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Titanium Elites

December 14, 2013

International Conference
The 13th ICMSS
Investment Analysis
Titanium Elites
Sampoerna School of Business

PT Kalbe Farma Tbk.

Titanium Elites
December 14, 2013
Date: December 13rd,2013

Current Price: IDR 1,200

Ticker: KLBF-JK

USD/IDR: 11,999

Recomendation : BUY

Target Price : IDR 1,544

Pharmaceutical Industry

PT Kalbe Farma Tbk.

Potential Upside : 28.67%

Income Stock With Sustainable Business Strategy
As Indonesia annual health care expenditure is expected to be
increase to US$ 60.6 billion, that makes it tobe the sixth largest
health care spanding in Asia Pacific in 2018. The number came
from many assumptions like increasing GDP and rapid increasing
in middle class. Then, the National Healthcare Insurance (NHI)
one of decision that made by government will become another
challanges and opportunities for KLBFthat planned to cover
domestic population in 2019. As strong fundamental that own by
KLBF we recommend strong BUY for KLBF.
Buy recommendation based on valuation and fundamentals:
Kalbe have target price of Rp 1,544 by 2014, with increase on revenue
of 15%. As the income stock, Kalbe have dividend payout ratio of
44% with regular increase on the amount dividend paid that predicted
to be Rp 74with 85 billion outstanding shares. Kalbe has shown high
liquidity and inventory turnover.
Sustainable strategy that ensure robust growth:
Kalbe made acquisitions and joint venture with strategic companies
that increase their net sales over time after the acquisition takes place.
Kalbe also aggressively buy depleted trademarks and patents to
increase their own portfolio. Last strategy is stem cell and cancer cure
institution that turn Kalbe as the game-changing companies in stem
cell and cancer research.
Market leader that will sustain its superiority:
Over the decade, Kalbe has become the leader in Indonesia

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December 14, 2013
pharmaceutical industry with market share of 12% with 50.78 billion
share outstanding.

Business Description
Indonesias and Southeast Asias Largest Publicly-Listed
Pharmaceutical Company. Established in 1966, located in Jakarta,
Indonesia, PT Kalbe Farma Tbk. is one of the largest players on
pharmaceutical industry in Indonesia. The Company went to public in 1991
and currently holds 52.28% shares (Figure 1). Under management of Kalbe
Farma, the four segments which are :
Distribution and Logistics, Prescription Pharmaceuticals, Nutritionals
and Consumer Health have successfully led the market positions with
more than IDR 67.03 trillion of market capitalization in 2013. We identify
the biggest strength of the Company to be quality of its products,
quantity of production facility as well as research and development
institute, effective marketing and sales, and good consumer
relationship. To strengthen their international position, Kalbe Farma is
currently engaged in a Stem Cell and Cancer research with their own
institution named Kalbe Genomix. As a holding, Kalbe Farma comprises
22 subsidiaries. However, the core business of Kalbe Farma is Distribution
and Logistics which contributed to 37% of Group revenues and 23% from
Prescription Pharmaceuticals division in year 2012 (Figure 2).
Strong Brand Equity with Leading Market Position. Along its
subsidiaries, Kalbe Groups currently the #1 highest trademarks owner for
product portfolio for more than 1,027 of trademarks (exclude patents and
formulas) and dominating 13% of the total market share (Figure 3). Kalbe
Farmas strong brand name is not only result the Company to have good
reputation with the highest share of total market but also positions each of
the four segments as the market leader. The Company exports its products
for 96% to domestic market and 4% to Southeast Asia and several African
countries (Figure 4).
Current Strategy of the Company can be described with the following 5
Expediting Go Global main goal is to achieve Global Brand for all
business segments. Possible solutions are through more aggressive product
launching and strengthening distribution network in the global market, and
build production facility in new territories globally.
Strengthening Business Portfolio the idea is to increase the revenue
simultaneously halt the unit cost of production. Considered solutions are
through innovative products development, increase merger and company
acquitting, and introduce products for drugs that have reached their patent
expiration dates.
Improving Sales and Marketing strategic goal of reaching mass market
segment and to achieve better product availability. Solutions are opening
new market opportunities, expanding the presence of Mitrasana Clinic in
minor area in Indonesia as well as to global area, and building more
branches and warehouses.
Developing Competent Leaders with Panca Sradha Kalbe Character
main goal is to have Companys personnel who are collaborative, assertive,
passionate, and competent. Solutions are establishing more research

