FOCUS Sarimelati Kencana Initiating Coverage 03 July 2018

Transcription

1 FOCUS XXX Company Update XX XXXXX 213 FOCUS Sarimelati Kencana Mandiri Sekuritas Analyst Laura Taslim Adrian Joezer Riyanto Hartanto Sector : Restaurant BUY Current Price Rp1,9 Target Price Rp1,5 (+37.6%) 52-wk range Rp1,465 - Rp1, Stock Data Bloomberg Code PZZA IJ Mkt.Cap (Rp bn/us$ mn) 3,294 / 229 Issued Shares (mn) 3,22 Avg. Daily T/O (Rp bn/us$ mn) 15.7/1.1 Major shareholder PT Sriboga Raturaya 64.2% Mountain High Investment Limited 4.8% Share price performance Since IPO Absolute (%) (.9) Relative to JCI (%) 1.1 Strong Nationwide Domination Sarimelati Kencana (SMK) was established in 1987 and holds the franchise rights for Pizza Hut brand in Indonesia. In 217, SMK operated a total of 393 outlets nation-wide, with 86.6% market share in the pizza full-service-restaurant (FSR) category as of 216. SMK plans to deepen its penetration in Indonesia s second and third tier cities and is targeting to open 125 new outlets in , which will translate into a CAGR of 14% in 217-2F net profit. Initiate with a Buy rating. Strong market dominance. With over 3 years of establishment, SMK enjoys the benefits of being among the first-movers with long-standing presence not only in the modern chain restaurant category but also in the chain pizza FSR category with 86.6% market share as of 216, according to Euromonitor. SMK operates two main brands, Pizza Hut Restaurant (PHR) and Pizza Hut Delivery (PHD), totaling 393 outlets in 28 provinces as of 217. Scalable business model. Modern chains like Pizza Hut should benefit from Indonesia s lifestyle changes and the longterm growth opportunities in the underserved cities. With the integrated supply-chain and scalable business model, we believe SMK has the capacity to deepen its penetration in the tier-2 and -3 cities. The relatively more diversified and fragmented raw material costs also minimize the risk of margin volatility. High return business. We forecast EBIT- ROIC to average at 13% in 218-2F; despite the aggressive expansion, this remains ahead of the regional peers (7-12%). We believe the return profile could eventually increase given maturing outlets. With stable SSSG and outlets opening, we forecast CAGR of 13%/14% in revenue/net profit for 217-2F. Near term catalyst. Its strong 79% YoY growth in 1Q18 NPAT implied that it needs just a flat YoY growth in Apr-Dec 218 to achieve our 11% full-year growth forecast, suggesting upside risks to our forecast. This was helped by the strong 18% YoY revenue growth, which kicked in positive operating leverage combined with the royalty fee reduction from the newly opened stores (51 in 217). Additionally, two big sporting events, 218 FIFA World Cup and 218 Asian games, as well as the long 2Q18 holidays will support 2Q18-3Q18 demand for the restaurant business. Initiate with a Buy rating. Our PT of Rp1,5 is derived from 3-stage DCF with 11% WACC and 3% LTG. This implies 24x 219F P/E, equally valued with average regional peers (ex. Jubilant). However we believe SMK deserves a premium given 1) scarcity premium as a proxy to Indonesia s growing lifestyle spending, 2) strong brand equity and 3) strong earnings growth. FINANCIAL SUMMARY YE Dec (Rp Bn) 216A 217A 218F 219F 22F EBITDA Net Profit Fully-diluted EPS Fully-diluted EPS growth (%) P/E Ratio (x) EV/EBITDA (x) P/B Ratio (x) Dividend Yield (%)..... ROAE (%) Source: Company ( ), Mandiri Sekuritas (218-22) Please see important disclosure at the back of this report Page 1 of 46

2 PZZA - At a Glance FIGURE 1. GOOGLE TRENDS ANALYSIS SHOWS HIGH AWARENESS OF PIZZA HUT BRANDS IN INDONESIA FIGURE 2. # OF OUTLETS COMPARISON AMONG THE WELL- KNOWN CHAIN FOODSERVICE OUTLETS IN INDONESIA Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Pizza Hut Domino's Pizza Paparons Pizza KFC McDonald's PHR 156 PHD 125 Domino's KFC 182 McD 56 BK 216 Starbucks 71 Yoshinoya 156 Hokben FIGURE 3. SMK SSSG BREAKDOWN % F 219 F 22 F Blended SSSG PHR SSSG PHD SSSG FIGURE 4. SMK EBIT ROIC TREND 5 23% - (5) 17% 15% (1,) 1% 12% 13% (1,5) (2,) Rp bn F 219 F 22 F EBIT Invested capital EBIT ROIC 25% 2% 15% 1% 5% % FIGURE 5. EPS GROWTH TREND FIGURE 6. LEVERAGE TREND (Rp) (%) (%) (2) (x) Dec-16 Dec-17 Dec-18 Dec-19 Dec-2 Dec-16 Dec-16 Dec-17 Dec-18 Dec-19 Dec-2 EPS EPS Growth [RHS] Net Debt/Equity (NDE) Interest Cover [RHS] Please see important disclosure at the back of this report Page 2 of 46

3 Competitive Strengths Strong market dominance First mover with nationwide presence. Established in 1985, SMK now operates a total of 393 outlets, consisting of 237 Pizza Hut Restaurants (PHR) and 156 Pizza Hut Delivery (PHD) outlets, located in 28 provinces, 76 cities, across 5 big islands including Papua Island. There are 29 outlets in big cities (first-tier), 61 outlets in second-tier cities, and 42 outlets in third-tier cities. In the future, SMK hopes to serve a broader customer base to support its growth strategy by opening PHR outlets in new areas. The company targets Indonesia s second and third-tier cities given the low chain FSR penetration. FIGURE 7. PHD AND PHR HAS A NATIONWIDE PRESENCE IN INDONESIA PHR: 13 PHD: - Sumatra Population: 5.37mn Kalimantan Population: 18.9mn Sulawesi Population: 17.36mn PHR: 13 PHD: 6 Maluku, Papua, Nusa Tenggara Population: 14.85mn Java Population: 141mn PHR: 34 PHD: 6 PHR: 173 PHD:144 PHR: 4 PHD: - Source: Company, Mandiri Sekuritas FIGURE 8. RANKING OF FRANCHISE PIZZA SERVICE PROVIDERS IN INDONESIA BY RETAIL VALUE, Ranks PT Sarimelati Kencana (PHR and PHD) PT Dom Pizza Indonesia (Domino s Pizza) PT Eatertainment Indonesia (Papa Ron s Pizza) PT Mitra Adiperkasa (Pizza Marzano) Source: Euromonitor, Mandiri Sekuritas High brand awareness. Given its nationwide presence and early mover status, Pizza Hut has developed very strong brand equity and awareness in Indonesia. When we compared the Google Search trend for Indonesia using Google Trends data, the results clearly show Pizza Hut dominates the global FSR brands in Indonesia, along with KFC. The other pizza chains, Domino s Pizza and Papa Ron s, lagged behind, even compared to the fast-food giant McDonald s. Interestingly, Pizza Hut brand also stands out to the local brands like HokBen, Es Teler 77 and Solaria. Using the social media followers (here we use Instagram and Twitter), PHR and PHD also rank comparatively high with relatively comparable Zomato ratings. Please see important disclosure at the back of this report Page 3 of 46

4 FIGURE 9. SOCIAL MEDIA FOLLOWERS AND RATINGS FOR THE LEADING INDONESIAN CHAIN RESTAURANTS #of followers (') rating: PHR PHD Domino's KFC McD BK Starbucks Yoshinoya Hokben Instagram Twitter Zomato rating (RHS) Source: Mandiri Sekuritas survey FIGURE 1. GOOGLE TRENDS ANALYSIS ON PIZZA HUT VS. DOMESTIC FSR CHAIN FIGURE 11. GOOGLE TRENDS ANALYSIS SHOWS HIGH AWARENESS OF PIZZA HUT BRANDS IN INDONESIA Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Pizza Hut HokBen Es Teler 77 Solaria Pizza Hut Domino's Pizza Paparons Pizza KFC McDonald's Source: Google trends Source: Google Trends Franchise holder of global brand Pizza Hut As a franchise holder in Indonesia, SMK has the right to develop and operate Pizza Hut restaurants throughout the country based on the franchise agreement with Yum! Pizza Hut Asia. Yum! is a global restaurant chain that operates three different brands: KFC, Taco Bell, and Pizza Hut; with over 45, restaurants in 135 countries as of 217. In Indonesia, Yum! collaborates with SMK as the Pizza Hut brand franchisee and Fast Food Indonesia (FAST) as the KFC brand franchisee. The relationship between SMK and Yum! has been established since 1985 and the synergies so far are very supportive to the business: Access to innovative products Access to global procurement International marketing strategies Best practices sharing Quality control and regular technical support Please see important disclosure at the back of this report Page 4 of 46

5 We believe all these help SMK in increasing the feasibility of opening new outlets in the untapped market, increasing capacity expansion, and defending market shares. Going forward, SMK will aggressively open new outlets. In the span of , SMK has agreed with Yum! to open 175 new outlets; in return, SMK is entitled for certain incentives. We have not factored in any incentives in our forecasts, which could be an upside risk. Continuous innovations to adopt the changing consumer landscape Innovative store layouts. To keep track with the consumer taste and lifestyle, SMK rejuvenates its outlets design and ambience every five to seven years. Its ability to adapt with the changing market landscape is one of the key reasons behind its longterm survival and market share sustainability, being in the industry for more than 3 years. The newly designed PHR outlet now comes with a minimalist touch, adapting with the recent trend in people s preferences; equipping the company to compete with the rising competition from the modern independent chains. In the last few years, SMK has also shifted its strategy toward opening more free-standing PHR outlets that give the company more efficient cost-control (i.e. lower rental rates adjustment relative to shopping malls) and higher productivity through the more flexible opening hours. FIGURE 12. THE DESIGN OF THE NEW PIZZA HUT OUTLETS Source: Company FIGURE 13. THE DESIGN OF THE OLD PIZZA HUT OUTLETS Source: Company Three store concepts addressing different needs. From just one PHR concept during the establishment, SMK now operates three different brands: 1) Pizza Hut Restaurants (PHR); 2) Pizza Hut Delivery (PHD, introduced in 27); and 3) Kitchen by Pizza Hut (introduced in 215). The main focus of the company s growth strategy is still within PHR and PHD, while there are only two outlets of Kitchen by Pizza Hut located in two shopping malls in Jakarta. Please see important disclosure at the back of this report Page 5 of 46

