A journey of resilience

Over its nearly 30-year history, ACES has faced numerous challenges, including intense competition and the disruption of e-commerce during the 2020-2022 period. Notably, the company faced competition from Best Pongs (unlisted), founded by its former Operational Director, Paulus Ong, with backing from Ancora Capital Management (unlisted) in 2011.

#1: Importance of prudent working capital management

Best Pongs, despite possessing expertise in merchandising and store operations from ACES, eventually failed due to working capital issues. This highlights ACES's prudent approach to managing working capital, relying primarily on free cash flow generation for inventory procurement and store expansion (Fig. 1 and 2). This strategy has enabled the company to maintain a strong financial position, even during the most challenging economic downturns.

#2: Investing in core value: customer-centric merchandising and services

Competition from e-commerce, exacerbated by the pandemic and mobility restrictions, posed significant challenges to ACES in 2020-2022. However, the company has rebounded with several strategic initiatives. To address the shift in consumer behavior (Fig. 3), ACES has targeted a younger demographic of millennials aged 28-43. Leveraging digital campaigns, including collaborations with brand ambassadors and KOLs, the company has successfully engaged this audience. Additionally, ACES has expanded its product offerings, explored trending items like air fryers and the Stora concept, and increased inventory replenishment rates to 15% annually (5% in pre-2023). These efforts have led to a substantial increase in millennial and younger members, now comprising 55% of the total membership base (up from 15% pre-2023).

Additionally, ACES shifted its promotional strategy to offer thematic promotions throughout the year, by offering variety of products, giving more excitement to customers. Instead of using promotions solely for clearance, the company introduces new, low-priced items during these periods, creating excitement while still being able to maintain overall GPM.

These initiatives, on top of the fact that e-commerce performance has been sluggish given the high merchant fees and the imposition of cross-border import ban for goods priced <USD100 has helped ACES’s overall performance recovery starting in 2023.

Store rebranding progress is worth monitoring

Following the termination of its franchise license agreement with Ace Hardware US (unlisted), ACES plans to invest in its own brand. While this could potentially save around 0.7% of sales annually, the initial transition will require significant upfront costs. These include a IDR30bn investment for new store signage, an increase in advertising and promotion expenses from 1.4% in 6M24 to 2-2.5% of sales, totalling IDR45-90bn in 2025F, and an additional month inventory. As a result, we anticipate earnings pressure in 2025F due to these rebranding efforts. Although transitioning to a proprietary brand could save on long-term franchise fees, there is a risk associated with replacing a well-established brand in the Indonesian market. Despite the company's history of overcoming challenges, investors may want to adopt a cautious stance until further details about the new plan are disclosed.

Maintain Neutral at TP of IDR935

Our TP of IDR935 is pegged at 19x 2024F P/E, +1SD of its five-year average. Overall, we maintain our Neutral stance on ACES due to limited projected earnings upside from the store rebranding process within the next three years. While the company's history of overcoming challenges and its focus on consumer-centric merchandising and service may provide advantages, we believe there is a potential risk associated with distancing itself from a well-known brand. Until the company unveils its new plan, we advise investors to proceed with caution. The upside and downside risks are primarily tied to the potential earnings impact of the rebranding strategy. Within the discretionary retail sector, we continue to favor MAP Active (MAPA IJ, Buy). Currently, ACES trades at 17.5x 2024F P/E.

Fig. 1: ACES free cash flow trend, consistently high FCF generation over the past five years

Fig. 2: Discretionary retailers 2023 FCF as % of sales – ACES is the strongest compared to other retailers

Fig. 3: Indonesia's population based on age – shifting age demographic that is happening being ACES’s reason to target the millennials

Fig. 4: ACES P/E ROE 2015-2024 analysis (excluding 2020-2022) – derated P/E driven by the decline in ROE, ACES PE/ROE band suggests that the level is above the 2015-2024 (excl. 2020-2022) average PE/ROE

Fig. 5: ACES 2015-2025F ROAE trend – declining ROAE on the back of NPM, Asset Turnover, Financial Multiplier

Fig. 6: ACES 2015-2025F net profit margin (NPM) trend – declining NPM → focus on improving operatin leverage

Fig. 7: ACES 2015-2025F asset turnover trend – declining asset turnover → narrowing inventory days

Fig. 8: ACES 2015-2025F financial multiplier trend – declining financial multiplier → increase dividend payout ratio/leverage (less likely)

Fig. 9: 2015-2025F inventory days trend – improvement will help to increase asset turnover and consequently ROAE

Fig. 10: ACES store location based on provinces heat map – company focus on expanding more into tier 2,3 and ex-Java

Fig. 11: MR DIY Indonesia (unlisted) store location based on provinces heat map – in contrast with ACES, MR DIY has strong presence outside Jakarta and also ex-Java

Fig. 12: Erafone (ERAA IJ, Buy) store location based on provinces heat map – should be able to picture new potential area for both ACES and MR DIY

Fig. 13: ACES vs MR DIY Indonesia (unlisted) vs MINISO Indonesia (unlisted) vs KKV (unlisted) product price difference – ACES premium price clearly distinguish its product price range from the other 3 players. In conclusion, ACES offers a wider range of product category, MR DIY offer much basic household items at a cheap price, while KKV and MINISO focuses on niche and trendy items

INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Jody Wijaya (jody.wijaya@verdhana.id)

Sandy Ham (sandy.ham@verdhana.id)

Samuel Christian (samuel.christian@verdhana.id)