harnessing nature’s goodness with herbal medicines...

8 August 2014

Page | 1 MCI (P) 046/11/2013 Ref. No.: SG2014_0013

MCI (P) 046/11/2013 Ref. No.: INDO2014_0003

Industri Jamu dan Farmasi Sido Muncul Harnessing Nature’s Goodness with Herbal Medicines INDONESIA | CONSUMER GOODS | INITIATION

Rating: Neutral

Initiated with Neutral Company Background Sido Muncul is the largest herbal medicine company in Indonesia. Founded in 1940 in Yogyakarta. Two main Sido Muncul products are Tolak Angin and Kuku Bima Ener-G. Sido Muncul is the only herbal medicine manufacturer certified with pharmaceutical standards. Harnessing Nature’s Goodness with Herbal Medicines. Indonesia with its biodiversity has known herbal medicine for centuries. Jamu, the most well-known Indonesia original herbal medicine, has become part of the culture and nation’s pride. Herbal medicine industry uses 85% of raw material originating from Indonesia’s natural resources. The back to nature lifestyle increases demand for herbal medicine, leading to a promising larger market in the coming years. Investment Merits Market leader in herbal medicine for cold and energy drinks. Tolak Angin market share for cold herbal medicine reached 75%. Meanwhile Kuku Bima energy drink leads the market share of 60%. Focus on higher margins from herbal medicine products. Herbal medicine products generate much higher gross profit margin (2013: ~64%) than other of its business lines. Most of the raw materials for herbal medicine originate from domestic market. Key Risk Factors Fluctuations in Raw Material Prices. Because most of the raw materials come from local herbal plants, weather conditions can lead to fluctuations in raw material prices. Competition Risk. The competition in coming years will grow fiercely as the attractive market of herbal medicine business has prompted some players in the pharmaceutical industry to produce herbal medicines. Investment Action Using discounted cash flow method with WACC of 10% and terminal growth of

5%, we estimate the fair price of Sido Muncul shares for the end of this year at IDR

785 per share. Total dividend for financial year 2014 is estimated at Rp 14.8 per

share with a dividend payout ratio of 50%. Thus there is an implied potential gain

of 3.9%, compared to the closing price of Rp 770 per share on August 6, 2014.

Key Financial Summary

Source: Company, PSI estimates

Target Price (IDR)

Forecast Dividend (IDR)

Closing Price (IDR) 6 Aug 14

Potential Upside

Company Description

Company Data

Raw Beta (Past 2yrs weekly data) 0.50

Market Cap. (USD mn / IDR bn) 988 / 11625

Ent. Value (USD mn / IDR bn) 929 / 10933

3M Average Daily T/O (mn) 7.0

Closing Px in 52 week range 580 955

Major Shareholders (%)

40.5

8.1

3. Sofyan Hidayat 8.1

4. Johan Hidayat 8.1

5. Sandra Linata Hida jat 8.1

6. David Hidayat 8.1

19.0

Valuation Method

DCF (WACC: 10.0%; termina l g: 5.0%)

Analyst

Martha Christina

[email protected]+62 21 57900800

3.9%

1. Ny. Desy Sul i s tio

7. Publ ic, each less than 5%

Sido Muncul is the largest herba l medicine

company in Indones ia . Founded in 1940 in

Yogyakarta . Two main Sido Muncul products are

Tolak Angin and Kuku Bima Ener-G. Sido Muncul

is the only herba l medicine manufacturer

certi fied with pharmaceutica l s tandards .

2. Irwan Hidayat

785

15

770

0

20

40

60

80

100

500

600

700

800

900

1,000

Au

g-13

Au

g-13

Sep

-13

Oct-1

3

Oct-1

3

No

v-13

De

c-13

Jan-1

4

Jan-1

4

Feb

-14

Mar-1

4

Mar-1

4

Volume, mn SIDO IJ Equity JCI rebased

Analyst Phillip Research Team +65 65311240 [email protected]

Industri Jamu dan Farmasi Sido Muncul 8 August 2014

Page | 2

INDUSTRY OVERVIEW

Indonesia has abundant biodiversity and ranks second next to Brazil in terms of

biodiversity. There are forty thousand species of plants worldwide and thirty

thousand of these species can be found in Indonesia. From this number, 9,600 of

them have medicinal benefits, and 400 species have been used as traditional

medicines.

Herbal Medicines in Indonesia

Indonesians have known herbal medicines for centuries. One famous example of

Indonesian original herbal medicine is Jamu, which are made from local plants.