6 Pizza Hut Restaurant With a price point of Rp57,, PHR branded itself as casual dining restaurant targeting the A and B- customers that include young adults and family. It has 237 outlets as of 217. The product offerings are mainly freshly made pizza, sensasi delight packages, and salad bar. PHR typically generates better margin than PHD, as the 128 menu offerings include the higher-margin beverages. The typical outlet size for PHR is around 25sqm on average with 125 seating capacity. The strategy is to gradually operate more free-standing PHR outlets to have better cost efficiencies (lower rental rate adjustment than shopping malls) and higher sales productivity through more flexible opening hours. Given its strong brand equity, we think this strategy is return accretive. FIGURE 14. PIZZA HUT RESTAURANT IN INDONESIA Source: Company Pizza Hut Delivery Introduced in 27, SMK operates 156 PHD outlets as of 217. It has a different concept with PHR, as it serves the home delivery services with just an average of 1sqm of outlet space and 16-seat capacity. With a Rp45, price point, it serves wider segments (A to C+ customers) but still focusing on the young adults and family. While the offerings are much fewer with just 58 menus, the big difference is mainly due to the absence of beverage offerings. The idea is to serve a much more modern population in the city who need express food delivery service amid the worsening road traffic and the increasing number of female workers. As such, almost all of the outlets are in-line to enable deeper geographical penetration. To further cement the service quality, PHD guarantees a 3-minute delivery for every order and offers a free voucher for one pan pizza if the delivery takes longer than 3-minutes. In this segment, PHD competes directly with Domino s Pizza; however, the former is an early mover with a more integrated supply chain. FIGURE 15. PHD OUTLET IN INDONESIA Source: Company Please see important disclosure at the back of this report Page 6 of 46

7 FIGURE 16. THE KEY DIFFERENCENS IN THE CONCEPTS OF PHR AND PHD PHR Restaurants PHD Delivery Year of Launch Customer profile Young adults and family, A and B- customers Young adults and family, A to C+ customers Price point IDR57k IDR45k # of outlets per 31 Dec Outlet location Mall: 44.9% Free-standing: 44.9% Inline: 1.2% Mall: 1.3% Free-standing: - Inline: 98.7% Average outlet size 25m 2 1m 2 Average seating capacity # menu offered 128 include dessert and drinks 57 include dessert and drinks Signature product(s) Source: Company Meat Lovers Pizza, Salad Bar, Creamy Fettuccine, Stuffed Crust, Cheesy Bites Big Box, My Box. Stuffed Crust, Cheesy Bites FIGURE 17. SIGNATURE PRODUCTS OF PHR AND PHD Pizza 1 flavors, 5 types of crusts, 3 sizes (6,9 & 12 inches) 9 flavors, 4 types of crusts, 3 sizes (6,1 & 14 inches) Chicken 4 types 2 types Pasta 9 types 5 types Rice 4 types 6 types Desserts 4 types (exc. ice cream) 3 types Drinks 52 types (exc. pitchers) 8 types Snacks - 12 types Signature products Source: Company PHR Pan Pizza, Stuffed Crust and Cheesy Bites Pizza, Salad Bar, New Orleans Chicken Wings, Lasagna and Creamy Fettuccine PHD Big Box and My Box, in addition to most menu items mentioned in PHR Supporting units for addressing the growing delivery market. SMK is also among the first movers in offering an organized home-delivery platform, initially using its call center before branching out to web-based, mobile applications, and lately through online aggregator. The following platforms can now be used by consumers to place orders: Call Center at 156 for PHD and 158 for PHR Official website: Official mobile apps for PHD Indonesia Third party food delivery aggregator, i.e. Go-Food and Grab Food Please see important disclosure at the back of this report Page 7 of 46

8 FIGURE 18. ONLINE AGGREGATOR APPS INTERFACE VS. PHD S OFFICIAL MOBILE APPS Source: Company, Mandiri Sekuritas survey FIGURE 19. PHD AND PHR WEBSITES Source: Company PHD provides differentiated delivery services and quality. As also implemented by most of the global chain pizza foodservice brands, PHD in Indonesia also offers a 3- minute delivery time while the food is delivered using its own 2W fleet equipped with a warm storage unit. While this is similar to Domino s Pizza, the higher store count enables PHD to have wider reach. Please see important disclosure at the back of this report Page 8 of 46

9 Testing the services PHD: We tested ourselves and received free pizza voucher that can be redeemed through ordering from its Call Center; when we called the Call Center, the response was good with helpful solution. The food is also delivered in warm condition as promised thanks to its special storage delivery box. PHR: We tested the delivery via PHR as it also offers delivery service. The convenience of using PHR delivery is our main concern. With only one of four phone numbers listed in the website available to call and only two drivers available in each restaurant, thus the waiting time is longer, so an online aggregator will be a better option for customers if they want to order directly from PHR. Note: delivery fee is Rp16, flat within the delivery coverage area. Go-Food (third party): We tested Go-Food to buy from the PHR menu. The response was faster compared to using PHR s in-house delivery service. However, we have to pay the delivery cost based on distance, and the delivered food was not in a warm condition relative to the in-house delivery because there was no special storage delivery box. FIGURE 2. DELIVERY SERVICES OFFERING AMONG THE GLOBAL CHAIN FOODSERVICE OPERATORS IN INDONESIA PHD PHR Domino's KFC Delivery McDonalds Penalty if late - Voucher for one regular pizza - Applicable for take away or delivery using call center 156 n/a - Voucher for one Medium Handtossed /Favorite Pizza - Only applicable for Dine In or Carry Out n/a n/a Delivery fee Rp16, per order Rp. 16, per order Free Rp12, per order Rp13, per order Quality of delivered food The delivered food was still warm and as expected Delivery food was colder compare with PHD The delivered food was still warm and as expected Payment Cash, credit and debit card Cash via PHR; Go-pay or cash via Go-food Cash, credit card and BCA debit Cash Cash, credit and debit card Online aggregator Go-food Go-food Go-food Go-food; Grab Food Go-food Loyalty card PHD Point No No No No # of steps to order using the app - Registration - 2 steps to get the menu - 2 steps to payment - Call the restaurant and order - Use Go-food app for ordering - Registration - 4 steps to get the menu - 2 steps to payment - Need to call the call center for convenience - Registration - 2 steps to get the menu - Payment Advertising via mobile app Only when there is promo available Everyday notifications in the app Source: Mandiri Sekuritas survey Please see important disclosure at the back of this report Page 9 of 46

10 FIGURE 21. FREE VOUCHER FROM PHD LATE DELIVERY >3MINS FIGURE 22. FREE VOUCHER FROM PHD LATE DELIVERY >3MINS Source: Mandiri Sekuritas survey Source: Mandiri Sekuritas survey Continuous innovations in menu offerings suited to local taste. SMK continuously adopts the menu offering with the changing market trend with about 1-15 new items typically introduced every year. The majority mostly have limited period of time offering, which can be made permanent if demand is strong under this circumstances, the slow-moving items are replaced. PHR and PHD menu offerings are also tailored to the Indonesian tastes; for instance, the mix of pizza selection here is only about 45% of total, much lower than the global PHR of around 8%. The local menu offering in Indonesia includes rice selections, soup, and sensasi delight packages. Rice is a key staple food for Indonesians. Indonesians also love soup; one example of a favorite traditional soup is soto. There are even different soto selections across the archipelago; so this also supports there being soup in the menu selections. Lastly, PHR and PHD offer a bundled package promotion called sensasi delight, which includes main course (personal pizza/pasta/rice), appetizer, and beverage selections. Starting from Rp39,/person, this package is very economical and suitable for the mass-market, as it gives up to 53% cheaper pricing per person and also allows people to share meals as there are many different selections from which they can choose. The company also complies with Halal certification since 1998, an important benchmark in Indonesia given the majority of the population is a Muslim society. FIGURE 23. WELL TAILORED MENU OFFERINGS THAT SUIT INDONESIAN TASTE Source: Company Please see important disclosure at the back of this report Page 1 of 46

11 FIGURE 24. NEW BLACK MEAT MONSTA PIZZA MENUE Source: Company Customer-focused service quality. As part of the operational excellence, the company sets aside Rp3.5bn annual budget for staff uniform and makeup course for their female staffs. They believe staff appearance is one of the key things that will help increase customer experience. Additionally, to further cement its brand awareness, the company also offers an interactive children activity called Junior Pizza Maker. By paying Rp4k 52k (USD 3-4) per person, the kids may engage in the pizza making activity supervised by PHR staffs and get to enjoy their creation by the end. FIGURE 25. JUNIOR PIZZA MAKER ACTIVITY Source: Company Please see important disclosure at the back of this report Page 11 of 46

