Corporate Flash Visit Note: Pan Brothers (PRBX IJ, NR), Expansion To Boost Growth

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Corporate Flash Visit Note: Pan Brothers (PRBX IJ, NR) Expansion To Boost Growth

Pan Brothers guided us on its expansion, especially on its Vietnam and Cambodia garment plants. It should benefit from these expansions on US export tax incentives (Vietnam) and lower labour costs (Cambodia). It also plans to set up a new fabric mill to lower garment inventory days and reduce costs. However, Pan Brothers' retail chain expansion will be challenging as its own Zoe brand remains unpopular.

What's new:

¨       Regional garment expansion. Pan Brothers is one of the largest garment manufacturers in Indonesia with an annual production capacity of 42m garment pieces. More than 98% of its sales are exported, with its Top 5 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%). Pan Brothers' expansion plans include setting up a joint venture (JV) and acquiring regional garment companies in Vietnam and Cambodia. Currently, the company only owns plants in Indonesia 

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

Our view:

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

Best regards,

RHB OSK Indonesia Research Institute