Emerging markets, a consumer powerhouse

March 23, 2023

Selamat Datang Monument in central Jakarta, Indonesia.

We believe emerging markets (EMs) offer a multitude of benefits to equity investors, including: 

  • High growth potential. EMs typically follow rapid economic growth trajectories, which can be reflected in the performance of companies operating within these markets. 
  • Undervalued quality assets. EMs are home to many high-quality companies not yet recognized by the broader investment community. As these companies grow, they gain awareness and appreciate. 
  • Diversification. Investing in EMs can help diversify portfolios concentrated in more developed markets, enhancing their risk-return profile. 
  • Favourable demographics. Most EMs have young and growing populations that can drive economic growth and provide opportunities for companies catering to these markets. 

Small-cap (SC) companies can often have significantly more room for growth than their larger peers, as they launch new products and expand into new markets, providing substantial upside potential. Also, because they are typically less known outside of their domestic market and inadequately covered by sell-side analysts, they can present “hidden gem” opportunities that the market maybe be overlooking. The EM SC investable universe comprises over 11,000 companies offering a wide variety of investment ideas across 24 countries and 11 sectors. 

For a company to be included on our shortlist, it must be run by an outstanding management team and have a sustainable competitive advantage and defined growth strategy within what we believe is an attractive market. Although we are bottom-up investors, we are also macro aware and acknowledge secular investment themes in the EM middle-class consumer space. Notably, EM countries have nearly four times the middle-income households as their developed market counterparts.

Indonesia, which we last wrote about in August 2021, is the largest economy in Southeast Asia, the world’s fourth most populous country and home to more than 50 million consumers in the middle-income bracket. Amid gloomy economic projections for many countries globally, Indonesia is expected to experience only a mild slowdown and actually grow 4.8% in 2023. Its economy is supported by strong exports, investment (with foreign direct investment having consistently posted new records every quarter last year) and household spending (being the most significant GDP contributor). Even with the possibility of a global recession and a tight global financial environment threatening Indonesia’s momentum, our view is that companies with sustainable business models, pricing power and appealing product offerings can nevertheless extract meaningful benefits. We believe that one of our Emerging Markets Small Cap portfolio’s core holdings offers the best exposure to Indonesia’s middle-income consumers.

Business overview

Mitra Adiperkasa (MAPI IJ) is Indonesia’s leading multi-format lifestyle retailer catering primarily to middle- and high-income earners. Since its establishment in 1995, the company has managed to build a diversified portfolio of franchise agreements with more than 150 world-class brands (e.g., Zara, Marks & Spencer, Footlocker, Converse, Starbucks, Subway, Krispy Kreme, Tissot, Pandora, Sephora, Samsonite). Mitra Adiperkasa has cultivated long-term relationships with its principals and secures exclusive rights from virtually all brands it partners with. Supported by a veritable army of 23,000 employees, the company runs an omnichannel network of nearly 3,000 physical and 20 online stores. In 2016, Mitra Adiperkasa started its overseas expansion venturing into Vietnam, followed by the Philippines in 2020, and Malaysia and Singapore in 2022.

Competitive advantages

  • Diversified portfolio of exclusive brands and long-term relationships with principals.
  • Unmatched scale and store network. 
  • Strong reputation and track record of execution.
  • Focus on target customers with resilient purchasing power. 
  • Solid balance sheet with net cash position. 

Growth strategy

  • Same-store sales growth and store network expansion, with a focus on higher-profit specialty stores. 
  • Addition of new brands and optimization of existing ones. 
  • Expansion in Vietnam, the Philippines and Malaysia. 

A combination of target demographics with more resilient purchasing power, a diverse portfolio of exclusive brands and a robust omnichannel strategy in our view make Mitra Adiperkasa one of the best-positioned consumer companies in the EM SC universe.

Global Alpha Capital Management Ltd.
March 23rd, 2023