CFA Institute Research Challenge

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Surya Capital

The CFA Institute Research Challenge is a global competition that tests the equity research and valuation,
investment report writing, and presentation skills of university students. The following report was
prepared in compliance with the Official Rules of the CFA Institute Research Challenge, is submitted by a
team of university students as part of this annual educational initiative and should not be considered a
professional report.

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information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report
should not be considered to be a recommendation by any individual affiliated with CFA Society Indonesia, CFA Institute, or the CFA
Institute Research Challenge with regard to this company’s stock.
 PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange

Ticker AVIA.JK

BUY
Current Price 505
Target Price 611
Surya Capital Upside 21%

Top Player with a lot to Uncover

Fig. 1 - Market Overview
Source: Company Data, Team Analysis
We advise a BUY position on PT Avia Avian Tbk (AVIA) with a 2-year target price set at IDR 611 per
MARKET INFORMATION share. This target reflects a potential gain of 17% (implying a forward PE of 21) from the closing
price of 505. This recommendation is mainly grounded in the following: categories

52-Week Range Rp422.00 - Rp760.00 Resilience amid uncertainty. AVIA, the paint company, has demonstrated remarkable resilience
AVG Volume 46.18M amid uncertainty. During the COVID-19 pandemic (2021), AVIA maintained strong performance
Market Cap 30.729T
with an operating profit of IDR 1,802 Bn (26.59% of its revenue). However, amidst the period of
Free Float 11.54 B
21.02 all-time high oil prices (2022), the operating profit experienced a decline to IDR 1,459 Bn (21.80%
PE Ratio (TTM)
EPS (TTM) 23.60 of its revenue). This decrease primarily stemmed from a reduction in sales volume, reflecting
challenging market conditions. AVIA has also succeeded in managing seasonal factors as a paint
company, by maintaining its performance during the rainy season which is not too heavy.
Nevertheless, the company's ability to sustain profitability under external pressures
underscores strategic resilience and robust risk management. AVIA continues to demonstrate
Fig. 2 - Historical Price & Scenario Analysis adaptability in navigating dynamic market changes.
TP
Source: Tradingview, Team Analysis Strong brand recognition. In 2022, AVIA obtained the Top Corporate Award 2022 organized by
INFOPBRAND.ID and TRAS N CO Indonesia in the Digital Corporate Brand Awareness Aspect.
HISTORICAL PRICE AVIA also acquired 3 awards in the brand awareness aspect. This can also be seen as AVIA is the
leading manufacturer in the paint industry in Indonesia, acquiring 20 % of the market share of
Bull Case paint and decorative painting in Indonesia.
789
Normal Case Massive room for growth. Indonesia’s paint market is projected to experience 32.2% growth from
611
2022 up until 2025F (4 years 7.23% CAGR) (Figure 9). Accompanying that, the market size of
557 decorative paints and coatings (which is one of AVIA’s largest segments) still growing steadily
Bear Case
and is projected to grow 27.5% from 2022 to 2025F (4 years 6.23% CAGR) (Figure 17). This is also
backed by the growth of the urbanization rate (Figure 36) with an average growth of 1.15% which
will drive the demand in the construction and architectural sectors. Our thesis is also supported
Detail by the still relatively modest paint consumption rate of only 6.0 liters per capita which is still
less than other developing countries like Thailand and Malaysia (Figure 16). Furthermore, the
increasing GDP per capita will drive the standard of living which will shorten the repainting cycle
(Figure 35). AVIA on its own also can capitalize on this opportunity with its strong balance sheet
Fig. 3 - Crude Oil Futures Price Impact to and strong cash position, enabling AVIA to expand organically and inorganically (merger and
Stock Price acquisition).
Source: investing.com, Team Analysis

Distribution channels cover a wide range of areas. Through the conclusion of the third quarter
of 2023, the company has augmented its distribution infrastructure by integrating 116 self-
owned distribution centers, 14 mini-distribution centers, and an additional 40 third-party
distribution centers (Appendix 10). This expansion is supported by a fleet of 607 trucks, enabling
Potential for faster
stock price a daily delivery capacity of approximately 10,300 shipments. This strategic initiative is
appreciation
anticipated to contribute to sustained sales growth for AVIA over the long term. Our revenue
projection for FY2032F stands at IDR 13,400 Bn reflecting a compound annual growth rate
(CAGR) of 6.87%.

Fig. 4 - Surya Capital
Surya Capital
Michael Genesis Bimasatrya de Fretes
David Roderic Pirih
David Bryant Malonda
Christopher Dean Nugroho
Michael Chandra
Catalyst to reach the target price. AVIA's potential to hit its target price is fueled by the
projected recovery in Operating Profit and Net Income for 2024. The key lies in the favorable Oil
Price trend, with January 2024 prices below the 2023 average. Continued or stable oil prices
could boost AVIA's gross profit margin and likely elevate net profit. Additionally, we anticipate
sales volume growth in 2024. We envision market appreciation for Avia's performance, driving
the stock toward its target price (Figure 3).
michaeldefretes4@gmail.com
drpirih@gmail.com
davidbryant168@gmail.com
christ.djie@gmail.com Key Business Variables
michaellikechocolate@gmail.com

Source: Company Data , Team Analysis

Fig. 5 - Shareholder Structure

Source: Company data, Team Analysis

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 PT Avia Avian Tbk
Surya Capital Basic Material - Indonesia Stock Exchange

Business Description
Fig. 6 - AVIA’s Best Seller 4 decades of brushing the paint industry in Indonesia. Established on November 1, 1978, by Mr.
Source: Company data Soetikno Tanoko, Avian Brands embarked on a journey to become Indonesia's leading paint
manufacturer. Avian Brands has transformed into the country's foremost decorative paint
company, maintaining three resilient generations. On December 8, 2021, Avian Brands achieved
a significant milestone by listing its shares on the Indonesian stock exchange under PT Avia Avian
Tbk (AVIA). With over 44 years of expertise, AVIA has maintained business continuity through
prudent management and continuous innovation. Right now, AVIA is led by the third generation
of the Tanoko Family, Mr. Ruslan Tanoko as the VP Director, and Robert Tanoko as the Operation
and Development Director (Appendix 12, 13). As of right now, AVIA is mostly owned by the
Tanoko Family (Figure 5).

