Wager against Further Rally

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NH 해외주식–인도네시아

1 NH Korindo Research

Summary:

After recording the massive rally in the start of 2018, we project JCI will likely rally further in the

remaining 2018. The rosier global economy coupled with the further downbeat mood in Dollar

strengthens

Indonesia’s

economy to face the

Fed’s

monetary tightening. In addition, the paradigm

shift in commodities based economies is the potent driver for massive foreign inflow. Although the

current JCI valuation is premium, its prospect remains alluring. Our top picks are TINS, EXCL, and

PTPP.

Indonesia Market

–

Outlook 2H17

Wager against Further Rally

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1. Macro Backdrop

Further Slump in Dollar

Investment Rotation in Asia

Resilient Rupiah

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Further Slump in Dollar

1. Macro Backdrop

• Dollar dimmed touching 3-year lowest level. The downtrend of dollar will likely remain albeit the Fed’s monetary tightening. Rosier economic outlook in China and Europe, monetary normalization abroad, and political blow are takeaways factors blunting dollar.

• Although the U.S. economy marks the buoyant growth boosted by the U.S. tax reform, so does the global growth. IMF projection of 3.9% for 2018 global economic growth is the swiftest pace since 2011.

Europe economies outpace U.S. economy so does China mark first-time-since-2010-accelerating growth.

Meanwhile, commodity prices standing closely to the strongest level since 2015 also trigger off the global reflation trade potentially driving capital outflow from the U.S to the faster-growing regions.

• The moving toward monetary normalization not only by the Fed but also by its peers, ECB, BoE, BoJ, caps dollar’s upside. ECB is poised to bring back its quantitative easing lifting rosier Euro into its highest level since 2014.

• The U.S. budget deadlock underlines theU.S. political condition is more unstable than is Europe. This anomaly political blow will drive dollar to slump deeper.

Global Economic Growth

Source: Bloomberg, NH Korindo Research

US Dollar Index

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Investment Rotation in Asia

• As of note, the paradigm shift in investment from technology-based economies in North Asia into commodities-based economies in Southeast Asia

likely comes in favorable as the upswing in energy outpaces booming in technology industry.

• Resurgence in commodity prices is the key catalyst for a terms-of-trade boost momentum experienced by commodities-based economies in Southeast Asia.

• In striking contrast, technology-based economies in North Asia faces challenges of bigger import bill and stronger currencies attributable to U.S. trade war policy.

Stock Indexes in Selected Asian Countries

Selected Commodities Prices

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Resilient Rupiah

• In stark contrast to 2013 taper tantrum impact, the Fed’s further monetary tightening has insubstantial impacts on Rupiah.

• Foreign fund inflow resulting in a stronger Rupiah will be prioritized by Bank Indonesia to accumulate more foreign reserves. The forex has currently reined at USD130.2 million, the all-time highs.

Further build-up of foreign reserve will mitigate any inevitable risk of global volatility stemming from monetary normalization pace.

• In 4Q17, the trade balance started to experience a heightened pressure bringing about a deficit of USD270 million in December 2017. Strong pick-up in receipts from export attributed by a firm up in commodities price should offset the uptrend of stronger imports. As such, wider deficit in the trade or current account sets to fade.

Foreign Exchange Reserves & Trade Balance (USD mn)

USD/IDR

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Stable Benchmark Rate

• We expect Bank Indonesia (BI) to hold steady the current level of benchmark rate throughout the year after eight times cuts as of 2016.

• BI finds no reasons for changing the benchmark rate likely constituting as a giant impediment to the current progress of its goal for encouraging economic growth through financial stability.

• We arrive into a consensus that not only does the pressure stemming from Dollar come in insignificant,

but also the pressure driven by the upside in food commodities (price) in the beginning of 2018 comes in interim.

However, the upswing in crude prices looms a challenge for government to prove its healthier budget can buffer its impacts.

• In contrary, further rate cut may hurt the lenders as they are still struggling to achieve favorable credit growth.

• Moreover, BI rate cut likely spurs aggressive bonds rally making a significant yield gap to its peer and narrowing yield spread to the U.S. benchmark. This backdrop spoils foreign investors’ appetite for investment in Indonesia.