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December 14, 2013
institutes, and improving the quality of their education institute called
Kalbe Farma School of Business and Technology.
Managing Working Capital Effectively main goal is to have
sustainable working capital to increase the quantity of products. Solutions
are having strategic raw material sourcing, labor outsourcing from
countries with low cost of wages, and investing in new technologies and
Kalbe Farma management comprises only professionals. Currently,
management of Kalbe Farma consists of 5 persons. The CEO is Bernadette
Ruth Irawati Setiady, M.Sc. (Forbes Asias 50 Women In the Mix). She
has served as the chairman of management board since 2008. Under her
leadership, Kalbe Farma successfully obtained status PROPER Blue
category from Indonesia Ministry of Environment. Other 4 members of
management have wide experience in either pharmacy, food science:
Herman Widjaja or are experts in planning and finance projections: Ongkie
Tedjasurja, Vidjongtius, and Budi Dharma Wreksoatmodjo.
Corporate Governance and Social Responsibility
The company shows good result in creating transparency to the corporation
and shareholders. Moreover, Kalbe also show good CSR program, shown
on their willingness to engage to the social and also ecological
Corporate Governance
Kalbe has developed whistleblowing system and transparency to the
shareholder. The company shows good effort on creating good corporate
governance system.
Corporate Social Responsibility
Company reflected good CSR from the report. Kalbe engaged in various
acts in ecological and social engagement. On ecological side, Kalbe
invested on several programs to improve their
waste management and energy reduction. Kalbe received full mark on
Performance Rating of Environmental Management from State Minister of
Environment of Indonesia.

Industry Overview and Competitive Positioning

Macroeconomics Overview
Intermediate Economic Growth and Attractive Demographic
Profile.Indonesias economic outlook remains positive but having a slight
slowdown. Based on World Bank forecast, Indonesia GDP growth will be
reduced into 5.6% on 2014, from previous forecast of 6.2%. Economic
slowdown is occurred as the result of external financial pressures and high
cost on fuel subsidies, making it sensitive to the level of Rupiah. In spite of
the slowdown, the growth is expected to be greater than 5% (figure 5.1)
World Bank also predicted that inflation on 2014 would be on average
level of 7.3%, as the impact of election and fuel subsidy.
However steady domestic consumption, robust investment climate and
accelerated infrastructure development will give beneficial traits to invest
in Indonesia. Accelerated infrastructure development is shown on the long
run projects that are started on 2013 such as airports, MRT, and toll
roads.This positive projection expansion of middle class segment has been
increasing over time. According to data from World Bank and IMF,
Indonesias population growth has been experiencing an increase from

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December 14, 2013
Figure 5.1 : Indonesian GDP Growth

2008 to 2012 (Figure 6) of an average by 1.2%, followed by increase of per

capita GDP shown in figure5
Forecasted future economy has shown a green light. The increasing of
consumption growth of Indonesia benefits the pharmaceutical industry in
the country. This forecasted outlook is ignited by Indonesian governments
new plan, called Master Plan for Acceleration and Expansion of
Indonesias Economic Development (MP3EI) that aims to put Indonesia as
one of the top ten biggest global economies by 2025, spanning the years of
2011 to 2025 and creating six main economic corridors. This scheme also
means a primary investment in infrastructure to improve and continue
supporting industries. World Bank, IMF, and Asian Development Bank
have forecasted an explicit economic viewpoint in regard of this countrys
future GDP growth.
Pharmaceutical Industry