12 High entry barrier with scalable business model Pizza Hut is already well accepted nationally. Pizza was a new concept for Indonesians when first introduced. To reach the widest audience possible, SMK has made heavy investments in mass media advertising as well as developing menu selections that fit with the Indonesian taste. It is a 33-year journey to gain trust and brand loyalty from the customers, especially in a complex demographic population like Indonesia s with different kinds of ethnic backgrounds and unique regional tastes. We believe the company s efforts have paid off, as most of Indonesians - as we can see from the social media followers and Google Trends analysis earlier - are familiar with the idea of sharing a pizza with friends and families, and the Pizza Hut brand has become their top of mind. This can be shown by its staggering 97% market share in the pizza FSR category in value terms based on Euromonitor data in 216. With this scale, we believe replicating the success would take time for new entrants. Integrated business model with strong operations and back-end facilities. SMK operates full supply chain from factory and commissary, logistics, and warehousing until reaching retail outlets. It has seven manufacturing facilities to support nationwide operation: One dough ball and pasta factory in Pulo Gadung, Jakarta One dough ball and sausage factory in Bandung, West Java Five regional dough ball commissaries in Semarang (Central Java), Surabaya (East Java), Denpasar (Bali), Makassar (South Sulawesi), and Medan (North Sumatra). Dough ball products are used by all PHD outlets in Indonesia, because those outlets cannot produce their own dough ball due to space and time constraints, while pasta and sausages are used by both PHD and PHR outlets. SMK want to ensure cost efficiency and maintain high product quality assurance by having those facilities. To further maintain the seamless supply chain process, the company also operates regional logistics and warehouse chains. It currently operates 5 dry warehouses in the following locations: Ancol, Jakarta. This serves as the main DC that receives all imported and locally supplied goods. From this main DC, the products are distributed to all other warehouses before being delivered to all outlets. This DC is equipped with 13 trucks. Rorotan, Jakarta Medan Surabaya Makassar In addition to the dry warehouses, SMK rents frozen warehouses from third parties with a total of 15 warehouses to support the logistics of frozen raw materials. The distribution fleet consists of 3 refrigerated trucks owned and managed by the company. Please see important disclosure at the back of this report Page 12 of 46

13 FIGURE 26. PHR SUPPLY CHAIN FIGURE 27. PHD SUPPLLY CHAIN Source: Company Source: Company How the PHD and PHR supply chain works: PHR and PHD will receive all the dry raw materials needed from the nearest dry warehouses. This includes tomato sauce, mayonnaise, spaghetti, fettuccini, onion, liquid materials, syrup, soy oil, etc. All the frozen materials, i.e. meat and cheese, will be sent from the rented frozen warehouses. The logistics will be handled by SMK s refrigerated trucks. Sausage and lasagna factory will supply to all PHR and PHD outlets in Indonesia. The products are lasagna, sausage, and cannelloni for PHR only. Dough ball factories and commissary will supply dough ball to all PHD outlets in Indonesia. Less complex menu offerings give flexibility to efficiently scale up. We observed that PHR and PHD, despite their far higher market dominance, have less complex menu offerings compared to the rival, Domino s Pizza; hence making it possible to achieve the economies of scale when expanding the outlets, particularly to the underpenetrated areas. In the production process, Pizza Hut has just two types of pizza dough to make all types of pizza crusts: 1) pan pizza dough to make the original pan pizza; and 2) the stuffed crust dough to make stuffed crust, cheesy bites, sausage crust, and crown crust. While for the topping selections, PHR offers 8 main toppings, i.e. Meat Lovers, Super Supreme, Tuna Melt, Frankfurter, American Favorite, Black Pepper Beef / Chicken, Deluxe Cheese, and Cheeseburger Pizza; and 9 pizza toppings in PHD; vs. 26 toppings for Domino s Pizza. We think this helps PHR and PHD minimize the waste on raw materials inventory and simplify the production process. From the customers point of view, it is also easier to place an order due to the less complex menu. The management is also disciplined in terms of slow-moving menu deletions. Please see important disclosure at the back of this report Page 13 of 46

14 FIGURE 28. CHAIN FOODSERVICE METRICS COMPARISON PHR PHD McD KFC Dominos No of stores Geographical presence 28 provinces & 76 cities Sumatra, Sulawesi, Java & Bali islands 38 cities in Java, Bali, Sumatra, Kalimantan & Sulawesi 17 cities Greater Jakarta, Bandung & Bali Price range (food) Rp14k-17k Rp31k-393k Rp14k-14k Rp5k-11k Rp14k-14k Menu variants Source: Mandiri Sekuritas survey 1. Pizza: pan, cheesy bites, stuffed crust with cheese or sausage & crown crust 2. Salad: all you can take salad bar 3. Pasta: tailored to the tastes of Indonesians 4. Appetizer: garlic bread, chicken wing 5. Rice 6. Dessert 1. Package: Big Box, My Box 2. Pizza: pan, cheesy bites, stuffed crust. 3. Pasta: spaghetti, fettuccine, fusilli & lasagna 4. Snacks: salad, chicken wing, soup 5. Rice 6. Drinks and desserts 1. Burger: cheese burger, Big Mac 2. Rice & chicken 3. Drinks & ice cream: McFloat, Sundae, McFlurry 3. Snacks: McNuggets, Wraps 1. Combo: chicken & rice 2. Goceng: Soup, pudding, burger 3. Practical: bread with chicken, 4. Breakfast 5. Beverages 1. Pizza: premium, favorite, super value, mania 2. Sides: chicken, wedges, sausage 3. Dessert: brownie, cookie, lava 4. Rice 5. Pasta: penne, lasagna 6. Bread: garlic, cinnamon, sticks FIGURE 29. PIZZA HUT PIZZA SELECTIONS FIGURE 3. PHD PIZZA SELECTIONS Source: Company Source: Company Please see important disclosure at the back of this report Page 14 of 46

15 FIGURE 31. DOMINOS PIZZA SELECTIONS FIGURE 32. DOMINOS PIZZA SELECTIONS Source: Mandiri Sekuritas survey Source: Mandiri Sekuritas survey Please see important disclosure at the back of this report Page 15 of 46

16 Growth Strategy and Opportunities Expansion into underserved cities Opportunities in >Tier 2 cities. According to Euromonitor, about 7% of Indonesia s total retail values of chain foodservices reside in Java Island. This is mainly explained by the higher income per capita, the vast development of urban lifestyle, and higher population density compared to the outer islands. As of 217, SMK operates 317 outlets in Java (1 outlet serves 45k people) and 76 outlets for outside Java (1 outlet for 1.6mn people). This underlined the idea there are underserved opportunities for outside Java. SMK plans to open 125 new outlets in This comprises 75-9 PHD outlets, 25-3 PHR outlets and 1-15 Pizza Express Regional analysis: Euromonitor forecasts the CAGR of chain foodservice retail value at 4.4% CAGR in , outpacing the independent foodservice at 3.8%. This is driven by rising middle class segment and urbanization. Global brands such as KFC, Pizza Hut, and McDonalds dominate the Indonesian market with 599, 393, and 182 outlets, respectively. The numbers will keep growing as these brands will further penetrate second and third tier cities with their new outlets. Eastern areas (Papua, Nusa Tenggara, & Maluku) and Sulawesi are showing great signs of potential for chain consumer foodservice industry. Euromonitor predicts the retail value of outlets In Eastern and Sulawesi will be growing at 4.8% and 5.8% CAGR in , respectively. On the other hand, Kalimantan and Sumatra are expected to post lower growth of 3.5% and 2.6%, respectively. With the rise of Eastern Indonesia s economy, Sulawesi is the main hub for the Eastern part of the country. Meanwhile, for Eastern areas, we believe poor infrastructure and scarcity of raw materials are still the causes of slow economic growth. Further, we believe the high growth for the past few years was due to low base effect in Eastern Indonesia. In the long run, we believe chain foodservice operators will eventually target Sulawesi as for their expansion. Though the market is already packed, the growth in Java is still promising given the density of population, availability of raw materials, and better infrastructure. Greater Jakarta and Java will grow at 4.6% and 4.2%, respectively, in Please see important disclosure at the back of this report Page 16 of 46

17 FIGURE 33. REGIONAL ANALYSIS OF CHAIN FOODSERVICE IN INDONESIA CAGR : 6.4% : 2.5% Sulawesi Population: 17.36mn # of stores in 216: 452 CAGR : 8.1% : 4.8% Sumatra Population: 5.37mn # of stores in 216: 1738 Kalimantan Population:18.9mn # of stores in 216: 798 Java Bali Population:141mn # of stores in 216: 4861 Maluku, Papua, Nusa Tenggara Population: 14.85mn # of stores in 216: 138 CAGR : 7.1% : 3.6% CAGR : 9.2% : 4.6% CAGR : 8.9% : 4.2% CAGR : 8.2% : 5.7% Source: Euromonitor We believe, minimum wage growth is also a good indicator to determine the attractiveness of one area. Indonesia s minimum wage growth is already set at 9.3% in 218. Several provinces that will have higher than average minimum wage growth: Bengkulu/West Nusa Tenggara/Maluku/Papua at 9.2%/12%/17.5%/1.4%. Market acceptance for Pizza Hut supports its expansion plan. We think the market acceptance for PHR and PHD is sizeable, leaving room for store expansions. We looked at the relationship between the number of outlets and the number of Instagram social media followers among the notable global and domestic restaurant brands in Indonesia. We see that PHR has around 318k followers on Instagram, with 237 stores around Indonesia. Meanwhile, KFC has around 386k followers, with 599 stores. With only 68k followers difference, there is a 362 number of stores difference. FIGURE 34. RELATIONSHIP BETWEEN # OF OUTLETS & #SOCIAL MEDIA FOLLOWERS 7 6 FIGURE 35. # OF OUTLETS COMPARISON AMONG THE WELL- KNOWN CHAIN FOODSERVICE OUTLETS IN INDONESIA Number of Stores Instagram Followers (') PHR PHD Domino's KFC McD BK Starbucks Yoshinoya Hokben Source: Various media, Respective companies, Mandiri Sekuritas Source: Various media, Respective companies, Mandiri Sekuritas Please see important disclosure at the back of this report Page 17 of 46