Jamu has become part of the culture and the nation’s pride.

Based on the level of clinical trials, herbal medicine can be divided into three

categories:

Jamu (empirical-based herbal medicine)

Standardized Herbal Medicines (scientific-based herbal medicine)

Phytopharmaca (clinical-based herbal medicine)

To accomplish national and global standards, scientific research is absolutely

necessary to prove the efficacy of herbal medicines. Of the many herbal medicines

in Indonesia, only about 30 have been listed as standardized herbal medicines and

only five have been categorized as phytopharmaca. Jamu is the most well-known

herbal medicine in Indonesia. With better standards and efficacy testings,

Indonesian herbal medicines are expected to be accepted within and outside the

country.

Back to Nature

Advances in science and technology resulted in a shift in people's behavior. We are

seeing a change in consumers’ preference towards natural herbal medicinal

products that have minimal side effects, compared to pharmaceutical drugs.

This prompted an increase in demand for herbal medicines both within and

outside the country. The increase in demand has created the growth of the herbal

medicines industry (in this case Jamu) in Indonesia. Herbal products are becoming

increasingly varied and the use of technology in the industry is growing. The rapid

development of herbal industry triggered tight competitions, especially for

products with specific efficacy such as for curing colds, fatigue, stamina and others.

The higher price for pharmaceutical drugs is also considered by consumers. Weak

IDR exchange rate against the US dollar has weighed on pharmaceutical

companies, because 90% of raw materials for pharmaceutical industry in Indonesia

are still imported. On the other hand, the production cost for herbal medicines are

relatively cheaper, because many raw materials are available in the country.

.


Page | 3

Jamu Industry in Indonesia

Jamu industry in Indonesia started from small home businesses in 1825 in

Ambarawa, Central Java. At that time, Jamu was used to fulfill demands for small-

scale treatments. In early 1900s, Jamu business was growing rapidly, marked by

the emergence of Jamu producers such as Jamu Jago, Jamu Jawa Asli Cap Nyonya

Meneer, Jamu Sidomuncul, Jamu Air Mancur, and others. (Fig.1)

Fig 1. Jamu (Herbal Medicine) Production in Indonesia

Source: Company, Capricorn Indonesia Consult

Based on the scale of production, herbal medicine business in Indonesia is divided

into three categories: Traditional Medicine Industry (“IOT”), Traditional Medicine

Small Business (“UKOT”), and Traditional Medicine Micro Business (“UMOT”).

Currently, there are 1,247 herbal medicine producers in Indonesia, including 132

companies in IOT categories. Based on data from the Food and Drug

Administration (“BPOM”) and the Herbal Medicine Association of Indonesia

(“GPJI”), the number of IOT have been increasing from year to year.

As technology advances and production capacity increases, some traditional

medicine products have made good progress, including Jamu, standardized

traditional medicines and phytopharmaca. In fact, some IOT companies have been

able to implement Good Manufacturing of Traditional Medicine (“CPOTB”) and

Good Manufacturing Practice (GMP) conducts.

Global herbal medicine market is expected to reach USD 100 billion by 2015.

Herbal medicine industry is one of the rapidly growing industries in the world.

Herbal medicine’s global market is still dominated by China and India as the biggest

exporters. WHO estimated 80% of the population in Asia and Africa chooses to use

herbal medicines as they are easier to obtain and cheaper than chemical drugs.

In 2012, herbal medicine market size in Indonesia was IDR 13 trillion, or only about

2% of the total herbal medicine market in the world. This number has increased

significantly from 2008, when herbal medicine market was only IDR 7.2 trillion. This

means that within the last five years, herbal medicine market has grown almost

twice larger. (Fig.2)


Page | 4

Fig 2. Market Size of Jamu (Herbal Medicie) in Indonesia


Jamu Consumption in Indonesia

Herbal medicine consumption in Indonesia continues to increase from year to year,

with an average growth of 35.1% per annum from 2008 to 2012. Higher demand

for Jamu consumption has triggered rapid growth in herbal medicine industry in

Indonesia. Jamu in Indonesia are produced in three forms: powder, liquid and

tablets. (Fig.3)

Fig 3. Jamu Forms and Its Contribution


Along with the people's need for practical products in recent years, liquid Jamu

dominates with 67% contribution to the total national Jamu production, followed

by powder Jamu with 30% share and tablet Jamu with 2% share. The demand for

liquid Jamu and tablets will continue to rise in line with consumer demand for

practical products.