Source: Teams Estimation

Prosperous market driven by strong domestic demand and

consumption. In consequence of the lack of health issue penetration within
the country of around 250 million people, Indonesia still positioned the
lowest for total expenditures on health compared to other ASEAN top
members with average only 2.6-2.7 percent of its GDP, with an estimated
value of 7.31 billion USD in 2012. However, due to the countrys large
population with high local demand and consumption for medicines and
drugs, Indonesias practically small but rapid type in pharmaceutical
market is expected to grow at an annual growth rate of 10.8%, reaching a
value of 12.2 billion USD by 2017 which will be positioned as the sixth
largest pharmaceutical market in Asia-Pacific region.
As Indonesias population tends to increase along with the consumer
spending, prosperous pharmaceutical industry is promised. Higher than in
2012 which had 47 trillion rupiah (around $4.865 million), the
pharmaceutical products sales in the market is domestically predicted to
attain 50 trillion rupiah (around $5.173 million). Furthermore, Indonesias
comparatively strong production level that is boosted by generic drugs
demand triggers the growth of pharmaceutical and healthcare market. The
system of consolidation that has been likely formed in the country where
powerful companies maximizes their profits by acquiring smaller domestic
businesses also contributes in the part of this growing industry.
The Ministry of Health and Universal Health insurance access
healthcare services. Indonesian central government including Ministry of
Health (MOH) are setting up for the project of increasing number of
hospitals and hospital beds in the country by 100,000. Presently, the
availability of hospital beds in Indonesia is only 6 with just 3 physicians
for every 10,000 people, with a ratio of around 1:7 compared to US. This
development is expected to increase the value of pharmaceutical and
healthcare industries in this country, from $24.5 billion to $49 billion. Due
to the improvement of Indonesias primary healthcare system, workers, and
facilities, the MOH is taking out more than $3.27 billion in 2013.
The system of Universal Health Insurance, which is aimed to cover
Indonesias total 237 million people by 2019, is planned to be launched in
2014. This governments movement bridges healthcare service and
distribution of drugs and medicines all around the regions, and will
eventually increase the countrys health expenditure which will drive the

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December 14, 2013
pharmaceutical industry to a better view.
Competitive Positioning
Bargaining Power of Supplier (5/5)
Kalbe Farma and other pharmaceutical companies outsource the
supply from foreign supplier. Suppliers have the right to dispose Kalbe
if there are adjustments to the prices due to the changes in foreign
exchange and the companies dont want to follow the adjustments.
Suppliers are also able to change their business partner if the partner
is not profitable.
Bargaining Power of Customers (4/5)
Customers have a freedom to choose the best pharmaceutical product
for OTC and consumer goods market. In spite of the freedom to
choose, most of Kalbe Farmas product lines are customer favorite,
shown by the number of Top Brand awards given to the products in
their line.
Threat of New Entrants (2/5)
Pharmaceutical industry has a strong barrier to entry for new
business. Taking capital as the consideration, new companies need to
invest a lot of capital in order to start competing in the industry. Lab,
manufacturing plants, research and development, and patent needs
substantial amount of capital. Moreover, major pharmaceutical agents
mainly control distribution line to the drug store.
On the legal side, according to Ministry of Health Order Number
1799/Menkes/PER/XII/2010, companies must finish the assessment
and gain approval from Ministry of Health of Indonesia. Strict
Requirements and assessments that were implemented by Ministry of
Health halt the entry of new businesses.
Threat of Substitution (3/5)
In terms of substitution of Kalbes product, Kalbe has diverse
perspective based on the range of the product portfolio. On the
prescription drug perspective, doctors and pharmacist show big trust
to choose Kalbes product, ensuring Kalbes domination. Over The
Counter medication is based on consumer preferences. Kalbe has
shown consumer trust from the products that achieved Top Brand
Platinum for OTC medication like Promag. In spite of consumers that
have freedom to choose the similar product from the competitors,
consumer choice is mainly based on trust and personal preferences
In the consumer health division, consumers have more freedom to
choose the substitution of product. Taking example on multivitamin,
Kalbe have Fatigon and Tempo Scan Pacific, their competitor have
Hemaviton. Both products have similarities and gained public trust,
seen on Top Brand that was awarded to both goods. From the
example, we can see that substitution in pharmaceutical product is on
the fair scale, weak for the prescription drugs but medium on
consumer health and OTC drugs
Rivalry in Industry (5/5)
Fierce and intense competition can be found in Indonesia
pharmaceutical industry. Kalbe competes with companies like Dexa
Medica Group, Sanbe, Soho Group, Pharos Group, Tempo Group, GSK,
Kimia Farma and other companies. In spite of the tight competition,

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December 14, 2013
Kalbe shown an outstanding performance in terms of market share in
Indonesian pharmaceutical industry by more than doubling the shares
than the competitor
Pharmaceutical industry shows rapid innovation among the
competition member. Taking an example from cancer medication,
companies are researching for the best cancer medication to gain their
competitive advantage. In a decade, pharmaceutical companies in
Indonesia have their own cancer medication like Kalbe with TheraCim,
Merck with their Erbitux, and Shering Plough Indonesia with Intron
and Temodal. Vast growth and competitiveness indicates that rivalry
among competitor is tough