18 Supply chain expansion to support growth. Particularly for PHD, one of the notable ambitions is the plan to develop a frozen dough production facility. As we have stated, the existing dough ball facilities supply chilled dough ball to all 156 PHD outlets in Indonesia. The main dough ball factory in Jakarta has a daily capacity of ±6 tons of dough balls, the one in Bandung with ±3 tons, and other small commissaries with ±6 kg per day. These chilled dough balls, however, can only last for five days on the shelves. Because of this limitation, the company has to build one dough ball commissary in order to tap into new areas for PHD. This limits PHD s presence, which notably is located just in Java, Sumatra, and Sulawesi, as the commissaries are only located in these areas. The rule of thumb is to have 4 nearby PHD outlets and one commissary to be feasible in entering a new area. By having a new frozen facility, the frozen dough can be stored up to 12 days vs. 5 days for chilled dough; hence, the longer shelf-life could allow PHD to have more flexibility in expanding into the new underserved markets with less capex needs. This could support PHD s expansion strategy into the outer islands going forward. The target, according to the management, is to have this frozen facility in the next two years, 22 at the latest. FIGURE 36. EXISTING FACTORY FACILITIES PHD PRESENCE IS ONLY LIMITED BASED ON THE DOUGH BALL COMMISSARY FACILITIES dough ball commissary dough ball, lasagna and sausage factories Source: Company, Mandiri Sekuritas Maximizing the growing home-delivery market opportunities PHD s expansion will continue with the additional 1 new outlets in The number of PHD outlets has been doubled from only 82 in 213 to 156 in 217. However, most of the outlets were built in Java area, 92% of all PHD outlets. The expansion plan will later focus on second and third tier cities as well as some untapped first tier cities. Online aggregators: maximizing the opportunities. We believe the traction in food delivery market will continue to increase, not only driven by lifestyle changes, but also the help of third-party food delivery aggregators, such as Go-Jek (via Go-Food service) and Grab (via Grab Food service). While this implies more competition from the independent chains that can finally get wider market access, SMK sees this as an opportunity to serve a wider coverage area, beyond their PHD point of sales. As such, the sales impact has been positive by far, as PHD outlets are also underserved. PHD has a limitation in delivery coverage area simply to manage the guaranteed 3- minute delivery time and to maintain food quality. The third-party food delivery aggregators on the other hand limit the coverage area at a maximum of 25 km, a wider coverage area, we believe, compared to PHD s, especially in congested cities like Jakarta. Please see important disclosure at the back of this report Page 18 of 46

19 While positive in the foreseeable future, we admit the presence of third-party food delivery aggregators could pose medium term risks: Rising competition from the independent food stalls. Customers will have more options and access to the independent food stalls, as food delivery is getting cheaper and more convenient. Losing big data analysis. The idea of having PHD is to acquire big data from customers behavior to analyze future trend and growth opportunity. The rising role of online aggregators will eventually diminish the possibility of big data acquisition by SMK. Bargaining power from online aggregators over revenue sharing cuts. Currently, the revenue sharing split, based on our check, is about 2% for the online aggregator like Go Food. We do not rule out the possibility of this rate being increased in the future as the bargaining power rises. We still think the benefits outweigh the risks in the near-term, while the company s technical know-how should continue to strengthen its delivery service quality relative to independent chains. We think having strong brand awareness also helps. PHD also continuously innovates to increase its efficiency and service quality, while the best practices of Yum!, we believe, could also be a support, as when SMK introduced the PHD concept in 27 as an early mover. PHD s menu offering has been tailored to be much more efficient in terms of preparation processes, hence suitable for fast-delivery. Unlike PHR, PHD does not produce its own pizza doughs and only receives the chilled doughs from the nearest dough ball factory/commissary. In delivering the food to consumers, PHD uses its own 2W fleet equipped with heat-keeping delivery boxes to maintain the foods freshness. Payment options also vary, such as Mandiri Click Pay, Visa and Master credit cards (for minimum payment of Rp5, after tax), Doku wallet online payment, as well as Cash on Delivery. Room to increase productivity The younger generations are not into home-cooking anymore and prefer to enjoy out of home meals. As previously mentioned, this is due to rising female workers population. It is also well known that Indonesian people have very strong bonds in society, which make gathering over meals (e.g. breakfast, lunch, dinner, and late-night dinner) a common activity. To serve this growing demand, SMK already limits the number of PHR outlets inside shopping malls and hence moving into free-standing locations. Currently, about 44% of SMK s outlets are located inside the malls vs. 5% for free-standing, the rest are in-line. Going forward, the strategy is to further relocate the outlets from mall to free-standing at the rate of 1 outlets every year. FIGURE 37. INSIDE MALL PIZZA HUT RESTAURANT OPENING HOURS Mall Opening Hours Delivery Time Breakfast Gajah Mada Plaza No Bogor Indah Plaza No Megamall Batam Center No Ciputra Mall No Source: Company Please see important disclosure at the back of this report Page 19 of 46

20 FIGURE 38. FREE STANDING PIZZA HUT RESTAURANT OPENING HOURS Free-standing Opening Hours Delivery Time Breakfast Bendungan Hilir Menara Cakrawala (Mon-Thu) (Fri-Sat) Lokasari (Sun-Thu) (Fri-Sat) No No Banjarmasin (Sun-Thu) (Fri-Sat) Source: Company In addition to that, this strategy is also expected to address another challenge in increasing table utilization ratio. For an outlet inside a mall, the operational hours follow the mall s operational hours, - usually from 1 am until 1 pm. By having free-standing outlets, the company will be able to have greater flexibility in operational hours - usually opens at 7 am and closes at 11 pm, which can be extended to 12 pm on weekends (Saturdays and Sundays). This will enable the outlet to serve breakfast menu (available from 7 am to 1 am) and late-night dining (>1 pm). FIGURE 39. PIZZA HUT BREAKFAST MENU Source: Company Please see important disclosure at the back of this report Page 2 of 46

21 Currently, PHR s table utilization ratio is around 5%/46%/41%/98% for breakfast (7 am 1 am), lunch (1 am 2 pm), tea-time (2 pm 5 pm), and dinner (5 pm 1 pm), while the revenue mix is 25%/22%/53% for lunch/tea-time/dinner. The biggest challenge for a Full-Service Restaurant (FSR) is to increase the utilization during the non-peak hours (tea-time: 2 pm 5 pm). SMK has been very active in giving promotions as well as adding variations on the menu that are relevant during tea-time, i.e. coffee and tea selections. However, the effort is still far beyond the optimized level with 41% seating utilization in tea time while revenue is only at 22%. The company continues to explore new menus, offering promotions, and relocating outlets, thus offering a potential upside for the future growth. FIGURE 4. PIZZA HUT HAPPY HOUR PROMOTION Source: Company Please see important disclosure at the back of this report Page 21 of 46

22 Industry Attractiveness Attractive long-term demographic profile Set to unlock the mid-to-long-term growth opportunities. Indonesia s disposable income per capita of US$2,153 is one of the lowest among the average peer group of US$6,742, but the growth has been one of the highest at a CAGR of 8.8% compared to the average peer group s 6.4% in the period of The huge population size of 258mn (the fourth biggest globally) and the massive infrastructure developments in the last three years offer lucrative income growth to unlock potential in the mid-to-longterm horizon. While we have seen ongoing consumption hiccups due to the tax reforms and the massive government subsidy spending reduction since 215 (right after the 213 IDR depreciation), we believe the structural shift has placed Indonesia s economic growth in the right and better direction. Our economists forecast real GDP growth acceleration to 5.3%/5.5% in 218/219 from 5%/5.7% in 216/217, with private consumption GDP growth at 5.1%/5.1% in 218/219 from 5%/4.95% in 216/217. FIGURE 41. DISPOSABLE INCOME PER CAPITA AND GROWTH US$ 3, 25, 2, 15, 1, 5, China Source: Euromonitor India Indonesia Malaysia Philippines Singapore 216 Disposable Income CAGR (RHS) Thailand 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % FIGURE 42. INDONESIA S GDP GROWTH TREND AND FORECASTS 5.9% 5.7% 5.5% 5.3% 5.1% 4.9% 4.7% 4.5% F 219F GDP growth Source: CEIC, Mandiri Sekuritas estimates A sweet spot for the consumer foodservice industry. Structurally, we believe Indonesia s economy offers attractive opportunities for the F&B industries, including the consumer foodservice industry. The recipes are just right not just that Indonesia has a large population base and growing disposable income per capita (8.8% CAGR in ), but the country is also lucrative for restaurant operators given its young median age (28 years in 216, according to United Nations), fast-urbanization (urban population to reach 68% by 225, according to World Bank), high internet penetration at 56.4% in 217, and avid social media users (33.2% Facebook penetration in 217). FIGURE 43. THE SWEET SPOT FOR RESTAURANT INDUSTRY Data as of 217 Indonesia China India Malaysia Phillipines Singapore Thailand Population (million) GDP per capita growth 5.3% 6.1% 5.9% 2.7% 5.3%.7% 2.9% Urbanization rate 55.% 57.4% 33.1% 75.4% 44.3% 1.% 51.5% Internet penetration 56.4% 52.2% 29.6% 68.6% 43.5% 82.5% 42.7% Facebook penetration 3.% n.a. 12.1% 35.4% 29.% 51.9% 27.9% Source: Indonesia Internet Provider Association, WHO, World Bank, Mandiri Sekuritas Please see important disclosure at the back of this report Page 22 of 46

