October Monthly Report Make Best Use of Momentum NHKS Monthly Report (English)

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Indonesia Market

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Ou2H17

Make Best Use of Momentum

Summary:

In SeptemberIndonesia’sstock market failed to uphold its two-back-to-back rallyin July and August as JCI waned by 1% to 5,951.5. Despite the failure, Indonesia’s financial market circumstances in September improved significantly.The rupiah was successful stableat the range of 14,800-14,950 andthe bonds market ralliedon the back of the decline of more than 50 bps in yields of the government bonds. The shrugging off concern about the global trade war and theFed’sstance of monetary tightening were the logical takeaways for a conducive trading territory.

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Market Recap September 2018

• JCI : 5,976.55 (-0.70%)

• USDIDR : 14,903 (+1.31%)

• 10-year Government Bond Yield : 8.115% (-8.7 bps)

• Significant Factors Affecting Market in September 2018 : 1. Fears of the U.S. New Import Tariffs

2. Subdued jitters of trade war between the U.S. and China

USDIDR & Government Bond Yield | Aug - Sep 2018

Source: Bloomberg, NH Korindo Research

Jakarta Composite Index | Aug - Sep 2018

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Declining Forex Reserves Promptly Halted

• In August 2018, Indonesia posted the forex reserves of USD117.9 billion. The figures were lower thanJuly’sforex reserves of USD118.3 billion in July and the lowest figures since January 2017.The decline of USD400 million inAugust’sforex reserves was lower than the decline of around USD1.1 billion-USD3.9 billion per month from February to July 2018.

• We estimate thatthe trend of downbeat forex reserves virtually reached its climax. From February to November 2015, forex reserves depleted by USD15.3 billion amid the climax of the rupiah depreciation settling at 14,691 per the U.S. dollar. Now, forex reserves have rooms for whittling away after posting the decline of USD14.1 billion and reaching the highest figures in January 2018.

Forex Reserve & 10-year Government Bond Yield

Source: Bank Indonesia, Bloomberg, NH Korindo Research

Forex Reserve & USDIDR | Sep 2014 - Aug 2018

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Pressure Deriving from Export Anomaly

• August’strade balance posted the deficit of USD1.02 billionlower thanJuly’sdeficit of USD2.01 billion.

• August’stotal export depleted by 2.6% m-m.The decline inAugust’sexport was an anomaly because on monthly basis,August’sexport consistently hiked as of 2014. The downturn inAugust’sexportwas attributable to the decline in export volumesinstead of the decline in prices of exported goods.

• August’s total imports edged down by 7.8% m-m to USD16.8 billion.The lowering imports were attributable to the downturn in the average prices of imported goodsfrom USD1,178 per ton in July to USD1,082 per ton in August. On the other side,August’simport volumes nudged up0.16% m-m to 15.6 million tons.

Export Volume (‘000 tons) and Export Avg. Price (USD/ton)

Trade Balance (USD mn) | Sep 2016 - Aug 2018

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Consistent Trend of Core Inflation

• In August, Indonesia posted the deflation of 0.05% m-m. Meanwhile,August’sinflation was lower thanJuly’sinflation of 0.28% m-malining with the monthly cycle.

• August’score inflation of 2.90% y-y increasing thanJuly’score inflation of 2.87%.The trend of core inflation rose further since February 2018. The acceleration in July andAugust’score inflation signed that the trend of recovery in domestic consumption continued further albeit the ending of Idul Fitri.

Annual Headline and Core Inflation | Aug 2017 - Aug 2018

Source: Indonesia Statistics, Bloomberg, NH Korindo Research

Monthly Inflation | Jun 2017 - Aug 2018

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Rupiah Beginning to Be Stable

• The rupiah recovered in September asit was capable to settle at the range of 14,800-14,950in stark contrast to its depreciation in August.

• In August the rupiah was hardly stable despite the U.S. dollar depreciation. In September, the U.S dollar depreciated further resulted in the stable rupiah.

• The stable rupiah aligned with other emerging economies’ currencies appreciation; the Turkish lira was capable of being appreciated in August after a steep depreciation in August, for example. The Argentina peso, dissimilar from the rupiah and the Turkish lira, remains to be depreciated further because it conceives worse internal circumstances compared to its emergingeconomies’peers.

