www.danareksa.com See important disclosure at the back of this report 1 Equity Research Company Update Friday,01 October 2021 Bank Jago (ARTO IJ) BUY Initiation Way to go! Within the digital banking landscape, ARTO is well placed to run ahead of its peers backed by: 1) its partnership with the GoTo digital ecosystem, 2) its solid and knowledgeable management team, and 3) its focus on the mass-market segment that should translate into higher NIMs. GoTo as one of ARTO’s non- controlling shareholders will help the bank through monetization of the sizeable database to support digital business expansion. Combined with its experienced management team and solid CAR post rights issue, we assume 102.1% loans growth resulting in a 6.9% NIM next year. All in all, the bottom line will turn positive at IDR302bn in FY22F based on our model. The digital ecosystem is the key factor. We believe the right digital ecosystem and a definitive database are the two components for digital banks to succeed. With the massive and aggressive e-commerce platforms, many digital banks are looking to tap into these ecosystems due to their sizable databases. Nonetheless, the bank would also need to select which data can be used in the credit scoring model. This requires decent data analytics with the right personnel in place along with a knowledgeable management team as the approval time is a crucial factor in the mass-market segment. Solid and well-experienced management team. ARTO’s management team has proven experience in the mass market segment, from the Danamon Simpan Pinjam (DSP) era to BTPN’s Jenius digital savings initiative. Its shareholders will allow ARTO to reach more customers across different sectors and segments, from the GoTo digital ecosystem to sharia-based P2P lending. At the same time, the dominance of millennials as ARTO’s employees should help the bank to continuously develop and launch innovative digital products and services. Focus on the mass-market segment. The c.64.0mn MSME business owners in Indonesia with knowledgeable teams are the low hanging fruit for ARTO. By partnering with the right digital ecosystem, ARTO can penetrate the high-yield loan segments, i.e. BNPL, merchants financing, and others. Combined with its low savings interest rate compared to its peers, NIM should touch 6.9% next year. All in all, FY22F’s net profits should reach IDR302bn based on our forecast. Initiate coverage with a BUY, TP of IDR20,000. We utilize lifetime value as the valuation basis on ARTO assuming a total of 11mn customers. Downside risks to our TP are: 1) execution delays, 2) lower-than-expected customer acquisition, 3) potential Government intervention, 4) reversal in the policy rate that might impact its blended CoF, and 5) the non-exclusive partnership with GoTo and other possible digital ecosystems. Last price (IDR) 15,100 Target Price (IDR) 20,000 Upside/Downside +32.5% Previous Target Price (IDR) 0 Stock Statistics Sector Banking Bloomberg Ticker ARTO IJ No of Shrs (mn) 13,856 Mkt. Cap (IDRbn/USDmn) 209,229/14,659 Avg. daily T/O (IDRbn/USDmn) 277.6/19.4 Major shareholders (%) PT Metamorfosis Ekosistem Indonesia 29.8 PT Dompet Karya Anak Bangsa 21.4 Estimated free float 48.8 EPS Consensus (IDR) 2021F 2022F 2023F Danareksa (1.5) 23.8 47.2 Consensus 1.4 25.1 68.5 Danareksa/Cons (205.6) (5.1) (31.1) ARTO relative to JCI Index Source : Bloomberg Eka Savitri (62-21) 5091 4100 ext.3506 [email protected]Andreas Kenny (62-21) 5091 4100 ext.3509 [email protected]Key Financials Year to 31 Dec 2019A 2020A 2021F 2022F 2023F PPOP (IDRbn) (26) (148) 39 528 973 Net profit (IDRbn) (122) (190) (19) 302 599 EPS (IDR) (101.1) (22.5) (1.5) 23.8 47.2 EPS growth (%) 423.7 (77.8) (93.3) (1,682.6) 98.4 BVPS (IDR) 564.7 146.2 650.2 674.0 721.3 PER (x) (149.3) (671.5) (10,037.7) 634.3 319.7 PBV (x) 26.7 103.3 23.2 22.4 20.9 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 ROAE (%) (30.6) (19.8) (0.4) 3.6 6.8 Source : ARTO, Danareksa Estimates
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www.danareksa.com See important disclosure at the back of this report 1
Equity Research Company Update
Friday,01 October 2021
Bank Jago (ARTO IJ) BUY
Initiation Way to go!
Within the digital banking landscape, ARTO is well placed to run ahead of its peers backed by: 1) its partnership with the GoTo digital ecosystem, 2) its solid and knowledgeable management team, and 3) its focus on the mass-market segment that should translate into higher NIMs. GoTo as one of ARTO’s non-controlling shareholders will help the bank through monetization of the sizeable database to support digital business expansion. Combined with its experienced management team and solid CAR post rights issue, we assume 102.1% loans growth resulting in a 6.9% NIM next year. All in all, the bottom line will turn positive at IDR302bn in FY22F based on our model. The digital ecosystem is the key factor. We believe the right digital ecosystem and a definitive database are the two components for digital banks to succeed. With the massive and aggressive e-commerce platforms, many digital banks are looking to tap into these ecosystems due to their sizable databases. Nonetheless, the bank would also need to select which data can be used in the credit scoring model. This requires decent data analytics with the right personnel in place along with a knowledgeable management team as the approval time is a crucial factor in the mass-market segment. Solid and well-experienced management team. ARTO’s management team has proven experience in the mass market segment, from the Danamon Simpan Pinjam (DSP) era to BTPN’s Jenius digital savings initiative. Its shareholders will allow ARTO to reach more customers across different sectors and segments, from the GoTo digital ecosystem to sharia-based P2P lending. At the same time, the dominance of millennials as ARTO’s employees should help the bank to continuously develop and launch innovative digital products and services.