AVIA’s supply chain. AVIA has evolved into an integrated paint industry, spanning from
upstream to downstream operations. With state-of-the-art facilities producing raw materials
such as resin, pigment colorant, additives, and extenders, along with printing and packaging units
Fig. 7 - AVIA’s Supply Chain
(Figure 7), AVIA's products are accessible nationwide, reaching from Sabang to Merauke
Source: Company data, Team Analisys
(Appendix 10). Through a vast distribution network comprising 116 company-owned distribution
Mineral Mining centers and an additional 14 mini distribution centers, also wholly owned. AVIA also has 40
independent distribution centers, AVIA Brands serves over 56,000 building material stores
Petrochemical
Pigment and Raw Materials Solvent and across 88 cities in Indonesia.
Additive Additive

Monomers Top Notch Products. AVIA has two main product segments, architectural and trading goods. In
and
addition to its wide range of architectural solutions, Avia offers various products used in
Polymer
construction and renovation, including wall paint, wood and metal paint, waterproof paint, wood
Resin care products, and more. Its product portfolio caters to retail professionals and DIY enthusiasts
in Indonesia (Appendix 14). Avia differentiates its products based on a combination of character,
Paint quality, functionality, and price, ensuring it meets its customers' specific needs and budgets
Porducer
(Appendix 11). Two of AVIA’s best sellers are No Drop and Avitex Cat Tembok (Figure 6).
End
Distributor
Customer
Avia's competitive strengths lie in its strong brand recognition, strategic market positioning,
extensive distribution network, and a dedicated management team with a proven track record.
The company's commitment to innovation is evident through its Avian Innovation Center, a hub
for research, development, and innovation.

Fig. 8 - Industry Segmentation Industry and Competitive Analysis

Source: Company data, Team Analisys

1) Industry Overview

The main industry that Avian is involved in is the chemical industry, especially in paint and
coatings. The paint and coatings industry itself is divided into two segments (Figure 8). In 2024,
the paint and coatings industry is targeted to grow by 8.75% from the previous year. In the long
term, we believe that the paint and coatings industry will experience significant growth. Most of
this growth is driven by increasing urbanization, per capita consumption of paint products, a
decrease in repainting cycles in Indonesia, and an increase in consumer purchasing power. In the
long term, the paint and coatings industry is estimated to grow at a 7,23% CAGR from 2022 to
2025F. (Figure 9).

Fig. 9 - Market Size of Paint and Decorative
Coating (In MM US Dollar)
Source: Frost and Sullvian, Team Analysis
Market characteristic: The paint and coatings industry in Indonesia has the characteristics of an
oligopoly market, where 74% of sales are dominated by 7 companies such as Avia, Nippon Paint,
AkzoNobel, Propan Raya, Mowilex, Jotun, and Pacifist Paint. Avia, Nippon, AkzoNobel, and
Propan Raya control more than 50% of the industry's sales (Figure 10). Avia is the market leader
in the waterproofing and wood and metal segments. Meanwhile, Nippon Paint has the largest
market share in the wall segment, followed by AkzoNobel, and Avia in third place. Consumer
behavior in the paint industry is also quite loyal, with the majority of families choosing the same
brand to paint their homes. This is due to the color differences between each paint company's
products.

Industry challenges and opportunity: In 2023, the paint industry faced a challenging situation,
where crude oil, the main material for producing companies' direct materials, experienced a
significant increase ($64 per barrel, 5y average Oil Price futures( 2022 - 2018) , compared to $77
per barrel in 2023). This increase led paint industry players to raise their product prices. If the
increase in product prices is not followed by an increase in purchasing power, it will result in a
decrease in industry sales volume. In early 2024, oil prices were lower than in 2023. This is a
positive sign, and we also hope that the Indonesian economy in 2024 will improve, thereby
increasing consumer purchasing power to consume more painting products.

