Pan Brothers (PBRX IJ, NR) Corporate News Flash: Expansion To Boost Growth - Daily Pack 4 April 2014

We met with Pan Brothers management and had expansion updates, especially on garment plants in Vietnam and Cambodia. The company should benefit from these expansions, such as export tax incentives to the US market from its Vietnam plant, and lower labour costs from its Cambodian factory. Also, it plans to set up a new fabric mill to lower garment inventory days and reduce costs. However, its retail chain expansion will be challenging as its own brand, Zoe, is still unpopular.

What’s new:

¨       Regional garment expansion. Pan Brothers is one of the largest garment manufacturers in Indonesia with annual production capacity of 42m pieces of garments. More than 98% of its sales are exported, with its top five customers – Mitsubishi (Uniqlo), Adidas, The North Face, Amer and Nike – accounting for 56% of its FY13 sales. Over the next three years, the company plans to increase its annual production capacity by 30m pieces (+70%). Its expansion plans include setting up a joint venture (JV) and acquiring regional garment companies in Vietnam and Cambodia. Currently, the company owns plants merely in Indonesia 

¨       Upstream and downstream expansion. Pan Brothers will create a JV company to build a fabric mill to produce woven synthetic fabrics. The majority of its production will be used for internal consumption. The management said that the main purpose of this fabric factory is to reduce inventory holding period. According to management, the long lead time for woven synthetic fabric has resulted in high costs. On downstream expansion, the company plans to increase retail outlets of its in-house brand Zoe.

Our view:

¨       We are positive on Pan Brothers’ garment expansion. Notably, Vietnam and the US have a bilateral trade agreement on export tax incentives. Whereas in Cambodia, the company will benefit from cheaper labour costs at around USD70/month lower than that in Vietnam and Indonesia. We are also positive on its fabric mill expansion as it will reduce inventory holding period and improve cost efficiency. However, we are neutral on its retail business expansion, as its own brand Zoe is still not popular. We are of the view that Pan Brothers does not have expertise in retail business and needs to acquire more well-known brands to develop its retail business.  (Andrey Wijaya)

ON THE PLATTER:

Ciputra Surya (CTRS IJ, BUY, TP IDR4,830) Results Review: A Sterling Margin

FROM TRADING DESK: JCI today is expected to be traded at 4,939.15 and 4,854.20

MEDIA HIGHLIGHTS:

Adi Karya to accelerate monorail project

10 New airports will have public private partnership

Indonesia’s Broad Money Supply (M2) moderated Further 

Best regards,

RHB OSK Indonesia Research Institute