140) 1,529 1,529 2,608

25,723 (20,004) 5,719 (4,560) 1,159 60 25 185 0 1,429 (328) (105) 996 996 1,736

(17.7) (37.1) (44.4) (42.7)

13.0 52.1 54.4 57.8

(0.6) (0.8) (4.0) 3.3

23.6 30.0 38.3 19.6

(18.3) (33.4) (37.5) (34.9)

21.2 4.0 3.5

21.8 5.4 4.8

21.9 5.3 5.0

22.4 5.9 4.9

22.2 4.5 3.9

2015A

2016A

2017F

2018F

2019F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

11,149 3,425 26,783 9,764 10,576 1,774 1,688 65,160

12,562 3,424 30,477 12,718 13,342 1,988 2,185 76,695

14,080 3,526 30,477 13,185 13,670 3,013 2,185 80,136

15,478 3,629 30,477 16,981 15,145 3,343 2,185 87,238

16,701 3,732 30,477 21,593 16,665 3,683 2,185 95,033

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

2,845 14,796 885 0 1,129 43,524 1,982 65,160

6,576 16,797 1,106 0 1,652 47,587 2,978 76,695

6,576 14,622 1,923 0 1,652 52,122 3,241 80,136

6,576 16,200 2,119 0 1,652 57,157 3,535 87,238

6,576 17,825 2,336 0 1,652 62,781 3,863 95,033

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

(1,643) 6,920 6.6 76.0 51.4 1.5 1.3 0.6 CASH CASH 109.3 5.6

(388) 6,142 6.5 71.9 54.4 1.5 1.2 0.6 CASH CASH 49.4 4.7

2,322 6,609 7.7 63.8 54.9 1.5 1.4 0.7 CASH CASH 57.7 5.1

2,354 10,405 8.9 56.5 52.8 1.6 1.5 0.8 CASH CASH 59.5 5.0

2,371 15,017 8.9 56.7 53.0 1.6 1.7 0.9 CASH CASH 60.5 5.0

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (P m) FY Dec

Improving margins y-o-y

War chest that can be easily liquidated

Source: Company, DBS Bank

Page 85

Company Guide Robinsons Retail Holdings Cash Flow Statement (P m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (P) Free CFPS (P)

2015A

2016A

2017F

2018F

2019F

5,848 1,647 (1,268) (40) (1,366) (372) 4,449 (3,109) (1,359) (4,144) 84 1,694 (6,835) (729) 2,733 0 167 2,172 0 (213) 4.2 1.0

6,667 (2,038) (1,393) (103) (1,039) 4,075 6,169 (3,246) (531) (2,180) 112 (80) (5,924) (936) 3,731 0 (87) 2,709 0 2,953 5.2 2.1

7,492 2,276 (836) (103) (3,528) 0 5,301 (3,794) 0 0 0 0 (3,794) (1,041) 0 0 0 (1,041) 0 467 6.4 1.1

8,378 2,512 (1,653) (103) (227) 0 8,908 (3,910) 0 0 0 0 (3,910) (1,201) 0 0 0 (1,201) 0 3,796 6.6 3.6

9,362 2,757 (1,849) (103) (234) 0 9,934 (3,979) 0 0 0 0 (3,979) (1,344) 0 0 0 (1,344) 0 4,612 7.3 4.3

Capex can be funded by internally generated cashflow

Source: Company, DBS Bank

Page 86

Company Guide Robinsons Retail Holdings

Target Price & Ratings History

Source: DBS Bank Analyst: Regional Research Team

Page 87

Regional Company Guide

Puregold Price Club Refer to important disclosures at the end of this report

Version 5 | Bloomberg: PGOLD PM | Reuters: PGOLD.PM

DBS Group Research . Equity

16 May 2017

HOLD

Devil in the details part deux

Last Traded Price ( 15 May 2017): P42.95 (PCOMP : 7,772.93) Price Target 12-mth: P41.90 (2% downside) Potential Catalyst: Faster store rollouts, M&A, and recovery in both Puregold and S&R Where we differ: FY17F/FY18F earnings are below consensus Analyst Regional Research Team [email protected]

1Q16 net profit rose 10.5% - in line. PGOLD reported net income of P1.3bn (+10.5% y-o-y) in 1Q17, in line with our estimate but trails consensus’. Consolidated revenue growth was slower (+11.2% y-o-y) and tepid sales growth of Puregold stores (7.7% y-o-y) dragged down the robust performance of S&R stores (27.6% y-o-y). While gross margins rose 16bps y-o-y, translation to earnings was lower on higher operating expense. Consolidated gross/net profit margin was 16.8%/4.6% in 1Q17. Same-stores-sales growth (SSSG) was robust at 6.1% for the quarter despite coming from a high base.

What’s New •

1Q16 net profit up 10.5% y-o-y - in line

•

Speed bumps ahead

•

Maintain HOLD, TP P41.90

Price Relative P

Puregold Price Club (PGOLD), HOLD and TP at P41.90. We are projecting 9.2%/9.7% net profit growth for FY17F/FY18F. The slower earnings growth is due to lesser impact of new stores on revenue growth, higher inflation, and competition. Cash conversion cycle (CCC) will continue to deteriorate on rising inventory levels and management preference on paying supplier early to avail discounts. Industry outlook remains bright and PGOLD’s long-term earnings prospects are attractive. However, we anticipate better entry points ahead.

Relative Index 212

52.0

192

47.0

172 42.0

152

37.0

132 112

32.0

92

27.0 May-13

May-14

May-15

Puregold Price Club (LHS)

Forecasts and Valuation FY Dec (P m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (P) EPS Pre Ex. (P) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (P) Net DPS (P) BV Per Share (P) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (P): Other Broker Recs:

2015A 9,717 885 710 500 500 1.80 1.80 11 11 1.80 0.30 13.8 23.9 23.9 35.9 13.4 0.7 3.1 CASH 13.8

72 May-17

May-16

Relative PCOMP (RHS)

2016A 11,259 997 792 553 553 1.99 1.99 10 10 1.99 0.30 15.5 21.6 21.6 44.3 12.1 0.7 2.8 0.0 13.5

2017F 12,370 1,087 862 603 603 2.17 2.17 9 9 2.17 0.30 17.4 19.8 19.8 24.4 11.0 0.7 2.5 0.0 13.2

2018F 13,532 1,189 945 661 661 2.38 2.38 10 10 2.38 0.33 19.4 18.1 18.1 18.3 9.9 0.8 2.2 CASH 12.9

B: 9

2.3 S: 2

2.6 H: 1

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

ed: TH / sa: YM / AH

Speed bumps ahead. S&R is a bright spot, but it is dimming. Come 2H17, the high-base effect will kick in and the impact of promotional sales events will likely to lessen. Competition from Landers Superstore and weaker domestic currency should put pressure on gross margins longer. And unless S&R rein in operating expenses, EBIT margins will likely contract further. Slower revenue growth for Puregold stores should drag on longer as inflation picks up and the impact of new stores on revenue lessens. Valuation: HOLD, TP at P41.90, based on SOTP valuation methodology. This implies PE of 19x FY17F and 18x FY18F earnings. Key Risks to Our View: Key risks are: 1) intense competition from big modern and mom-and-pop (relating to Puregold) retail chains; 2) fewer number of new store rollouts, hence less pronounced impact on sales growth; and 3) competition from Landers Superstore, stronger USD, inventory management, rising opex, and QSR (relating to S&R). At A Glance Issued Capital (m shrs) 2,765 Mkt. Cap (P/US$m) 11,877 / 2,390 Major Shareholders (%) Cosco Capital Inc 51.0 Co Lucio Lao 7.6 Co Susan Pe 6.5 Free Float (%) 34.9 3m Avg. Daily Val (US$m) 3.5 ICB Industry : Consumer Services / Food & Drug Retailers

Page 88

Company Guide Puregold Price Club

WHAT’S NEW

Outlook

1Q17 net profit up 10.5% y-o-y

Speed bumps ahead. No change in forecast. We are projecting 9.2%/9.7% net profit growth for FY17F/FY18F. The slower earnings growth is due to lesser impact of new stores on revenue growth, higher inflation, and competition. While S&R is a bright spot, it is dimming. Come 2H17, the high-base effect will kick in and the impact of promotional sales events is likely to lessen. Competition from Landers Superstore and weaker domestic currency should put pressure on gross margins longer. And unless S&R rein in operating expenses, EBIT margins will likely contract further. Slower revenue growth for Puregold stores should drag on longer as inflation picks up and impact of new stores on revenue lessens. Cash conversion cycle (CCC) will continue to deteriorate on rising inventory levels and management's preference on paying suppliers early to avail discounts.

1Q17 net profit up 10.5% y-o-y - in line. PGOLD reported net income of P1.3bn (+10.5% y-o-y) in 1Q17, in line with our estimate but trails consensus’. Consolidated revenue growth was slower (+11.2% y-o-y) and tepid sales growth of Puregold stores (7.7% y-o-y) dragged down the robust performance of S&R stores (27.6% y-o-y). While gross margins rose 16bps y-oy, translation to earnings was lower on higher operating expenses. Consolidated gross/net profit margins were 16.8%/4.6% in 1Q17. Same-stores-sales growth (SSSG) was robust at 6.1% for the quarter despite coming from a high base. Devil in the details part deux. While in line with our estimate, the slower revenue growth for Puregold branded stores is likely to remain sticky this year. Higher inflation and impact of new store rollouts becoming less pronounced (evident in the solid post-election SSSG of 4.5% in 1Q17) have translated to slower sales growth of 7.7% y-o-y. Meanwhile, margins have ticked up for the segment due to windfall from price increase and as cost-saving measures continue to bear fruit. Puregold branded stores' 1Q17 net profit came in at P876m or 12.9% y-o-y growth.

Valuation HOLD, TP at P41.90, based on SOTP valuation methodology. Our TP implies 19x FY17F PE – below its historical mean valuation. Aside from the lower earnings projection, we are also factoring in a net debt position for PGOLD in FY17 due to deteriorating CCC.

For S&R, the robust sales of 27.6% y-o-y was driven by 13% SSSG, contribution from new stores, and the promotional sales event held from March 31-April 2. However, the strong sales growth did not translate to better profitability as margins were squeezed. 1Q17 Gross margins contracted by 110bps y-o-y due to weaker local currency, promotional sales event, and competition. EBIT and net profit margins contracted further on higher operating expenses from its aggressive new store rollout. Net profit came in at P399m and growth was slow at 5.6% y-o-y.

Page 89

Company Guide Puregold Price Club

Quarterly / Interim Income Statement (P10000000) FY Dec Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc

1Q2016

4Q2016

1Q2017

% chg yoy

% chg qoq

2,476

3,385

2,753

11.2

(18.7)

(2,064)

(2,822)

(2,291)

11.0

(18.8)

412

563

462

12.2

(18.0)

(245)

(280)

(277)

13.0

(1.0)

Operating Profit

167

284

185

11.1

(34.7)

Other Non Opg (Exp)/Inc

(0.9)

(0.8)

(0.7)

18.9

(5.3)

0.0

(6.8)

0.0

nm

-

(1.5)

(3.1)

(2.8)

(83.7)

7.4

0.0

0.0

0.0

-

-

Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit

164

273

182

10.6

(33.4)

(48.8)

(84.7)

(54.1)

10.8

(36.2)

Minority Interest

0.0

0.0

0.0

-

-

Net Profit

115

188

128

10.5

(32.2)

Net profit bef Except.

115

188

128

10.5

(32.2)

EBITDA

200

310

223

11.7

(28.0)

Tax

Margins (%) 16.6

16.6

16.8

Opg Profit Margins

6.7

8.4

6.7

Net Profit Margins

4.7

5.6

4.6

Gross Margins

Source of all data: Company, DBS Bank

Page 90

Company Guide Puregold Price Club

CRITICAL DATA POINTS TO WATCH Earnings Drivers: The 5-year organic growth plan, underpinned by favourable industry backdrop such as the still low penetration rate of modern grocery retail at 30% as at end-2016, and household disposable income growth at 5.6% CAGR during FY11-16. Management plans to roll out 25 Puregold and two S&R stores every year till 2020. In the next three years, we forecast Puregold/S&R stores to grow net selling area (NSA) by 48,000/30,930 sqm or at 3.7%/14.4% 3-year CAGR. Our assumptions take into account smaller-sized stores for Puregold given that the expansion is focused outside Metro Manila. M&A activity is a bonus and an upside risk to our forecast. Management is constantly looking for M&A opportunities, aiming to secure at least one acquisition a year on average. Slower sales growth for Puregold branded stores. We forecast revenues from Puregold branded stores to grow by 7.0% (FY16-19F CAGR) and margins to be stable in FY17F/18F. The tepid pace in sales growth takes into account: 1) normalisation of same-store metrics as PGOLD was a beneficiary of election-related spending in FY16; 2) impact of new store rollouts on revenues to become less pronounced given the slower expansion in NSA; and 3) rising inflation as Puregold’s target households are sensitive to inflation given their lower household income. On a brighter note, overall demand for Puregold offerings should remain resilient to changes in consumption patterns borne from existing/upcoming regulations (such as selling restrictions on liquor and cigarettes, nationwide smoking ban, etc.) and income tax reforms (if impact on household disposable income is positive, we believe grocery retailers will benefit first). Solid FY17F earnings growth but challenges remain for S&R. We expect S&R to deliver better earnings growth in 2017, underpinned by two membership sales drives this year. Its single membership sale last year helped S&R produce better earnings results in 2H16. However, challenges remain as rising competition from Landers Superstore could have an adverse impact on S&R’s revenues and margins. Landers Superstore directly competes with S&R’s offerings. It opened two Manila stores in 2016, with two more set to open in 2017 (Alabang and Cebu). Furthermore, weaker peso and rising operating expenses (as a result of its aggressive expansion plans) may continue to put pressure on S&R’s margins longer than so far assumed. Taking these into account, we still see earnings growth of 7% (FY16-19F CAGR) for S&R, with net margins expected to decline 70ppts/30ppts in FY17F/18F.