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Fig. 10 - Market Share of Paint and
Decorative Coating
Source: Frost and Sullivan, Company data, Team Analysis
Fig. 11 - Forecasted Decorative Paint Market
by Region 2025F
Source: Frost and Sullivan, Company data, Team Analysis
Fig. 12 - AVIA ESG Snapshot
Source: Company data, Team Analysis
Fig. 13 - Hazardous Waste vs Reuse of
Industrial waste (Tons)
Source: Company data, Team Analysis
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
2) Competitive Positioning
Market Leader in the Decorative Paints Market. As a long-standing player, AVIA has now become
the market leader by capturing a 20% market share in the paint industry in Indonesia (Frost &
Sullivan, 2020) (Figure 10). This achievement has been realized through a strong distribution
channel. In terms of regional GDP contributions in Indonesia, AVIA is trailing behind in the
Sumatera and Java regions, particularly in Northern Sumatera and Jakarta. However, AVIA holds
the market leader position in Kalimantan, Sulawesi, and other parts of Indonesia.
Competitive Prices through Variety of Products. AVIA can be considered not to have a specific
target market. This is because AVIA offers products with various price ranges for each product
segment, ranging from premium prices to economical prices (Appendix 11). AVIA does this to
avoid price wars with competitors and to maintain their profit margins.
Strong Customer Relationship. One of AVIA's competitive advantages is its strong customer
relationship. This is achieved through various customer-engaging services, such as a loyalty
points program. This program allows customers to accumulate points that can be redeemed for
free items. AVIA also educates construction workers from retail stores about their products.
That way, when end users come to the retail store, the construction worker can explain AVIA’s
product to them. Additionally, AVIA also allows its customers to extend credit with a 60-day
repayment period. AVIA also has a same-day delivery program that can deliver orders to retail
stores within 2 hours. These aspects enable AVIA to establish a strong connection with its
customers and maintain their loyalty.
Environmental, Social and Governance (ESG)
Overall, AVIA maintained good ESG performance with an overall rating of 6.28 (A rating). AVIA
has four main ESG focus areas: Economic, Environmental, Social, and Government, which are in
line with SGD 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15, 16. AVIA scores using the MSCI framework. The
framework assesses 17 key themes in the appendix. Key themes are identified based on the MSCI
ESG Industry Materiality Map (Appendix 15, 16, 17)
[E] Environment [4,8/10]
Environmentally friendly value chain quality. AVIA continually strives to improve its value chain
by reducing hazardous waste and replacing environmentally unfriendly activities with more
environmentally friendly ones. AVIA uses solar panels capable of generating 251,894 kWh of
electricity to partially meet the company's electricity needs. Additionally, AVIA is increasing its
use of renewable energy sources by adding 300,000 Wp of solar power in 2022, replacing diesel
forklifts with electric forklifts, and switching from diesel fuel to gas for thermal power generation
and boiler operation.
Increased toxic waste and emissions. AVIA has a Reduce, Reuse, and Recycle (“3R”) program for
returned paint waste (paint returns). These wastes are often caused by packaging damage during
storage, incorrect customer orders, and other reasons. In 2022, a total of 17.08% of potentially
hazardous and toxic waste generated from paint factory activities was recovered through the 3R
approach. In the case of hazardous and toxic waste that cannot be treated, AVIA will endeavor to
collect, segregate, and deliver such waste to government-approved collectors, transporters,
processors, and users of hazardous and toxic waste. However, the amount of hazardous and toxic
waste (B3) has increased significantly over the past two years, increasing by 91% since 2020.
However, this is balanced by the increasing reuse of industrial waste (Figure 13).
[S] Social [8/10]
Zero accidents. AVIA believes that creating a suitable, safe, and healthy working environment
following the (“K3”) principles contributes significantly to employee performance and
productivity. AVIA has also obtained ISO 45001: 2018 for its Occupational Safety and Health
Management System “SMK3”. Moreover, his AVIA's excellent performance in SMK3 in 2022 was
externally recognized by winning the "Zero Accident" award from the East Java Provincial
Government.
Commitment to local involvement. AVIA fosters community engagement by empowering a local
workforce and local suppliers. Currently, all of AVIA's employees are local workers, and local
suppliers meet 76% of AVIA's production needs.
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Fig. 14 - AVIA ESG Risk Mitigation
Source: Company data, Team Analysis
Fig. 15 - GDP & Growth Rate
Source: Company Data
Fig. 16 - Consumption per Capita of Paint and
Decorative Coating
Source: Frost and Sullivan, Company Data, Team Analysis
Fig. 17 - Total Market Size in Paint and
Decorative Coating in Some Countries
(in $MM)
Source: Frost and Sullivan, Team Analysis
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
[G] Governance [8/10]
AVIA is a family business and faces risks such as intrafamily discord, communication problems,
and accusations of nepotism from non-family employees, which can undermine the family
business's desire to grow and its smooth running. AVIA has successfully managed this issue. The
painting industry has been working hard for 45 years. Three of five AVIA's board members are
family members of the company's owners. However, no controversy arose regarding this. AVIA's
entire management team has performed well without any incidents. AVIA also meets the
requirements of ISO 26001 regarding good corporate governance (GCG) practices, prevention
of social harassment, and gender equality.
Investment Summary
1] Precisely Positioned to Embrace the Thriving Growth Opportunities in
Indonesia's Evolving Industry Landscape
Indonesia's nominal GDP is anticipated to experience a remarkable CAGR of 7.7% growth
between 2021 and 2025, establishing it as one of the world's fastest-growing economies (Figure
15). It's important to note that Indonesia currently has a relatively modest paint consumption
rate of only 6.0 liters per capita (Figure 16), which is significantly lower compared to more
developed nations. This presents a unique opportunity for substantial growth, as AVIA aims to
'catch up' with these higher levels of consumption. Furthermore, the Total Market Size in Paint
and Decorative Painting in Indonesia is also predicted to experience an increase of 32.2% from
2022 to 2025F (CAGR 7.23%). Additionally, the paint and coatings industry is estimated to grow
steadily.
2] Strong Distribution Network
We are optimistic about the growth of AVIA's distribution network due to a series of strategic
steps taken until the end of YTD Q3 2023. AVIA's big advantage is that it has 156 Distribution
Centers and around 56,000 retailers, which is far above the average of AVIA's competitors (Fig
19). Additionally, AVIA's unique competency in owning dyeing machines adds a significant
dimension to its competitiveness. This technology allows us to consistently create the colors
consumers want, bringing rare and valuable elements to the market. With the combination of a
strong distribution strategy, high operational efficiency, and the ability to meet consumer color
