A Way More Attractive Outlook

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Indonesia Market

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Ou2H17

A Way More Attractive Outlook

Summary:

In October JCI failed to rally and lagged further. However, its decline of 2.42% was lower than the decline in global markets.October’sdecline was exacerbated by rising global crude prices fuellinginvestors’fears ofIndonesia’sexterna l deficit potential for swelling further. However,trade balance surpluseshalted pressures on JCI.

We forecast that JCI still faces looming risks of global volatility. On the other side, investors need to keep their eyeson

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Market Recap October 2018

• IHSG : 5.831,65 (-2,42%)

• USDIDR : 15.203 (+2,01%)

• 10-year Government Bond Yield : 8,543 (+42,8 bps)

• Significant Factors Affecting Market in October 2018 : 1. Rising Global Oil Prices

2. Indonesia Trade Surplus

USDIDR & Government Bond Yield | Sep - Oct 2018

Source: Bloomberg, NH Korindo Research

Jakarta Composite Index | Sep - Oct 2018

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Import Drops Driving Trade Balance Surplus

• September’strade balance bookedsurplus of USD227 millionand outstrippedAugust’s deficit of USD940 million. The improvement in the trade balance was on the back of increasing surplus of non-oil and gas trade and shrinking deficit of oil and gas trade.

• September’simports slid to USD14.6 billion or 13.8%,much lower than August’sdeclineof 8.08% m-m. The decline was attributable to shrinking import volume from 15.6 million tons in August 2018 to 12.8 million tons in September 2018.

• The oil and gas sector posted a drop of 26.71% m-m in import volume ascrude import dived 30.01% m-mfrom 1.8 million tons to 1.27 million tons. B20 mandatory taking into effect at the early of September 2018 is a factor driving shrinking oil and gas imports.

Crude Oil Import Volume (‘000 tons)

Source: Indonesia Statistics, NH Korindo Research

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

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Exposed to Market Volatility, Forex Reserves Dived

• September’sforex reserves amounted to USD114.8 billion, a lot lower thanAugust’sforex reserve of USD117.9 billion and the lowest level since January 2017. The decline inSeptember’sforex reserves of USD3.1 billion, by far is the largest since February 2018.

• Bank Indonesia (BI)’scommitment to keeping Indonesia rupiah stability in check with varied interventions in forex and government bonds (SBN) markets will drain up forex reserves. In September, Indonesia rupiah was still depreciated by 1.3%.September’sdepreciation was a lot lower than August of 2.1%. However, on a daily basis, greater volatility in financial markets depleted forex reserves. New volatility arises from the trend of criping-higher global crude prices from USD68 per barrel to USD74 per barrel.

WTI Oil Price & USDIDR | Aug 2018 - Sep 2018

Forex Reserve (USD bn) | Oct 2016 - Sep 2018

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Anomaly in Deflation

• In September, Indonesia re-posted deflation of 0.18% m-m, a lot deeper than deflation of 0.05% m-m in August. September’s deflation is an anomaly because Indonesia consistently posted inflation in September since 2014.

• September’sdeflation mainly arosefrom foodstuff expenditureposting deflation of 1.62% m-m, much deeper thanAugust’sdeflation of 1.10% m-m.

• OverseeingSeptember’sinflation of 2.88% y-y, we lower the inflation target at the end of 2018 to be 3.23%.Inflation will hit higher in November and Decemberamid the upbeat demand arising from the year-end expenditure cycle. We estimate that in November and December, monthly inflation will settle at 0.33% and 0.85%.

Annual Headline and Food Inflation | Sep 2017 - Sep 2018

Source: Indonesia Statistics, NH Korindo Research

Monthly Inflation | Sep 2017 - Sep 2018

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Pause in Benchmark Rate Hike

Benchmark Rate & 10-year Government Bond Yield

Source: Bank Indonesia, Bloomberg, NH Korindo Research

Benchmark Rate & USDIDR

Source: Bank Indonesia, Bloomberg, NH Korindo Research

• BI’sBoard of Governors Meeting on Monday and Tuesday, October 22nd and 23rd, 2018 decidedto hold BI 7-day reverse repo rate unchanged at 5.75%.Of note, BI has increased BI 7-day reverse repo rate by 150 bps since May 2018.

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• At the early of October, Indonesia rupiah was depreciated further from 14,900 to 15,200. The depreciation paired with the global pressures arising from the appreciation of the U.S. dollar index.

• The U.S. dollar index is appreciated further,yet Indonesia rupiah hovers stably at 15,200 avoiding sharp dip since the middle of October.