Net Selling Area sqm 600,000

16% 14%

500,000

12% 400,000

10%

300,000

8% 6%

200,000

4% 100,000

2%

0

0% FY14 S&R. lhs

FY15

FY16 Puregold, lhs

FY17F

FY18F y-o-y Growth, rhs

Same-Store-Sales Growth 8.0%

40.0% 35.0%

6.0%

30.0% 4.0%

25.0% 20.0%

2.0%

15.0% 0.0% 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

10.0% 5.0%

-2.0%

0.0% -4.0%

-5.0%

-6.0%

-10.0% Consolidated, lhs

Puregold, lhs

S&R, rhs

S&R Margins and Php:US$ Trend (%)

(P)

30.0% 49.0

25.0% 20.0%

47.0

15.0% 10.0%

45.0

5.0% 43.0

0.0% -5.0%

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16 41.0

-10.0% 39.0

-15.0% Gross Margin, lhs

Operating Margin, lhs

Php:US$ Average, rhs

Source: Company, DBS Bank

Page 91

Company Guide Puregold Price Club

Balance Sheet: Net debt position for the first time since 2010. PGOLD reported a net debt position of P1.0bn in FY16. Cash conversion cycle deteriorated to 42 days in FY16 from 32 days in FY15. According to management, PGOLD is able to obtain better supplier discounts by paying early. The company's balance sheet remains unlevered and hence it is able to tap on its short-term bank credit lines at low interest rates. The company is unlikely to return to a net cash position if its cash conversion cycle days continue to lengthen.

Leverage & Asset Turnover (x) 1.9

0.25

1.9

0.20

1.8 0.15 1.8 0.10 1.7 0.05

1.7

0.00

1.6 2014A

2015A

2016A

2017F

Gross Debt to Equity (LHS)

2018F

Asset Turnover (RHS)

Capital Expenditure

Share Price Drivers: Return to net cash position, if cash conversion cycle improves. Unlikely to happen in FY17F given rising inventory levels in anticipation of higher prices and management’s preference to paying suppliers early to obtain discounts. Better performance from both Puregold and S&R stores. For PGOLD to trade at higher multiples, earnings growth must pick up pace. In order for this to occur, both Puregold and S&R must deliver better performances. The industry backdrop is conducive for growth despite intensifying competition. The counter is well positioned to benefit first from rising household disposable income and the increasing penetration rate of modern retailing.

Pm 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 2014A

2015A

2016A

2017F

2018F

Capital Expenditure (-)

ROE (%) 14.0% 12.0% 10.0% 8.0%

Key Risks: Competition. PGOLD does not only compete with big-chain modern retailers but also with smaller mom-and-pop chains (mainly in provincial areas). Big-chain players have so far been rational competitors; however, mom-and-pop chains offer better value proposition due to less regulatory oversight (i.e. flexibility in declaring taxable income). Expansion constraints. Availability of space, especially in key areas, is paramount for PGOLD’s expansion plan. Also, bigchain retail players have aggressive expansion plans, which present challenges to PGOLD’s expansion plans. Inflation. Puregold stores target households in the lower income group, which are sensitive to inflation. S&R concerns. The extent of S&R’s margin contraction hinges on the USD strength, the ability to rein in opex, and the gravity of the price war on high turnover items. S&R’s expansion into the QSR business may negatively impact S&R sales, as it may divert traffic and curb impulse purchases.

6.0% 4.0% 2.0% 0.0% 2014A

2015A

2016A

2017F

2018F

Forward PE Band (x) (x) 31.3 29.3

+2sd: 28.2x

27.3 25.3

+1sd: 24.8x

23.3

Avg: 21.5x

21.3 19.3

‐1sd: 18.2x

17.3 15.3

‐2sd: 14.8x

13.3 May-13

May-14

May-15

May-16

May-17

PB Band (x) (x) 4.3

+2sd: 4.07x

Company Background Puregold Price Club Inc. (PGOLD) operates as a retailer in hypermarkets, supermarkets, discount and convenience stores, and uses the membership shopping format in the Philippines. The company is the country's second biggest grocery retailer.

3.8

+1sd: 3.57x 3.3

Avg: 3.08x 2.8

‐1sd: 2.59x 2.3

‐2sd: 2.1x 1.8 May-13

May-14

May-15

May-16

May-17

Source: Company, DBS Bank

Page 92

Company Guide Puregold Price Club Key Assumptions FY Dec

2014A

2015A

2016A

2017F

2018F

Puregold (NSA Growth) S&R (NSA Growth)

0.09 0.16

0.13 0.16

0.04 0.22

0.04 0.17

0.04 0.14

Segmental Breakdown FY Dec

2014A

2015A

2016A

2017F

2018F

68,921 15,770 84,691

79,351 17,821 97,172

90,939 21,653 112,592

97,181 26,515 123,696

103,821 31,498 135,320

3,877 2,601 6,478

4,549 2,601 7,150

5,176 2,921 8,097

5,533 3,256 8,789

5,936 3,677 9,613

5.6 16.5 7.6

5.7 14.6 7.4

5.7 13.5 7.2

5.7 12.3 7.1

5.7 11.7 7.1

2014A

2015A

2016A

2017F

2018F

84,691 (69,937) 14,754 (8,276) 6,478 27 (17) (30) 0 6,458 (1,938) 0 0 4,520 4,520 8,143

97,172 (80,683) 16,489 (9,339) 7,150 18 (11) (52) 0 7,105 (2,103) 0 0 5,002 5,002 8,854

112,589 (94,051) 18,538 (10,441) 8,097 (23) (68) (89) 0 7,917 (2,391) 0 0 5,526 5,526 9,973

123,696 (103,337) 20,359 (11,570) 8,789 0 (75) (96) 0 8,618 (2,585) 0 0 6,033 6,033 10,874

135,320 (112,997) 22,323 (12,710) 9,613 0 (83) (80) 0 9,450 (2,835) 0 0 6,615 6,615 11,894

15.7 18.5 18.8 14.2

14.7 8.7 10.4 10.6

15.9 12.6 13.3 10.5

9.9 9.0 8.5 9.2

9.4 9.4 9.4 9.7

17.4 7.6 5.3 13.9 8.8 11.5 18.4 219.0

17.0 7.4 5.1 13.8 8.9 11.4 16.6 138.0

16.5 7.2 4.9 13.5 8.9 11.1 15.0 91.2

16.5 7.1 4.9 13.2 8.9 10.9 13.8 92.0

16.5 7.1 4.9 12.9 9.1 11.0 13.7 119.7

Revenues (P m) Puregold S&R Total Operating profit (P m) Puregold S&R Total Operating profit Margins Puregold S&R Total Income Statement (P m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

Slowing NSA growth due to high base

Upper end of management’s guidance of 8%-10%

Source: Company, DBS Bank

Page 93

Company Guide Puregold Price Club Quarterly / Interim Income Statement (P m) FY Dec 1Q2016 2Q2016

3Q2016

4Q2016

1Q2017

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

24,761 (20,643) 4,119 (2,452) 1,667 (9) 0 (15) 0 1,642 (488) 0 1,154 1,154 1,999

26,296 (22,130) 4,167 (2,565) 1,602 0 0 (20) 0 1,583 (470) 0 1,113 1,113 1,944

27,680 (23,061) 4,618 (2,625) 1,993 (6) 0 (23) 0 1,964 (585) 0 1,378 1,378 2,345

33,852 (28,217) 5,635 (2,799) 2,835 (8) (68) (31) 0 2,729 (847) 0 1,881 1,881 3,101

27,534 (22,911) 4,623 (2,771) 1,852 (7) 0 (28) 0 1,816 (541) 0 1,275 1,275 2,233

(17.0) (31.3) (35.2) (35.8)

6.2 (2.7) (3.9) (3.6)

5.3 20.6 24.4 23.9

22.3 32.2 42.2 36.5

(18.7) (28.0) (34.7) (32.2)

16.6 6.7 4.7

15.8 6.1 4.2

16.7 7.2 5.0

16.6 8.4 5.6

16.8 6.7 4.6

2014A

2015A

2016A

2017F

2018F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

13,132 0 20,054 6,758 11,167 1,946 610 53,666

14,034 0 21,796 6,246 12,983 2,683 1,102 58,844

15,712 0 21,870 6,416 16,488 3,881 1,017 65,383

16,643 0 21,794 6,396 18,670 5,552 1,017 70,073

17,662 0 21,711 7,906 21,021 6,444 1,017 75,763

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

1,364 10,465 2,007 2,493 3,104 34,233 0 53,666

3,138 9,778 1,691 2,395 3,429 38,413 0 58,844

5,018 9,644 1,401 2,397 3,750 43,173 0 65,383

5,018 8,389 3,143 1,397 3,750 48,376 0 70,073

5,018 8,870 3,393 647 3,750 54,085 0 75,763

1,251 2,902 6.8 57.5 55.1 1.6 1.5 0.6 CASH CASH 43.9 6.2

5,299 714 8.7 46.8 55.8 1.7 1.6 0.6 CASH CASH 45.4 6.2

10,341 (999) 10.6 38.5 58.4 1.8 1.7 0.6 0.0 0.0 40.0 5.7

13,707 (18) 13.9 32.5 63.4 1.8 1.9 0.7 0.0 0.0 48.2 5.5

16,220 2,241 16.2 28.5 65.5 1.9 2.1 0.8 CASH CASH 59.7 5.4

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (P m) FY Dec

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Improvement q-o-q driven by S&R

Higher cash conversion cycle days

Source: Company, DBS Bank

Page 94

Company Guide Puregold Price Club Cash Flow Statement (P m) FY Dec

2014A

2015A

2016A

2017F

2018F

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (P) Free CFPS (P)

6,458 1,185 (1,618) 17 (2,981) 410 3,472 (1,692) 131 0 821 (918) (1,658) (830) 480 0 (4) (354) 0 1,460 2.3 0.6

7,105 1,279 (1,992) 11 (3,570) 494 3,327 (2,513) (88) 0 921 (2,576) (4,256) (830) 1,280 0 (34) 417 0 (512) 2.5 0.3

7,917 1,409 (2,242) 68 (4,911) 458 2,700 (2,964) 0 0 825 (992) (3,131) (830) 1,430 0 0 600 0 169 2.7 (0.1)

8,618 2,161 (844) 75 (5,108) 0 4,902 (3,092) 0 0 0 0 (3,092) (830) (1,000) 0 0 (1,830) 0 (20) 3.6 0.7

9,450 2,364 (2,585) 83 (2,763) 0 6,548 (3,383) 0 0 0 0 (3,383) (906) (750) 0 0 (1,656) 0 1,510 3.3 1.1

16.5% payout ratio from last year’s net profit

Source: Company, DBS Bank

Target Price & Ratings History

50.20

P Closing Price

1:

04 J ul 16

42.65

50.00

BUY

2:

11 Aug 16

45.20

50.00

BUY

3:

12 Aug 16

44.10

50.00

BUY

4:

15 Nov 16

40.90

50.00

BUY

5:

13 Apr 17

42.20

41.90

HOLD

48.20 46.20 44.20

2 1 3

42.20

4

12- mt h T arget Rat ing Price

Dat e of Report

S.No.