Page | 5

BUSINESS OVERVIEW

Sido Muncul Business

Sido Muncul is the biggest herbal manufacturer in Indonesia. Sido Muncul history

began in 1940 in Yogyakarta. Started as a household business, in 1975 PT Industri

Jamu dan Farmasi Sido Muncul established with its factory in Semarang.

To anticipate a surge in demand, Sido Muncul decided to build a larger and more

modern factory in an area of 30 hectares. With the modern plant, Sido Muncul

obtained the Good Manufacturing of Traditional Medicine (“CPOTB”) and Good

Manufacturing Practice (GMP) certificates, the equivalent of pharmaceutical

company certification. With these certificates, Sido Muncul has become the only

herbal medicine company in Indonesia with pharmaceutical standards.

In 2013, Sido Muncul held an initial public offering (IPO) in Indonesia Stock

Exchange (IDX) by issuing 1.5 billion shares (10%), with an offering price of IDR 580

per share. Sido Muncul raised IDR 870 billion from the IPO. Sido Muncul plans to

use the IPO proceeds for land purchase, contruction of new plants, and the

purchase of more modern production facilities.

Sido Muncul Subsidiaries

Fig 4. Sido Muncul and Subsidiaries

Source: Company

Semarang Herbal Indo Plant (“SHIP”)

SHIP is a subsidiary of Sido Muncul in which the company has 99.99% ownership.

SHIP is engaged in the extraction of herbs. Currently, the entire production is

dedicated to Sido Muncul. SIDO plans to use IDR 87 billion of the IPO proceeds to

purchase new extraction machines. With the operation of the new machine, SHIP’s

production capacity is expected to rise 300% by the end of 2014. With this

additional capacity, SHIP is expected to receive herb extraction demand from third

parties.

Muncul Mekar (“MM”)

MM is a subsidiary of Sido Muncul, in which the company has 99.99% stake. MM is

the sole distributor of Sido Muncul products. Its distribution channel is supported

by 108 sub-distributors that channel Sido Muncul’s products to 76 cities in

Indonesia.


Page | 6

Sido Muncul Business Lines

Sido Muncul categorizes its products into five business lines, namely:

Herbal Medicine

Energy Drink

Beverage and Confectionery

Health Drink

Herbal Supplement

Fig 5. Sido Muncul Products

Source: Company

In recent years, Sido Muncul’s revenues have been predominantly contributed by

two main products: Tolak Angin (from herbal medicine business) and Kuku Bima

(from energy drink business). At the end of 2013, herbal medicine business

accounted for 43% of the total revenue, and energy drinks business also accounted

for 43% of the total revenue.

In the coming years, Sido Muncul prefers to focus on the development of herbal

medicine business, as the company sees great potential and attractiveness of the

industry. Abundance in raw materials for herbal medicines in Indonesia and larger

profit margins are the reason for Sido Muncul to focus on herbal medicines.

Sido Muncul and Competitors

Jamu as an original product from Indonesia which has been around for hundreds of

years attracts many industry players. Sido Muncul as the largest herbal medicine

company in Indonesia faces several close competitors such as Bintang Toedjoe,

Deltomed Laboratories, and others. In addition, the similarity between the product

lines among players is causing tigher competitions.

Besides competition among herbal medicine companies, competition also comes

from pharmaceutical companies. The attractive market of herbal medicine

business has also prompted some players in the pharmaceutical industry to

produce herbal medicines.

Sido Muncul Expansion Plan

Due to rapid growth in demand for herbal medicines, Sido Muncul has planned to

increase the production capacity of Tolak Angin liquid, which is a major contributor

to its herbal medicine business line. Around IDR 200 billion from the IPO proceeds

has been allocated for the construction of the new plant. The construction is

expected to be completed gradually until the end of 2016. Next year, with some


Page | 7

new machines being installed, the targeted production of liquid Tolak Angin jamu

can be increased by 100%.

Sido Muncul also plans to add extraction machines in its subsidiary SHIP.

Operations are expected to commence by the end of this year and will increase

production by about 300%. While for MM, Sido Muncul prepared IDR 77 billion to

purchase land and build warehouse. The land purchase and warehouse

construction is expected to be completed no later than 2016.

Sido Muncul will continue to focus in Jamu business and standardized herbal

medicine, as well as food and health drinks made from herbs. To increase public

awareness of herbal medicines, Sido Muncul will continue to provide education to

the community, to build people’s familiarity and confidence in the efficacy of

herbal medicines.

Sido Muncul Competitive Advantages

Sido Muncul is the largest producer of herbal medicine in Indonesia with

more than 70 years experience

Sido Muncul is the only herbal medicine manufacturer certified with

pharmaceutical standards.

