Description

Continuing on my trend of Southeast Asian companies which I feel is significantly underfollowed (hopefully getting more visibility with members like jt1882 and trev62) and hence, undervalued, I'd like to present my highest conviction idea at the moment, Map Aktif (MAPA), the dominant sports apparel retailer in Indonesia.

Investment thesis

The company has 50-60% market share of the international sportswear in the country. It has exclusive rights for offline and online sales, which last 5-10 years, for most of its key brands like Skechers, Reebok, Converse, Crocs, and New Balance. While they do not have exclusivity for Nike, Adidas and Puma, they are the largest channel for these brands in Indonesia as well.

MAPA has ~1.1k stores across multi-brand and mono-brand. As seen above, they have multiple concepts to appeal to a wide range of customers with Planet Sports and Athlete's Foot targeting the affluent segment while Sports Station and Royal Sporting House targets the mass market, acting as a channel to sell aging inventory at discounted prices without diluting their premium concepts.

Based on my research of sports retailers globally, a good framework to analyse their multi-brand concepts would be JD Sports or Foot Locker for Planet Sports / Athlete's Foot, while we can use Sports Direct (listed as Frasers Group in the UK) and Dick's Sporting Goods for the value segment.

Mr Market is giving us an amazing opportunity to own a company that has massive tailwinds (consumption upgrade, rising income levels, widespread acceptance of athleisure, and international expansion) at 4.4x 2019 EBIT and 6.6x 2019 P/E. If we assume there will be permanent margin erosion from 13.3% EBIT margin in 2019 to 9% in 2022 coupled with the fact that sales will only recover to pre-covid levels in 2022, we can own it at 5.3x 2022 EBIT at today's prices for a company that could reasonably grow 10-20% CAGR for the next 5-10 years.

You might ask why is the market so irrational?

• After a brief period of stagnating covid cases, I believe Indonesians let their guard down during their Lebaran holiday in May, ignoring many of the basic health and safety protocols. Additionally, the norm for Lebaran was to travel from the city back to their hometowns, and despite the government's pleas to restrict travel, many citizens simply didn't care (https://www.channelnewsasia.com/news/asia/indonesia-covid-19-spike-idul-fitri-delta-quarantine-tracing-15138518)
• This led to a hyperbolic spike in daily cases from 5k to 35k, and as of July 10, there remains no signs that it is plateuing 
• The government implemented a strict lockdown, and among many other measures, they closed the malls from July 3 to July 20 in Jakarta and Bali, where 60-70% of MAPA's stores are located, similar to what Indonesia did when covid first came to Indonesia, leading to MAPA's price crashing from Rp 5k in Jan 2020 to a trough of Rp 1,575 in April 2020 before recovering to a peak of Rp 3,150 around December 2020
• Moreover, ASEAN in general has seen a prolonged outflow of institutional capital, leading to an outsized impact from retail investors who tend to be very short-term oriented. Therefore, when murmors of an impending lockdown arose, many of them decided to just flee businesses which they think would be impacted by a lockdown, retailers being the most obvious sector (ACES, MAPI, and RALS) but mall operators (Ciputra and Pakuwon) weren't spared as well

What gives me confidence that MAPA's fundamentals will recover post covid?

After Indonesia's first major lockdown in Q2 2020, MAPA has been delivering solid figures from Q3 2020 to Q1 2021. 

Q1 2021's sales were only 13% lower than Q1 2020, therefore if the second wave didn't occur, I would think that by Q3, the company's run rate would be back to pre-covid levels. Compared to pre-covid's GPM range of 43-44%, Q2 2020's GPM was 30.6% (this was the period where the company didn't know if it would survive and prioritised converting inventory into cash through steep discounts), Q3 2020 reported 38.9% GPM, Q4 2020 saw 40.8% GPM, and finally, Q1 2021's GPM of 42.8% was almost back to normal levels.

Of course, with the new lockdown, I expect MAPA's sales to decline ~40% in Q3 (since the lockdown is for 2 weeks in July) but my bet is that Indonesia will eventually manage to get a good grip. The country is currently administering ~800k vaccines per day, and the population should reach the critical vaccination rate either by end of 2021 or Q1 2022.

If you think that i) Indonesia will overcome covid, ii) the population's standard of living and disposable income will increase, iii) demand for sportswear and athleisure will grow, and iv) consumers will buy more international brands, then I believe MAPA is the best proxy in the country. 

Background

In 2018, MAPA was spun out of the retail conglomerate, Mitra Adiperkasa (MAPI), to much excitement at Rp 3150 per share and quickly rose to Rp 8450 by April 2019. The company's guidance was a little too optimistic and eventual results disappointed shareholders even though revenues +19% and EBIT is on track for +14% in 2019.

Anyway, the parent MAPI is the largest consumer retailer in the country, owning department stores, fashion, F&B and activewear / sports lifestyle. It has the exclusive rights for hundreds of brands like Inditex, Dominos, Krispy Kreme, Skechers, Reebok, Converse, Starbucks, Burger King etc. Widely known that if you want to get into Indonesia quickly with a wide distribution, you partner with MAPI.