preferences through advanced technology, our confidence in AVIA's market share growth and
strengthening of position in the market continues to grow.
3] Market Leadership and Expansion
AVIA remains steadfast in its efforts to maintain its position as the leading player in the national
paint industry, boasting a market share exceeding 20%. As a prominent figure in this industry,
AVIA is dedicated to expanding its market share, thereby creating a wider gap between itself
and competitors, both national and multinational. To date, the market presence serves more
than 56,000 hardware stores scattered throughout Indonesia, reinforcing its stronghold and
still growing (Figure 18). Additionally, AVIA is a trusted paint supplier for a diverse range of
contractors (paint workers) across various project types.
These achievements are not only sustained by the ownership of 116 in-house distribution
centers and 40 third-party distribution centers but also by a robust marketing team. The
marketing efforts include the deployment of product consultants strategically placed within
retail outlets to promote AVIA’s products and address any inquiries that may arise from end
consumers visiting these stores. We anticipate a continual increase in the count of Distribution
Centers, projecting growth to 187 by 2032F (Figure 19). This augments our optimism regarding
the advancement of AVIA's market share. The increasing number of market shares will also
reflect the number of stores AVIA has reached (Figure 18)
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Fig. 18 - Numbers of Store Reached
Source: Company Data, Team Analysis
Fig. 19 - Forecasted Number of
Distribution Center
Source: Company Data, Team Analysis
Fig. 20 - Distribution Comparison
Source: Company Data, Team Analysis
Fig. 21 - Architectural vs Trading Goods
Revenue and COGS
Source: Company Data, Team Analysis
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
4] A Comprehensive Range of Architectural Solutions for Diverse Applications
and Budgets
In a developing nation like Indonesia, consumer needs vary widely, encompassing a broad
spectrum of preferences, from the most budget-friendly paints to premium selections. To
effectively meet these diverse demands, Avian Brands offers a comprehensive and diverse
product portfolio, as showcased in (Appendix 14).
Consumer preferences often shift in response to changes in their financial situations. During
economic downturns or when consumers are on a tight budget, there's a tendency to opt for
more affordable paint products. Conversely, when consumer purchasing power improves,
there's a natural inclination to seek out higher-quality paint products.
The company's commitment is to be responsive to these evolving consumer preferences.
Regardless of the specific paint products customers require, Avian Brands is well-prepared to
provide a wide range of product variants to suit their diverse needs. Their mission goes beyond
flexibility; it involves anticipating and consistently exceeding the expectations of their
discerning customer base, ensuring that AVIA remains a trusted and preferred choice in the
architectural solutions industry, no matter how dynamic and varied the market may be.
Financial Analysis
1] Revenue:
AVIA’s revenue structure can be split into 2 segments, 1) the architectural segments which
amount to 80 percent of total revenue, and 2) trading goods segments which amount to 20
percent of total revenue (Figure 22). The Architectural and Trading Goods segments exhibit
robust expansion, with Architectural revenue projected to increase from IDR 5,384 Bn in 2022
to a peak of IDR 11,404 Bn in 2032F (Figure 21) which is around 7.79% CAGR. The key revenue
driver for the architectural segment is Average selling price and volume growth is the driver of
this growth.
Average Selling Price / Metric Tons (ASP) Projection (Figure 23): Our analysis indicates an
anticipated gradual increase in AVIA's ASP at a rate of 3.3%. This projection is lower than the
long-term growth trends in the Indonesian Real Gross Domestic Product (Figure 39) and
minimum wages in Indonesia. We use 3.3% for conservative purposes. Nevertheless, it is
important to note that occasional fluctuations in the prices of direct materials may
necessitate adjustments in ASP. In the long-term perspective, we expect the company to
exercise caution in raising ASP, primarily in line with GDP and minimum wage increments, as
a strategy to sustain both their selling volume and market share. ( Figure GDP)
Volume Growth Projection: Our analysis anticipates a gradual 5% increase in AVIA's sales
volume for architectural solution products. We hold the view that AVIA's sales volume has
the potential to outpace industry averages, attributable to the robust distribution network
(Figure 19, 20) and the strong brand recognition enjoyed by the company, exemplified by
established brands like AVIA, Avitex, and No Drop (Figure 10). volume growth projection is
driven by the increasing number of residents undergoing urbanization (Figure 36),
increasingly rapid repainting cycles (Figure 35), and the growth of the construction sector.
Trading Goods revenue is anticipated to grow from IDR 1,310 Bn in 2022 to IDR 1,996 Bn in
2032F. (Figure 21)
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Fig. 22 - AVIA’s Revenue Structure
Source: Company Data, Team Analysis
Architectural
Trading Goods
Fig. 23 - Architectural Profitability Breakdown
(Metrics Tons)
Source: Company Data, Team Analysis
Fig. 24 - Cost of structure
Source: Company Data, Team Analysis
Fig. 25 - AVIA’s Cost Structure
Source: Company Data, Team Analysis
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
We use a 4.3% growth rate (a rate above inflation but below GDP Growth) to forecast the trading
goods segment. Our assumption is based on the fact that 1) AVIA is not a market leader in the
trading goods segment, and 2) AVIA has a strong position in its distribution channel to maintain
its growth.
2] Expenses:
In 2022, AVIA's Cost of Goods Sold (COGS) amounted to IDR 3,948 Bn with 73% originating from
the Architectural Solution segment and 27% from the Trading Goods segment (Figure 24).
Notably, the Architectural COGS is primarily influenced by direct material prices, avia direct
materials are mostly specifically oil derivatives. AVIA procures its trading goods from affiliated
suppliers, and the prevailing belief is that the costs from these suppliers are fair, given AVIA's
consistently healthy gross profit margin of approximately 17% in the trading goods segment.
We Forecast Both Architectural and trading goods cost of goods sold. AVIA's cost of goods sold
in the architectural segment is mostly determined by:
1. Average COGS / Metric Tons ( Figure 23). We believe that it is very hard to predict their
exact ACP in the future because it is determined by a lot of factors such as Direct Materials
Prices and Avia BTL Expenses. We use the 3 % (8-year Indonesian inflation Growth rate) to
forecast the Average Cost selling price. we use the inflation rate in the assumption that
direct material prices and other costs on average will rise in line with inflation, we believe
that this forecast is pretty conservative remembering that direct materials can fluctuates
up and down.
2. Number of volumes sold. The trading goods segment is forecasted by using the same
growth rate as the revenue which is around 4,3%. We use this rate with an assumption that
their supplier will sell their product with the same margin in the long term. (Figure 21).
Direct Materials Analysis
