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Analysis on Mobile Phone Stocks

Some years ago, a mobile phone or handphone or cell phone, was a device to call and send SMS, that's it. But along with the development of technology, now people could use his cell phone to take pictures, play video clips, send pictures, browse the internet, and any other functions like a computer. Cell phone is no longer just a communication device, but a gadget. And for some people, especially teenagers, it is a matter of pride to have the latest gadget which is in trend, so cell phone is now a fashion item that is have to be updated after some years or months. While for investors and businessmen like us all, that behavior is an opportunity.

In Indonesia, the trend of cell phone brands is often to change. In the beginning of 2000’s,  some brands like Nokia, Ericsson, and Motorola were the market leaders, before then a newcomer, Research in Motion (RIM), had beaten them all with its new generation of cell phone, which called Blackberry (BB) smartphone. And now, the position of BB is threatened by Apple’s iPhone, Google Android, and Samsung. Going forward, some analysts has predicted that Samsung would become the next leader in the cell phone and gadget industry, which at this time Samsung has successfully popularized a new gadget after smartphone: Tablet PC. In the first half of 2011, the brand of Samsung Galaxy Tab was the market leader of tablet PC with a market share of 60%, followed by Apple's iPad.

Outside the big brands, the changes of trend are also happens to small brands of cell phones. For example, Nexian was the market leader of low-mid class cell phone, before then shifted by Cross and Mito. So in this case, given that the development of technology of gadgets and cell phone will never end, then consumers will continue to spend money to buy the latest cell phone, as well as its accessories. As the results, a company who engaged in cell phone trading industry (trading, not producers) will reap huge and, be supposed, consistent profits. Because when a brand of cell phone began to lose its consumer, then the company could easily switch to sell another brand that fulfilling the consumer’ demand.

And in the IDX, there are at least four companies who engaged in the trading and distribution of mobile phone products, including accessories, multimedia contents, SIM cards and cell phone’ credit vouchers. They are, sorted by size of assets from the largest to the smallest: Trikomsel Oke (TRIO), Erajaya Swasembada (ERAA), TiPhone Mobile Indonesia (TELE), and Skybee (SKYB). Given that companies in the cell phone trading industry should have a consistently growing performance, as we mentioned above, so here are the track records of net profit growth over the last five years plus the first half of 2012, the figures in billions of Rupiah.

Company
2007
2008
2009
2010
2011
2012*)
TRIO
80
103
118
204
303
304
ERAA
28
79
203
218
255
425
TELE
-
0
51
115
153
-
SKYB
1
3
3
19
23
31

To be noted:

1. PT TiPhone Mobile Indonesia (TELE) established in 2008
2. Data in 2012 is data for the first half 2012 (1H12) which have been annualized
3. When this article was written, TELE had not released its financial statements for the period of 1H12.

Okay. From the data above, we can conclude that the four companies in the sector of cellular products trading does have a fairly consistent record of growth (if using its performance in First Quarter, TELE recorded annualized net profit of Rp156 billion). Including when the global financial crisis occurred in 2008, the net profits of TRIO, ERAA, and SKYB were still growing (wa cannot count TELE as the company was established in that year). Well, it seems we find a sector that is prospective here, at least when we take a point of view from the historical performance of the companies.

Unfortunately, if we consider the liquidity of the stocks, then we can take a look to ERAA and TELE only, as stocks of TRIO and SKYB are completely illiquid. So in the next paragraphs we will focus on the discussion of ERAA and TELE, we start from ERAA first.

ERAA is one of the largest distribution company of cellular products in Indonesia, with 24% market share in 2010. Especially for Blackberry, the company holds a market share of about 50% of the product in Indonesia, after the acquisition of one of its subsidiary, PT Teletama Artha Mandiri (TAM) in August 2011. TAM itself is a distributor of mobile phones of Blackberry, Sony Ericsson, and Samsung. By the end of 2011, ERAA holds distribution rights for at least nine brands of mobile phones, namely Acer, Dell, Huawei, LG, Motorola, Nokia, Blackberry, Sony Ericsson, and Samsung. In addition, ERAA has also its own brand mobile phone through TAM, Venera. ERAA also have a side business of vouchers selling and others, which in 1H12 accounted for 6.4% of total company’ revenues.

Although ERAA is already one of market leaders in cellular business, but the company is keep expanding. During the first six months of 2012, the company did some expansion activities, namely: 1. Opening 'Erafone Megastore' outlets in two places, namely Jakarta (Mall Taman Anggrek) and Makassar, South Sulawesi, 2. Acquired 'iBox' outlets, an Apple iPhone store, so ERAA is automatically adds brand of iPhone to its portfolio, and 3. Being a distributor for HTC mobile phones. Looking forward, until the end of 2012, ERAA will add at least four Erafone Megastore outlets, bringing the total to eight outlets. ERAA will also add three iBox outlets, bringing the total to twenty-two outlets, and set up four 'AndroidNation' outlets in Jakarta, which will be a special store for mobile phones with the Android operating system. ERAA claims that AndroidNation will be the first special store of Android in the world.