Business model

Industry has quite a straightforward model that everyone should be familiar with, so I will focus on MAPA in particular. The retail concept of each multibrand chain determines how MAPA establishes the interior design, variety of brands it carries, price range of its products and the range of services it provides. The beauty of MAPA's model is that because each chain has its own concept, they are often able to have several of their stores in the same shopping mall, capturing foot traffic across multiple segments of the Indonesian market.

Through its parent company, MAPI, who has ~40% of the gross retail mall area in the country, MAPA is also able to get very beneficial rental rates and have been getting good rental support from mall operators because if MAPI decides to leave a mall, it's pretty impossible for them to find replacements for 40% of that mall.

MAPA strongly believes that the design, layout and presentation of merchandise in each store are essential to its success. Each format has a different focus, for example Plant Sports will allow customers to immerse themselves in a sporting environment to promote experiential design while Sports Station stores are design for efficient shopping to allow customers who are looking for a bargain to compare products and prices easily.

The company views their people equally as important as the store, thus they regularly provide store managers with training on current merchandising concepts and marketing directions.

Additionally, they aim to remodel a store every 5 years to offer a modern environment for customers and enhance the overall shopping experience of customers. 

Multibrand stores account for 70% of sales and monobrands are 30%, but going forward, the new store rollout will be targeting a 50/50 split. As the company gains scale, the unit economics per store has been steadily improving from 26% ROCE and 11% EBIT margin in 2017 to 56% ROCE and 13% EBIT margin in 2019.

Inventory management and merchandising

A critical factor in retail has always been the merchandising and MAPA has been increasing their sell-through (% of goods purchased for a season sold by the end of that season) from 32% in 1H17 to over 50% in 2H19. The ability to improve the sell-through is due to certain determinants like ability to gauge consumer sentiment, maintain optimal stock and mix of product, effectively market the brands, and deliver a shopping experience which meets customers expectations. 

Moreover, another positive trend is their inventory days which has been declining from 179 days in 2016 (28% of sales) to 157 days in 2019 (24% of sales), with the long term goal of 120 days. Besides improving their procurement, they also invested in IT systems that can improve warehousing and distribution, resulting in a structural change in the number of stocks per SKU.

Since the key to retail is detail, I would say a large competitive advantage lies in the management and culture.

At the moment, MAPA is run well by the CEO who has been with the company for 18 years who focuses a lot on data according to the ex-CFO we spoke to. The IR said it's built into their culture with examples like using real-time data analysis to monitor and respond to changing consumer demand. Thus, even if the rumour that the CEO is leaving, the practice of relying on empirical evidence will live on in the company.

Reading their prospectus, I was very impressed with the level of detail the company had to improve their product cycle efficiency and productivity, with their plan (see below) which I didn't even see when reading JD Sports' annual reports.

Key risks

E-commerce: Undeniably gaining market share at the expense of sports retailers but the demise of brick and mortar might be exaggerated. To calibrate our base rates, US and China are probably mid-20% penetration, Europe I would estimate 15-20% while Indonesia is currently 4-6% penetration. Despite the rapid growth of e-commerce over the past few years, JD Sports has been able to generate 10%+ SSSG in their UK stores from 2015-2017, telling me that if a retailer is able to offer a differentiated product, customers will still come. 

• We can also take comfort that besides Nike, Adidas and Puma, MAPA has the exclusive distribution rights for most of the other big international brands in Indonesia, so online sales will go be done by MAPA, regardless of the channel like marketplaces (Shopee, Lazada, Tokopedia, Zalora and Bukalapak) or brands' online store as long as it ends in .id (eg Reebok.id or Skechers.id)

Direct to consumer: Perhaps an even greater risk because most people are fixated on e-commerce and might not see this. Think this is a bigger threat for i) developed countries where a Nike or Adidas has built logistics and distribution (good example is how Nike still uses Alibaba in China but is able to end their partnership with Amazon) and ii) retailers which are built on exclusive or limited edition products, but at Indonesia's current GDP, I doubt the target audience wants to buy the latest Air Jordans or Yeezys.

• As a counter argument, their top brands Converse, New Era and New Balance have just given them new exclusive contracts in 2020-2021 in neighbouring countries Thailand, Philippines and Vietnam as they were extremely pleased with MAPA's domestic performance. Therefore, it would make no sense for them to suddenly decide to not renew MAPA's exclusivity in Indonesia.

Entrance of international players: Very possible scenario in the future, but there are certain obstacles (not really barriers) that might dissuade new entrants. Indonesia has a criteria for retail where foreigners cannot own stores less than 400sqm, can own between 33-66% of stores between 400-2000sqm and can fully own stores above 2000sqm. Based on 2019's data, the average JD Sports size is 315sqm and Foot Locker is 158sqm. However, we also learnt that prior to covid, JD Sports was in early discussion with Matahari Department Store for a potential partnership, but logically covid would put a pause to most expansion plans for the next few quarters or even years. Nevertheless, from this very dated 2017 Euromonitor Report, Indonesian sports retail and selling space is extremely low, and based on my conversations with the company and peers, new entrants will probably grow the pie faster than market share erosion. One example of this is e-commerce in China, even though Alibaba has been losing market share to PDD and JD.com, their Taobao + Tmall sales continue to grow at double digits.

Catalyst

• Increasing vaccination rate + getting covid under control
• Declining inventory days, particularly aging inventory
• Traction from overseas expansion