Most of AVIA COGS are direct materials (Figure 25). Predicting the exact trajectory of AVIA's
direct materials prices poses a notable challenge. However, the company's primary direct
materials costs, which include Resin (comprising 18-23% of the total cost of goods sold), Color
Pigment (7%), additives (5%), solvent (6%), and plastic packaging (7-8%), are significantly
influenced by fluctuations in oil prices, given their status as oil-derived materials (Figure 26).
Avia also faces a currency risk in its direct materials cost due to the importation of certain
direct materials from other countries (Figure 27). AVIA also takes pride in producing our raw
materials in-house, which results in cost savings and sustainability (Figure 27). Historically, AVIA
has effectively managed to safeguard its gross profit margin in the face of rising direct materials
prices by adjusting product ASP. We remain confident that AVIA can maintain and potentially
enhance its long-term gross profit margin, underscoring the strong brand reputation enjoyed by
the company (Figure 29).
OPEX, Salaries, and Wages Analysis
Salaries and wages at AVIA represent a substantial expense, traditionally constituting 58% of
the total operating expenses (OpEx) or around 10% of total Revenue. In our valuation
projection, we anticipate a growth rate of 7% in this category. This projection is substantiated
by two primary factors: 1) The expansion in the workforce due to the establishment of the new
factory in Cirebon. 2) Adjustments in employee compensation in response to the increased
minimum wage. It is noteworthy that the high year-over-year (YoY) increase anticipated in the
years 2024-2026 is primarily attributed to the company's strategic aim to commence
operations at the new factory by 2025. Meanwhile, other operational expenses are projected
based on historical cost percentages of sales.
3] Profitability:
Gross profit is projected to increase from IDR 2,746 Bn in 2022 to IDR 6,240 Bn in 2032F,
reflecting a Compound Annual Growth Rate (CAGR) of 8.55%. From a gross profit margin
standpoint, the AVIA margin is anticipated to expand by 6%, with 2022 at 41% and 2032 at 47%.
This underscores our confidence in the strength of the AVIA brand, influencing its pricing
capabilities. (Figure 29).
Operating profit is projected to increase from IDR 1,459 Bn in 2022 to IDR 3,692 Bn in 2032F,
reflecting a Compound Annual Growth Rate (CAGR) of 9.73%%. From an Operating profit margin
standpoint, the AVIA margin is anticipated to expand by 5%, with 2022 at 21.8% and 2032F at
27.56%. (Figure 29).
Additionally, we conduct a comparative analysis of AVIA's profitability against its closest
competitor in Indonesia, Nippon Paint Indonesia (Figure 30). Nippon Paint Indonesia currently
holds an advantage in operating profit margin, influenced by several factors. Firstly, AVIA's
revenue structure includes trading goods, which typically yield lower profit margins.
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Fig. 26 - AVIA’s Direct Material Breakdown
Source: Company Data, Team Analysis
Fig. 27 - Direct Material Sources
Source: Company Data, Team Analysis
Fig. 28 - Dividend and Utilization
rate
Source: Company Data, Team Analysis
Fig. 29 - AVIA’s GPM, OPM, and NPM
Source: Company Data, Team Analysis
Fig. 30 - AVIA vs Nippon Paint Indonesia
Profitability (IDRmm)
Source: Company Data, Team Analysis
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
Secondly, Nippon Paint's sales mix, particularly its dominant market share in wall paint.
Considering these factors, We believe that Avia's operating margin in the architectural segment
will closely align, with Nippon Paint's operating margin. In summary, the AVIA net profit is
forecasted to rise from IDR 1,400 Bn in 2022 to IDR 3,062 Bn in 2032F, with a CAGR of 8.14%
accompanied by a 2% increase in the AVIA net profit margin. This indicates AVIA’s pricing power
ability to strengthen its profitability margins and its power to control its operational cost. (Figure
29).
4] Healthy operating cash flow & generating dividend regularity.
We anticipate a positive trajectory in Avia's Operating Cash Flow from 2022 to 2032F, projecting
a cumulative operating cash flow of IDR 23,346 Bn during this period (Figure 31). Our long-term
forecast suggests that Avia is poised to sustain its previous favorable Cash Conversion Cycle.
This assumption can be attributed to their robust customer and supplier relationships, coupled
with their adept management, boasting over 40 years of experience, particularly in managing
AVIA‘s inventory.
Moreover, we envision Avia adopting a prudent financial strategy by implementing a 90%
dividend payout ratio of net income. Our confidence in this assumption is grounded in two key
factors:
1. Avia requires minimal capital expenditure owing to its low utilization rate. Our projection for
2032 indicates a 40% utilization rate for Avia. ( Figure 28).
2. Avia boasts significant cash reserves evident in its balance sheets. We firmly believe that their
ample cash position supports a sustainable 90% Dividend Payout Ratio. We firmly believe that
their ample cash position supports a sustainable 90% Dividend Payout Ratio (Figure 28).
5) Strong Financial Position but too much!
We assess AVIA's financial resilience using both the Cash Buffer ratio and quick ratio. (Appendix
7) From the Cash Buffer Perspective, AVIA's cash reserves can cover operational expenses for
624 days (2022, excluding bonds), assuming no net income is generated. We advocate for a
robust cash buffer ratio, ideally within the range of 180 days to 365 days. However, the current
scenario suggests that AVIA may be holding an excessive amount of cash, negatively impacting
its return on equity.
Notably, AVIA experienced a significant drop in return on equity, from 24.5% before the IPO to
15.24% primarily due to the surplus cash from the IPO (Figure 32). We propose that this excess
cash be strategically deployed to optimize returns on equity, perhaps through avenues like
targeted company acquisitions. If such deployment fails to achieve returns surpassing the pre-
IPO levels, we think it prudent for the management to consider cash distribution through
dividends and buy back their stocks below their intrinsic value. This approach ensures a
judicious use of resources while maximizing shareholder value.
Additionally, AVIA's quick ratio reflects a sound financial position, with 6.83 indicating a healthy
liquidity level. The Cash Rich position not only reinforces financial strength but also positively
influences the company's debt position. Avia exhibits minimal financial debt, constituting only
12.7 % of the total equity. This Cash-rich financial position further contributes to the company's
overall financial stability.
Valuation
Following our analysis, we hereby deliver a BUY recommendation for AVIA, with a designated
target price of IDR 611 per share. This recommendation implies a potential upside of 21%. Our
analytical approach is rooted in an intrinsic valuation framework, with the principal valuation
methodology being the application of the Discounted Cash Flow (DCF) method. (Figure 33).
1] FCFE Approach
In summarizing the valuation, three key variables on the income statement impact the
company's net income, consequently influencing the overall valuation:
1) Revenues: These are influenced by both architectural revenues and trading goods segments.
Architectural revenue will be influenced by their average selling price and their volume.
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Surya Capital Basic Material - Indonesia Stock Exchange