5

40.20 38.20 36.20 34.20 May-16

Jul-16

Sep-16

Nov-16

Jan-17

Mar-17

May-17

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank Analyst: Regional Research Team

Page 95

Indonesia Company Guide

Matahari Putra Prima Refer to important disclosures at the end of this report

Version 4 | Bloomberg: MPPA IJ | Reuters: MPPA.JK

DBS Group Research . Equity

12 Jul 2017

FULLY VALUED

Cutting the shelf price

Last Traded Price ( 11 Jul 2017): Rp620 (JCI : 5,773.00) Price Target 12-mth: Rp450 (-27% downside) (Prev Rp1,060) Analyst Tiesha PUTRI +6221 30034931 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New 

Price-cutting strategy should put margin under pressure in the near term



Revising down FY17/FY18 net profit forecasts by 142%/84%



Maintain Fully Valued with a lower TP of Rp450

Price Relative

Forecasts and Valuation FY Dec (Rp m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

2015A 13,802 617 272 222 222 (60.0) 41.2 41.2 (60) 41.2 26.0 467 15.0 15.0 nm 5.8 4.2 1.3 0.1 8.8

Earnings Rev (%): Consensus EPS (Rp): Other Broker Recs:

2016A 13,527 525 101 38.0 38.0 (82.6) 7.16 7.16 (83) 7.16 0.0 452 86.6 86.6 5.7 7.3 0.0 1.4 0.2 1.6

2017F 14,097 365 (111) (83.0) (83.0) nm (15.4) (15.4) (316) (15.4) 0.0 436 nm nm 16.6 11.4 0.0 1.4 0.4 (3.5)

2018F 15,580 584 54.0 40.0 40.0 nm 7.53 7.53 (149) 7.53 0.0 444 82.4 82.4 8.1 7.2 0.0 1.4 0.4 1.7

(50) N/A B: 5

(142) 22.2 S: 10

(84) 27.7 H: 5

Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P

ASIAN INSIGHTS ed: JCC / sa:MA, PY

Earnings risk still lingers. MPPA has implemented a new strategy to capture more market share since the beginning of the year. By embarking on price-cutting exercises, the company aims to narrow the gap between its and its competitors’ prices, specifically regional supermarkets and minimarkets. This however should put MPPA’s earnings under pressure, against the backdrop of still-weak household demand and an increase in opex, as the company cleans up its account receivable. We revise down our FY17/FY18 net profit forecasts by 142%/84% , based on our lower SSSG and margin assumptions. Where we differ. We expect MPPA to book Rp83bn in net loss in FY17, the lowest among consensus. Consensus forecasts MPPA to book net profit of Rp85bn in FY17, which implies that MPPA would book Rp262bn in net profit in 2Q17-4Q17. We believe this would be difficult to achieve. Recall that MPPA booked Rp117bn in net loss in 1Q17, while the first round of price cuts only began at the end of March. We believe the new pricing strategy will continue to put MPPA’s margin under pressure in the near term. Potential catalyst. In February, media reported that MPPA’s major shareholders, including Temasek, are planning to sell their stakes in MPPA in a deal that could value MPPA at USD1bn. Temasek, through Prime Star Investment, acquired MPPA for Rp2,050 per share back in 2013 and currently owns a 26.1% stake in MPPA. Should this stake sale go through at a premium, MPPA’s share price could see some valuation support or rerate upward. Valuation: We switch our valuation method to three-stage DCF from relative PE valuation. We assume 11.4% WACC and 5% sustainable growth rate in our calculation. Our new TP of Rp450 implies 9x/6x FY17F/FY18F EV/EBITDA, 40%/59% discount to the average multiple of regional grocery retailer. Key Risks to Our View: Better-than-expected profitability on the back of improvement in operational efficiencies could lead to higher earnings. Change in shareholders. MPPA’s valuation could be supported if sale by major shareholders fetches a premium. At A Glance Issued Capital (m shrs) Mkt. Cap (Rpbn/US$m) Major Shareholders (%) Multipolar Prime Star Investment Pte. Ltd. Free Float (%) 3m Avg. Daily Val (US$m) ICB Industry : Consumer Services / General Retailers

5,378 3,334 / 250 50.2 26.1 23.7 0.40

VICKERS SECURITIES Page 96

Company Guide Matahari Putra Prima

WHAT’S NEW Price-cutting strategy should put margin under pressure in the near term Competing through pricing. MPPA has lowered the selling price of several popular items with the aim of increasing its competitiveness against smaller-scale regional supermarkets and minimarkets. Around the Lebaran season, the company cut the selling price of 5,000 items (c. 12% of its total SKUs) and launched a special promotion called “Turun Harga” to boost traffic. During our recent basket price comparison survey at MPPA’s outlets at Bandung Indah Plaza and Yogya Supermarket at Riau Junction, which are only 300 metres apart, we found that MPPA has managed to narrow its price gap over its competitor. Based on our survey, our basket of eleven daily need items was priced 1% lower in MPPA’s outlet than that in the Yogya outlet.

prolonged weak demand and the impact of intensifying competition to MPPA’s SSSG. We have assumed 0%/6% SSSG in FY17F/FY18F. We have also lowered our EBIT margin as we expect higher opex from AR impairment. We now forecast MPPA to book a net loss of Rp83bn in FY17 and a net profit of Rp40bn in FY18. Maintain Fully Valued with lower TP of Rp450. We have switched our valuation from relative PE valuation to DCF as we expect MPPA to still record a net loss in FY17. We use 11.4% WACC and 5% sustainable growth rate in our threestage DCF model. Our TP of Rp450 implies 9x/6x EV/EBITDA FY17F/FY18F and 1x PBV FY17F/FY18F.

Cutting FY17F/FY18F net profit by 142%/84%. We have cut our revenue forecasts for FY17/FY18 by 7%/6% to factor in

Price comparison survey in Bandung, West Java No

Product

1 2 3 4 5 6 7 8 9 10 11

Instant noodles Sugar Tea Cooking oil Soy sauce Milk powder Soap bar Tooth paste Shampoo Detergent Liquid dish soap T ot al *As of 29 June 2017 Source: DBSVI, DBS Bank

Brand Indomie Soto Mie flav our Priv ate label Sariwangi Bimoli Spesial Kecap Bango Dancow F ortigro Lux Pepsodent Clear Rinso Anti Noda Sunlight

Size 70 gr 1 kg 25 pcs 2l 135 ml 400 gr 85 gr 225 gr 170 ml 700 gr 800 ml

Hy permart* 2,100 12,500 4,250 28,400 8,400 42,700 3,100 9,700 19,200 15,900 14,500 160,750

Yogy a* 2,025 12,500 5,250 29,750 8,950 41,450 2,950 9,300 22,300 14,100 13,750 162,325

Hy permart v s. Yogy a 4% 0% -19% -5% -6% 3% 5% 4% -14% 13% 5% - 1%

MPPA’s “Turun Harga” promotion

Source: DBSVI, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 97

Company Guide Matahari Putra Prima

Earnings revision 2017F

Revenue (net) Gross profit EBIT EBITDA Net Profit Gross margin (%) EBIT margin (%) EBITDA margin (%) Net margin (%) Opex to net revenue (%)

2018F

Old 15,165 2,519 337 739 196

Ne w 14,097 2,334 (25) 365 (83)

16.6 2.2 4.9 1.3 (14.4)

Cha nge -7% -7% -107% -51% -142%

Old 16,534 2,746 408 859 250

Ne w 15,580 2,610 154 584 40

16.6 (0.2) 2.6 (0.6)

16.6 2.5 5.2 1.5

16.8 1.0 3.7 0.3

(16.7)

(14.1)

(15.8)

Cha nge -6% -5% -62% -32% -84%

Source: DBSVI, DBS Bank

DCF assumption WA CC

K ey assumpt ions

Risk-free rate

7.5%

ERP

5.3%

Beta

1.0

Debt/equity

0.4

2017F -2022F

7.9%

Tax rate

25.0%

2022F -2027F

6.1%

Cost of equity

12.8%

A v g, EBIT margin

7.9%

2017F -2022F

0.7%

11.4%

2023F -2027F

1.3%

Cost of debt WA CC Present v alue

T erminal grow t h rat e

5.0%

Sales CA GR

A v g, w ork ing c apit al/sales

2017F-2022F

79

2017F -2022F

-0.4%

2023F-2027F

645

2023F -2027F

-0.3%

Terminal v alue

2,497

Sum of PV

3,221

Net cash (debt)

(822)

A v g, capex/sales 2017F -2022F

-2.8%

2023F -2027F

-1.5%

Equity value

2,399

No. of shares

5,378

2017F -2022F

2.5%

450

2023F -2027F

2.0%

Equit y v alue per share

A v g, deprec iat ion/sales

Source: DBSVI, DBS Bank

Peers comparison Company

T ic k er

(USD mn) Matahari Putra Prima

PE

M ark et cap

MPPA IJ

17F

EV /EBIT DA 18F

17F

18F

Pric e/sales 17F

18F

ROE (%)

Net DER

17F

end of 17F

251

N/A

83.0

10.7

6.7

0.24

0.22

(3.5)

0.4

Dairy F arm

DF I SP

11,117

22.9

21.2

14.2

13.2

0.95

0.90

30.2

0.1

Sheng Siong Group

SSG SP

1,481

20.6

19.4

16.2

15.4

1.84

1.79

26.9

Net cash

Big C Supercenter*

BIGC TB

5,395

24.2

22.0

14.0

12.9

1.69

1.55

13.8

N/A

Siam Makro*

MAKRO TB

5,032

27.5

24.2

17.5

15.5

0.91

0.83

37.1

N/A

Puregold Price Club

PGOLD PM

2,519

21.3

19.4

12.3

11.2

1.03

0.95

13.2

Net cash

Robinson Retail

RRHI PM

2,400

Net cash

A v erage

21.8

19.6

13.5

12.0

1.03

0.93

11.2

23.0

20.9

14.6

13.4

1.24

1.16

22.1

*As of 10 July 2017 Source: DBSVI, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 98

Company Guide Matahari Putra Prima Sales per sqm (Rp mn)

CRITICAL DATA POINTS TO WATCH Critical Factors Store productivity. We think that competition among hypermarket operators in the Greater Jakarta area has been intensifying, with operators revamping stores and pushing promotions to boost demand. The growing number of convenience stores also adds to the competitive pressure. We think this could potentially impede the company’s revenue growth going forward, as growth in sales productivity per sqm has become harder to achieve (as evident in the last three years). We estimate revenue to grow at a CAGR of 7% over FY16-18F, driven mostly by new store openings. Economic recovery in ex-Java cities. MPPA is looking to further strengthen its foothold in underpenetrated ex-Java cities. As at end of Sep 2016, 144 stores, or 49% of MPPA’s total stores, are located outside Java. The performance of MPPA’s ex-Java stores, particularly in Sumatera and Kalimantan, was weak in 2016. Given the high dependency of the ex-Java economy on commodity prices, the recent rally in commodity prices may help support consumers’ purchasing power, hence leading to better performance by MPPA’s ex-Java stores.

Retail space (sqm)

Sales breakdown by geography 100% 90%

Significant contribution from marketing income. MPPA has a negative marketing expense item booked under its operating expenses. This is essentially marketing income which is earned from advertising fees (through brochures and pamphlets) as well as supplier rebates and discounts. We note that marketing income’s contribution to operating income has been increasing, i.e. 51% in 2013 to 333% in 2016. We view this increasing dependency negatively as it reduces earnings visibility and presents risks. In FY16, marketing income accounts for 4.2% of MPPA’s gross sales. Furthermore, part of it is uncollectible, causing MPPA to book an account receivable impairment amounting to Rp90bn in 1Q17. We assume an impairment of Ro180bn for FY17 or 1.2% of gross sales. Our sensitivity analysis shows that a 10bps move in AR impairment/gross sales would impact MPPA’s bottom line by 13%.

80%

40.5%

41.2%

27.7%

27.0%

31.9%

31.8%

FY16

1Q17

70% 60% 50% 40% 30% 20% 10% 0% Greater Jakarta

Java

Ex-Java

Margin trend and forecasts % 20 18

17.3

16.4

17.0

16.8

16.6

16 14 12 10 8 6 4

5.2

4.1 2.2 1.6

2

1.3

0.3

0 -2

14A

15A Gross margin

16A EBIT margin

-0.2 17F -0.6

1.0

0.3

18F

Net margin

Source: Company, DBSVI, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 99

Company Guide Matahari Putra Prima

Appendix 1: A look at the company's historical performance – what drives its share price? MPPA share price vs. peers Oct 6, 2010 = 100

MPPA (LHS)

5,000

MPPA vs. Consumer Sector (RHS)

1.40

4,500

1.20

4,000

A2 1.00

3,500 3,000

0.80

B

2,500 2,000

0.60

A1

1,500

0.40

1,000

0.20

500 0 Oct-10

May-11

Dec-11

Jul-12

Feb-13

Sep-13

Apr-14

Nov-14

Jun-15

Jan-16

Aug-16

Mar-17

-

Source: Bloomberg Finance L.P, DBSVI, DBS Bank

A: Store productivity MPPA’s shares move in line with its store productivity. This is evident in 2010-2011 and 2015-2016, when the decline in store productivity caused the shares to fall in 2010-2011 and 2015-2016. An increase in productivity, driven by prudent new store openings or market share gain, led to a share price rally, as shown in 2014.