Investment Summary
We suggest (strongly buy) recommendation for PT. Kalbe Farma
(KLBF.IJ) with target price (IDR) and upside gain about (28.67%) from its
current market price of IDR 1,200. The company is market Leader of
prescription pharmaceutical with market share of 13% among its other
competitors. The companys product has been distributed in 100%
hospitals and drugstore in Indonesia. In 2012, The Company is experienced
growth 25% in its total revenue and in 2013 the revenue is expected
increase about 15%.
Our team believes there are many investment keys that have been
appreciated by market. KLBF stock categorize as Income Stock since the
stock offer positive-increasing dividend every year. The company earns
from existing products, potentially earn from future projects and
development, leader between its peers in pharmaceutical industry.
Income Stock. The KLBF stock is categorized by us as income stock since
the company pay increasing amount of dividend every year. The dividend
payout ratio of the company is not constant; recently in 2012 the dividend
payout ratio is 44%. Then, even the price is relatively stable in Indonesias
currency downswing recently; we cannot categorize the stock defensive
stock. The KLBF Beta is 1.1 that indicates the stock is not defensive since
it gives 10% return. Even, the company can hold its price in current
currency issue, it is not indicates that the stock is defensive stock since the
company imports about 95% its material using forward contract every 4
months. So its also one of company way to diversify risk.
Increasing of Population. The increasing population and health
expenditure that spend privately has positive-modest correlation of 44%.
The percentage proves that positive growth of population will affect
pharmaceutical-health care industry positively. Furthermore, there is also
positive correlation between increasing GDP and health-private
expenditure of 34% that will give positive effect to the industry.
Positive Growth of Dividend Payout. Kalbe Farma is income stock that
offered positive growth dividend every year. There is positive correlation
within dividend payout and companys net income of 91%. As the
characteristic of defensive stock of KLBF that is not going to be affected
by economy downswing, we expect the net income will grow of 21% from
previous year and we estimate the dividend payout will grow 16.5% next
year as the consequence.

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December 14, 2013
Innovation stimulates positive growth. Positive growth is the aim as
company that can be achieve in 2 major ways. Those ways are innovation
in developing new products and acquisition. The companys product
innovation by company is done by increasing developing capability that
supported by brand repositioning, packaging improvement and
modernization, Promotion and increasing the availability of product.
Today, the company has more than 380 brand names, and it is expected
increasing as every year the company launch new product every year. The
mergers and acquisition is done by company to increase their market share.
So far, the company has 22 subsidiaries that run their business and four
segments and the number of subsidiaries is expected increase every year.
The company is going to strengthen the existing expansion plan in ASEAN
to reach 500 million people through joint venture, subsidiaries or
Strengthen Regional Market. The companies are going to expand their
distribution networking through opening central of regional distribution
and new branches, the company are going to increase the branches capacity
and their facilities. In 2014, the company plans to expand its market to
Myanmar and Vietnam and expected to contribute almost 8% to the
Companys net sales.
Appealing Valuation with Buy Recommendation. We obtain the Kalbe
Farma Stocks will be worth IDR 1640 using DCF method. The reason of
using the method is the company are pharmaceutical company with cash
basis and the method can be implemented in over all sectors. The stocks
beta is 1.1 than indicate the companys stock will give return about 0.1.

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December 14, 2013

With current market price of IDR 1,200 (December 13, 2013), we
estimated the target price to be IDR 1,544 with potential upside gain
DCF Valuation Method for KLBF
We used the valuation model using Discounted Cash Flows (DCF). DCF
Valuation will be appropriate for valuing KLBFs stock as its business of
pharmaceutical in which the transaction is usually cash basis. It is believed
that The Company has a sustainable business that could maintain the Free
Cash Flows to be grow.
The 5-year projected Free Cash Flows, Capital Expenditures, Discount
Rate, and Continuing Value are our consideration to build a strong
valuation model.
5- Year Sales Forecast
The sales forecast was estimated by the expansion of The Company in
acquiring other pharmaceutical companies. The companys net sales
expected increase of 15.5% every year. In 2013, KLBF will be expected to
generate IDR 15,750 billion from net sales through the aggressive
expansion. We estimate a 9.10% growthof net income in 2013 revenue
CAGR FY 2011-17.
Capital expenditure
The CAPEX would be forecasted to be IDR 3,671 billion from 2013 to
2017 for financing KLBF expansion and investment. The CAPEX
distribution goes to build new factories, distribution expansion, and
investment on other asset.
Continuing Value
Our teams estimation suggested the perpetual growth of 14%. The
percentage is calculated from multiplication of 5 year average of ROE and
Retention Rate. The continuing value is expected to be IDR 143,625
Discount Rate
We used WACC as the discount rate since the average Debt to Equity ratio
was maintain to be 27.76% every year in average. We assume that KLBF
will always maintain its DER in that percentage. The WACC is 15.45%
with the cost of debt 8.79% and cost of equity 17.30%. Our teams
estiamation also predict the market return (IHSG) was 16.57% and riskfree at 9.27% (SUN matured in 2014) with companys beta of 1.1.