Fig. 31 - Cash Flow Summary (in IDRbn) 2) COGS (Cost of Goods Sold): the C0GS of the architectural segment is mostly determined by
Source: Company Data, Team Analysis direct materials' volatility and production costs. Their direct materials and production costs will
be affected by oil-based direct materials, currency standpoint, and the number of volumes sold.
the COGS of the Trading Goods segment is mostly determined by their Affiliation suppliers.

3) Operational Expenses: The efficiency in how Avia management handles operational costs
plays a pivotal role in the valuation process. The operational expense is affected by their above-
the-line marketing projections, salaries, and wages.

2] Net Working Capital and CAPEX Analysis

2023F 2024F 2026F 2028F 2030F 2032F

Net Working Capital analysis: Our projection suggests that AVIA's Delta Net Working Capital will
grow in alignment with the company's sales volume expansion. We hold the perspective that
the Cash Conversion Cycle of the company will persist in relative stability over an extended
Fig. 32 - AVIA’s ROE period. (Figure 34).
Source: Company Data, Team Analysis
Capex analysis: To maintain its company, AVIA usually needs 2 percent of revenue to be used
for capital expenditure. We forecast in 2024 and 2025 AVIA capital expenditure will be high due
to the company's plan to build a new factory in Cirebon, Indonesia. After the new factory is
built, we forecast that AVIA’s capex will not be as high as 2024 and 2025. But still considerably
high due to AVIA's plan to renovate their Sidoarjo factory. (Figure 34).

3] Discount Rate Rationale

Our valuation methodology employs the 30-year Indonesian government bond yield, which
currently stands at 7.25%, as the discount rate. We maintain the perspective that the most
appropriate discount rate for assessing a company's intrinsic value is the risk-free opportunity
cost obtainable by investors through government bonds. Our approach avoids the utilization of
Fig. 33 - DCF - FCFE Approach the Weighted Average Cost of Capital (WACC), as we assert that Beta does not accurately
Source: Company Data, Team Analysis
represent the true cost of equity for investors. (Appendix 5).

4] Growth Rationale
Our projection indicates a robust growth in the company's Free Cash Flow, expected to grow
over 6% in the next decade. This assumption is grounded in several key factors: The rapid
growth in consumption of AVIA's architectural products can be attributed to the increasing
pace of urbanization and GDP growth (Figure 15, 36). This trend is expected to lead to a
significant uptick in the volume of industry products sold, as urbanization typically drives
higher demand for construction and architectural solutions (Figure 37). Increased industry
consumption due to rising standards of living. The increase in the Indonesian standard of living
will drive the demand for architectural products and shorten the repainting cycle. (Figure 35)
The company's substantial cash reserves, position it for potential acquisitions of competitors
within the industry, which could bolster company profitability.

Fig. 34 - AVIA’s NI, CAPEX, and NWC It's essential to note that forecasting a company's terminal growth rate carries a relatively high
(in IDRbn) margin of error. Recognizing competition risk as one of the primary company risks (Figure 33),
Source: Company Data, Team Analysis
we have conservatively estimated the terminal Free Cash Flow growth rate to be approximately
1.5% below the long-term Real GDP growth rate in Indonesia (Figure 39). We have refrained
from adopting a more aggressive approach in estimating the terminal growth rate, as we do not
identify sufficient competitive advantages within AVIA to justify such a stance.

5] Liquidation Value Analysis

For conservative assessments, we solely consider net cash when determining the liquidation
value of the company.
2023F 2024F 2026F 2028F 2030F 2032F

6] Relative Valuation

Fig. 35 - Indonesia Repainting Cycle

Source: Frost and Sullivan, Team Analysis

6 - 7 years

3 - 4 years

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2023F 2024F 2026F 2028F 2030F 2032F