23 Sizeable consumer foodservice market size opportunities Indonesia consumer foodservice market stood at Rp473tn (US$35.5bn) in 216 according to Euromonitor. Taking into account the enormous population in Indonesia, there is still a lot of potential in the consumer foodservice market. In , Indonesian consumer foodservice industry grew at a CAGR of 7.8%. On per capita basis, the consumer foodservice market in Indonesia as of 216 was US$136. As lifestyle evolves along with the rising middle class and disposable income, the potential room for growth is sizeable, we believe. Independent operators dominate, but chain operators grew faster. Indonesia s consumer foodservice industry is further divided into chain and independent foodservices. Independent operators held 92.2% of value share in 216. In , however, the chain operators retail value has risen rapidly at a CAGR of 8.7%, stronger than the independent operators 7.7% CAGR. Euromonitor forecasts that the chain operators will continue to have higher CAGR at 4.4% in , outpacing the 3.8% CAGR for independent operators. This should mainly be supported by the aggressive expansion of the chain foodservice operators into the smaller cities. FIGURE 44. INDEPENDENT CHAINS DOMINATE INDONESIA S CONSUMER FOODSERVICE MARKET Source: Euromonitor Independent 92% Chained 8% FIGURE 45. BUT CHAIN OPERATORS HAVE GROWN FASTER THAN THE INDEPENDENT OPERATORS Rp tn Source: Euromonitor Chained (LHS) Independent Rp tn Indonesia s chain foodservice market size: a growing Rp37trn market. In 216, the chain foodservice industry had a total market size of Rp37trn based on retail value, according to Euromonitor. This accounted for 5.3% of Indonesia s nominal private GDP consumption for restaurant and hotel. Chain foodservice is broken down into several different formats, i.e. home delivery/takeaway, full-service restaurant (FSR), fast food or quick service restaurant (QSR), street stalls/kiosks, and others. The top three growth drivers are home delivery/takeaway, FSR, and QSR with 21.8%, 8.6%, and 8.5% CAGR, respectively, in Meanwhile, kiosks/stalls had negative growth, as changing lifestyle shifts consumer preference to more pricy and well-known full-service restaurant chains. The two largest segments are QSR and FSR, forming 48.3% and 32.6% of the chain foodservice retail value. KFC, McDonalds, Pizza Hut, and Starbucks are the top global brands that dominate in Indonesia, while the well-known domestic brands include Es Teler 77, Solaria, and HokBen. Please see important disclosure at the back of this report Page 23 of 46

24 FIGURE 46. GROWTH OF CHAIN CONSUMER FOODSERVICE SEGMENT (212-21) CAGR CAGR Chain Consumer Foodservice 8.7% 4.4% - 1% Home Delivery/Takeaway 21.8% 16.5% - Full-service Restaurants 8.5% 4.8% - Fast Food 8.6% 3.5% - Street stalls/kiosks -1.2% -3.4% - Others (collective) 14.4% 5.7% - Pizza Consumer Foodservice * 11.1% 12.7% Source: Euromonitor FIGURE 47. TOP TWO CONTRIBUTORS IN CHAIN FOODSERVICE: QSR AND FSR Street stalls/kiosks 5% FIGURE 48. RETAIL VALUE OF CHAIN FOODSERVICE, (RP BN) 5, 4, Fast Food 48% Others (collective) 11% 3, 2, 1, Full-service Restaurants 33% 1% Home Delivery/Takea way 3% % Home Delivery/Takeaway - Full-service Restaurants - Fast Food - Street stalls/kiosks - Others (collective) Source: Euromonitor Source: Euromonitor Pizza FSR sub-segment contributed 17.6% of the total chain FSR market. The rising popularity of chain pizza full-service restaurants can be associated with consumers growing acceptance of Western cuisine, rising middle-class income, and the surge in consumerism. Globally, demand for pizza was decreasing at a CAGR of -.7% in ; however, the demand for Asia Pacific increased at a CAGR of 4.4%. China, India, and Indonesia were the top three drivers to the increase demand with 13.9%, 2.4%, and 9.5% CAGR respectively. FIGURE 49. REGIONAL AND GLOBAL MARKET SIZE OF PIZZA CONSUMER FOODSERVICE ( ) Unit CAGR World USD million 134, , , ,9. 13, % Asia Pacific USD million 8, ,184. 9, ,1.4 1, % China CNY million 13, , , , , % India INR million 33, , ,9.3 6, , % Malaysia MYR million % Philippines PHP million 414, , , , , % Indonesia IDR billion 4,. 4, , , , % Source: Euromonitor Please see important disclosure at the back of this report Page 24 of 46

25 Currently contributing 17.6% of Indonesia s chain FSR market share, the pizza segment is ranked third in Asian and North-American FSR. In Indonesia, the market size of the pizza FSR segment was Rp2,114.3bn in 216 and grew by 7.4% CAGR in Pizza Hut, Domino s Pizza, Papa Ron s, and Pizza Express are the main players in Indonesia s pizza FSR segment. However, the Pizza Hut brand dominates with 86.6% market share, based on Euromonitor data. Going forward, Euromonitor expects the pizza FSR segment will grow at 1.7% CAGR in , mostly coming from existing players store expansion strategy. FIGURE 5. PIZZA SEGMENT MARKET SHARE RANKED THIRD IN ASIAN AND NORTH AMERICAN FSR CATEGORY Street stalls/kiosks 5.3% Fast Food 48.3% Source: Euromonitor Others (collective) 11.% Full-service Restaurant, 32.6% 1% Home Delivery/Takea way 2.7% European 1.1% North American 6.% Others (collectively) 5.4% Asian 14.4% Pizza 5.7% FIGURE 51. NUMBER OF CHAIN OUTLETS IN INDONESIA Source: Euromonitor Pizza Asian European North American Others (collectively) Changing consumption behavior: more lifestyle Consumption lifestyle is changing. The ways Indonesians consume have gradually changed, probably along with the rise of the young generation. The common perception of cutting discretionary spending in a difficult time remains valid, but somewhat not so relevant anymore on lifestyle spending. We took a sampling of nominal private GDP growth and its components between 1Q16 and 4Q17. Between those periods, the overall private consumption GDP growth slowed, but most of the slowdown was contributed by the F&B-ex-restaurant and apparels. Meanwhile, the lifestyle category - like transportation, communication, restaurant, and hotel - had a resilient growth trend. FIGURE 52. NOMINAL PRIVATE CONSUMPTION GROWTH BREAKDOWN 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Overall Private consumption GDP 8.7% 8.2% 7.9% 8.1% 8.5% 8.9% 8.5% 8.4% F&B ex-restaurant 1.4% 1.8% 1.5% 1.6% 9.2% 8.1% 7.5% 7.4% Apparels, footwear & maintenance 6.5% 7.6% 7.7% 6.8% 6.5% 6.6% 4.6% 7.4% Equipment 6.6% 5.9% 5.9% 6.4% 7.2% 8.9% 9.1% 9.% Health and education 9.4% 9.3% 8.8% 8.6% 9.9% 9.2% 8.6% 9.% Transportation and communication 7.% 4.5% 4.5% 5.2% 8.4% 1.8% 1.9% 9.9% Restaurant & hotel 1.% 9.5% 8.8% 8.3% 8.4% 8.8% 9.1% 9.2% Others 7.7% 7.8% 7.% 7.2% 7.% 6.7% 5.8% 5.7% Source: CEIC Apart from the rising middle class and disposable income, we think the rising social media usage and awareness partly triggered the change in Indonesians lifestyle. The internet penetration in Indonesia has risen to above 4%, almost equivalent to the TV household penetration, along with the significant increase in smartphone penetration. The social media penetration in Indonesia is also among the highest, far exceeding the bank account penetration. We think this partly contributed to the consumerism Please see important disclosure at the back of this report Page 25 of 46

26 lifestyles, such as increasing their dining out frequency while sharing their dining experiences on social media platform, i.e. Instagram and Facebook. We believe this is also one of the reasons why shopping malls with good F&B tenants tend to do better in terms of foot traffic these days. FIGURE 53. DATA USAGE CONSUMPTION Terra Byte 3,5, 3,, 2,5, 141% 2,, 1,5, 163% 1,, 5, M16 9M17 Source: Telkomsel, XL, Indosat Another reason that supports the lifestyle changes, we believe, is less home-cooking among the Indonesian middle class. Arguably this could be attributable to the rising number of female workers population as a result of the increasing number of dual income households amid the rising challenging economy as well as the rising trend of aspiring and more educated young generation pursuing working career. That said, the home cooking traditionally practiced by housewives has probably declined, as there are more convenient options available, i.e. dining out and the availability of third party food delivery applications. Additionally, the acceleration in minimum wage, we believe, also limited the supply of cheap labors for household assistants. The divergence in supply - demand for this household assistant is getting wider as more and more people prefer to have more formal jobs (i.e. at factories or SMEs) rather than helping household errands while earning below the minimum wage. FIGURE 54. EMPLOYED FEMALE POPULATION IN INDONESIA Working Age Female Population (15-64) - in mn Female Employment Rate (% of working age) Employed Female Population - in mn Source: Euromonitor CAGR % 48.8% 48.3% 49.2% 48.1% 5.% % FIGURE 55. INDONESIA S REAL MINIMUM WAGE GROWTH % Rp ' 14 2,5 12 2, 1 8 1,5 6 1, Source: CEIC UMP (thousand Rupiah) Real income (%) 218 F Please see important disclosure at the back of this report Page 26 of 46

27 Particularly on the presence of third party food delivery applications, we believe this also plays a big role in changing consumers lifestyle, mainly because those apps offer affordable, accessible, and efficient transportation and courier services that ease people s lives. There are two main players competing for market share, Go-Food by Go- Jek and Grab-Food by Grab, but the service is still limited in first and second tier cities. Go-Food in particular was only established in 215, but the hype and people s enthusiasm are very substantial. This can be seen on Euromonitor s data, showing home delivery services and online sales - which reflect the contribution of third party food delivery applications - are gaining tractions with expected growth of 7% and 41% CAGR over FIGURE 56. MARKET SIZE BREAKDOWN OF CONSUMER FOODSERVICE BY SALES FORMAT- THIRD PARTY FOOD DELIVERY CATEGORIZED AS HOME DELIVERY Idr bn Drive-Through % 5.3% Eat-in 322, , ,584 48, , , ,65 496,65 516, , % 3.9% Home Delivery 8,612 1,267 12,338 14,79 15,946 18,31 19,12 2,436 21,932 23, % 7.% Takeaway 2,177 21,663 22,693 23,332 23,498 23,619 23,439 23,329 23,288 23, % -.3% Total 35, ,44 417, , ,328 55, , ,92 561, , % 3.8% Source: Euromonitor CAGR CAGR FIGURE 57. MARKET SIZE BREAKDOWN OF CONSUMER FOODSERVICE BY CHANNEL TYPES Idr bn Offline 382, , , ,45 52, ,92 533,85 553, ,76 7.2% 3.5% Online ,265 1,923 2,676 4,315 6,98 8,57 1, % 41.3% Total 383,44 417, , ,328 55, , ,92 561, , % 3.8% Source: Euromonitor CAGR CAGR Please see important disclosure at the back of this report Page 27 of 46

