Erajaya Swasembada Too early to call for a competition

Erajaya Swasembada: Too early to call for a competition (ERAA, Rp2,875, Buy, TP: Rp3,875)

ERAA fell 5.7% yesterday, contributing a total decline of 16.1% from its high of Rp3,425 last month. We have specifically asked the company - and it clearly stated to us that there are no company-specific issues behind the recent sell-off. Potentially weak 1Q13 results, as has been discussed in our recent report, should be quite widely understood and thus expected. We believe that the recent sell-off could be driven by rising market worries over the issues on the potential threat of Taiwanese distributor Synnex entering the competition in the Indonesian handset market. We believe that this call is too early, justified by our explanations below.

Synnex's presence in Indonesia is not new. Synnex is a Taiwanese-based distribution company with main focus in the IT products distribution for the North Asian region like China. Its presence in the Indonesian market is not new at all, as it already has a local joint venture with PT Metrodata Electronics (MTDL) under a company called PT Synnex Metrodata Indonesia, established in 2011.
Synnex's network is not comparable to main players like ERAA and TRIO. As revealed in the website, Synnex distributes its products in Indonesia through agents and sellers using 6 distribution centres in Jakarta, Bandung, Yogyakarta, Surabaya, Medan, and Makassar. This is very insignificant as compared to ERAA that has presence in more than 50 cities with about 90 distribution centres and more than 20,000 retailers.

Synnex's brands portfolio are limited. When we screened through its Indonesian website, we learned that Synnex has wide brands portfolio in the IT products but not in handsets with only a few brands like Samsung, Sony, and ZTE. Its distribution market share in key brand like Samsung, if any, should also be small, we believe, as Samsung has about 50 distributors in Indonesia with ERAA alone, as the largest among all,  having approximate market share of 30%. In the IT products distribution, which is its core, what we know is that Synnex is not as big as the main players like Astrindo which distributes Acer products. ERAA, given its strong distribution network, has also been trusted.

Synnex’s costs structures are no better than ERAA. There has been a few investors asking us about the potential price war and margin cuts happening to ERAA if Synnex is competing in the handset market. We do not think that the company is able to do price war as we learned that Synnex uses a lot of master-dealer concept when distributing products in Indonesia, which yields lower gross margin by 1-2ppt as compared to directly selling to end-retailers. At the same time, having a price war between distributors is also not a good thing for brands principals (who normally set its suggested retail price), as it would have impact to the sustainability of their brands. Some investors also aske

Reiterate our BUY call. After the sell-off, ERAA’s valuation has come off to 13.2-10.7x FY13F-14F PE, on a 30% EPS CAGR in FY12-15F periods. With the continuous increase of retail business proportion, ERAA’s valuation becomes attractive against those high-flyer retailers. We continue to reiterate our BUY call on the stock. Grey market clampdown and strong products launching (i.e. BB Z10, BB Q10, Samsung Galaxy S4, and potentially iPad mini) would make 2Q13 a strong quarter.