Selected Currencies’ Depreciation against USD

USDIDR & Dollar Index

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Rally in Government’s Bonds Shrugging Off Concerns about the Fed

• The stable rupiah causedIndonesia’sgovernment bonds to rally. After reaching its highest position of 8.623% on September 5th_,_{yields of 10-year government bonds}

consistently waned further to 8%.

• The decline of higher the 50 bps inIndonesia’sgovernment was in a stark contrast to the hike to 3%-3.1% in yields of the U.S. government bonds. The figures topped the psychological threshold and signalled that the jitters of monetary tightening sending yields of the U.S. government bonds to soar gave no significant impacts onIndonesia’smarkets.

• The consistent decline in yields ofIndonesia’sgovernment bondswas also coupled with the trend of net buy by foreign investors since the mid of September.

Foreign Net Buy (IDR tn) in Indonesia Government Bond

Source: Bloomberg, NH Korindo Research Indonesia and US 10 year Gov’t Bond Yield

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• In September 2018, BI raised BI 7-Day Reverse Repo Rate by 25 bps to 5.75%, the highest since May 2016. It was the fifth rates hike in 2018;BI has raised its benchmark rate by 150 bps since May 2018.

• In 2013 when the global volatility occurred, BI raised its benchmark rates by 175 bps from 5.75% to 7.50%. Meanwhile, BI has raised its benchmark rates by 150 bps in 2018. The trend of stable rupiah starting in September 2018 underpinned by the shrugging off global concern about the U.S. and China trade war and theFed’srate hike in December causesBI to face less intense pressure on re-raising its rate until the end of 2018. However,to rejuvenate the domestic financial market, BI likely raises its rate once more at the end of 2018.

BI’s Effective Policy

Benchmark Rate & 10-year Government Bond Yield

Benchmark Rate & USDIDR

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Welcoming Net Buy by Foreign Investors in Stock Market

• In September JCI slipped, posted the lossin a stark contrast to rally territory where majorities of Asia markets reigned.

• However since July 2018,within the 3-consecutive months, Indonesia’sstock market experienced no massive capital outflows. This backdrop was the logical takeaway forJCI’s stable movement at the range of 5,700-6,000. Considering the stable rupiah coupled with the rally in the government’s bonds, foreign investors likely start to post massive net buy; it impacts onJCI’srally in October.

Foreign Net Buy (Sell) Position in JCI (IDR tn)

Global Market Performance

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Consumer and Automotive Sectors Reigning in September’s Rally Territory.

• After blown by the negative sentiment of the rising benchmark rate by BI,the property sector posted a steep decline of 6.6% ledSeptember’sdecline in JCI.

• However, in Septemberthe two large-cap sectors, namely Consumer and Misc. Industries were reigning in a rally mood of 2.4% and 1.3%, respectively. It signed that the decline in JCI should not spark fears.

• The rally in consumer sector was entwined with the core inflation climbing consistently, signaling the recovery in Indonesia-based consumption. UNVR led the rally by posting the rally of 7.5%. On the other side, INDF waned by 6.3%.INDF’sdivergent stock price is potential for rebound.

• Meanwhile the rally in misc. industries were attributable to the rally inASII’sstocks. The performance of Indonesia-based automotive sales is a positive catalyst for ASII.

Major Consumer & Automotive Stocks Performance

Sector Performance

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High Chance of October’s Rally

JCI Seasonality Monthly Return in October

Forward P/E

• JCI posting the decline in September caused its current valuation of forward P/E to settle at 14.3x. The widening gap between the current valuation and the average forward P/E of 15.3xcauses its current valuation quite attractive.Until the end of 2018, JCI is potential for reaching the target of 6,375.

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Top Recommendation: Aneka Tambang (ANTM

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Metal and Mineral)

• 2Q18: Downbeat Margin

ANTM posted 2Q18’ssales of IDR6.08 trillion (+6% q-q or +347% y-y). On the cumulative basis, 1H18’s revenue reached IDR11.85 trillion (+292.4% y-y). Meanwhile, 2Q18’s net profit was IDR99 billion vs. 1Q18’s net profit of IDR246 billion (-60% q-q). Meanwhile, its EBIT margin was 3.3% (vs. 5.5% in 1Q18) and net profit margin was 1.6% (vs. 4.3% in 1Q18).