Surya Capital
Fig. 36 - Indonesia Urbanization Rate
Source: Statista, Team Analysis
Fig. 37 - Indonesia Commercial Real Estate
Market (USD Bn)
Source: Mordor Intelligence, Team Analysis
CAGR 7.4%
Fig. 38 -Scenario Analysis - Impact to Net
Income and Stock Price (in IDRbn)
Source: Company Data, Team Analysis
TP: 789
TP: 611
TP: 557
Fig. 39 - Indonesia Real GDP Growth
Source: Company Data, Team Analysis
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
We also conducted relative valuation through peer multiples pricing to check whether our
target price is in a sensible range. The target price for our relative valuation is 613 / share. We
did not find any compatible peers domestically.
Thus, we compile comparable overseas retailer peers, based on several criteria: 1) Operate as a
producer of architectural products. (like AVIA); 2) market leader in architectural products within
the country ); 3) at least IDR5tn in revenues; 4) at least IDR10tn in assets. We attain the
following companies based on our peer group analysis: 1) Sherwin-Williams (SHW UN EQUITY), 2)
PPG Industries, Inc (PPG UN EQUITY), 3) RPM International, Inc (RPM UN EQUITY), 4) Axalta
Coating Systems Ltd (AXTA UN EQUITY), 5) Akzo Nobel N.V (AKZA NA EQUITY), 6) Nippon Point
Holdings Co Ltd (4612 JT EQUITY), 7) Kansai Paint Co., Lt (4613 JT EQUITY), 8) Asian Paints Ltd
(APNT IN EQUITY), 9) Berger Paints India Ltd (BRGR IN EQUITY), and 10) Kansai Nerolac Paints
Ltd (KNPL IN EQUITY.
At the current share price, AVIA is trading at FY23F PE of 21x below the global paint company
median PE of 24.8x
7] Scenario Analysis
We've conducted a scenario analysis to assess AVIA’s performance across 3 different scenarios
(Figure 38). We believe that the primary driver for AVIA’s valuation lies in their pricing power
and the ability to enhance both ASP and volume growth. In the base case scenario, representing
our strongest conviction, we project a 3.3% ASP growth and a 5% volume increase. This
underscores AVIA's strategic emphasis on enhancing profitability while maintaining competitive
positioning. In the best-case scenarios, we anticipate a more aggressive approach with a 5% ASP
growth and a 5% volume surge, signifying a higher risk for reduced volume growth in pursuit of
increased profitability. Conversely, the worst-case scenario reveals a 2% ASP growth and a 6%
volume increase, indicating AVIA's focus on increasing its industry positioning and market share.
It's essential to note that AVIA ASP and Consumer Buying Power play a pivotal role in shaping
their volume growth prospects.
Investment Risks
1] Macro Economy Risk
With the official end of the COVID-19 pandemic in July 2023, Indonesia's economy continues to
recover. According to data from the Central Statistics Agency (BPS), Indonesia's economy has
shown an increase of 4.94% YoY and 1.6% QoQ in the third quarter of 2023. However,
Indonesia's economy is not immune to risks. The global economic slowdown amid the Russia-
Ukraine conflict, and Palestine-Israel conflict, will increase the risks to achieving Indonesia's
economic growth in the fourth quarter of 2023. Global risks are expected to impact Indonesia's
economic growth, which is targeted to reach 5.2% (Coordinating Ministry for Economic Affairs of
the Republic of Indonesia, 2023). The global economic growth for 2023 is projected to slow
down from 2022. Nevertheless, developing countries are projected to grow above global
economic growth and developed countries.
In the year 2024, Indonesia will also experience a political year with a presidential election.
During a change of power, there are several risks to be considered. IKN (National Capital
Integrated Coastal Development) presents a good opportunity for AVIA if capitalized
effectively. If the development of IKN continues, it will stimulate housing and infrastructure
demand, consequently driving the need for the paint industry. If not continued or if the
implementation of its construction is not executed effectively, there is a risk of losing the
opportunity for growth.
If all the worst-case scenarios of this risk occur, it will have an impact on AVIA's operating profit.
During economic downturns and when the purchasing power of the public is weak, AVIA's sales
volume will be affected. We observed this in 2022 when sales volume declined, and at the same
time, AVIA increased its ASP. However, in 2022, AVIA's operating profit margin decreased from
26.59% in 2021 to 21.80% in 2022.
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Surya Capital Basic Material - Indonesia Stock Exchange

Fig. 40 - Global Economy Outlook (GDP

Growth) 2] Industry Risk
Source: Badan Pusat Statistik
[IR1] Industry Risk 1: Lucrative Market of Indonesia. Looking at (Figure 42, 30), Nippon Paint
Japan claims that Nippon Paint Indonesia is its most profitable subsidiary, with an operating
margin exceeding 30% on average. Each market leader in different countries does not have
profitability as good as either AVIA or Nippon Paint Indonesia, especially in the Indonesian
region. Even Nippon Paint's subsidiary in China holds the number 1 market share, they only have
an average operating margin of 15%. It can be said that the paint market in Indonesia still has the
potential to attract new competitors to enter and become more competitive, due to a significant
difference in profit margins among companies in other countries.

AVIA is also faced with regulatory issues. Over time, the government is increasingly paying
attention to environmental issues such as factory waste and carbon emissions. As a paint
factory, AVIA generates several types of waste from its operational activities, namely hazardous
Fig. 41 - Crude Oil Futures Prices and toxic materials and non-hazardous and toxic materials. Chemical spills, oil, fuel, or other
Source: Tradingeconomics, Team Analysis hazardous substances can have a negative impact on soil quality, water, air, biodiversity, and
human health. For the sake of the company's reputation and sustainability, AVIA is compelled to
comply with the new regulations and standards, whether willingly or not.
Q2 2022 Q4 2022 Q2 2023
+7.7% -12 % -12.3 %
Q1 2022
+24.8% Q3 2022
-22 % In facing industry risks, we are confident that AVIA has more than enough ammunition to
Q2 2021 Q4 2021
+26.7%
Q1 2021 Q3 2021
-5.6%
confront them. AVIA holds a very strong financial position with a quick ratio of 6.82 in 2022,
+17.6% +0.17%
indicating good liquidity. Additionally, a rich cash balance sheets provides AVIA with the
flexibility to compete with its rivals, whether through organic means or inorganic ones
(acquisitions). AVIA also has more than enough capital to undertake ESG issues such as carbon
emissions and hazardous wastes.

3] Business Risk
[BR1] Business Risk 1: The risk of rising derivative oil raw materials prices. There are three main
derivative oil raw materials used in producing paint. These materials are Resin, Packaging
(plastics), and solvents. Raw materials account for 58% of the Cost of Goods Sold (COGS). A
Fig. 42 - Other Countries Market Leader resin incurs a cost of 22% of COGS, then plastic packaging at 7-8% of COGS. Solvent contributes
Operating Margin 5% to COGS. AVIA claims that when the price of oil increases by 50%, its own-produced raw
Source: Company Data, Team Analysis materials through the AVIA supply chain will not automatically increase by the same amount.

Due to 30% - 35% of raw materials still being imported by the company, every 5% strengthening
or weakening of the exchange rate impacts the increase or decrease in COGS (Cost of Goods
Sold) by 0.6% - 0.7%.

Crude Oil Futures Prices vs AVIA’s Price Increase

Source: Company Presentation, Team Analysis

Fig. 43 - Avian Pricing Strategy Compared to When examining (Figure 43) the quarterly chart, every time AVIA raises its selling price, it results
Production Volume in a decrease in production volume. This indicates that there are limitations for AVIA in
Source: Company Data, Team Analysis increasing the selling price of its products, leading to a decrease in the all-time low volume in
2022. When looking at the data annually, there is a more noticeable correlation, especially in the
year 2022 when they increased the price of paint up to 4 times due to a 10% increase in
currency and a 37% increase in Oil Prices. However, pricing determination is also one of the AVIA
strategies in fighting competition.