MPPA’s share price vs. EBIT margin 5,000

10.0

4,500

8.0

4,000

6.0

3,500

4.0

3,000

2.0

2,500

0.0

2,000

-2.0

1,500

MPPA’s share price vs. store productivity 5,000

20.0

1,000

-4.0

500

-6.0

-

4,500

19.5

4,000 3,500

19.0

3,000 2,500

18.5

2,000

-8.0 Oct-10

Oct-11

Oct-12

Oct-13

MPPA share price (LHS)

Oct-14

Oct-15

Oct-16

EBIT margin, % (RHS)

Source: Bloomberg Finance L.P, DBSVI, DBS Bank

18.0

1,500 1,000

17.5

500 -

17.0 Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

MPPA share price (LHS)

Oct-15

Oct-16

Sales/sqm, Rp mn (RHS)

Source: Bloomberg Finance L.P, DBSVI, DBS Bank

B: Profitability We have also seen a growing correlation between MPPA’s share price and its profitability since 2015. The subsequent chart shows that MPPA saw its share price derating in 2015 to 1Q17 as intensifying competition and operating deleverage crimped its EBIT margin.

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VICKERS SECURITIES Page 100

Company Guide Matahari Putra Prima

Leverage & Asset Turnover (x)

Balance Sheet: Asset-light business model. MPPA has an asset-light business model as it does not own its establishments, but lease them from either affiliated or third parties. As at end of March 2017, MPPA’s net gearing was 0.24x. We expect its net gearing ratio to rise to 0.35x as the company expands its store network and make further investments in MatahariMall.com. Share Price Drivers: Recovery in consumer spending. Any signs of recovery in the domestic economy or consumer spending (i.e. reflected in a strong Consumer Confidence Index) will fuel expectations of stronger revenue and earnings growth. This would lead to more positive investor sentiment towards MPPA, thus boosting its share price.

Capital Expenditure

Rpbn

Key Risks: Weakness in domestic consumption. Lower consumer spending would naturally reduce the company’s revenue . Furthermore, consumers tend to hold off purchases of durable goods, such as electronics, gadgets, and household equipment, which typically carry higher margins. This could lead to margin contraction for MPPA.

ROE (%)

Delay in real estate development. MPPA relies on third-party real estate developers for new store sites. A weak economy and an uncertain interest-rate environment could cause developers to hold off their developments, which would negatively impact MPPA’s store expansion plan and its growth. Competition from foreign players. Given Indonesia’s attractive growth potential and consumer demographics, foreign players have sought opportunities to establish a presence here. Korean retailer Lotte Group has set up its department store and grocery retailer Lotte Mart in Indonesia. In 2016, the Abu Dhabi-based Lulu Group opened a hypermarket in Java that sells only halal products to differentiate itself. The company plans to open nine more hypermarkets in 2017. These incoming competitors could erode MPPA’s market share and profitability going forward.

Forward EV/EBITDA Band (x) 45.0 40.0 35.0

+2sd

30.0 +1sd

25.0 20.0

Avg.

15.0 -1sd

10.0 5.0

Company Background Matahari Putra Prima is a mass grocery retail store operator in Indonesia. Its store formats include hypermarkets under the name “Hypermart”, supermarkets under “Foodmart”, as well as health and beauty stores under “Boston Health & Beauty”. More than 90% of the company’s revenue is derived from its hypermarket stores, and currently, it is the second largest hypermarket store operator in Indonesia, with over 30% market share in terms of retail value.

0.0 Jul-12

-2sd

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

PB Band (x) 12.0 10.0 +2sd

8.0

+1sd

6.0

Avg.

4.0

-1sd

2.0

-2sd 0.0 Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Source: Company, DBSVI, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 101

Company Guide Matahari Putra Prima

Key Assumptions FY Dec Sales per sqm (Rp mn) Retail space (sqm) Segmental Breakdown FY Dec Gross Revenues (Rpbn) Direct sales Consignment sales Total Gross Profit (Rpbn) Direct sales Consignment sales Total Gross Margins (%) Direct sales Consignment sales Total Income Statement (Rpbn) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2014A

2015A

2016A

2017F

2018F

20.0 698,763

20.0 734,862

18.0 767,807

18.0 800,258

19.0 834,360

2014A

2015A

2016A

2017F

2018F

13,497 791 14,288

13,713 711 14,425

13,436 661 14,097

14,004 689 14,693

15,476 762 16,238

2,261 94.0 2,354

2,180 89.0 2,269

2,202 92.0 2,294

2,241 94.0 2,334

2,507 104 2,610

16.8 11.8 16.5

15.9 12.5 15.7

16.4 13.8 16.3

16.0 13.6 15.9

16.2 13.6 16.1

2014A

2015A

2016A

2017F

2018F

13,590 (11,236) 2,354 (1,643) 712 0.0 0.0 19.0 0.0 731 (177) 0.0 0.0 554 554 975

13,802 (11,534) 2,269 (1,961) 307 0.0 0.0 (36.0) 0.0 272 (50.0) 0.0 0.0 222 222 617

13,527 (11,233) 2,294 (2,117) 177 0.0 0.0 (76.0) 0.0 101 (63.0) 0.0 0.0 38.0 38.0 525

14,097 (11,763) 2,334 (2,360) (25.0) 0.0 0.0 (85.0) 0.0 (111) 28.0 0.0 0.0 (83.0) (83.0) 365

15,580 (12,970) 2,610 (2,456) 154 0.0 0.0 (100.0) 0.0 54.0 (13.0) 0.0 0.0 40.0 40.0 584

14.1 23.5 20.9 24.5

1.6 (36.8) (56.8) (60.0)

(2.0) (14.9) (42.4) (82.6)

4.2 (30.4) (114.2) nm

10.5 59.9 (710.2) nm

16.5 5.0 3.9 21.9 10.0 19.4 41.7 NM

15.7 2.1 1.5 8.8 3.7 7.2 63.1 8.6

16.3 1.3 0.3 1.6 0.6 1.9 0.0 2.3

15.9 (0.2) (0.6) (3.5) (1.3) (0.7) N/A (0.3)

16.1 0.9 0.2 1.7 0.6 3.1 0.0 1.5

Margin to gross sales.

Source: Company, DBSVI, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 102

Company Guide Matahari Putra Prima

Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2016 2Q2016 Revenue (net) Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

3Q2016

4Q2016

1Q2017

3,265 (2,806) 459 (569) (110) 0.0 0.0 (16.0) 0.0 (126) 3.00 0.0 (123) (123) (26.0)

3,736 (3,063) 673 (560) 112 0.0 0.0 (18.0) 0.0 94.0 8.00 0.0 102 102 194

3,393 (2,834) 558 (470) 89.0 0.0 0.0 (21.0) 0.0 68.0 (15.0) 0.0 53.0 53.0 177

3,133 (2,529) 604 (518) 86.0 0.0 0.0 (20.0) 0.0 65.0 (59.0) 0.0 6.00 6.00 180

3,101 (2,667) 433 (651) (218) 0.0 0.0 (20.0) 0.0 (238) 61.0 0.0 (177) (177) (128)

(2.7) nm 504.9 414.3

14.4 nm (202.3) (183.1)

(9.2) (8.8) (21.0) (47.9)

(7.6) 1.8 (3.4) (88.9)

(1.0) nm (353.7) (3,087.7)

14.1 (3.4) (3.8)

18.0 3.0 2.7

16.5 2.6 1.6

19.3 2.7 0.2

14.0 (7.0) (5.7)

Balance Sheet (Rpbn) FY Dec

2014A

2015A

2016A

2017F

2018F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

1,273 0.0 657 748 2,355 31.0 470 5,534

1,462 0.0 861 409 2,498 26.0 777 6,033

1,576 0.0 1,024 249 2,747 47.0 1,060 6,702

1,585 0.0 1,145 128 2,682 38.0 1,060 6,638

1,591 0.0 1,145 143 2,957 42.0 1,060 6,937

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

0.0 1,893 859 0.0 253 2,528 0.0 5,534

250 1,763 801 400 304 2,514 0.0 6,033

140 2,318 876 610 328 2,430 0.0 6,702

140 2,137 876 810 328 2,347 0.0 6,638

180 2,356 876 810 328 2,387 0.0 6,937

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

104 748 0.9 63.1 75.2 2.2 1.3 0.3 CASH CASH N/A 4.4

736 (241) 0.8 57.9 76.8 2.4 1.3 0.2 0.1 0.1 65.0 3.8

660 (501) 1.3 75.3 89.3 2.1 1.2 0.1 0.2 0.2 53.2 3.6

766 (822) 1.0 66.3 83.2 2.1 1.2 0.1 0.4 0.4 42.1 3.7

826 (847) 1.0 66.3 83.2 2.3 1.2 0.1 0.4 0.4 44.1 3.9

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins (to net revenue) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

The company booked loss in 1Q17.

Source: Company, DBSVI, DBS Bank

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VICKERS SECURITIES Page 103

Company Guide Matahari Putra Prima

Cash Flow Statement (Rpbn) FY Dec

2014A

2015A

2016A

2017F

2018F

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (Rp) Free CFPS (Rp)

731 264 (177) 0.0 (255) (73.0) 490 (407) 63.0 0.0 0.0 474 130 (1,000) 0.0 0.0 (175) (1,176) 0.0 (555) 139 15.5

272 309 (50.0) 0.0 (559) (114) (141) (422) (32.0) 0.0 0.0 (129) (583) (231) 650 0.0 (33.0) 385 0.0 (339) 77.6 (105)

101 347 (63.0) 0.0 104 92.0 583 (399) (158) 0.0 0.0 (71.0) (628) (140) 100 0.0 (75.0) (115) 0.0 (160) 88.9 34.2

(111) 390 28.0 0.0 (107) 0.0 201 (400) (121) 0.0 0.0 0.0 (521) 0.0 200 0.0 0.0 200 0.0 (120) 57.2 (37.0)

54.0 430 (13.0) 0.0 (60.0) 0.0 411 (436) 0.0 0.0 0.0 0.0 (436) 0.0 40.0 0.0 0.0 40.0 0.0 15.0 87.5 (4.7)

We have factored in Rp120bn investment in MatahariMall.com in FY17.

Source: Company, DBSVI, DBS Bank Target Price & Ratings History

Source: DBSVI, DBS Bank Analyst: Tiesha PUTRI Andy SIM CFA

ASIAN INSIGHTS

VICKERS SECURITIES Page 104

SMC Research

Regional Equity Explorer

7-Eleven Malaysia Holdings Refer to important disclosures at the end of this report

Bloomberg: SEM MK | Reuters: SEVE.KL

DBS Group Research . Equity

3 Apr 2017

NOT RATED RM1.60 RM1.60 KLCI : 1,740.09

Conveniently priced

Closing price as of 31 Mar 2017

Return *: 1 • Largest domestic convenience store operator Risk: Moderate Potential Target 1212-mth* mth* : 12-Month RM 1.58 (-2% • Aggressive store expansion and refurbishment to support 3-year earnings CAGR of 5.8% downside) Analyst Regional Research Team; [email protected]

•

Growth prospects have been largely priced in; Fair value at RM1.58

The Business Malaysia.. 7-Eleven (M) is the sole Dominant convenience store player in Malaysia operator of 7-Eleven convenience stores within Malaysia and a licensee for Brunei. The group has a commanding share of about 82% market share in the standalone convenience store segment. The group has 2,122 stores as at 31 Dec 2016 across all states in Malaysia.

Price Relative RM

Relative Index

2.1 2.0

206

1.9

186

1.8 1.7

166

1.6

146

1.5 1.4

126

1.3

106

1.2 1.1 May-14

86 Nov-14

May-15

Nov-15

7-Eleven Malaysia Holdings (LHS)

Forecasts and Valuation FY Dec (RMm RMm) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (sen) EPS Pre Ex. (sen) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus EPS (sen):: Other Broker Recs:

2016A 2016A 2,103 131 70.8 52.2 58.0 4.70 5.22 4 8 4.70 4.70 3.17 34.1 30.6 23.6 14.1 2.9 50.5 1.8 50.8

May-16

Nov-16

Relative KLCI (RHS)

2017F 2017F 2,309 146 83.0 61.2 61.2 5.51 5.51 17 5 5.51 4.41 4.27 29.2 29.2 13.1 12.5 2.8 37.5 1.1 148.2

2018F 2018F 2,542 170 96.4 71.1 71.1 6.40 6.40 16 16 6.40 5.12 5.55 25.0 25.0 11.9 10.7 3.2 28.8 0.6 130.4

2019F 2019F 2,804 188 108 79.8 79.8 7.19 7.19 12 12 7.19 5.75 6.98 22.3 22.3 10.7 9.5 3.6 22.9 0.1 114.7

5.50 B: 1

6.40 S: 3

N/A H: 2

ICB Industry : Consumer Services ICB Sector: Food & Drug Retailers Principal Business: 7-Eleven (M) is the sole operator of 7-Eleven convenience stores within Malaysia and the licensee for Brunei. The group is a dominant convenience store player in Malaysia, having about 82% market share in the standalone convenience store segment.

