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Selasa, 07 Juni 2011

Inflation, BUY companies with pricing power - CLSA

"The multibillion-dollar bailouts handed out by the US Government will bring on an onslaught of inflation" Warren Buffett 2009

Fast forward it two years, it appears not only these bailouts/handouts/printing/free money continues in the US, it seems that the phenomena has spread well into to Europe and Japan, three of the four biggest economies in the world going into a competitive devaluation cycle. Looking around today, you begin to see cost pushed inflation everywhere and be assured it is only going getting worse. As Willam Fung from supply chain mgmt giant Li and Fung have word it "What we will have for the next 30 years is inflation. A lot of Western managers have never coped with inflation."

Other than the obvious resources plays, you want to own a strongly branded business that can pass on higher costs to customers via price increases is desirable. A monopoly would be the most ideal (for the monopoly holders, obviously).

Interesting charts showing YTD performance of the Indonesia big three retailers (from Jessica Irene - CLSA research):
Mitra Adi (MAPI IJ) and Ace Hardware (ACES IJ) both have a strong brand and have complete dominance over their respective space. Their strong SSG numbers speaks for itself. This contrast sharply the performance of Ramayana where they there is little or no branding and operate at a highly competitive environment (you have at one end the hypermarts and the other moms and pops shops).

The reason Ramayana (RALS IJ) cited for the poor performance is they have not been willing to pay up for cotton based clothing (cloth prices doubled last 12 months) and instead chose to desperately look for supplier willing to see at discount prices. Clearly, their buyer/manager is not "coping" well with inflation. Such stark contrast to the fortunes of these retailers (ones with brand/pricing power and the other dont). Ramayana's EPS has grew a mere 10% since 2001, underperforming inflation by a massive margin.

Companies such as MAPI, ACES, Kalbe Farma (KLBF IJ), and Unilever (UNVR IJ) face relatively mild competition, hence giving them strong pricing power to pass on rising costs. In times when costs deplete, they are comfortable to let margins expand by maintaining selling prices.

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