Report of the Board of Commissioners

Dear Stakeholders,

The Board of Commissioners (“BOC”) recognizes the continuing hard-work efforts demonstrated by PT Matahari Putra Prima Tbk (“Company/MPPA”)’s Directors, Management and staff in navigating the Company to overcome the challenges in 2018. The Company continued to reposition itself to become a customer driven retail organization in order to provide its best retail offerings to the consumers. Alongside, a certain number of issues were addressed, tight cost efficiency measures, including a further streamlined changes within organization structure, were taken as well as the rights issue in mid-year to strengthen the Company’s working capital was successfully executed. These would support the Company’s strategy to realign its basic foundation and business direction going forward.

The strategic steps are supported by the Company’s strong store network nationally consisting of 107 Hypermarts, 24 Foodmarts (Foodmart Primo & Foodmart Fresh), 74 Boston Health & Beauty, 12 FMX convenience stores and 2 SmartClubs at the end of 2018. The formats are also well positioned to support growing demand from increasingly urbanized middle-class customers.

Macroeconomic Overview

The government’s economic policies ensures a measure of stability in both inflation and exchange rates, while its structural reform program has continued to underpin the improvement in the country’s macroeconomic fundamentals. This was seen through a positive investment growth and partial recovery of key commodity prices, while the country’s GDP growth reached 5.18% and inflation was at the rate of 3.1% within the year.

Despite the encouraging fundamentals, the area of consumers spending on goods and services continued to be a challenging environment. The relatively low increase of annual minimum wages negatively affected consumer-spending power. These conditions were exacerbated by the shift of the peak season of Lebaran closer to the new school year resulting in less overall spending in the retail market.

In addition to the macroeconomic situation above, the competition from local supermarkets aggressive price cutting and proliferation of minimarts across Indonesia has put pressure on MPPA sales and margin, impacting the Company’s ability to reach its target performance for 2018.

Performance Evaluation

During the year, the BOC has been closely monitoring and reviewing the Company’s strategy, acknowledging changes in the market as well as consumer behavior and advising the Directors and Management to bring the Company aligning its direction toward those changes.

We strongly believe and are delighted to see that the Company making good progress in changing its focus to a more committed consumer-centric retailer with an enhanced approach to serve the consumer with the right products at competitive prices in 2018. Started in previous 2017 with the launch of competitive pricing strategy of 5,000 SKUs, this initiative has widened the focus to several important actions, such as competitive pricing strategy for major fast-moving, daily basic household needs; assortment reviews and inventory management with a goal to focusing on fast moving, productive SKUs and to reducing slower unproductive items for better cashflow; intensive review and implementation of our core Hypermart new basic format for more efficient operation and Foodmart supermarket format to adapt the market change as well as reduction the Company’s exposure from unprofitable B2B business.

The Company also continued in re-examining its cost structure to support a lower merchandise margin business by looking at a number of operational efficiencies. These include headcount productivity optimization including further change in organization structure, a review of unsupportable costs including a shift of marketing spending from expensive nationwide media advertising to a more cost-effective social media approach and community-based marketing as well as the development of a low-cost store format and online business to adapt the changing consumer lifestyle.

With these cost efficiency actions, the Company was able to achieve a 22.1% savings in its selling, general, and administrative expenses compared to the previous year.

In summary, we are pleased and commend the Directors and Management team for their leadership during the year and their unwavering focus in enhancing the Company’s value proposition for the consumers. Their positive steps to leverage some of the Company’s core capabilities during the year, particularly with the realignment of the Company’s business strategy, would certainly bring MPPA to another level of future growth path.

Supervision of Strategy Implementation

As specified in Indonesia’s Company Law and the Company’s Articles of Association, the BOC’s main responsibility is to exercise supervisory duties over BOD and Management team and to provide guidance where necessary. We do this primarily through a program of scheduled meetings, but we also endeavour to maintain other channels for frequent, open and constructive communication.

Throughout 2018, the BOC was engaged in and gave advice on the Company’s plans and strategy. In compliance with the Financial Service Authority (OJK) Regulation No. 33/POJK.04/2014, the BOC continued to enforce the compliance of the guidelines to each BOC member. During the year, the BOC held 6 meetings and 4 separate formal meetings with BOD. Within its bi-monthly internal meeting, the BOC discussed various topics ranging from external market conditions and internal Company’s on-going matters as well as reviewed reports from the Audit Committee and Nomination and Remuneration Committee (NRC). The 4 formal meetings with the BOD were held quarterly to review both quarterly and year to date financial and operating performance. During these meetings, strategic plans were reviewed and, where necessary, updated. Actions were then designed to insure delivery of the updated strategic plan. Upon completion of these meetings BOC and BOD members were aligned on the results, strategic plan updates and necessary execution actions.