Acceleration of new stores rollout and stores refurbishment. refurbishment. Apart from improving its infrastructure (IT & supply chain) and offers better product mix to drive its earnings, the group has been in aggressive expansion mode as it believes that the Malaysian market is still under penetrated. In the last three years, it has managed to open 591 new stores and refurbished existing 600 stores or an average 200 stores p.a. This was in line with its guided strategy by management when it was relisted back in 2014. As a result, its topline growth remains resilient despite the challenging operating environment. We estimate that the group will continue its expansion plan by opening an average of 200 new stores per annum between 2017 and 2019. Fair value at RM1. RM1.58 1.58. 58. 7-Eleven (M) is currently trading at an FY17 PE of 29x, which is in line with its regional peers. Although the group offers one of the best exposures to a potential consumption recovery story with an aggressive new store expansion plan supporting topline growth, we are concerned that high operating expenses arising from new store expansion could weigh on its earnings. Furthermore, a slow recovery in consumer sentiments could cap its near term earnings growth. Our fair value for 7-Eleven (M) stands at RM1.58, based on 29x PE, which is in line with its regional peers’ average PE. At A Glance Issued Capital (m shrs) Mkt. Cap (RMm/US$m) Major Shareholders (%) Berjaya Retail Berhad Isotrema Sdn Bhd Genesis Asset Managers LLP Free Float (%) 3m Avg. Daily Val (US$m)

1,111 1,778 / 402 48.5 7.5 6.0 49.8 0.27

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report. ed: CK / sa: BC, PY

Page 105

Regional Equity Explorer

7-Eleven Malaysia Holdings REVENUE DRIVERS Chart 1: 5–year Revenue and GP Margin

The leading convenience store player in Malaysia Malaysia.. The group is a dominant convenience store player in Malaysia with ~82% market share in the standalone convenience store segment. The group has 2,122 stores as at 31 Dec 2016, serving ~900,000 people per day. The sheer size of its operations has provided the group with high economies of scale and strong bargaining position in sourcing its products, which serve as strong competitive edge compared to the smaller players.

RMm

% 32.0

2,000.0

31.0 30.0

1,500.0

29.0 28.0

1,000.0

27.0 26.0

500.0

25.0

Aggressive store expansions to drive earnings. With RM250m proceeds raised from the IPO in 2014, 74% were used to support capex. Management targets to open 600 new stores from 20142016. As of end-December 2016, the group managed to open 591 new stores, which is not far off from its target. We estimate that the group will continue to open an average of 200 new stores per annum from 2017-2019. We understand the group is trying to get into areas that have high traffic flow such as MRT and LRT stations. Store refurbishments to increase footfall. footfall From 2014 to 2016, 7Eleven (M) had successfully refurbished 600 of its existing stores. The renovation works include flooring, lighting & store panelling and cost between RM100k and RM150k per store. To attract consumer footfall and diversify its product offerings, the group has been converting some stores to café cum stores type ‘next generation stores (Next Gen)’ and ‘quick win food service stores’ (QWFS) since 2014. Among others, these new type of stores will 1) provide a wider selection of fresh food, beverage and non-food products, (2) seating area, and (3) free Wi-Fi. In 2016, the group had renovated 202 stores, converted 35 stores to Next Gen and 124 stores to QWFS. We expect the group to continue to refurbish 200 stores, convert 50 stores to Next Gen and 100 stores to QWFS per year going forward. Expanding Expanding high margin products. Tobacco sales typically constitute the largest component of the group’s revenue and yet have low profit margins. As such, management is focusing on achieving a better product mix and expanding its high-margin product categories such as food and beverages, non-food like Health & Beauty Aid (HABA), to cushion the impact of rising costs such as minimum wage increase. The strategies 7-11 (M) are currently pursing include continuing to introduce more new store keeping units (SKU) and expanding in-house products (Slurpee, Big Gulp and Coffee). In FY2016, 7-11 (M) had introduced 455 new SKUs. By focusing on higher value product offerings, we believe this will definitely help the group to improve its profit margin as well as provide the flexibility for the group to make necessary price adjustments. Sales from HABA in FY2016 was supported by strong c.11% growth in confectionary sales while non-alcoholic beverages and snack grew 3-5% excluding GST. The growth has helped the group to sustain its margin c.31%.

0.0

24.0 2012

2013

2014

Revenue (LHS)

2015

2016

GP Margin (RHS)

Source: Company, DBS Bank Chart 2: No. of Stores and New Store Openings 2500

210 2122

2000

1944

204

1745

200

199

1500

205

195 1000 190 188 500

185

0

180 2014

2015

Number of stores

2016 New stores opening

Source: Company, DBS Bank Table 1: Next Gen and QWFS stores Next Gen A store with a complete food service infrastructure: • Hot Beverages • Cold Beverages • Mash Potato Machine • Open Cold Case • Fresh Bakery Display • Roller Grill • Noodle Station • Speed Oven • Triple Sink with Hot Water • Food Captain • Seating area • Free Wi-Fi

QWFS QWFS Moderate food service infrastructure: • Hot Beverages • Cold Beverages • Mash Potato Machine • Fresh Bakery Display • Up Right Chiller Fresh to Go • Triple Sink with Hot Water • Food Captain • Seating area • Free WIFI

Source: Company

Page 106

Regional Equity Explorer

7-Eleven Malaysia Holdings GROWTH PROSPECTS

Optimising merchandise mix and creative promotional strategies. 7Eleven (M) has adopted a centralised strategy where merchandise mix of each convenience store is dependent on its operating environment for which management has broadly classified under 12 categories including colleges, commercial, shopping mall, tourist, hotel, and hospital areas. Management believes that such a strategy will help to optimise its merchandise mix and improve its sales per store. The group has also come out with new innovative and unique promotions activities such as monthly promotions, mix-and match promotions, and redemption promotions to increase sales per store. Furthermore, it has kept customers abreast with the latest promotions or new products via social media and rewarding regular customers with loyalty cards.

Chart 3: MIER Consumer Sentiment Index and Private Consumption Growth Private consumption growth (lhs)

sa % q-o-q

Consumer sentiments index (rhs) 3.5

130

3.0

120

2.5

110

2.0

100

1.5

90

1.0

80

0.5 0.0

70

-0.5

60

-1.0

50

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Good proxy to possible pick pick-up in consumer recovery. recovery. FY16 results were impacted by weak consumer spending, which saw its same stores same growth (SSSG) contracted by 2.2% in 4Q16 and 1.5% for the whole of FY16 (excluding GST). However, thanks to its aggressive expansion plan, its overall FY16 sales actually increased 4.8% vs ~3.0% for the total FMCG market, largely supported by contribution from new stores. Going forward, we understand that the group is looking to revise selling prices to protect its margin. Nevertheless, we think price revisions could be minimal at this juncture due to an on-going challenging operating environment and subdued consumer spending recovery. However, should there be a pick-up in consumer sentiment; we believe that the group should offer good exposure to a consumption recovery story in Malaysia given (1) its vast network, and (2) its high operating leverage from selling price revision.

Source: Department of Statistics, MIER Table 2: The 12 categories of store locations Shopping Mall

Urban

Suburb

Hospital

Hotel

College

Tourist

Transportation

Industrial

Kiosk

Petrol Station

CBD

Source: Company

Chart 4: Sept-Nov 2016 Promotion

Better infrastructure. infrastructure 7-Eleven (M) has successfully implemented the Integrated Retail Information System (IRIS) system in April 2016 and it is currently in the stability phase to ensure better control in reporting and analytical processes. The group has also further enhanced its supply chain model to optimise its inventory management. This has resulted in its fulfilment level to stores remaining high at ~90-94%.

Source: Company

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Regional Equity Explorer

7-Eleven Malaysia Holdings MANAGEMENT & STRATEGY Strong management team led by an F&B veteran. The key management of the group has many years of working experience in their respective fields and is led by CEO Mr Gary Thomas Brown, who has vast experience in the F&B, household products retailing, manufacturing and wholesaling industries, having worked in reputable companies such as Sara Lee Group, Dairy Farm, Pos Ad Group.

Competitive environment. Despite being the largest convenience store operator in Malaysia, it still faces stiff competition from other convenience stores such as KK Supermart, Circle K and Bison. To a certain extent, it also competes with petro marts, mini markets or even supermarkets since we think that some of product offerings are quite similar and the location of these stores are quite close to each other, especially in the Central Business District (CBD), urban and suburban areas.

RISK FACTORS Higherthan-expected store operating expenses. expenses Total FY16 Higher-thanexpenses (store and general & administration) rose 6.0% y-o-y and store operating expenses were impacted by various cost increases due to new store expansion and depreciation. They were also significantly impacted by minimum wage increase of 10% from 1 July 2016. We expect the overall expenses to increase in tandem with its expansion plan and store refurbishment but larger-thanexpected costs increase could erode its profit and affect its business strategy.

Renewal of regulatory licenses. 7-Eleven (M)’s operations require a number of licences. The key one being the Area License Agreement (ALA) between the group with 7-Eleven USA, which allows 7-Eleven (M) to operate and grant sub-franchises 7-Eleven convenience stores in Malaysia and Brunei. This ALA expires in 30 Nov 2033 and is renewable for an additional 10 years, subject to material compliance with the terms therein. Nonetheless, 7-Eleven Inc reserves the right to reject or even revoke the ALA before its expiration.

Execution risks. Any hiccup in implementing of its multi-pronged corporate strategies to drive its earnings growth could cap its growth prospects, especially for its store expansion plan – whether there is a delay or new stores not located in commercially viable locations.

Table 3: Key Management Team

Name of Designation

Profile

Gary Thomas Brown

Appointed as a CEO and executive director in Aug 2014, he has more than 30 years working experience in F&B and consumer related industry, attaching to multinational companies such as Dairy Farm Group and Sara Lee Group. An accountant by training, he has more than 35 years of working experience in various industries, including over 8 years in external and internal auditing. Prior to joining 7-11(M) He was CFO of Digi Telecommunications till 2005 and CEO of U Television Sdn Bhd between 2005 and 2010. He has more than 20 years working experience in finance, accounting and auditing covering a variety of industries including retail, trading, manufacturing, IT consulting services, telecommunications and public accounting practice. Prior to this appointment, he was the Finance Director, a member of the Board of Directors and the Company Secretary of the largest consumer electronics and furniture retailer in Malaysia for the past 4½ years.

CEO

Ho Meng

Deputy CEO

Lim Heng Seong

CFO

Chua Seok Theng

Chief Information Officer Zulhikam b Ahmad

GM, (Sales and operations)

Prior to this appointment, she worked as CIO for Maxis Bhd. She has more than 30 years working experience in the IT industry. He used worked as a store director at Carrefour Malaysia He has more than 10 years working experience in the retail related industry.

Source: Company

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Regional Equity Explorer

7-Eleven Malaysia Holdings

Sensitivity Analysis Key Assumptions FY Dec

2017 2014A 2014A

2015A 2015A

2016A 2016A

2017F 2017F

2018F 2018F

2019F 2019F

188 1.08 29 100 71.4

199 1.03 31 0.99 115

204 0.99 0.31 1.00 65.7

200 0.99 0.31 0.80 75.0

200 1.00 0.31 0.80 75.0

200 1.03 0.31 0.80 75.0

FY Dec

2014A 2014A

2015A 2015A

2016A 2016A

2017F 2017F

2018F 2018F

2019F 2019F

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) PrePre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

1,893 (1,335) 558 (468) 90.5 0.0 0.0 2.08 (3.3) 89.3 (26.2) 0.0 0.0 63.1 66.3 129

2,006 (1,388) 618 (542) 76.6 0.0 0.0 5.00 (3.8) 77.8 (22.0) 0.0 0.0 55.8 59.6 125

2,103 (1,457) 647 (569) 77.4 0.0 0.0 (0.8) (5.8) 70.8 (18.6) 0.0 0.0 52.2 58.0 131

2,309 (1,594) 716 (630) 85.5 0.0 0.0 (2.4) 0.0 83.0 (21.9) 0.0 0.0 61.2 61.2 146

2,542 (1,754) 788 (685) 103 0.0 0.0 (6.8) 0.0 96.4 (25.4) 0.0 0.0 71.1 71.1 170

2,804 (1,935) 869 (754) 115 0.0 0.0 (6.7) 0.0 108 (28.5) 0.0 0.0 79.8 79.8 188

13.2 42.4 54.6 51.4

6.0 (3.0) (15.4) (10.2)

4.8 4.5 1.1 (2.7)

9.8 11.9 10.4 5.5

10.1 16.2 20.8 16.2

10.3 10.8 11.4 12.3

29.5 4.8 3.3 76.2 10.3 42.0 99.7 NM

30.8 3.8 2.8 27.5 7.5 29.1 99.5 NM

30.7 3.7 2.5 50.8 6.9 31.7 100.1 95.6

31.0 3.7 2.6 148.2 7.7 32.7 80.0 35.0

31.0 4.1 2.8 130.4 8.5 33.3 80.0 15.2

31.0 4.1 2.8 114.7 8.9 35.2 80.0 17.3

Net additions of stores Sales per store (RM,m) Gross margin (%) Dividend payout ratio Net capex (RM m)