Bond Yield Spread

Inflation (m-m)

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2. Indonesia Equity Market

Foreign Buy: An Inception

JCI Hovering around Premium Valuation

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Foreign Buy: An Inception

2. Indonesia Equity Market

Net Foreign Value T12M (USD mn)

JCI & Foreign Flow

• Foreign net buy recorded at USD323 million in January, 2018.

The figures were the first net buy after as of May 2017, foreign investors recorded the average net sell of USD580 million per month.

From May to November 2017, JCI stayed at modest growth pace of 5,800-6,000 as the signal of the Fed’s monetary tightening lackedforeign investors’ appetite.

• Early year’s rally cycle in JCI coupled with foreign investors’ appetite likely remain to persist in 2018.

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JCI Hovering around Premium Valuation

• The early 2018’s rally in JCI has brought its valuation at a 2018E forward P/E of 16.3x (+1SD higher than the last 5-year average).

Although its current valuation is premium, the downtrend of valuation risk is low along with the rosier macroeconomic backdrop and bigger potential for foreign flow.

• We hold strong JCI target in the end of 2018 at 7,025 using an estimate of forward P/E of 16.3x as the basis of valuation method. Although the more premium valuation (a 2018E forward P/E of 17.4x or 2SD higher than the 5-year average) can be achieved, in the end of 2018, the valuation figures likely settle similar to the current valuation.

JCI Forward P/E

Listed Companies Performance

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Top Pick: Timah (TINS - TP 1,500)

• TINS having the market cap of IDR8,0 trillion is the biggest tin miner in Indonesia and recorded a stellar profit growth around 100% in 2016 and 2017. Of note, 95% of its sales derives from export, particularly in China’s market.

• Based on December 2017’s data of the Minister of Trade, the total tin exported by Indonesia rumped up 17% y-y into 7,056 tons. The buoyant tin export volume is underpinned by the high demand for tin products required by electronic products.

We forecast that in 2018, the demand for tin products will remain favorable attributable to the uptrend demand for gadget.

• Based on the comparison of metal prices, the tin benchmark price, LME, only nudged up 6% in one recent year.

The hike was dramatically lower than the hike in other metal prices such as nickel (41%), copper (19%), and zinc (24%).

The tin price likely hikes as the tin’s LME inventory still settles at the low position of 1,800 tons than its last year’s position of 6,000 tons.

Source: Bloomberg, NH Korindo Research Source: Bloomberg, NH Korindo Research

Selected LME Metal Price (Rebased) Financial Summary (IDR bn)

FY2016 FY2017 FY2018E FY2019E

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Top Pick: XL Axiata (EXCL

–

TP 4,400)

• XL Axiata armed with 52.5 million customers compared to Telkomsel (190 million), and Indosat (90 million)

is the third biggest telecommunication provider in Indonesia, yet it recorded the highest growth in the telecommunication industry in Indonesia. In 3Q17, its data traffic soared 136.5% into 325,747 TB.

• The stellar growth is estimated to stand out further as it is committed to allocating 50% of total capital expenditure than the prior allocation of 20% for beefing up ex-Java markets having high growth potential.

As of now, Telkomsel, the market leader of telecommunication provider in Indonesia, still dominates ex-Java markets.

• EXCL consistently improves its total coverage amid the intense competition among three biggest providers in Indonesia.

It outpaced Indosat and positioned in the second ranking in term of total 3G/4G BTS coverage.

Now, its BTS of 60,173 3G/4G outnumbers Indosat’s BTS of 36,022, yet lowers than Telkomsel’s BTS of 101,865.

Data Traffic and Data Yield

FY2016 FY2017 FY2018E FY2019E

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Top Pick: Pembangunan Perumahan (PTPP

–

TP 4,770)

• PTPP is one of four listed state-owned constructors and thesecond biggest constructors among the four constructors. It has the market cap of IDR19.9 trillion lower than WSKT’s market cap of IDR38.6 trillion.

• Compared to other state-owned constructors, its new contract growth figures of 20%-30% since 2015 turned into the most stable growth. The consistent double-digit growth in new contract was attributable to its diversified-based contracts.

• The increment in revenue portion contributed by the property and investment division is a takeaways factor

for hedging risk looming from new construction contracts exposed to any impediment.

New Contract (IDR bn)

FY2016 FY2017 FY2018E FY2019E

Sales 16,459 22,423 27,565 32,967

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Thank You

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