TiPhone Mobile Indonesia, and Erajaya

About a year ago, in August 2012, I began to analyze the stocks in sectors that were not so popular: Sector of retail for mobile phone products and accessories, and vouchers (for phone credit). From several stocks in this sector, such as Trikomsel Oke (TRIO), Erajaya Swasembada (ERAA), TiPhone Mobile (TELE), Skybee (SKYB), and Global Teleshop (GLOB), it was ERAA that selected. And ERAA indeed made considerable gain, whose the price of shares continue to rise from 2,200, until reaching 3,500 as its peak in last May. You can read the full article here.

Unfortunately entering the year of 2013, ERAA’ financial performance was down, so that the shares tumbled and return to its IPO price, ie 1,000's. The cause of the ERAA’ lower performance was very clear: The weakening of Rupiah against the U.S. Dollar, where it became one of the main risks of the company's business as a distributor of mobile phone. So  then, I sold out the stock at the first quarter of 2013 and no longer pay attention to it, as well as the sector.

Until yesterday a friend asked me to analyze TELE, and it seems that this stock is now more interesting than ERAA (ERAA is still attractive because of its status as the largest distributor for smartphones in Indonesia, but we have to wait until its performance back to normal, maybe next year). That's why we will discuss about TELE here, here we go!

History of TELE began in 1992, when its owner, Hengky Setiawan, opened his first mobile phone store in Jakarta. Five years later, ie in 1997, Mr. Hengky gained trust from Telkomsel to become a distributor for phone credit vouchers and SIM Card of Telkomsel. The agreement gave birth to Telesindo Shop, and Telesindo officially incorporated (became PT Telesindo Shop) in 2001.

Furthermore, in 2006, Mr. Hengky once again earned trust from XL Axiata, which was still called Excelcom, to become a distributor for phone credit vouchers of XL, so that the entrepreneur set up his second company, PT Excel Utama. Two years later ie in 2008, Mr. Hengky acquired the rights to distribute the TiPhone mobile phone (a mobile phone brand from China) in Indonesia, so PT TiPhone Mobile Indonesia was established. And in 2010, Mr. Hengky entering the business of mobile phone service and content providers, by set up PT Setia Utama Service and PT Media Aplikasi.

In 2011, all the companies were consolidated under PT TiPhone Mobile Indonesia, which then held an IPO in 2012, with ‘TELE’ as its ticker. As of April 2013, TELE already has no less than 146 outlets, 92 service centers, and 180,000 active resellers throughout Indonesia.

In general, here are some lines of business of TELE:

1. Distributor of starter packs and phone credit vouchers of Telkomsel, Telkom Flexi, and XL Axiata.
2. Distributor and retail partner for mobile phone brand products such as TiPhone, Blackberry, Samsung, LG, Nokia, HTC, and iPhone. But TiPhone is still the largest product sold by the company.
3. Mobile phone service and repair centers, and
4. The business of applications and content providers, but still not active yet.

In 2012, approximately 90% of TELE’ revenue derived from sales of starter packs and vouchers. But entering the year of 2013, along with the increasing portfolio of mobile phone brands held by the company, the proportion of revenue of the company changed to 70% of starter packs and vouchers, and 30% of mobile phone (there was no revenue from the business of service centers, applications, or content providers). The value of the company's revenue from mobile phone distribution business is very likely to increase after TELE officially acquired two companies which are importers of iPhone and Samsung mobile phones. So it seems that TELE can no longer be underestimated as a distributor of low-end mobile phones like TiPhone. However, until the first semester of 2013, TELE’ revenues are still dominated by sales of starter packs and vouchers. While as a distributor of mobile phones, TELE is still far below ERAA, which is the largest mobile distributor in the country.

But apart from that, TELE offers a very attractive growth prospects. After the acquisition of importers of iPhone and Samsung at this year, TELE expects revenue of Rp4.5 trillion (about US$ 450 million) from sales of mobile phone in 2014, from only Rp1 trillion in 2013. After adding the revenue of Rp9 trillion from the sale of starter packs and vouchers, then TELE will make Rp13.5 trillion (about US$ 1.3 billion) of revenue in 2014. Assuming that TELE could maintain its net profit margin of 3%, so the company’s net profit in 2014 would be Rp405 billion (about US$ 40 million). However, the net profit margin should be increased to be 4 - 5% in 2014, because the margin of mobile phones distribution is greater than the margin of starter packs and vouchers. As an illustration, during the first semester of 2013, TELE’ operating profit margin from sales of mobile phone reached 11.6%, while the margin of starter packs and wouchers was only 2.8%.