GP margin +/- 1%

Net Profit +/30%

Income Statement (RMm)

Higher contribution from high-margin products

Margins Trend 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 2015A

2016A

Operating Margin %

2017F

2018F

2019F

Net Income Margin %

Source: Company, DBS Bank

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Regional Equity Explorer

7-Eleven Malaysia Holdings Quarterly / Interim Income Statement (RMm) FY Dec

3Q2015 3Q2015

4Q2015 4Q2015

Revenue Trend 1Q2016 1Q2016

2Q2016 2Q2016

3Q2016 3Q2016

4Q2016 4Q2016

560

10% 8%

540

(3.9) 4.9 0.9 (5.4)

8.3 (13.8) (22.6) (22.7)

(4.4) (7.2) (16.7) (18.3)

30.8 4.1 3.2

31.6 4.1 2.8

30.4 4.3 3.0

31.0 4.5 3.0

30.9 3.2 2.1

30.7 2.8 1.8

2014A 2014A

2015A 2015A

2016A 2016A

2017F 2017F

2018F 2018F

2019F 2019F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

242 0.0 11.7 244 149 85.5 2.42 735

304 0.0 21.5 126 181 106 5.61 744

319 0.0 36.0 51.7 264 92.5 13.3 777

336 0.0 33.7 63.1 243 114 13.3 803

346 0.0 31.4 81.0 268 125 13.3 865

351 0.0 29.1 109 296 138 13.3 936

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

5.36 369 109 2.06 13.6 236 0.0 735

1.95 411 146 0.13 14.5 170 0.0 744

90.5 465 138 25.2 22.8 35.2 0.0 777

90.5 479 138 25.2 22.8 47.4 0.0 803

90.5 527 138 25.2 22.8 61.6 0.0 865

90.5 582 138 25.2 22.8 77.6 0.0 936

(241) 237 18.8 97.3 39.7 3.1 1.0 0.7 CASH CASH 962.5

(265) 124 17.4 106.3 44.9 2.7 0.7 0.4 CASH CASH 5,516.5

(233) (64.0) 17.2 113.9 57.9 2.8 0.6 0.2 1.8 1.8 56.8

(246) (52.6) 16.3 112.4 60.5 2.9 0.6 0.3 1.1 1.1 64.8

(259) (34.7) 17.2 108.9 55.3 3.0 0.6 0.3 0.6 0.6 64.8

(273) (6.8) 17.2 108.7 55.2 3.1 0.7 0.3 0.1 0.1 64.8

0%

480

-2% 460

-4%

440

-6%

Revenue

Revenue Growth % (QoQ)

Impacted by minimum wage

Source: Company, DBS Bank Balance Sheet (RMm) FY Dec

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%)

4Q2016

5.3 (1.5) 9.6 14.6

2%

3Q2016

(3.8) 8.0 (3.8) (17.3)

4%

500

2Q2016

7.6 18.8 46.1 56.4

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

6% 520

1Q2016

524 (363) 161 (146) 14.6 0.0 0.0 (0.8) (1.8) 12.0 (2.5) 0.0 9.52 11.3 28.9

4Q2015

548 (379) 169 (151) 17.6 0.0 0.0 (0.3) (1.8) 15.5 (3.9) 0.0 11.7 13.5 31.1

3Q2015

506 (349) 157 (134) 22.7 0.0 0.0 (0.4) (1.4) 21.0 (5.9) 0.0 15.1 16.5 36.1

2Q2015

526 (366) 160 (138) 22.5 0.0 0.0 0.59 (0.8) 22.3 (6.4) 0.0 15.9 16.7 34.4

1Q2015

500 (342) 158 (137) 20.5 0.0 0.0 1.06 (1.8) 19.8 (5.9) 0.0 13.9 15.7 34.9

4Q2014

519 (359) 160 (139) 21.4 0.0 0.0 1.24 0.0 22.6 (5.8) 0.0 16.8 16.8 32.4

3Q2014

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) PrePre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

Asset Breakdown (2017)

Source: Company, DBS Bank

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Regional Equity Explorer

7-Eleven Malaysia Holdings Cash Flow Statement (RMm) FY Dec

Capital Expenditure

2014A 2014A

2015A 2015A

2016A 2016A

2017F 2017F

2018F 2018F

2019F 2019F

89.3 38.2 (27.4) 0.0 66.0 (67.5) 98.6 (71.4) 0.0 0.0 0.0 48.0 (23.4) (62.9) (120) 250 53.8 121 0.0 196 2.65 2.21

77.8 48.3 (24.8) 0.0 23.7 1.88 127 (115) 0.0 0.0 0.0 (2.7) (117) (62.9) (5.3) (58.9) 0.0 (127) 0.0 (118) 8.37 0.99

70.8 53.1 (19.3) 0.0 (31.9) 2.63 75.4 (65.7) 0.0 0.0 0.0 (10.9) (76.6) (55.5) 48.1 (132) 65.5 (73.6) 0.0 (74.8) 9.66 0.87

83.0 60.6 (21.9) 0.0 13.6 0.0 135 (75.0) 0.0 0.0 0.0 0.0 (75.0) (48.9) 0.0 0.0 0.0 (48.9) 0.0 11.4 11.0 5.43

96.4 66.5 (25.4) 0.0 12.3 0.0 150 (75.0) 0.0 0.0 0.0 0.0 (75.0) (56.8) 0.0 0.0 0.0 (56.8) 0.0 18.0 12.4 6.74

108 73.1 (28.5) 0.0 13.8 0.0 167 (75.0) 0.0 0.0 0.0 0.0 (75.0) (63.8) 0.0 0.0 0.0 (63.8) 0.0 27.9 13.8 8.26

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (sen) Free CFPS (sen)

RMm 140.0

120.0 100.0 80.0 60.0 40.0 20.0 0.0 2015A

2016A

2017F

2018F

2019F

Capital Expenditure (-)

Source: Company, DBS Bank

VALUATIONS Fair valu value e at RM1.58 RM1.58. 58. 7-Eleven (M) is currently trading at an FY17 PE of 29x, which is in line with its regional peers. Although the group offers one of the best exposures to a potential consumption recovery story with an aggressive new store expansion plan supporting topline growth, we are concerned that high operating expenses arising from new store expansion could weigh on its earnings. Furthermore, a slow recovery in consumer sentiments could cap its near term earnings growth. Our fair value for 7-Eleven (M) stands at RM1.58, based on 29x PE, which is in line with its regional peers’ average PE. Although management has guided that dividend payout would be c.50%, we are assuming an 80% dividend payout in view of (1) the group has been giving c.100% payout in the past 3 years, and (2) strong operating cash flows. This implies a dividend yield of 3% for FY2017. Risk Assessment: Moderate Category Earnings Financials Shareholdings Overall

Risk Rating 1 (Low) - 3 (High) 2 1 1

Wgt

Wgtd Score

40% 20% 40%

0.8 0.2 0.4 1.4

Regional peer comparison Company Rat ing Sout h East A sia Ret ailers Dairy F arm Intl BUY CP ALL BUY Big C Supercntr Siam Makro Puregold Robinsons Retail Sumber Alfaria Matahari Putra PSC Sheng Siong Hero Supermarket Bison Cons 7 Elev en Modern Internasi Midi Utama ID

HOLD Not rated BUY BUY Not rated Not rated Not rated BUY Not rated Not rated Not rated Not rated Not rated

TP 9.96 75 210 n/a 49.50 92.00 n/a n/a n/a 1.13 n/a n/a n/a n/a n/a

M ark et Cap ( S$m)

17,262 21,455

Px L ast

PE ( A c t )

PE ( Y r 1)

PE(Y r 2)

P/ BV (x)

P/Sales (x)

RO E (% )

O perat ing M argin ( %)

Net M argin ( %)

Div idend Y ield (% )

9.02 59.00

26.6x 32.1x

25.4x 26.5x

23.5x 22.0x

7.2x 8.0x

1.1x 1.1x

30% 33%

4.1% 6.6%

4.2% 4.1%

2.5% 1.9%

6,787 204.00 6,484 33.50 3,474 44.00 3,052 76.50 2,310 530.00 632 1,120.00 2,108 165.00 1,428 0.94 580 1,320.00 186 1.90 530 1.67 36 75.00 278 920.00 Regional av erage

26.3x 29.7x 22.2x 22.2x 36.6x N/A 66.6x 22.8x 36.3x 29.0x 30.6x N/A 13.5x 30. 1x

21.3x 26.2x 20.0x 19.6x 27.4x 87.1x N/A 21.1x N/A 24.6x 29.2x N/A N/A 29. 0x

19.0x 25.3x 17.9x 17.1x 22.5x 34.2x N/A 19.8x N/A 19.6x 25.0x N/A N/A 22. 7x

3.3x 10.2x 2.6x 2.1x 4.3x 2.5x 16.8x 5.5x 1.0x

1.4x 0.9x 1.0x 0.9x 0.4x 0.4x 2.8x 1.8x 0.4x 0.7x 0.4x

7.0% 4.1% 6.9% 5.4% 2.3% 1.9% 6.6% 8.9% 1.6% 8.3% 3.7% 6.7% 5.0% 5. 3%

5.5% 3.1% 4.8% 4.7% 1.1% 1.3% 4.5% 8.5% 1.1% 6.9% 2.6% -4.8% 2.3% 3.3%

0.9% 2.5% 0.7% 0.9% 0.8% 2.9% 0.3% 4.3%

34.7x 0.3x

16% 45% 14% 11% 14% 9% 39% 27% 3% 15% 148% -3% 31% 27%

6. 8x

1.0x

3.0% 1.6% 1. 8%

Source: DBS Banks, Bloomberg Finance L.P

Page 111

SMC Research

Regional Equity Explorer

Bison Consolidated Bloomberg: Bison MK Equity | Reuters: BISO.KL

Refer to important disclosures at the end of this report

DBS Group Research . Equity

18 Apr 2017

NOT RATED RM2.12 KLCI : 1,733.93

Shop at your convenience

Closing price as of 17 Apr 2017

Return *: 1.4 Risk: Moderate Potential Target 12-mth*: 12-Month RM 2.02 (-5% downside) Analyst Regional Research Team; [email protected]



Fast growing homegrown retail convenience store operator



Plans to open 70 new stores per year, largely in the Klang Valley



3-year earnings CAGR of 24.7% (FY16 – FY19F)



Fair value is RM2.02, pegged at 25x FY17 PE

The Business Price Relative RM

Relative Index

2.5 2.4

208

2.3

188

2.2

168

2.1

148

2.0

128

1.9 1.8

108

1.7 Mar-17

88

Bison Consolidated (LHS)

Forecasts and Valuation FY Oct (RMm) 2016A Revenue 264 EBITDA 28.7 Pre-tax Profit 23.6 Net Profit 18.1 Net Pft (Pre Ex.) 18.6 EPS (sen) 5.85 EPS Pre Ex. (sen) 6.00 EPS Gth (%) 34 EPS Gth Pre Ex (%) 38 Diluted EPS (sen) 5.85 Net DPS (sen) 1.50 BV Per Share (sen) 49.2 PE (X) 36.3 PE Pre Ex. (X) 35.4 P/Cash Flow (X) 33.5 EV/EBITDA (X) 22.6 Net Div Yield (%) 0.7 P/Book Value (X) 4.3 Net Debt/Equity (X) CASH ROAE (%) 17.4 Consensus EPS (sen): Other Broker Recs:

Relative KLCI (RHS)

2017F 336 38.1 32.6 25.0 25.0 8.06 8.06 38 34 8.06 1.50 55.7 26.3 26.3 31.8 17.3 0.7 3.8 0.0 15.4

2018F 411 47.0 39.7 30.5 30.5 9.83 9.83 22 22 9.83 1.50 64.0 21.6 21.6 13.6 13.5 0.7 3.3 CASH 16.4

2019F 490 55.9 47.0 36.1 36.1 11.6 11.6 18 18 11.6 1.50 74.2 18.2 18.2 15.9 11.1 0.7 2.9 CASH 16.8

7.90 B: 4

10.0 S: 0

12.0 H: 1

ICB Industry : Consumer Services ICB Sector: General Retailers Principal Business: Bison are principally involved in the provisions of press and convenience retailing products under the main trade name myNEWS.com. The group also operates under other trade names such as Newsplus, WH Smith, MagBit, and The Front Page.