Sido Muncul has its own raw material processing facility, and most of the

raw material originates from Indonesia.

Major products of Sido Muncul have been certified through researches to

test their safety and efficacy.

Sido Muncul continues to innovate to produce nutritious and high quality

products.


Page | 8

INVESTMENT MERITS

Market Leader in Herbal Medicines for Cold and Energy Drinks

Tolak Angin’s market share for cold herbal medicine reached 75.10%. Meanwhile,

the market share for the Kuku Bima energy drink reached 60.02%. Through

innovation that produces liquid Tolak Angin, Sido Muncul successfully introduced

herbal medicine that is more practical and meets the standards. It is of no wonder

that although many competitors tried to imitate the products, Tolak Angin is still

the market leader. (Fig.6)

Fig 6. Tolak Angin and Kuku Bima Market Share


Focus on Higher Margins from Herbal Medicine Products

In Indonesia, the pharmaceutical industry imports about 90% of its raw materials.

Meanwhile, herbal medicine industry uses 85% of raw materials originating from

Indonesia's natural resources. Hence, herbal medicine industry has the highest

gross profit margin than other similar business lines. In 2013, herbal medicine

business gross profit margin reaches 64%, while gross profit margin for energy

drinks business was only 24%.

Solid Financial Positions

Last year’s IPO strengthened Sido Muncul’s cash flow position. The IPO proceeds

will be used for the construction of a new plant, the purchase of machinery and

addtion to warehouse. Sido Muncul also does not have any interest-bearing debt.


Page | 9

KEY RISKS FACTORS

Fluctuations in Raw Material Prices

Because most of the raw materials come from local herbal plants, weather

conditions can lead to fluctuations in raw material prices. Raw material shortages

could also be caused by undeveloped and unmapped production centers for herbal

plants.

Competition Risk

The attractive herbal medicine market became the target of both herbal medicine

and pharmaceutical companies. Increasingly sophisticated technology and more

intensive researches have supported herbal medicine market growth. Not

surprisingly, the competition in the coming years will grow fiercely, especially

among the big players such as Deltomed Laboratories and Bintang Toedjoe. big

players.

Exchange Rate Fluctuations

Most of the raw materials for herbal medicine products are locally sourced. But

95% of raw materials for energy drink products are imported. Weakness in

Indonesian Rupiah (IDR) will increase production costs.

Failure in Marketing Campaigns

To introduce new products to the public, the Company needs to continuously

educate its consumers through intensive campaigns, whereby the costs are

expensive. Failure in the marketing campaign may cause the Company to miss the

expected goals.


Page | 10

SWOT ANALYSIS

Strength

Safe and quality products with tested results

Well-known brands with more than 70 years experience in herbal

medicine industry. decades

Innovative products that are widely known by the public

Only herbal medicine manufacturer certified with pharmaceutical

standards

Weakness

Focused distribution network in Java

Export markets that have not been exploited

Dependence on two products, while Sido Muncul have more than 200

products

Opportunity

Back to nature lifestyle

Increasingly expensive chemical drug prices to cause consumers to turn to

more economical herbal medicines.

The society is more susceptible to herbal products

Technological advances enable the development of standardized herbal

medicines

Threat

Threats from imported herbal medicines

Lack of information about herbal medicines from medical professionals

The industry gives inadequate attention to scientific research of products

and market developments

Lack of standardizations in products, for example for materials used,

manufacturing methods, efficacy and product safety

Lack of public education about the advantages of herbal medicines


Page | 11

FINANCIAL AND VALUATION

1H-2014 Financial Result Update

Sido Muncul financial performance in the first half of 2014 was below

expectations. Compared to the 1H-2013, Sido Muncul booked lower sales in the

1H-2014 by 1.7%. The decrease in sales occured in energy drinks business and

beverage and confectionary business.

Fig 7. Sido Muncul Financial Result 1H-2014

Source: Company, PSI estimates

Sales of energy drinks fell by almost 10.0%. The decline in sales of energy drinks

was due to the cool weather in the first half of this year. Meanwhile, intense

competition in the beverage business caused sales from beverage and

confectionery business decrease 23.8%.

In terms of net income, Sido Muncul posted 37.4% net profit growth. The increase

in net profit is supported by decreased advertising fees and increased financial

income. (Fig.7)

Earning Forecast

For the end of 2014, we project Sido Muncul’s revenue to decrease by 2.4%, as

sales of the energy drink business decreases. Despite the decline in sales, net

income is projected to grow 10.5%. Rising contribution of herbal medicines that

has higher profit margins can increase Sido Muncul’s net profit.