So if the margins of 4 - 5% are realized, then the company's net profit would be in the range of Rp540 - 675 billion (US$ 54 – 67 million). Because TELE equity position is currently Rp1.8 trillion, then it was certainly a very big number of net profit for the size of a distributor company. Last year I said that TELE would be worth for investment if the company is able to acquire the distribution rights for mobile phone brands outside TiPhone, and they actually did it! Also, there are other potential revenues from the business of applications and content provider, which is still in the development stage.

But of course, the figures above are only rough projections that may be wrong. Meanwhile, if we look at the current valuation of the shares, then TELE is competing against ERAA as the most exciting mobile phone distribution companies on the Indonesia Stock Exchange (in terms of valuation). Here is the data of PER and PBV for five stocks of starter packs, phone credit vouchers, and mobile phone distribution companies on the IDX, based on closing price of the stocks at October 16, 2013.

Stock	Price	PER	PBV
TELE	495	11.8	2.1
GLOB	1,320	10.3	3.4
ERAA	1,220	13.6	1.4
TRIO	1,400	12.3	3.4
SKYB	500	125.0	1.2

Okay, if you notice, since the beginning TRIO and SKYB are not good options for investment because their fundamentals were not convincing, where TRIO has a lot of debts, and SKYB failed to made a consistent profit (plus, the management never perform any corporate actions). So the options are only TELE, GLOB, and ERAA. From the management side, GLOB is a subsidiary of TRIO, so even though the company is showing good fundamentals, but the quality of its management is doubtful.

While TELE and ERAA, both are conservative companies that focus on developing their businesses itselves, without ever held the rights issue, issuing bonds, or the like (ERAA had issued new shares in order of MESOP, but it was only 20 million shares). So the conclusion, if you want to invest in the business of starter packs, vouchers, and mobile phone distributor, you have two options: TELE, or ERAA. Fortunately the trading volume of the two stocks are liquid enough.

About the prospects, as we have discussed above, TELE is clearly more attractive. But when viewed from its valuation, then ERAA is more interesting with PBV of 1.4 times only (considering its current financial performance, then ERAA is expensive at the price of Rp2,000’s per share, but now it's only 1,000!). Because after all ERAA is the largest mobile distributor in the country, with a distribution network that is much better than its competitors, including TELE. Its declined performance at this year is due to the unavoidable risk factors, namely the weakening of Rupiah, but other than that there were no problem. So if Rupiah back to its track, perhaps next year, then ERAA’s performance will also increase.

However, it does not mean that TELE could not overtake ERAA someday. ERAA, as we know, could be the largest mobile phone distributor in Indonesia because of it was the owner of PT Teletama Artha Mandiri (TAM), which is the largest distributor of Blackberry smartphone in the country. But today, the market of Blackberry in Indonesia is challenged seriously by Android (Samsung), and that's why TELE acquired importer of Samsung, not Blackberry. If ERAA, or in this case the TAM, did not immediately ‘do something’ in this regard, then it is possible that in next 2014, the company’s performance will be disturbed by TELE and others.

In conclusion, if you confident with the prospects offered by TELE, then the stock is worth to invest, especially if you can buy it at prices that reflect PBV less than 2.0 times, which means Rp450 per share. Target price? Let say 1,000 next year, of course, if the company successfully achieved its revenue targets. I do not need to remind you that investing in stocks like TELE is more risky than invest in defensive stocks such as consumer goods, which TELE’ future performance, whether it increase or decrease, will be affected by many factors.

Meanwhile, if you are more interested to ERAA, then the shares may only be interesting if the company successfully made a net profit growth in the First Quarter 2014. On the other hand if you've already bought the stock, then do not sell it at current price because ERAA, based on the current price, is the cheapest stock in the sector, especially when considering the big name of the company. If you ask Warren Buffett when he was young (before he held partnership with Charlie Munger in the 1980’s), then Buffett would likely prefer ERAA than TELE. Because in 1964 he once said, 'Investing in undervalue/cheap stocks offers reasonable profit after one to three years. The reasons for buying the stocks may emerged after, either because the company's performance improved after some time, there are offers of acquisition, or there are psychological changes from the market’s opinion about the stock.'

Original article was written at October 16, 2013