Leading home grown retail convenience store player. Bison Consolidated Bhd (Bison) is principally involved in the provision of press and convenience retail products under its major trade name ‘myNEWS.com’. As at December 2016, Bison had a total of 316 outlets and currently has c.11% market share, second largest in Malaysia, but this is significantly behind 7-Eleven Malaysia Holdings Bhd with >80% market share. Expanding to heavy footfall areas. Bison has a presence in most states across Malaysia with 80% of its outlets in the Klang Valley. Most stores are located in high traffic areas such as shopping malls (31%), hypermarkets (16%), high street (15%), and transportation hubs (15%). It plans to open 70 new stores per annum while maintaining the geographical mix in order to optimise return per store. Successfully established a feasible business model. Bison posted an impressive profit CAGR of 15.7% over FY13-FY16 despite the challenging retail environment. We believe that the group has successfully established a feasible business model in the domestic retail space. With its upcoming new outlet openings and gradual recovery in consumer sentiment, we are optimistic that the group will continue to record double digit earnings growth at CAGR of 24.7% over FY17-19. Fair value at RM2.02. We have derived a TP of RM2.02, pegging at 25x FY17 PE, which is 20% discount to its regional peers’ average PE of 30x, after taking into account of its smaller size relative to peers. We believe that the stock is fairly valued at this juncture. At A Glance Issued Capital (m shrs) Mkt. Cap (RMm/US$m) Major Shareholders (%) D&D Consolidated Sdn Bhd Free Float (%) 3m Avg. Daily Val (US$m)

310.1 595.3 / 134.4 68.8 26.0 0.17

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report. ed: JS / sa: BC, PY

Page 112

Regional Equity Explorer Bison Consolidated REVENUE DRIVERS Leading home grown retail convenience store player. Bison is principally involved in the provision of press and convenience retailing products under its major trade name ‘myNEWS.com’. The group also operates under other trade names such as Newsplus, WH Smith, MagBit, and The Front Page. The WH Smith outlets at airports throughout Malaysia are the result of its 50:50 joint venture with UK’s WH Smith Plc. Bison is the largest home grown retail convenience store operator in Malaysia and the second largest player overall, with an estimated ~11% market share based on number of stores. Nonetheless, we acknowledge that the gap between the Bison and 7Eleven Malaysia Holdings Bhd (7-Eleven) is significant with the latter having >80% market share in the standalone convenience store segment and operates >2,000 stores across all states in Malaysia as at 31 Dec 2016.

its centralised distribution centre (CDC). This is mainly to cater for “on the go” food – which currently contributes 9% to total revenue. Chart 1: New store opened per year No of Stores 350

299

300

300 229

250

196

200

165

150

16

100

156

70

41

200 150

165

196

229

50

Bison is planning to expand the self-service convenience F&B or fresh food section at outlets where there is demand. Besides that, it plans to develop its own food processing centre in Rawang, located adjacent to

100 50

0

0 FY13

FY14 Stores opened during the year

FY15

FY16

Stores at beginning of the year

Stores at end of the year

Strengthening its foothold in Klang Valley region. As at December 2016, Bison had a total of 316 outlets (including nine WH Smith outlets). The group opened 70 new outlets in FY 2016 (against 41 in FY 2015), comprising 69 myNEWS.com outlets and one WH Smith outlet. Bison has a presence in most states in Malaysia with 80% of its outlets concentrated in Klang Valley and c.10% each in northern and southern part of Peninsular Malaysia, coupled with three outlets in East Malaysia. The group is planning to open about 70 new stores per annum and intends to maintain its geographical mix of 80:20 (80% in the Klang Valley and 20% in the rest of Malaysia).

F&B segment to drive earnings As at October 2016, 68% of the group’s total SKUs were convenience retail products (tobacco, food and beverages (F&B), and non-food), followed by print media (29%) and consumer services (3%). Nonetheless, we observe that F&B segment is gradually taking over tobacco products as the biggest contributor to group revenue. The former contributed 39% to Bison’s FY2016 sales (vs tobacco products at 35%), compared to 32% in FY2013. The improved contribution of its F&B segment is mainly due to 1) weak tobacco sales due to high excise duty and growing illicit cigarettes trade and, 2) the group’s deliberate effort to expand this segment since it carries better margins than some of its other segments. We understand that gross margin for beverages ranges from 40-60%, and its own food products have about 50% gross margin. Meanwhile, non-food segment has blended gross margin of about 40%.

250

37

Chart 2: Revenue contribution for FY2016

Operating in high density areas. Bison’s stores are mostly located in strategic areas that have heavy footfall such as shopping malls (31%), hypermarkets (16%), high street (15%) and transportation hubs (15%). We believe it is imperative for the group to maintain this strategy while expanding its retail network to ensure strong traffic volume to sustain earnings growth.

350

Chart 3: Gross profit contribution for FY2016

Figure 1: Site for new food processing centre

Source: Company, DBS Bank

Page 113

Regional Equity Explorer Bison Consolidated COMPETITIVE ADVANTAGE The past few years have been challenging period for the retail sector, which was adversely impacted by (1) GST implementation since April 2015, (2) slowing economic growth momentum, (3) concerns over job prospects, (4) ringgit volatility, (5) high household debt, and (6) higher cost of living contributed partly by the removal of subsidies by the government. Despite these challenges, we observed that Bison has been able to consistently register positive same store sales growth (SSSG) over 3 years (as illustrated in chart 4) and strong earnings growth (3-year CAGR of 15.7%). We believe Bison’s impressive financial performance relative to its peers is supported by its competitive advantages outlined below:

RM 2.5%

2.2% 2.0% 1.8%

1.5%

1.0%

0.8% 0.5%

0.0% FY2015

In-house team to handle product sourcing and active product customisation = optimised product offerings. We understand that Bison’s management is heavily involved in the business operations ranging from design of outlets, sourcing of products, customisation of product offerings etc. The group has developed an integrated IT platform for effective business controls over its retail business. This allows management to access detailed and customised sales data and trends at all its outlets, effectively tracking SKU (stock-keeping unit) movements and monitoring in-store performance, as well as examining the efficiency of its advertising and promotional strategies.

FY2016

Same Store Sales Growth

Source: Company, DBS Bank Strategically located and stylishly designed. As mentioned above, Bison’s outlets are strategically located in heavy traffic areas such as shopping malls (31%), hypermarkets (16%), high street (15%), and transportation hubs (15%). This helps to ensure strong footfall to its outlets even during the period where consumers have been tightening their belts. Besides that, its outlets are stylish and trendy, and this helps to attract customers. Figure 2: Store locations

Source: Company Small is beautiful - small outlet allows efficient optimisation of floor space. The average size of Bison’s stores is about 100 square feet, which is quite small and only allows selective product offerings. This allows the group to optimise its product offerings depending on the outlet’s location and demographic pattern.

Chart 4: Same store sales growth

FY2014

Figure 3: Fresh and stylish layout

Bison also ensures that the inventory level at each outlet remains at an optimal level by monitoring it via auto ordering system - which will trigger automatic orders once inventory falls below the required level. Homegrown brand - no strings attached. Being a homegrown convenience store operator provides Bison with full control over its business, operational systems and retail management. This also gives Bison the flexibility to respond to the ever-changing market demands and consumer preferences in an efficient and timely manner. Furthermore, the group does not need to pay royalty or licensing fees for use of its brand name. In a trading business where profit margins are relatively thin, a high licensing or royalty fees could have a significant impact on the profitability of a convenience outlet operator. This serves as one reason why Bison enjoys healthier operating margin c.9% (vs c. 4% for 7-Eleven’s) Carving out a feasible business model in the convenient store segment. While conventional theory may favour a convenience outlet with a large range of product offerings, we believe Bison has successfully carved out a feasible business model by having a relatively small yet dynamically set up outlet that is strategically focused on heavy footfall areas, with customised & selective product offerings to optimise its return per store.

Source: Company

Page 114

Regional Equity Explorer Bison Consolidated In fact, we have observed that customers who visit Bison’s outlets have a predetermined objective of products to purchase, and Bison becomes their preferred convenience outlet due to (1) its open and easy accessibility, (2) limited queuing time, (3) products are dynamically displayed and easy to find, and, (4) rarely has out of stock issues.

Figure 4: Bison’s top management Name Dang Tai Luk

Profile He is the founder of Bison and has more than 20 years of experience in retail business. Mr Dang Tai Luk holds a Bachelor of Computer Science (Honours) and a Master of Science in Computer Science from University of Manitoba, Canada. He started his career as a programmer in the banking industry prior to setting up Bison stores in 1996. With his academic background and IT knowledge, he developed computer applications to assist and enhance Bison's business operations

Dang Tai Wen

Prior to joining Bison, he was a junior architect and holds a Bachelor of Environmental Design from the University of Manitoba, Canada. Currently, he is responsible in creating the format of its outlets and Bison's branding concept

Dang Tai Hock

He has 24 years of experience in sales, including with his own company -Alphanical Press Sdn Bhd, which is principally involved in printing and stationeries. He joined Bison in 2014, and leads the F&B division, oversees the development and expansion of F&B products or SKUs for Bison’s retail business chain.

Managing Director

KEY OPERATING ASSETS Asset light model. The group does not own the physical properties of its outlets. The outlets located in shopping malls, hypermarkets, high streets, office spaces, transportation hubs, resorts and medical centres are all rented from third parties with most tenancy contracts having duration of less than three years. The major asset that the group owns is its CDC in Rawang. The majority of Bison’s SKUs were distributed from its CDC, which has 122,601 square feet of storage capacity and is operating at c.70% utilisation rate.

Chief Operating Officer

MANAGEMENT & STRATEGY Managed by founding members. Bison’s leadership team comprises founding members from the Dang family, who are actively involved in the business since the group was established in 1996. Its Managing Director, Mr Dang Tai Luk, has over 20 years of experience in the retail convenience business and through its private vehicle - D&D Consolidated Sdn Bhd. The Dang family is a substantial shareholder with an effective stake of 74% in Bison.

Executive Director

Source: Company

Together with his siblings, Dang Tai Wen and Dang Tai Hock, and an experienced management team, they have transformed Bison from small retail shop to become the largest home grown retail convenience store operator.

Page 115

Regional Equity Explorer Bison Consolidated FINANCIAL HIGHLIGHTS

GROWTH PROSPECTS

Good start to the year. Bison’s revenue for 1QFY17 grew by 24% y-o-y to RM76.2m. The growth in revenue was driven by sales from new store openings, improved product mix, and promotional activities. Mechandise sales which carry better margins, rose 21% y-o-y, and this led to a stronger bottomline growth (+48% q-o-q) to RM6.4m.

Impressive financial performance despite challenging retail environment. We believe that the impressive financial performance registered by Bison in FY14-16, despite the challenging retail environment, has provided strong evidence that the group has successfully developed a niche business model compared to other convenience store operators.

Chart 6: Revenue & margins (FY13-16 CAGR of 18.6%) RM'm 300

264

250 200

218 158

182

150

36%

34% 76

100 50

36%

33%

33%

0 FY13

FY14

FY15

Revenue

FY16 Gross Margin

37% 36% 36% 35% 35% 34% 34% 33% 33% 32% 32%

1QFY17

3-year revenue CAGR of 18.6% (FY13 –16). Bison has registered strong and consistent revenue growth over last 3 years, at CAGR of 18.6%. We forecast revenue to grow even faster this year, by 27% yo-y and the strong 1Q17 performance has reaffirmed our stand. Growth in revenue will be mainly supported by the progressive addition of new outlets and recovery in consumer sentiment.

Chart 7: Net profit & margins (FY13-16 CAGR 15.7%) 17.9

12%

18.1

10%

11% 12.4

13.5 8% 8%

7%

We understand that the group is currently improving its logistic capabilities by establishing secondary distribution center in Johor for better efficiency. Once completed, the existing distribution centre in Rawang will only cater to the central and northern regions.

RISKS

Source: Company, DBS Bank

RMm 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Given that the group has planned to open 70 new stores per year (representing >20% of its 316 store-network as at end FY16) in FY1718, coupled with gradual recovery in consumer sentiment, we are positive that the group will continue to record strong earnings growth going forward.

6%

7% 6.4

6% 4% 2%

Inability to secure strategic locations. As a convenience store operator, one of the key success factors for Bison lies with its ability to secure outlet locations with high foot traffic. Bison plans to open 70 new outlets per year as part of its expansion plan. With the new outlets mainly in the Klang Valley region, it is crucial for Bison to secure prime locations especially in the shopping malls. However, in the event of Bison failing to secure optimal retail locations for its new outlets, the group’s growth prospects could be adversely affected. Unforeseen changes in tenancy arrangements. Bison does not own the properties of its outlets. The outlets located in shopping malls, hypermarkets, high streets, office spaces, transportation hubs, resorts and medical centres are all rented from third parties with most tenancy contracts having tenures of less than three years. The terms and conditions of the tenancy agreements may be subject to the landlords’ review and revisions. There is a risk that the landlords will increase rental rates or not renew the tenancies when they expire.