In 2013, the contribution of herbal medicine business and energy drinks each

accounted for 43.0% of the Sido Muncul’s total revenue. This year, we expect

herbal medicine business to contribute about 48.0%, while revenue contribution

from energy drinks would drop to 37.0%.

In the coming years, Sido Muncul aims for revenue contribution from herbal

medicine business to reach above 50.0% of the company’s total sales. With higher

profit margins and greater market potential in herbal medicine business, Sido

Muncul’s profit growth will be higher.

In 2015, Sido Muncul’s sales are projected to increase. The new plant operation

will increase production of Tolak Angin. Estimated revenue growth is 11.3%, with


Page | 12

net profit growth of 20.3%. Tolak Angin will remain a major contributor of Sido

Muncul sales with a contribution portion of 56%.

Dividend

As a newly listed company, Sido Muncul distributed cash dividends for the fiscal

year 2013 with dividend payout ratio (DPR) of almost 100%. For fiscal year 2014,

Sido Muncul’s DPR can be expected to be lower than the previous year. We are

projecting a payout ratio of 50%, with a dividend of IDR 14.8 per share. The decline

in payout ratio is due to increasing capital expenditure requirements for the

expansion of the new plant or the acquisition of other companies.

Valuation

Along with the trend of "back to nature", public preference slowly began to shift

from chemical drugs to herbal medicines. Herbal medicine is perceived to be

better and have less side effects as it is derived from natural ingredients. To

increase public awareness of the benefits of herbal medicines, the Company needs

continuous education. On the other hand, it is necessary for industry players to

have good manufacturing practice (GMP) standard and clinical proof of the efficacy

of herbal medicines.

Herbal medicine consumption growth is expected to continue for the next years.

Sido Muncul has the opportunity to continue increasing production, expanding

market share and generating bigger sales value.

Using discounted cash flow method with WACC of 10% and terminal growth of 5%,

we estimate the fair price of Sido Muncul shares for the end of this year at IDR 785

per share. Total dividend for financial year 2014 is estimated at Rp 14.8 per share

with a dividend payout ratio of 50%. Thus there is potential gain of 3.87%,

compared to the closing price of Rp 770 per share on August 6, 2014.


Page | 13


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Page | 15

Total Returns Recommendation Rating> +20% Buy 1+5% to +20% Accumulate 2-5% to +5% Neutra l 3-5% to -20% Reduce 4<-20% Sel l 5

We do not base our recommendations entirely on the above quanti tative

return bands . We cons ider qual i tative factors l ike (but not l imited to) a s tock's

ri sk reward profi le, market sentiment, recent rate of share price appreciation,

presence or absence of s tock price cata lysts , and speculative undertones

surrounding the s tock, before making our fina l recommendation

Ratings History

PSR Rating System

Remarks

12345

500.00

600.00

700.00

800.00

900.00

1,000.00

1,100.00

1,200.00

De

c-13

Jan

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Fe

b-1

4

Ma

r-14

Ma

r-14

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r-14

Ap

r-14

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-14

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-14

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4

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g-1

4

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g-1

4

Se

p-1

4

Oct-1

4

Oct-1

4

No

v-14

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c-14

Source: Bloomberg, PSR

Market Price

Target Price


Page | 16

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Page | 17

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Website: www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak,

Bangkok 10500 Thailand Tel +66-2 6351700 / 22680999

Fax +66-2 22680921 Website www.phillip.co.th

FRANCE King & Shaxson Capital Limited

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel +33-1 45633100 Fax +33-1 45636017

Website: www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Capital Limited

6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS

Tel +44-20 7426 5950 Fax +44-20 7626 1757

Website: www.kingandshaxson.com

UNITED STATES Phillip Futures Inc

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel +1-312 356 9000 Fax +1-312 356 9005

AUSTRALIA PhillipCapital

Level 12, 15 William Street, Melbourne, Victoria 3000, Australia

Tel +61-03 9629 8288 Fax +61-03 9629 8882

Website: www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

2nd Floor,Lakshmans Building, No.321, Galle Road, Colombo 03, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 2429 199 Website: www.ashaphillip.net

INDIA

PhillipCapital (India) Private Limited No. 1, C‐Block, 2nd Floor, Modern Center , Jacob

Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955

Website: www.phillipcapital.in

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http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/

http://www.phillipcapital.in/

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