Financial Analysis
Based on the historical data, the biggest growth of revenue is experienced
by company in 2012 with 25%. We indicate that in 2013 2017 the
revenue growth will be 14.89% every year. Furthermore, there are many

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December 14, 2013
reason that will support the increasing of revenue growth, such as
increasing of population, GDP and private spending for health and the
company portfolio.
The company portfolio, the key of Kalbe Farmas growth. The
company portfolio in acquisition is one of Kalbe Farmas way to increase
their market share since they will also taking over all products under the
company, like in 2012 the Kalbe Farma Company acquire PT Hale
Internationala juice producer company, the acquisition of PT Hale also
first step to make an alliance between both of them to establish PT Kalbe
Milko International.
Increasing of Population, GDP, Private Spending for Health. Our team
indicates the increasing of population is 0.4% every year and the GDPs
growth is 1.1 every year. As a result of increasing GDP, the private
spending for health also increasing every year. The growth of them, will
affect the sales of company that run their business in pharmaceutical
Increasing Net profit margin. The increasing of net profit margin cannot
be separated by the companys way to diversify the risk by portfolio. The
net profit margin in 2008 -2012 is 12.5% and it is expected increase to
13.11% in 2013 to 2017.
Cash Flow:
The cashflowofcompany isexpectedincreasingyear to year.In 2013,the
companys free cashflow is expected IDR 849 billion. However, the
growth is decrease about 21% from 2012.
Debt to Assets ratio of the company is 20% in average, KLBF
expected will get easy accessto get loan when the comoany need
financing. The debtor will have no doubt as in average the company
current ratio is 3.5 and its capability to pay is 150 in average
calculated using Times Interest Earned Ratio. Then supported by its
currentcash conditionand the debt coverage ratio the company can
finance its project event the project is huge.

Investment Risk
Economic Risk
IDR-USD exchange rates fluctuation
Approximately 95% raw materials of the company are acquired by
importing from producer countries. When Rupiah weakens, raw materials
price is increasing due to the foreign exchange and Kalbe must do some
adjustment prior to the increase or they will face lost. Kalbe made 4
months future option contract with the producer to prevent the exposure
foreign exchange risk.
Operational Risk
Escalation on state minimum wages
On 2012, state minimum wages are increased substantially from the
government regulation. Increase on state minimum wages will increase the
production cost by the number of the labors. Kalbe put their plant on the
regions where the minimum wages are still low
Supply chain disruption

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December 14, 2013
Having wide distribution line, Kalbe distribution line can be disrupted by
natural disaster and human factor like floods, landslide, and labor strike.
Disruption will create a snowball effect to the company due to the shortage
of goods. Kalbe has preparation for the disruption by sending the goods
from other branches
Labor strike
Over the last year, there are plenty labor strikes that occurred in Jakarta and
other region. Labor strike will reduce the productivity of the business and
cut of the distribution line. Kalbe gives fair compensation and benefits to
the employee in order to prevent labor strike. Moreover, Kalbe laboratories
are located in places where labors are rarely got into the street
Acquisition on unbeneficial company
Kalbe is actively acquiring companies as their strategy to gain competitive
advantage. There is a possibility of Kalbe to acquire company that will
bring Kalbe group down because of the performance. Kalbe has set up high
standard and deep research on the companies to ensure the future success
after the acquisition
Political Risk
Government policy on pharmacy business
Government regulations have big impact on the pharmacy business.
Government can set up the policy to increase both prescription and generic
drugs. Kalbe has prepared to the effect of price increase by the trust from
doctors and pharmacists that usually choose product from this company
Possible ban on stem cell research
Countries like Austria, Italy, Norway, and Poland set restriction on stem
cell research due to the ethical issues. Stem cell research is one of the
spearhead of the industry that will face great loss if Indonesia government
restricts stem cell research. Kalbe set the stem cell research institution in
Indonesia and Singapore that give supports to the research.
Delay on Universal Social Health Program
Indonesian government is preparing universal social health program by the
year 2014. If the government delays the program, companies wont get an
extra income from the sale of the medicine that is used. Kalbe might not
have the sales increased if the delay happen, but the present sales indicates
that this company have strong sales.


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December 14, 2013