0% FY13

FY14 Net Profit

FY15

FY16

1QFY17

Net Margin

Source: Company, DBS Bank

Page 116

Regional Equity Explorer Bison Consolidated

Key Assumptions FY Oct Net additions of stores Sales per store (RM,m) Gross margin (%)

Sensitivity Analysis 2014A

2015A

2016A

2017F

2018F

2019F

37.0 0.93 33.1

41.0 0.95 34.2

70.0 0.88 35.8

70.0 0.91 36.4

70.0 0.94 36.8

70.0 0.96 36.9

2017 GP margin +/- 1%

Improving margins due to better product mix

Income Statement (RMm) FY Oct Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

Net Profit +/11%

2014A

2015A

2016A

2017F

2018F

2019F

182 (122) 60.4 (44.1) 16.3 0.0 0.30 (0.4) 0.08 16.3 (3.9) 0.0 0.0 12.4 12.4 19.4

218 (143) 74.4 (57.0) 17.4 0.0 0.73 (0.5) 0.0 17.7 (4.2) 0.0 0.0 13.5 13.5 21.8

264 (170) 94.5 (71.4) 23.1 0.0 1.11 (0.1) (0.5) 23.6 (5.5) 0.0 0.0 18.1 18.6 28.7

336 (214) 122 (90.9) 31.4 0.0 1.11 0.03 0.0 32.6 (7.6) 0.0 0.0 25.0 25.0 38.1

411 (260) 151 (113) 38.6 0.0 1.11 0.03 0.0 39.7 (9.2) 0.0 0.0 30.5 30.5 47.0

490 (309) 181 (135) 46.1 0.0 1.11 (0.3) 0.0 47.0 (10.9) 0.0 0.0 36.1 36.1 55.9

15.5 7.1 2.7 5.5

19.3 12.5 6.9 9.5

21.4 31.8 32.4 37.6

27.2 33.0 36.1 34.4

22.3 23.2 22.8 22.0

19.2 19.0 19.5 18.2

33.1 8.9 6.8 33.4 16.8 24.3 87.9 39.6

34.2 8.0 6.2 27.6 14.9 21.2 3.7 38.2

35.8 8.7 6.9 17.4 11.9 16.0 25.6 209.8

36.4 9.4 7.4 15.4 11.3 14.4 18.6 NM

36.8 9.4 7.4 16.4 11.9 15.5 15.2 NM

36.9 9.4 7.4 16.8 12.2 15.9 12.9 173.2

Margins Trend 10.0% 9.5%

9.0% 8.5% 8.0%

7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 2015A

2016A

Operating Margin %

2017F

2018F

Net Income Margin %

Source: Company, DBS Bank

Page 117

2019F

Regional Equity Explorer Bison Consolidated Revenue Trend 72.5 (46.7) 25.8 (20.1) 5.66 0.0 0.10 0.03 0.0 5.79 (1.5) 0.0 4.31 4.31 7.04

76.2 (48.8) 27.4 (19.7) 7.76 0.0 0.41 (0.1) 0.0 8.05 (1.7) 0.0 6.36 6.36 9.51

nm nm nm nm

4.1 (15.3) (21.7) (30.7)

1.3 (14.2) (16.4) 1.3

11.3 11.5 16.0 6.2

5.2 35.0 37.1 47.7

38.0 12.1 9.3

34.8 9.1 6.2

34.3 7.5 6.2

35.6 7.8 5.9

36.0 10.2 8.3

2014A

2015A

2016A

2017F

2018F

2019F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

42.7 0.34 0.01 8.68 15.8 12.6 1.76 81.9

46.7 1.57 0.01 7.02 21.8 21.2 1.26 99.5

65.3 2.68 8.64 17.8 29.8 25.4 54.9 204

85.7 3.79 8.64 7.83 39.6 36.5 54.9 237

99.5 4.90 8.64 30.5 39.4 36.2 54.9 274

112 6.01 8.64 45.9 46.9 43.2 54.9 317

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

1.45 25.2 1.14 9.67 1.97 42.5 0.0 81.9

1.46 31.1 0.59 8.75 2.11 55.5 0.0 99.5

1.55 40.4 0.15 7.31 2.59 152 0.0 204

1.55 45.0 7.66 7.31 2.59 173 0.0 237

1.55 54.6 9.32 7.31 2.59 199 0.0 274

1.55 65.0 11.0 7.31 2.59 230 0.0 317

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%)

3.80 (2.4) 23.4 70.2 41.1 2.5 1.4 0.8 0.1 0.1 80.9

12.5 (3.2) 28.3 73.6 49.1 2.4 1.5 0.9 0.1 0.1 75.3

69.5 8.93 32.2 79.0 57.0 1.7 3.0 1.0 CASH CASH 266.4

78.3 (1.0) 33.6 75.0 60.9 1.5 2.6 0.8 0.0 0.0 293.2

66.5 21.6 32.3 72.0 57.1 1.6 2.5 1.0 CASH CASH 238.8

68.9 37.0 29.6 72.7 52.4 1.7 2.5 1.1 CASH CASH 238.8

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

10%

70 60

8%

50

6%

40 30

4%

20

2%

10 0

Revenue

1Q2017

65.1 (42.8) 22.3 (17.4) 4.88 0.0 0.27 (0.1) 0.0 5.02 (1.0) 0.0 4.06 4.06 6.32

4Q2016

64.3 (41.9) 22.4 (16.6) 5.84 0.0 0.48 0.07 (1.2) 5.23 (1.2) 0.0 4.00 5.15 7.37

12%

80

3Q2016

61.7 (38.2) 23.5 (16.0) 7.45 0.0 0.27 (0.1) 0.0 7.58 (1.8) 0.0 5.77 5.77 8.70

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

90

2Q2016

1Q2017

1Q2016

4Q2016

4Q2015

3Q2016

3Q2015

2Q2016

2Q2015

1Q2016

1Q2015

FY Oct

4Q2014

Quarterly / Interim Income Statement (RMm)

0%

Revenue Growth % (QoQ)

Healthier margins due to better product mix

Source: Company, DBS Bank Balance Sheet (RMm) FY Oct

Asset Breakdown (2017) Debtors 21.2%

Net Fixed Assets 49.7%

Assocs'/JVs 2.2%

Inventory 23.0%

Bank, Cash and Liquid Assets 3.9%

Source: Company, DBS Bank

Page 118

Regional Equity Explorer Bison Consolidated Cash Flow Statement (RMm) FY Oct

Capital Expenditure

2014A

2015A

2016A

2017F

2018F

2019F

16.3 2.74 (27.4) (0.3) 0.32 20.6 12.2 (9.0) 0.0 0.0 0.0 0.23 (8.8) (10.9) 1.31 0.0 5.32 (4.3) (0.3) (1.2) 544 147

17.7 3.59 (0.6) (0.7) (8.6) (2.9) 8.50 (7.7) 0.0 (0.5) 0.0 0.13 (8.1) (0.5) (1.0) 0.0 (0.6) (2.1) (0.3) (2.0) 5.51 0.26

23.6 4.48 (0.5) (1.1) (56.6) 49.7 19.7 (23.6) 0.0 0.0 0.0 (61.9) (85.5) (4.7) (1.6) 88.7 (7.0) 75.5 0.0 9.66 24.6 (1.3)

32.6 5.60 (0.1) (1.1) (16.3) 0.0 20.7 (26.0) 0.0 0.0 0.0 0.0 (26.0) (4.7) 0.0 0.0 0.0 (4.7) 0.0 (10.0) 11.9 (1.7)

39.7 7.29 (7.6) (1.1) 10.1 0.0 48.5 (21.2) 0.0 0.0 0.0 0.0 (21.2) (4.7) 0.0 0.0 0.0 (4.7) 0.0 22.6 12.4 8.80

47.0 8.67 (9.2) (1.1) (4.1) 0.0 41.2 (21.2) 0.0 0.0 0.0 0.0 (21.2) (4.7) 0.0 0.0 0.0 (4.7) 0.0 15.4 14.6 6.47

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (sen) Free CFPS (sen)

RMm 30.0 25.0

20.0 15.0 10.0 5.0 0.0 2015A

2016A

2017F

2018F

2019F

Capital Expenditure (-)

Stores and CDC expansion

Source: Company, DBS Bank

VALUATIONS No formal dividend policy. Despite not having a formal dividend policy, Bison had declared 1.5sen DPS (26% payout) to shareholders in FY2016. We assume that the group will maintain 1.5 sen/share DPS going forward, on the back of strong cashflows, strong balance sheet and bright growth prospects. This translates to 0.7% dividend yield for FY17.

Fair value at RM2.02. We pegged Bison’s fair value at 25x FY17F PE, a 20% discount to the industry average given its smaller size. Although we are positive on the group’s growth prospects, we believe that the stock is fairly priced at this juncture. Risk Assessment: Moderate Category Risk Rating 1 (Low) - 3 (High) Earnings 2 Financials 1 Shareholdings 1 Overall

Wgt

Wgtd Score

40% 20% 40%

0.8 0.2 0.4 1.4

Low free float, key stakeholders control two-thirds of the company. Shares in Bison remain tightly held, with a free float of 26%. The Dang family effectively owns 74% - mostly through its family private vehicle, D&D Consolidated Sdn Bhd.

Regional peer comparison Company

Rat ing

TP

M ark et Cap (S$m)

Px Last

PE (A ct )

PE (Y r 1)

PE(Y r 2)

P/BV (x)

P/Sales (x)

ROE (%)

Operat ing M argin (%)

Net M argin (%)

Div idend Y ield (%)

Sout h East A sia Ret ailers DairyFarm Intl CP ALL

BUY BUY

9.96 75

17,262 21,455

9.02 59.00

26.6x 32.1x

25.4x 26.5x

23.5x 22.0x

7.2x 8.0x

1.1x 1.1x

30% 33%

4.1% 6.6%

4.2% 4.1%

2.5% 1.9%

Big C Supercntr Siam Makro Puregold Robinsons Retail Sumber Alfaria Matahari Putra PSC Sheng Siong Hero Supermarket Bison Cons 7 Eleven Modern Internasi Midi Utama ID

HOLD Not rated BUY BUY Not rated Not rated Not rated BUY Not rated Not rated Not rated Not rated Not rated

210 n/a 49.50 92.00 n/a n/a n/a 1.13 n/a n/a n/a n/a n/a

6,787 204.00 6,484 33.50 3,474 44.00 3,052 76.50 2,310 530.00 632 1,120.00 2,108 165.00 1,428 0.94 580 1,320.00 134 2.12 530 1.69 36 75.00 278 920.00 Regional av erage

26.3x 29.7x 22.2x 22.2x 36.6x n/a 66.6x 22.8x 36.3x 35.4x 30.6x n/a 13.5x 30.1x

21.3x 26.2x 20.0x 19.6x 27.4x 87.1x n/a 21.1x n/a 26.7x 29.2x n/a n/a 29.8x

19.0x 25.3x 17.9x 17.1x 22.5x 34.2x n/a 19.8x n/a 21.9x 25.0x n/a n/a 22.7x

3.3x 10.2x 2.6x 2.1x 4.3x 2.5x 16.8x 5.5x 1.0x 3.9x 34.7x 0.3x

1.4x 0.9x 1.0x 0.9x 0.4x 0.4x 2.8x 1.8x 0.4x 2.3x 0.7x 0.4x 1.0x

7.0% 4.1% 6.9% 5.4% 2.3% 1.9% 6.6% 8.9% 1.6% 9.4% 3.7% 6.7% 5.0% 5.3%

5.5% 3.1% 4.8% 4.7% 1.1% 1.3% 4.5% 8.5% 1.1% 7.4% 2.6% -4.8% 2.3% 3.3%

0.9% 2.5% 0.7% 0.9% 0.8% 2.9% 0.3% 4.3%

6.8x

16% 45% 14% 11% 14% 9% 39% 27% 3% 15% 148% -3% 31% 27%

Source: DBS Bank, Thomson Reuters

Page 119

0.7% 3.0% 1.6% 1.8%

Asian Insights SparX ASEAN Grocery Retail

DBS Bank, DBSVI, DBSVTH recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends DBS Bank, DBSVI, DBSVTH Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1

(>20% potential returns over the next 12 months)

2

(0 - 20% potential returns over the next 12 months)

3

(negative potential return over the next 12 months)

The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock. Completed Date: 18 Jul 2017 12:46:22 (SGT) Dissemination Date: 18 Jul 2017 13:15:38 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd, PT DBS Vickers Securities (Indonesia) (“DBSVI”), DBS Vickers Securities (Thailand) Co Ltd (“DBSVTH”). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd, DBSVI, DBSVTH. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

ASIAN INSIGHTS

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Asian Insights SparX ASEAN Grocery Retail which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Sheng Siong Group, CP ALL, as of 30 Jun 2017. 2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. Compensation for investment banking services: 3.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

1

An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2

Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Asian Insights SparX ASEAN Grocery Retail Disclosure of previous investment recommendation produced: 4.

DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or General located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia

This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong

This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report has been prepared by an entity which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia

This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia

This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

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Asian Insights SparX ASEAN Grocery Retail Singapore

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand

This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai International Financial Centre

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United Arab Emirates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States

This report is prepared by DBS Bank Ltd, PT DBS Vickers Securities (Indonesia) (“DBSVI”), DBS Vickers Securities (Thailand) Co Ltd (“DBSVTH”). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888 e-mail: [email protected] Company Regn. No. 196800306E

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