Based on the latest financial statement, ie the first half of 2012, ERAA demonstrate the best performance when compared to TRIO and SKYB. Here's the summary:

Company
ROA
ROE
NPM
Net Profit Growth
Earnings Growth
ERAA
12.8
18.0
6.6
213.5
80.2
TRIO
7.7
26.2
8.2
24.2
8.7
SKYB
2.8
15.2
2.8
-8.8
9.3

Note: All figures are in percentage, the larger means better. Net Profit Growth are calculated in a year, while Earnings Growth is calculated from the date of December 31, 2011.

Let see. In points of ROA, ROE, and NPM, performance of ERAA and TRIO were almost equal, while SKYB, well, you could say we can kick it out. But in terms of growth, ERAA was superior, probably because in this year of 2012, TRIO is more focus on raising funds through a rights issue and bond issuance at once, rather than boost its operating growth. As you know, TRIO issued 311.5 millions of new stocks, and a bond at a value of Rp808 billion. However, as already mentioned above, the lack of TRIO’ liquidity was automatically make it out of our stock list.

When viewed from the ROA, ROE, and NPM, the performance of ERAA is fairly standard, aka could not be compared with performance of consumer goods companies. But that does not prevent its shares to continue to rise since its initial listing on 14 December 2011, until now it has reached its new high in 2,250, reflecting the PER of 15.2 times. Expensive? Probably not, given that valuation of retail company stocks (remember that ERAA is a cell phone retail trade company, not producer) is actually that much. I just have realize myself that the stock of retail companies could not be valued at PER of 7 or 10 times, even though they have, by nature, a narrow margin and relatively small profitabilities. The reason is, a retail company may at any time replace its goods with other goods that consumers demand more, so that the business can continue to run, and consequently the risk of the business is relatively low. This is different with a manufacturing company, which should create a new product if their old product is no longer demand by consumers. And 'to create' is not easy, especially when it comes to innovation of technology. That's why a mobile phone manufacturer, Nokia, which was a market leader in the past, now began to experience a great declining, and is predicted to be bankrupt, after they failed to create some new products to compete with the iPhone and Android.

Okay, now we discuss TELE.

Unlike ERAA that sells various brands of mobile phones, TELE is a distributor for one brand only, ie TiPhone, although the company also sells some other brands of mobile phones in far fewer amounts. The brand of TiPhone is not as popular as Blackberry or iPhone, but TiPhone as a chinese mobile phone has a relatively low selling price, so it has its own market share (of low end segment). In addition to mobile phone, TiPhone also have some products of smartphones and Tablet PCs.

However, the main source of TELE’ income is not derived from TiPhone mobile phone sales, but credit phone vouchers (or simply vouchers). Yup, TELE is one of the main distributors for vouchers of three telecommunication operators, ie Telkomsel, Flexi, and XL Axiata. In the First Quarter 2012, TELE recorded revenues of Rp1.62 trillion, which Rp1.47 trillion of them comes from the sale of vouchers, and only Rp149 billion from the sale of mobile phones. So in this case, TELE is more appropriately referred as a vouchers company, not a mobile phone company. It seems that TELE is deliberately running the vouchers business, and more focus in this business than selling cell phones, as a precaution if the products of TiPhone are not very successful in the market, given that the competition in the low end segment are as hard as the high end segment, and the problem is, TELE  have only one brand of TiPhone (in contrast to ERAA that holds a lot of brands). In Indonesia , there are at least seven low end mobile phone brands that would be a serious competitor for TiPhone, ie Nexian, Mito, Cross, CSL Blueberry, Maxtron, Micxon, and HT Mobile.

While the business of credit vouchers, however are more safer and easier than selling phones, although the margin is also smaller. In the First Quarter 2012, the operating profit margin (OPM) for the mobile phone products of TELE was 8.5%, while the OPM for voucher products was only 2.8%.

Anyway, because the business type is different, it may be less appropriate if TELE is compared with ERAA. But let us try to compare the advantages and disadvantages of both companies:

1. Variations of mobile phone products: ERAA sells many, or even may be all high end mobile phone brands in Indonesia. While TELE only sells TiPhone. So in this case, ERAA has no dependence on certain brands, and may replace the products or brands they sold, with any other products that are more salable. While TELE can not do the same thing, only if they are able to obtain distribution rights for other mobile phone brands.