28 Financial Analysis Profit and loss Forecast revenue growth of 11%/15%/14% in 218/19/2. We expect this to mainly be driven by its aggressive outlet expansion. We understand this raises store cannibalization risks, but we think the impact should be well managed by the management s plan to also deepen its penetration in less crowded tier-3 and 4 cities. In , SMK managed to book a CAGR of 1% in revenues, CAGR of 11% in the number of stores, and an average SSSG of 5.2%. We breakdown our revenue growth drivers below: 14% CAGR in the number of outlets for 217-2F. SMK generated most of its revenue from PHR (81% sales contribution in 217), while the rest from PHD (19% contribution). Going forward, we expect the sales contribution from PHD to eventually increase from 19% in 217 to 29% in 22 given the much faster outlet expansion. We forecast SMK to open 125 new outlets in , in-line with its guidance. That said, we expect the total number of outlets to reach 577 by end-22 from 393 in 217, translating into a CAGR of 14%. FIGURE 58. SALES MIX AS OF 217 FIGURE 59. SALES MIX AS OF 22 PHD 19% PHD 28% PHR 81% PHR 72% FIGURE 6. REVENUE BREAKDOWN Rp bn 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, F 219 F 22 F PHR PHD %YoY revenue growth 16% 14% 12% 1% 8% 6% 4% 2% % FIGURE 61. PHR VS. PHD STORE MIX F 219 F 22 F PHR PHD Please see important disclosure at the back of this report Page 28 of 46

29 Average 5% SSSG in 218-2F. We forecast blended SSSG of 5.6%/5.%/4.6% in 218/219/22, lower than the actual SSSG of 6.1%/5.9% in 216/217, as we assumed some cannibalization impact from its aggressive store expansion, notably in the Greater Jakarta area in the past three years. For PHR, our SSSG assumptions are 5.%/4.5%/4.% in 218/219/22 (vs. 6.9%/5.5% in 216/217), while for PHD are 8.%/6.5%/6.% in 218/219/22 (vs. 1.1%/8.7% in 216/217). FIGURE 62. PHR NEW STORE OPENING BREAKDOWN FIGURE 63. PHR NEW STORE OPENING BREAKDOWN MIX % 9% 8% 7% 6% 5% 4% 3% 2% 1% % < < G. Jakarta Java Ex Java G. Jakarta Java Ex Java Source: Company, Mandiri Sekuritas Source: Company, Mandiri Sekuritas FIGURE 64. PHD NEW STORE OPENING BREAKDOWN G. Jakarta Java Ex- Java Source: Company, Mandiri Sekuritas FIGURE 65. PHD NEW STORE OPENING BREAKDOWN MIX 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % G. Jakarta Java Ex- Java Source: Company, Mandiri Sekuritas Price adjustment, ticket size, and foot traffic. These are the key SSSG drivers. The management claimed that the annual price adjustment for Pizza Hut has been around 3-4% recently; this mainly takes into account the cost inflations in raw materials and operating expenses. That said, the remaining balance of the SSSG should be contributed by a relatively balanced increase in the average ticket size and foot traffic. We believe SMK naturally has better pricing power over the other chain foodservices given its strong domination in the pizza sub-segment that relatively has lesser competition. We believe this also justifies SMK s less volatile SSSG relative to KFC Indonesia (FAST) over the observation period, as the latter faces more competition. Please see important disclosure at the back of this report Page 29 of 46

30 FIGURE 66. SMK SSSG BREAKDOWN % F 219 F 22 F FIGURE 67. SMK VS FAST SSSG COMPARISON % F 219 F 22 F Blended SSSG PHR SSSG PHD SSSG FAST SSSG SMK SSSG Forecast declining gross margin along with rising PHD sales mix. We forecast SMK s gross margin to gradually decline along with the aggressive expansion of PHD outlets, which we believe would generate lower gross margin mainly due to their much lower high-margin beverages sales mix and higher contribution from the sales of bundled menu, both relative to PHR. Overall, we forecast 66.5%/66.3%/66.2% gross margin in 218/219/22, versus 66.9% in 217. FIGURE 68. GROSS MARGIN TREND AND FORECASTS 68.% 67.5% 67.% 66.5% 66.% FIGURE 69. FOOD AND BEVERAGES SALES MIX Rp bn 3,5 3, 2,5 2, 1,5 1, 65.5% 65.% F 219 F 22 F Foods Beverages Source: Company Raw material costs are quite diversified. SMK s main raw materials costs include cheese, meat, and flour; these three account for about 4% of its total COGS. The rest of the COGS are relatively diversified, such as for onion, tomato sauce, pasta, sausage, etc. We believe this cost diversification adds to its strength, as each raw material s price trend may differ from time to time. For instance, while the IDR-converted price trends for beef and cheese are going up, the trends for chicken and flour are down. The price volatility also differs, allowing SMK to have better position in managing costs relative to restaurants with less-diversified food/ingredients costs. Notably, we believe SMK also benefits from the tight competition in the domestic flour industry. Please see important disclosure at the back of this report Page 3 of 46

31 FIGURE 7. QUARTERLY RAW MATERIAL PRICE INDEX OVER 2Q11 4Q FIGURE 71. KEY RAW MATERIAL PRICE VOLATILITY (QOQ GROWTH) OVER 2Q11 4Q17 Int'l wheat.1 14 Cheese Broiler.7 8 Bogasari flour.4 6 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Beef.2 Source: Bloomberg Cheese Int'l wheat Broiler Beef Bogasari flour Source: Mandiri Sekuritas Comparison to KFC Indonesia Comparing the gross margin of SMK against the closest locally listed peer, KFC Indonesia, gives a clearer picture of the benefits of having more diversified raw materials toward profitability. KFC Indonesia s main food raw material, we believe, is the broiler chicken. We believe this partly explains its higher volatility in gross margin relative to SMK s, besides the pricing power amidst SMK s much stronger domination in the sub-pizza segment. FIGURE 72. SMK VS. FAST GROSS MARGIN COMPARISON 7% 68% 66% 64% 62% 6% 58% 56% 54% F 219 F 22 F FAST SMK Operating costs: expect stable trend. Salaries & allowances, utilities & rental, and franchise fees are the key operating cost components of SMK. These three formed 7% of 217 s total operating expenses. Going forward, we expect the combined selling expenses and G&A costs to account for % of sales, relatively similar to 217 s ratio at 6.9%. Please see important disclosure at the back of this report Page 31 of 46

32 We break down the key operating cost components below: Salaries and allowances. These accounts for 26% of total revenue and 43% of total SG&A. SMK employ full time and part time workers. By doing this, the company can minimize salary cost escalation, especially for new outlets. Rental. Rental fees account for 4.9% of total revenue and 8% of total SGA in 217. SMK rents most of its outlets from mall developers and land owners. The latest mix is 44%/5%/6% for mall/free standing/in-line formats for PHR and 99%/1% for inline/mall for PHD. We expect the blended rental rates increase to be minimal, as the company is gradually relocating the PHR outlets in the malls into free-standing, which has much cheaper rental rates. Continuing franchise fee. Based on the agreement, SMK has to pay annual continuing franchise fee of about 6% of its revenue on top of the one-off franchise license paid at the opening of new outlets or franchise extension fee of the existing outlets. This accounts for 6.4% of total revenue and 11% of total SGA. We assumed similar ratios going forward. FIGURE 73. OPERATING EXPENSE BREAKDOWN AS % OF REVENUE 7% FIGURE 74. OPERATING EXPENSE BREAKDOWN IN 217 AS % OF TOTAL REVENUE 6% 5% 4% 3% 2% 1% % F 219 F 22 F Others Depreciation Advertising Rental Utilities Franchise fee Salary Depreciation 6% Advertising 6% Rental 8% Others 18% Utilities 8% Franchise fee 11% Salary 43% Source: Company Capex, free cash flow, and debt We forecast 218/219 capex at Rp359bn/Rp444bn, mainly to fund SMK s store expansions (7% contribution to capex), while the rest on new factories, warehouses, and support centers. We assumed new outlets capex at Rp8.9bn for PHR and Rp2.8bn for PHD, while assuming 5% p.a. inflation for these. Given the aggressive outlet expansions, we forecast SMK s free-cash-flow to remain negative until 219F. As of 217, SMK had Rp42bn interest-bearing debt, mainly used for its new outlet expansions and working capital needs. Of its total debt, we expect Rp3bn debt repayment this year, which will reduce interest expenses to Rp28bn in 218F and Rp13bn in 219F. In 217, SMK s cash cycle increased to 46 days from 38 days in 216. Food inventory was the main culprit to accommodate its aggressive 51 net outlet expansion in 217. The management also claimed that its cheese inventory was quite low in 216; hence the rise in cheese inventory which contributed to the higher food inventory in 217. Going forward, we forecast SMK s cash conversion cycle to be flat from 217 s position at 46 days. Please see important disclosure at the back of this report Page 32 of 46

33 FIGURE 75. CAPEX AND CAPEX TO SALES F 219 F 22 F Capex, Rp bn (LHS) Capex to sales (RHS) 14% 12% 1% 8% 6% 4% 2% % FIGURE 76. FREE CASH FLOW, RP BN (5) (1) (13) (15) (123) (146) (2) F 219 F 22 F FIGURE 77. NET DEBT TO EQUITY AND DEBT TO EBITDA 16% 14% 12% 1% 8% 6% 4% 2% % -2% F 219 F 22 F -4% -6% FIGURE 78. DEBT LEVEL AND COST OF DEBT F 219 F 22 F Net debt-to-equity Net debt-to-ebitda Total loans, Rp bn (LHS) Cost of debt, Rp bn (RHS) Return profile High ROIC model, but expect declining trend given the expansion mode. SMK s EBIT-ROIC of 18% as of 217 was relatively high compared to listed retailers and restaurant operators. This owes to its relatively high EBIT margin and lower invested capital. Going forward, however, we foresee a downward trend in its ROIC, affected by its aggressive outlet expansions. Regardless, this pressure should disappear once the newly opened outlets reach more maturity level in terms of foot traffic. FIGURE 79. SMK EBIT-ROIC TREND FIGURE 8. ROIC COMPARISON BETWEEN PEERS AS OF % 35% 23% 29% - 2% 3% (5) 17% 15% 25% (1,) 1% 15% 12% 13% 1% 2% 15% 18% 14% 12% 12% (1,5) 5% 1% 8% 7% (2,) Rp bn F 219 F 22 F EBIT Invested capital EBIT ROIC % 5% % ACES SMK MAPI Jubilant RALS KFC Shakey Please see important disclosure at the back of this report Page 33 of 46