Focus on the mass-market segment. The c.64.0mn MSME business owners in Indonesia with knowledgeable teams are the low hanging fruit for ARTO. By partnering with the right digital ecosystem, ARTO can penetrate the high-yield loan segments, i.e. BNPL, merchants financing, and others. Combined with its low savings interest rate compared to its peers, NIM should touch 6.9% next year. All in all, FY22F’s net profits should reach IDR302bn based on our forecast.
Initiate coverage with a BUY, TP of IDR20,000. We utilize lifetime value as the valuation basis on ARTO assuming a total of 11mn customers. Downside risks to our TP are: 1) execution delays, 2) lower-than-expected customer acquisition, 3) potential Government intervention, 4) reversal in the policy rate that might impact its blended CoF, and 5) the non-exclusive partnership with GoTo and other possible digital ecosystems.
www.danareksa.com See important disclosure at the back of this report 3
The digital ecosystem is the key factor The pandemic has expedited the transition to online-based transactions
The COVID-19 pandemic which broke out in 2020 has led many people, particularly those who live in urban and suburban areas, to limit their daily activities. Activities including studying, working, and shopping for daily needs as well as banking transactions have mostly been done in the home. This has led to a shift from an offline to online (O2O) business model in several sectors such as retail, food and beverages (F&B), and banks.
Additionally, the e-commerce players have also played a greater role given the change in consumer behavior, especially of those who live in first and second tier cities. This is partly due to their aggressive marketing gimmicks, with cashbacks and free delivery fees to name but a few. Tokopedia and Shopee are two main players that currently dominate the e-commerce space, offering a wide range of products and services. Both names claim to have more than 100 mn internet visits in the past six months (refer to Exhibit 1). Bukalapak, on the other hand, as the only e-commerce player already listed on the IDX, booked c.31.9mn internet visits in the last six months as the company focuses more on leveraging and monetizing its 5.0mn warung partners.
Exhibit 5: Key e-commerce players in Indonesia
Company General info Shareholders Traffic before pandemic Internet visits July 2021 (Last
6 months)
Bukalapak # of users: 90mn
Avg daily transactions: IDR2mn
GMV: USD3bn (2020)
TPV: IDR22.88tn
Employees: 2000+
PT Kreatif Media Karya (23.93%), API 9hong Kong Investment Limited (13.05%), Archipelago Investment Pte. Ltd. (9.45%), Achmad Zaky Syaifudin (4.32%), Muhammad Fajrin Rasyid (2.64%), New Hope OCA Limited (3.16%). Batavia Incubator Pte. Ltd (2.47%), Mirae Asset-Naver Asia Growth Investment Pte. Ltd (1.80%), UBS AG, London Branch (1.86%), Willix Halim (1.40%), Others (37.32%)
70 million active users, 4.5 SME sellers, 131.7 million visits (2019)
Softbank (35.35%), Alibaba Group (28.25%), Radiant (10.6%), Sequoia India (8.05%), William Tanuwijaya (4.66%), Anderson Investments (3.28%), Leontinus Alpha Edison (1.9%), Google (1.64%), East Ventures (1.08%), Dream Fund (1%)
www.danareksa.com See important disclosure at the back of this report 4
Plenty of growth opportunities for financial institutions
The big e-commerce players which own sizeable databases of customers attract banks and fintech companies to partner with them as the involved parties will share the database. Using the first principles design (build from scratch), the digital banks focus more on the customers’ needs and utilize the customer database to create customized products and services. The large database is also the underlying asset for the banks to build a proper underwriting and internal credit scoring system using data analytics. Such an approach applies not only for the end-customers (individuals) but also the merchants, the logistics companies and individual couriers (if any), in our view.
At a more micro level, by tracking the transactions from upstream to downstream (end-customers) the digital banks can obtain a better understanding of the volumes, patterns in certain areas, average transaction ticket size and many other aspects that can be included in the parameters of an internal credit scoring system. For the merchants, the banks can estimate the turnover value per month as the basis to calculate the potential loans facility to be offered. The banks can then offer either invoice-based loans (PO based) or regular working capital loans.
For the retail/individual segment, the banks can easily provide Buy Now Pay Later (BNPL) options for transactions value above IDR1mn, for example. Indeed, the e-commerce platforms already offer this payment term with interest rates ranging from between 1.4%-5.25% per month with a maximum loans size of IDR3bn (refer to Exhibit 2). Currently, the e-commerce players are partnering with fintech, multifinance companies and banks for the products. With a relatively small ticket size (max IDR30.0mn) and short-term tenors (less than 12 months), a fast approval and disbursement process are the key factors to beat the pay later competition.
Exhibit 6: Lending products in a few e-commerce platforms