2. Market share: ERAA has a narrower market share, because its products are sold at an expensive price, so it can only be bought by the upper middle class, whose population is certainly less than the lower middle class. However, due to fast change of trends in the high end mobile phone market, where almost every brands such as Blackberry, iPhone, iPad, and Samsung Galaxy Tab are regularly release new variants of their products every once a while, then the consumers were like forced to buy the new products (where the new product is not much different than the old one). And the desire of consumers to keep up to date on the latest mobile phone products, was not affected by the economic turmoil, at least if we use the experience of 2008, where the revenues and net profits of ERAA and others could continue to grow (only if we take the case of monetary crisis of 1998, then the story might be different).

While TELE has a larger market share as they are targeting the low end segment, and this market is almost always safe from the economy’ turmoil. Unfortunately, TELE only holds the distribution rights for one brand of mobile phone, so that TELE has so many competitors. And so far, the TiPhone brand is seems not a market leader in the low end segment.

3. Focus of products: ERAA is more selling mobile phone products, so the margin is fairly good. In the first half of 2012, the OPM was 4.8%. While TELE is more selling vouchers, so that the company had a relatively small margin. In the First Quarter 2012, the OPM was only 3.3%. For the voucher products, TELE relies on three mobile telecommunication operators, ie Telkomsel, Flexi, and XL Axiata. TELE doesn’t sell vouchers of Indosat, Esia, Tri, or Axis.

4. Future prospects: ERAA have a chance to enjoy the golden age of high end mobile phone products in years to come, and that's why the company is diligently opening new outlets in various cities, including acquiring the iBox. Because not only youngsters, now even adults are like to use gadget products of RIM, Apple, and Samsung. While TELE is likely to enjoy an unremarkable growth only.

5. Risks: Although ERAA holds a number of mobile phone brands in its portfolio, but the right to continue or terminate the cooperation with a manufacturer is fully held by the manufacturer company as a principal of brand, so ERAA can lose its rights as a distributor for several brands at any time. Then, given that most of mobile phones or gadgets sold by ERAA was imported, then the company’ revenue and earnings are highly dependent on fluctuations of the Rupiah agains US Dollar. And the last, gadget products such as Blackberry, Apple, and Samsung, are a target of the sellers on the black market. You can see it on the internet, there are so many sellers that offers Blackberry products which sold without customs, so the price is cheaper. Although it would not bring a significant effect on ERAA’ earnings, because consumers are also usually prefer to buy smartphones and Tablet PCs at the official store, but it still has the potential to interfere with the performance of the company.

For TELE, the biggest risk is if there is a significant technology upgrade, because TiPhone product itself will not always compatible with the latest development of the Android operating system (the majority of smartphones and tablet PCs of TiPhone is using the Android operating system), because Android is not owned by TiPhone, but Google. In this regard, the sale of TiPhone products is also highly vulnerable to changes in consumer demand. While for vouchers, the company is relatively have no risk, unless the risk of competition because TELE is only sells vouchers of Telkomsel, Flexi, and XL Axiata. But luckily, the three cellular operators, especially Telkomsel, are leaders in telecommunication operators market. And thankfully too, TELE is more selling vouchers rather than phones.

In conclusion, after taking all considered aspects, then the stock of ERAA is more interesting than TELE, if the objective is for long-term investment. In one or two year ahead, ERAA will probably reach the position of 4,000. But the problem is, the stock has gained a lot in recent months, as the result of its excellent performance at the first and second quarter of 2012, and is now relatively expensive at valuations. As a result, it would be quite risky if you buy the stock at current price, as if by historical, usually ERAA would drop by about 10% of its new high, to return to its pattern of technical. But if you are interested in this stock, you may starting to buy it from now.

One more thing. Although the outlook of ERAA is quite bright, and the risk is relatively low, but ERAA has one more risk that is potentially degrade the company’ performance significantly, ie the government policy. You may remember that some time ago, the Minister of Communication and Information of Indonesia, Tifatul Sembiring, had said he would boycott the products of Blackberry in Indonesia, because the principal of Blackberry, RIM, had declined to set up a local server. Although eventually the Minister did not boycotting the Blackberry, but there is no guarantee that in the future, the government will not boycott a particular mobile phone products, not only Blackberry but also the other. And if the boycott or something like that are really happened, then of course it will have an incredible impact on business continuity of ERAA, so you still have to be careful.

And how about the other mobile phone distribution company namely Global Teleshop (GLOB), which is also listing on the IDX? Why didn’t you analyze it too? Well, given that GLOB is just listed on the stock exchange some day ago, ie in July 10, 2012, then the company has not released many documents except financial statements, so it couldn’t be analyzed in a comprehensive manner, although the financial statements was likely good. But if we look at its liquidity, the stock of GLOB is not liquid, just like TRIO and SKYB. But maybe we’ll discuss it later.


Original article was written in August 15, 2012.

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