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Surya Capital
Appendix List
FINANCIALS AND VALUATION
1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
4. Key Forecast Driver
5. Key Forecast Assumption
6. Key Ratio
7. AVIA’s Free Cash Flow
8. Peers Valuation Comparison
Financials and Valuation
Appendix 1. Income Statement
Source: Surya Capital and Company Data
Appendix 2. Balance Sheet
Source: Surya Capital and Company Data
INDUSTRY AND BUSINESS
9. AVIA’s New Product Launched in Q3
2023
10. AVIA’s Distribution Center
11. Architectural Solution Products
12. Board of Commissioner
13. Board of Directors
14. AVIA’s Products
PT Avia Avian Tbk
Basic Material - Indonesia Stock Exchange
ESG AND RISKS
15. ESG MSCI Scorecard
16. Key Issue Evidence
17. Key Issue Performance Score
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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 3. Cash Flow Statement

Source: Surya Capital and Company Data

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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 4. Key Forecast Driver

Source: Surya Capital and Company Data

Appendix 5. Key Forecast Assumption

Source: Surya Capital and Company Data

Appendix 6. AVIA’s Free Cash Flow

Source: Surya Capital and Company Data

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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 7. Key Ratio

Source: Surya Capital and Company Data

Appendix 8. Peers Valuation Comparison

Source: Surya Capital and Company Data

Industry and Business

Appendix 9. AVIA’s New Product Launched in Q3 2023

Source: Surya Capital and Company Data

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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 10. AVIA’s Distribution Center

Source: Surya Capital and Company Data

Appendix 11. AVIA’s Architectural Solutions Product

Source: Surya Capital and Company Data

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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 12. Board of Commissioner

Source: Surya Capital and Company Data

Appendix 13. Board of Directors

Source: Surya Capital and Company Data

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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 14. AVIA’s Products

Source: Surya Capital and Company Data

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 PT Avia Avian Tbk
Surya Capital Basic Material - Indonesia Stock Exchange

CATEGORY PRODUCT NAME

Cement Additive Giant Mortar L500 No Drop Plaston.

Avian Zinc Chromate Lenkote Alkali Resisting Primer Yoko Loodmeni - Cat Dasar untuk Kayu Belmas Zinc Chromate
Base Paint Avitex Alkali Resisting Primer Yoko Yzermenie - Cat Dasar untuk Bes Suzuka 4100 Epoxy Filler
Lenkote Wall Sealer

Suzuka Clear Coat 2:1 Suzuka Lacquer

Duco and Spray Paint Suzuka Clear Coat 4:1 Suzuka Spray

Absolute Roof Yoko Roo

Roof and Zinc Paint Avitex Roof

Wood and Metal Avian Aluminium Paint Platinum Synthetic Glovin Synthetic
Paint Avian Kayu dan Besi Yoko Blu Avian Cling Synthetic

Floor Coating Avian Cat Paving Avian Roadline

Natural Stone No Lumut Water-Based

No Lumut Solvent-Based
Coating

Boyo Politur Vernis Solvent-Based
Boyo Politur Vernis Water-Based
Wood Care
Boyo Wood Stain Solvent-Based
Boyo Wood Filler Solvent-Based
Wood-Eco Woodstain SolventBased WoodEco Politur Interior P01 Solvent-Based
Wood-Eco Woodstain Water-Based WoodEco Politur Eksterior P03 Solvent-Based
Boyo Sanding Sealer NC SolventBased
Boyo Clear Coat NC Solvent-Based

Homedeco Glitz Homedeco Magnetic

Special Effect Paint
Homedeco Glow in the Dark Homedeco Metallic

Aquamatt Aries Cat Tembok Avitex Emulsion Avitex Exterior Everglo

Aries Gold Avitex 4kids Avitex Dapur dan Kamar Mandi Avitex One Coat Everglo Kids Care
Wall Paint Fres No Odor Sunguard Supersilk Avitex Anti Viruz
Jasmine No Odor Medicare Sunguard All inOne Supersilk Anti Noda Avitex Gold

Avitex Biocidal Wash

VIP Pengupas Cat Tembok (Water-Based)
Others VIP Paint Remover (SolventBased)

Avian Lem Epoxy Lem Putih VIP PVAc Lem Putih MAX PVAc
Glue Avian Non-Sag Epoxy Viplas

No Drop No Drop Mortar Anti Bocor No Drop Tape No Drop Membrane

Waterproofing PRO-X 207
No Drop Bitumen Black No Drop Anti Panas

Aries Thinner Lacquer A Avian Thinner B Asli Avia Thinner Lacquer Super
Paint Thinner Aries Thinner Lacquer A Special Avian Thinner Enamel

Aries Gold Wall Putty Lenkote Plamir Tembok (Wall Putty) Giant Mortar 220
Putty Avitex Plamir Tembok No Odor Wall Putty

Giant Mortar 260 Giant Mortar 380 Giant Mortar 480

Instant Cement Giant Mortar 270 Giant Mortar 420 - Perekat Keramik

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 PT Avia Avian Tbk
Surya Capital Basic Material - Indonesia Stock Exchange

ESG and Risks

Appendix 15. ESG MSCI Scorecard

Source: Surya Capital and Company Data

ESG ratings were determined by evaluating risk and opportunity exposures and management performance. The risks and rewards
of exposure are evaluated on a scale of 0 to 10, with 0 indicating no exposure and 10 indicating very high exposure. The control
score also ranges from 0 to 10, with 0 representing no sign of management effort and 10 representing firm control. To obtain the
same key issue score, the Risk Exposure Score and the Risk Management Score are combined such that the higher the Exposure
Score, the higher the level of management competency that must be demonstrated. Opportunity assessment works similarly to
risk, but a different model combines opportunity recognition and management. Ratings for key issues are also given on a scale of 0
to 10, with 0 being very poor and 10 being very good.

Appendix 16. Key Issue Evidence

Source: Surya Capital

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Surya Capital Basic Material - Indonesia Stock Exchange

Appendix 17. Key Issue Performance Score

Source: Surya Capital

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