34 As we compare SMK s EBIT-ROIC with peers, we also conclude the company has managed to have a high ROIC despite the aggressive outlet expansions among its peers, thanks to the company s strong EBIT margin generation and relatively low total invested capital. FIGURE 81. COMPARISON OF EBIT ROIC DRIVERS Analysis SMK FAST Jubilant* Shakey ** Revenue per store (Rp bn) Revenue per avg. store (Rp bn) Selling expenses per store (Rp bn) Selling expenses per avg. store (Rp bn) G&A per store (Rp bn) G&A per avg. store (Rp bn) OPEX per store (Rp bn) OPEX per avg. store (Rp bn) Gross margin 66.9% 62.6% 75.9% 6.5% EBIT margin 6.% 2.% 4.3% 1.4% EBITDA margin 14.4% 16.2% 1.2% 29.9% Selling cost to sales 56.1% 5.4% 71.7% 33.% G&A to sales 4.8% 1.2% 17.2% Opex to sales 6.9% 6.5% 71.7% 33.% Franchise % of sales 6.8% 6.8% 5.6% AR Days Inventory Days AP Days Cash cycle days (144) (7) Employee per store Salaries & allowances per employee (Rp m) Selling expenses 56.1% 5.4% 71.7% 33.% Salaries & allowances 23.% 15.6% 22.8% 12.4% Franchise fees 6.8% 6.8% 5.6% Utilities 5.% 3.9% 5.6% 4.2% Rental 4.9% 7.7% 11.7% 5.7% A&P 3.9% 6.5% 3.3% Depreciation 3.2% 3.4% 5.9% 1.4% Transport 1.5% 1.1% 3.% Repairs & maintenance 1.5% 1.% 2.8%.7% Others 6.3% 4.3% 11.% 8.6% G&A costs 4.8% 1.2% 17.2% Salaries & allowances 3.2% 6.2% 2.8% Depreciation.3%.6% 1.% Others 1.4% 3.4% 13.3% EBIT-ROIC 18.% 8.3% 12.4% 7.3% Rp bn AR Inventory AP NFA , Total assets 1,494 2,749 2,739 2,629 Cash NIBCL Invested Capital 1,17 1,294 1,828 2,277 (*) for the period ended 31 March 217 (**) for the period ended 31 Dec 216 Source: Company, Mandiri Sekuritas Please see important disclosure at the back of this report Page 34 of 46

35 Sensitivity analysis We performed sensitivity analysis to gauge the earnings impact from any changes in our key forecast assumptions, such as SSSG, outlets expansion and costs changes. The first two figures show the 218F net profit sensitivity against the changes in the assumptions for SSSG and outlets expansion, for each PHR and PHD. Given PHR s higher contribution and higher margin, the changes in PHR assumptions have larger earnings impact relative to PHD s. Going forward, however, the delta should change as PHD contribution gradually rises. FIGURE NPAT SENSITIVITY TO PHR SSSG AND NEW OUTLETS Changes in PHR new outlets PHR SSSG % -5% -2% 1% 4% -3-7% -4% -1% 2% 5% -6% -3% % 3% 6% +3-5% -2% 1% 4% 7% +6-4% -1% 2% 5% 8% Source: Mandiri Sekuritas estimates FIGURE NPAT SENSITIVITY TO PHD SSSG AND NEW OUTLETS Changes in PHD new outlets PHD SSSG %.%.7% 1.3% 2.% -3-1.% -.3%.3% 1.% 1.7% -1.4% -.7%.%.7% 1.4% +3-1.% -.3%.3% 1.% 1.7% %.%.7% 1.3% 2.% Source: Mandiri Sekuritas estimates Among key operating cost, salaries and allowances has the biggest exposure to SMK s earnings sensitivity. We estimate that every 1% increase in the salary expense would affect 218F net profit by 4.2%. To maintain the same profitability margin, the company s SSSG has to increase by 56bps. This however, poses risk for the company if there is a significant jump in salary cost like what happened in 213. We note, however, that SMK has been combining both full- and part-time workers, which we believe help mitigating this risk. Earnings sensitivity against rental expense assumption is much lower, with only -.8% negative earnings impact for every 1% increase in the rental cost. We reckon, however, that rental rate adjustment in the shopping malls can be much higher; justifying the company s strategy to gradually move its PHR locations to free-standing concept. The table below summarizes the impact, including the changes in the franchise fees as a portion of sales, for both PHD and PHR. We have not factored in any incentives in our forecasts (refer to page 21), which could be an upside risk. FIGURE NPAT SENSITIVITY TO 1% CHANGES IN KEY OPERATING COSTS AND 219 EBIT SENSITIVITY TO 2BPS CHANGES IN FRANCHISE FEES AS % OF SALES 1% increase in 218F NPAT impact (%) Required SSSG increase to neutralize (bps) Salary (4.2) 56. Rental (.8) 11. 2bps reduction in 219F EBIT impact (%) PHR franchise fees % sales 5% PHD franchise fees % sales 4% Source: Mandiri Sekuritas estimates Please see important disclosure at the back of this report Page 35 of 46

36 1Q18 result highlight PZZA had a strong 1Q18 with EBIT doubling to Rp44bn vs. Rp2bn in 1Q17. This was helped by the strong 18% YoY revenue growth, which kicked in positive operating leverage combined with the royalty fee reduction from the newly opened stores (51 in 217). The royalty fees were down by 35 bps to 5.9% in 1Q18 from 6.2% in 1Q17. These bring a substantial increase in EBIT margin to 5.4% in 1Q18 from 3% in 1Q17. Historically, 1Q EBIT is always the lowest, as revenue will only ramp up in 2Q onward, while many of the operating costs are fixed (i.e. rental, salaries, utilities, and depreciation and amortization charges). The strong EBIT growth later supported the 79% YoY growth in net profit, at 21% of our FY18 forecast. Additionally, the plan to partially repay the debt using the IPO proceeds will help reduce interest cost in 2H, hence provide further support to earnings. The strong 1Q18 achievement implies that even with a 5% YoY drop in April-December 218 EBIT, the company can still achieve our full year 218 EBIT growth estimate of 9% YoY. On the earnings level, it means the company needs only 1% YoY growth in April- December 218 to achieve our 11% full-year growth estimate. FIGURE 85. PZZA 1Q18 RESULT COMPARISON Rp bn 1Q18 1Q17 %yoy % Mansek Mansek Seasonality Net Sales % 24% 3,344 23% 2,541 2,349 8% Gross Profit % 24% 2,222 1,679 1,571 7% Operating Profit % 23% % Pretax Profit % 21% % Net Profit % 21% % Apr - Dec 218 Apr - Dec 217 %YoY bps change Gross margin 67.7% 67.1% % 66.% 66.9% Operating margin 5.4% 3.% % 5.8% 6.6% Net margin 4.1% 2.7% % 4.9% 5.2% Expansion plan is still on track PZZA targets to open around 6 new stores (gross basis, excluding closures) this year; the company thinks its expansion plan is still on track with the total gross store opening of 22 stores (2 PHDs and 2 PHRs) at the end of Apr 18, implying another 38 stores to be open until the end of the year. The management stated there are already 48 confirmed projects in the pipeline, of which contracts/mous have been signed. They will also open the new Pizza Hut Express concept soon with a total of two stores, which will be located in Kalibata City and Lotte Shopping Avenue. These stores will occupy an area of about 15-2 sqm with total capex up to Rp8mn per store. The management expects to have five Pizza Hut Express stores by the end of 218. Please see important disclosure at the back of this report Page 36 of 46

37 The short term catalyst: sporting events FIFA World Cup 218 (14 Jun 15 Jul) in Russia This year s World Cup is held in Russia, which is 4-6 hours behind Indonesia s time zone. The match will be starting from 5pm, 7pm, 1pm, and 1am on GMT+7 time zone; some of which will be held during dinner time in Indonesia (7pm-1pm), which is perfect for F&B spending. We know very well Indonesians follow soccer very much. Should they watch from home, they can prepare the meal or simply get the food ready-made by ordering from any restaurant delivery services, especially as the timing mostly coincides around dinner time in Indonesia. Past analysis using three angles: Based on restaurant/hotel spending: we observed a pickup in private consumption GDP in 214 when FIFA World Cup was held (12 Jun 13 Jul), despite the fact it was not really happening within dinner time (Brazil is GMT-3 and hence the match schedules were on 11pm, 2am, 3am, and 5am Indonesian time). The pickup can be seen from the sub-breakdown of restaurant and hotel consumption, outpacing the total household spending in GDP. Based on Google Trends: Google Trends for restaurants that offer delivery services (i.e. KFC, MCD, and PHD) also showed an uptick during the same period in 214 when the World Cup was held. FIGURE 86. F&B, RESTAURANT, AND HOTEL NOMINAL CONSUMPTION GROWTH (YOY) 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Source: CEIC 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Total GDP consumption F&B Restaurant & Hotel FIGURE 87. GOOGLE TRENDS FOR KFC, MCD, AND PHD BASED ON INDONESIA S DOMAIN Jan-14 Jan-14 Feb-14 Mar-14 Mar-14 Apr-14 May-14 Jun-14 Jun-14 Jul-14 Aug-14 Aug-14 Sep-14 Oct-14 Oct-14 Nov-14 Dec-14 Dec-14 KFC (LHS) MCD (RHS) PHD (RHS) Source: Google Trends Based on other pizza chains: we observed two US listed pizza restaurants, Papa John s Pizza and Dominos Pizza, experienced an uptick in their revenues during the 214 FIFA World Cup period. Please see important disclosure at the back of this report Page 37 of 46