• 2Q18: Bottom Line Constrained by the U.S. Dollar

Its finance costs amounted to IDR190 billion soaring 120% q-q (vs. IDR86 billion in 1Q18). The biggest contributor is the interest expense of long-term debt and bonds debt interest. Furthermore, the loss of forex gain was IDR173 billion soaring 122% (vs. IDR78 billion in 1Q18). 72% of its total debt was in the U.S. dollar denomination sensitive to the trend of rupiah depreciation.

• 2018E: Increment in Target of Gold Sales

ANTM revised its target of gold sales from 24 tons at the early of 2018 to 25.3 tons consisting of the domestic sales of 13 tons and the exports sales of 12.3 tons. Until 8M18, its gold sales reached 18.1 tons consisting of the domestic sales of 10.7 tons and the exports sales of 7.4 tons. The 8M18’ssales reached 71.5% of 2018’ssales target of 25.3 tons of gold.

Dec 2019 TP 1,200

Consensus Price 1,251

TP to Consensus Price -4.1%

vs. Last Price +42.0%

Last Price (IDR) 845

Price date as of Sep 28, 2018 52wk range (Hi/Lo) 1,015 / 600

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Top Recommendation: Indofood Sukses Makmur (INDF

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Consumer)

• CBP Division as the Pillar ofINDF’sStability

The Consumer Branded Products (CBP) division remains to be INDF’s backbone because this division contributes 52% toINDF’stotal sales. The CBP division dominates virtually 72%-75% of Indonesia-based instant noodles’market shares and continuously innovates new products, e.g. the launch of Indomie Mi Keriting Goreng Rasa Telur Asin expected to accelerate its future growth. Furthermore, ICBP carried out the increment of 10% in production capacities of instant noodles distributed to Greater Jakarta; accordingly, the total national capacities reach 18 billion packages per year. Overseeing ICBP’s market share dominance, we estimate that the CBP division likely maintains a stable growth of 5-6% per year from 2018 to 2020 with the net profit margin at around 12%.

• Awaiting Surprises from Flour Division and Agribusiness Division

We estimate that the flour division and the agribusiness division will give surprises of rosier sales. The cost-plus sales strategy and the recovery in prices of milled wheat flour since the early of 2018 are the growth pillars for the flour division. The flour division posted the increment of 6% and 12% in 1Q18’ssales and 2Q18’s sales, respectively. Such rosier sales were in stark contrast to the decline of 5% and 6% in 1Q17’s sales and 2Q17’s sales. The Agribusiness division is suffering from waning sales because of sluggish CPO prices. The further implementation and improvement in the biodiesel mandatory are rebound drivers for CPO prices because the policy inevitably raises the demand for CPO. Bloomberg Agriculture Index currently settles at the lowest level within 18 months and is estimated to be rebound within two years as it is backed by the B20 mandatory competing with the rising crude prices.

Dec 2019 TP 8,175

Consensus Price 8,250

TP to Consensus Price -0.9%

vs. Last Price +38.6%

Last Price (IDR) 5,900

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Top Recommendation: Bank Rakyat Indonesia (BBRI

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Bank)

• 2Q18’sProfit: Constrained by High Provision

BBRI posted the net profit of IDR7.5 trillion or growing by 10.4% y-y—lower than the estimated net profit of IDR8.4 trillion. The lower net profit was attributable to the high provision cost of IDR5.0 trillion (vs. the estimated provision cost of IDR4.2 trillion). Despite the sliding net profit, the 2Q18’s interest income, net interest income, operating revenue, and pre-provisioning operating profit (PPOP) were pursuant to the esti mate we make.

• Growth Acceleration in Credit Distribution

BBRI enjoyed the growth of 15.5% y-y to IDR794.3 trillion in credit distribution. The growth was the all-time high since the 1Q17. Its small commercial segment succeeded to mark the growth of 21%, while its SOE segment surged by 24% after sliding in the 1Q18. We overview that its 2018’scredit outgrows 14%.

• Expectancy of 2018’sNet Profit Acceleration

We overview that BBRI likely enjoys the rosier net profit of 13.7% y-y to IDR 32.4 trillion (vs. the 2017’s growth of 10.7%). The pressure stemming from the high provision cost likely subdues, particularly in the 4Q18, while the net interest margin likely remains to stand at 7.7% since the 1Q18. Indeed, it most likely enjoys the sliding cost of deposits thanks to the 4Q18’shike in the savings account.

IDR bn FY2016 FY2017 FY2018E FY2019E

Price date as of Sep 28, 2018 52wk range (Hi/Lo) 3,920 / 2,720

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