Corporate Governance

The BOC is assisted by the Audit Committee, chaired by William Travis Saucer. The Audit Committee has consistently placed high priority on Good Corporate Governance practices (GCG). Within the year, the Audit Committee conducted 4 meetings to review audit reports from Internal Audit, the findings and solutions of which were reported formally to BOC. It is in the opinion of the BOC that the Company has delivered all aspects of GCG according to guidelines. The Codeof Conduct and Whistleblowing system continue to be strengthened at all levels of the organization, helping to ensure the compliance with external laws and regulations.

Additionally, in compliance to OJK Regulation No. 34/POJK.04/2014, the Nomination and Remuneration Committee (NRC), chaired by William Travis Saucer, assisted the BOC to evaluate and advise on the remuneration of BOC and BOD members. During the year, the NRC conducted 4 meetings whose recommendations have been proposed and communicated to the BOC.

During 2018, the NRC submitted several proposals to the BOC in order to strengthen the overall structure of BOC, BOD and Management team. In April 2018, the BOC approved the appointment of Elliot James Dickson as the Company’s new CEO. Elliot brings strong vision and leadership, passion for the consumer, and execution capabilities needed to build upon our market leadership in this fast-changing environment.

Assessment of GCG Effectiveness

Based on the consideration above, the BOC has concluded that, in general, the Company’s GCG practices are being implemented effectively. However, within the dynamic development of the business environment, it is inevitable that the Company’s risk exposures might increase. The BOC urges the BOD to address any incompliance identified during the year and continues to adjust and strengthen the Company’s internal control and risk management systems going forward.

Changes in the Composition of Board of Commissioners

Based on the NRC proposal to the BOC as well as shareholders’ approval at the Company’s AGMS and EGMS in 2018, the structure of BOC has changed in order to strengthen the execution of supervisory duties. New BOC members are:

  • Roy Mandey as Independent Vice Chairman. Currently, Roy is the Chairman of APRINDO (Indonesia Modern Retail Association) and has wide networking within the retail industry and government.
  • Rudy Ramawy as Independent Commissioner. With his extensive experience in digital business, Rudy will strengthen the BOC to supervise the Company’s future online business as well as potential benefits with third party’s digital resources.
  • Liu Wai Ling as Independent Commissioner. Wai Ling will certainly bring valuable resources to the BOC with her extensive retailing background in Southeast Asia and China.
  • Henry Liando as Commissioner. With his remarkable experience in investment banking and corporate finance, Henry will also strengthen the BOC with more insights on financials.

The remaining members of the BOC in 2018 consisted of me, John Bellis, as the Independent President Commissioner, William Travis Saucer, Chua Siang Hwee (Jeffrey), Niel Nielson and John Riady. As we enter 2019, the BOC will continue to move the Company to higher levels of GCG practices.

Perspective on the Company’s Prospect

Indonesia’s GDP growth is expected to rise beyond 5.15% level in 2019 (government state budget projection), driven by rising exports, domestic demand and the on-going recovery of commodity prices. Inflation is projected to remain stable, while analysts expect to see an expansion of public and private investment, underpinned by the on-going reforms to create a more conducive business environment.

The Company is well-positioned to capture its potentials when consumer spending recovers. Moreover, the country’s demographic and socio-economic trends, including a young, growing and increasingly urbanised population and an expanding middle class, signal the potential for sustained consumption growth in the medium to long term.

For the coming year, management proposes to maintain the strategic focus of the business on maximising the value proposition for customers as well as continuing its tight cost controls. Management will also continue to explore opportunities to improve the overall efficiency and profitability of the business.

Taking these projections and the Company’s current condition into account, the BOC are optimistic that the strategy proposed by the BOD and Management team for 2019 will put MPPA in a right direction to optimise upcoming opportunities as well as to deliver sustainable results to the stakeholders.

On behalf of the BOC, I wish to thank each of our dedicated team members for their strong efforts in 2018. To our partners, I would like to reiterate that the Company would continue to work with you collaboratively, enabling us to prosper together in the future. Finally, to our stakeholders, I believe we have taken the important steps in 2018 to re-align MPPA on a positive growth path. Thank you for your continued support and confidence in MPPA.

On behalf of the Board of Commissioners,

John Bellis

Independent President Commissioner