38 FIGURE 88. USA LISTED PIZZA COMPANIES REVENUE TREND DURING WORLD CUP (YOY) 3% 25% 2% 15% 1% 5% % -5% -1% -15% 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 Papa John's Pizza Dominos' Pizza 218 Asian Games (18 Aug 2 Sep) in Indonesia Indonesia will be the host for the 218 Asian Games in two cities, Jakarta and Palembang. The impact toward the economy will be higher this time compared to FIFA World Cup. Not only the restaurant business that will enjoy additional demand, but other industries (i.e. hotel, transportation, F&B) will be affected as well. There will be ±15, athletes from 45 Asian countries joining the event. Bappenas has calculated the potential spending during the period is Rp3.6trn, of which 7% will be spent in Jakarta and 3% in Palembang. Please see important disclosure at the back of this report Page 38 of 46

39 Valuation and recommendation Initiate the stock with BUY rating and Rp1,5 target price. We used DCF methodology to arrive at our Rp1,5 target price for the stock (WACC: 11%, LTG: 3%), implying 24x 219F P/E. We believe DCF valuation is the best approach given1) SMK has limited domestic comparables; hence applying a DCF valuation allows us to capture the different WACC and long-term growth potential across regions; 2) SMK is in expansion mode; hence using DCF allows us to better capture its free-cash-flow generation in the near-to-medium-term. FIGURE 89. DCF BASED TARGET PRICE DERIVATION DCF Valuation Revenue 3,344 3,846 4,378 Operating profit Income tax (52) (62) (7) Depreciation Change in working capital: (3) (12) (15) Capital expenditure (387) (476) (345) Free cash flow to firm (18) (148) 22 PV of FCF (18) (134) 18 PV 2H18F to 225F 543 Risk free 7.5% PV F 2,266 ERP 5.% PV of terminal value 1,478 Beta 1 Sum of PV 4,287 DER 1.2% Debt 12 Tax rate 25.% Cash 28 CoE 12.5% Equity value 4,448 CoD 7.5% No. of shares (m) 3,22 WACC 11.% Equity per share (Rp/sh) 1,5 LT growth 3.% Source: Mandiri Sekuritas estimates We think the company deserves a valuation premium to peers considering the following: 1) Scarcity premium as a proxy towards growing lifestyle spending. As we mentioned earlier that Indonesian consumption is now shifting towards the lifestyle spending i.e. F&B, restaurant, recreation, health and education. Having options to invest in stocks that have exposures to the growing lifestyle spending is good for investors; yet, the options are limited in JCI relative to the regional bourses. 2) Strong brand equity. With over 3 years of establishment and broad store networks, Sarimelati controls 86.6% market share in Indonesia FSR Pizza chain based on Euromonitor data in 216. This implies that the company is the market leader in the industry without significant competition from other players which warrant a premium valuation, similar with ACE Hardware (ACES IJ) where our TP implies 27x FY19 P/E. The head to head comparison is Shakey Pizza Philippines (PZZA PH) which controlled 58% FSR pizza chain in Philippine (Euromonitor, 216). 3) High growth period. Sarimelati aggressive store expansion until 219 will translate to high earnings growth. We expect 12% EPS CAGR in F vs. regional peers average of 9%. Please see important disclosure at the back of this report Page 39 of 46

40 FIGURE 9. REGIONAL VALUATION COMPARISON Market cap PE (x) EV / EBITDA (x) CAGR MARGIN - 218F ROAE (%) Company's Name PEG* (USD 218F 219F 218F 219F REV. EBIT EBITDA EPS EBIT EBITDA NET 218F 219F Mn) Regional comparison Sarimelati Kencana* Jubilant Foodworks Ltd 2, Shakey's Pizza Asia Ventures Inc Fast Food Indonesia Jollibee Foods Corp 5, MK Restaurants Group 2, Max's Group Inc Berjaya Food Bhd Simple average Weighted average Global comparison Domino's Pizza Enterprises Ltd 3, Yum China Holdings Inc 14, Domino's Pizza Group 2, Papa John's International Inc 1, (8.1) (2.4) (5.6) N/A N/A (3.3) Wendy's Co/The 4, Cheesecake Factory Inc/The 2, (8.7) (4.3) (3.) (7.2) Simple average (.4) Weighted average *) using Mandiri Sekuritas estimates Source: Bloomberg FIGURE 91. OTHER INDONESIAN CONSUMER COMPANIES DISCRETIONARY AND STAPLES COMPARISON METRICS Market cap PE (x) EV / EBITDA (x) CAGR MARGIN - 218F ROAE (%) Company's Name PEG* (USD 218F 219F 218F 219F REV. EBIT EBITDA EPS EBIT EBITDA NET 218F 219F Mn) Indonesian retailers Ace Hardware Indonesia 1, Mitra Adiperkasa Matahari Department Store 1, Ramayana Lestari Sentosa Simple average Weighted average Indonesian consumer staples Unilever Indonesia 23, Indofood Sukses Makmur 3, Indofood CBP Sukses Makmur 6, Mayora Indah 4, Industri Jamu Dan Farmasi Sido Muncul Gudang Garam 9, Hanjaya Mandala Sampoerna 29, Simple average Weighted average Source: Bloomberg Please see important disclosure at the back of this report Page 4 of 46

41 Company Background One of the first and largest chain restaurant operators. PT Sarimelati Kencana (SMK), established in 1987, operates in the foodservices industry, especially pizza and pasta in Indonesia under the Pizza Hut brand. The company, through its Pizza Hut and Pizza Hut Delivery brands, is known as one of Indonesia s first and largest full service and delivery chain restaurants. PT Sriboga Raturaya, one of Indonesia s top three wheat producers, owns majority stakes in SMK. Such affiliation creates synergies across the production and distribution of wheat between the two companies. Moreover, the synergy between these two allows SMK to have higher control of quality standard and consistency. FIGURE 92. CORPORATE STRUCTURE OF SMK Alberta Investment Management Pangan Rahmat Buana Daniprisma Mitra Jumi Sarikencono Other shareholders 56.48% 25.73% 8.44% 4.9% 4.45% PT Sriboga Raturaya Mountain High Investment Ltd 9.99% 9.1% Company Source: Company Long-standing partnership with Yum!. As a franchise holder in Indonesia, SMK has the right to develop and operate Pizza Hut restaurants throughout Indonesia based on franchise agreement with Yum!. In connection with the Company's franchise business activities, SMK has cooperated and signed an International Franchise Agreement ("IFA") with Pizza Hut Restaurants Asia Pte. Ltd. (Yum!) as a franchiser. The Company has the right to establish and operate outlets in accordance with guidelines and standards established by international franchising agreements with Yum!. Under the agreement, SMK is required to comply with certain brand standards established by Yum!. The company is required to pay a franchise fee on a monthly basis to the franchisor for 6% of net sales for PHR and 5-6% of net sales for PHD. SMK is also required to pay an initial fee for each new restaurant and a renewal fee after 1 years of operations. The tariffs for initial fee and renewal fee at PHR outlets are respectively USD 5,1 and USD 25,5. As for PHD outlets, initial fees and renewal fees are respectively USD 25,1 and USD 12,55. The tariffs are valid until March 31, 218 and will be renewed yearly. Founded in 1958 by Dan and Frank Carney, Pizza Hut is an international chain of restaurants and franchises from the United States. The main dishes for Pizza Hut are Italian-American cuisines, such as pizza, pasta, and breads. Pizza Hut has more than 5,6 restaurants in over 1 countries. The license holder for Pizza Hut is the Yum! Brand. Yum! is an established global brand with 45, restaurants in 135 countries with the leaders of the chicken, pizza, and Mexican-style food categories (KFC, Taco Bell, and Pizza Hut). Please see important disclosure at the back of this report Page 41 of 46

42 FIGURE 93. COMPANY KEY TIMELINE Sriboga Raturaya acquired CertifiedHalal by MUI Majority of SMK PHD Established 27 PHD reached 1 outlets SMK Established 23 Stuffed crust pizza launched 26 Cheesy bites launched 212 PH reached 2 outlets 217 PHD mobileapp launched Source: Company Exponential growth to be the undisputed market leader. The first Pizza Hut restaurant in Indonesia was opened in 1984, located at the Djakarta Theater in Jakarta. Being among the first movers in the chain restaurant business, the company s outlets have expanded exponentially; as of 31 Dec 217, there are 393 outlets (237 Pizza Hut Restaurants and 156 Pizza Hut Delivery outlets) located in 28 provinces, 76 cities across 5 big islands including Papua Island. There are 29 outlets in big cities (first-tier), 61 outlets in second-tier cities, and 42 outlets in third-tier cities. More than 77% of total outlets are located in Java. Its dominance is unrivalled with 86.6% market share in the pizza foodservice category. Pizza Hut in Indonesia offers a wide range and innovative menu serving Indonesian people with a target market share of teenagers and middle-class families. Pizza Hut is well-known for its original pan pizza and cheesy bite menus. SMK has developed two main types of outlets, namely Pizza Hut Restaurant (PHR) and Pizza Hut Delivery (PHD) the latter was introduced in 27 but has grown tremendously along with the rising demand for food delivery. PHR provides full service on-site dining, while PHD offers online services and food delivery. Further, recently, a new restaurant concept was introduced using The Kitchen Pizza by Pizza Hut brand. This new restaurant concept is part of SMK s strategy to target the middle to high income class segment in Indonesia. The menu offering is more personalized and different compared to PHR. SMK believes the design concept and sales channels will provide flexibility for the company to grow. For now, the company tries to continue to innovate by adjusting the menu based on the tastes of Indonesians and improving its service to customers. In 1997, SMK has obtained the Halal Certificate from MUI (Indonesian Council of Ulama). The Company continues to maintain the Halal certification with a commitment to always produce Halal food products to provide comfort, security, and satisfaction to the customers. Please see important disclosure at the back of this report Page 42 of 46