• Unlike other emerging economies’ currencies e.g. Brazilian real, Argentine peso, Turkish lira showing appreciation, Indonesia rupiah and Indian rupee are still depreciated further.Fears of global crude oil movement caused Indonesia rupiah and Indian rupee to be depreciated deeper. Investors concerned about risks arising from external trade balance deficits posted by Indonesia and India due to their large populations.

Indonesian Rupiah Striving to Cushion Global Volatility

Selected Currencies’ Depreciation against USD

USDIDR & Dollar Index

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Government Bond Yield Hitting Climax

• InSeptember’s Indonesia’sgovernment bonds yield slumped hardest at 8.0%, yet in October it virtuallysnapped highest at 9.0%: a stark contrast toSeptember’syield. The U.S. Treasury yield topping above 3.2% was the logical takeaway forIndonesia’sOctober highest yield.

• We estimateIndonesia’sgovernment bond yield hit its climax as the hike in the U.S. Treasury yield discontinued. Indonesia’srocketing yield allured foreign investors to postnet buy amounting to more than IDR12 trillion in October.

Foreign Net Buy (IDR tn) in Indonesia Government Bond

Indonesia and U.S. 10 year Gov’t Bond Yield

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JCI: Minimizing Globally Negative Impacts

• JCI posted the decline, yet the decline wasmuch lower than the plunge of a lot higher than 5% posted by most of the global markets. The fact evidenced a narrowed possibility for JCI to tumble deeper.

• On the other side,foreign investors re-posted a significant net sellin October after a lot lower net sale from August to September. However, in light of net buy by foreign investors in government bond, we overview the significant foreign net sell is temporary.

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

Global Market Performance

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Telecommunication and Automotive Grasping October’s Rally

Major Misc. Industries & Infrastructure Stocks Performance

Sector Performance

• Infrastructure and miscellaneous industries rallied amid JCI’s sluggish state in October. The infrastructure industry nudged up 1.9%; while the miscellaneous industries buoyed 6.2%. The two industries carried on its buoyance they achieved in September.

• The buoyant infrastructure sector was attributable tothe rally inTLKM’sstocks prices. Of note, TLKM is the largest cap. company in the infrastructure sector. The rally inTLKM’sstock prices was underpinned by themarket’sexpectancy of 3Q18’srecovery performance along with the rosier telecommunication industry.

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More Attractive Valuation

• JCI’sreturn to its sluggish state in October causes its forward P/E valuation to be more attractive.Its forward P/E valuation nears to 12.9x or 2SD below the last 5-year average of 15.2x.

• The last time JCI settled at a forward P/E of around 12.9x was in 2015. Discerning the fact, we estimate rooms for JCI’s decline to narrow.Using an estimate of forward P/E of 14.1x, we project JCI to settle at 6,600 at the end of December 2019.

• DespiteJCI’snarrowing room for decline, it is still exposed to risks in November 2018. In recent years,JCI tends to move at sluggish pace in November. However, investors can reap benefits fromJCI’sdecline to accumulate stocks with positive prospects ahead of year-end rally.

JCI Seasonality Monthly Return in November

Forward P/E

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Top Recommendation: Telekomunikasi Indonesia (TLKM

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Telco Operator)

• Rosier Quarter Earnings

Fitting our extimate, TLKM is capable of posting 3Q18’s better performance than 2Q18’s performance. On a quarter basis, operational profit surged 57%; EBITDA rose 35.5%; net profit jumped 86.7%. Meanwhile, revenue increased 8.8% underpinned by increment in all segments but fixed line voice sliding 3.9%.

Telkomsel also suffered from decline in the number of its subscribers from 177.9 million at the end of June 2018 into 167.8 million at the end of September 2018. Despite of decline in the number of subscribers, Telkomsel remained to post growth of 10.1% q-q, with the digital segment posting hike of 16.2% q-q in sales. It well matches its transformation into digital-based telecommunication company.

At the end of September 2018, Indihome’stotal subscribers (digital services of fixed broadband internet, fixed phone, and interactive TV) reached 4.7 million subscribers, growing 101% compared to the same period of 2017. In August and September, TLKM charged its 700,000 subscribers for hiking prices at the range of IDR5,000-IDR15,000, prompting increment inIndihome’sARPU from IDR251,000 to IDR258,000 q-q.

In 9M18, TLKM ploughed IDR24.9 trillion into capex. The capex allocated to the mobile segment was concentrated on BTS construction. At the end of September 2018, it constructed 183,283 units of BTS. Now, it is improving its performance; therefore, it is likely to close 2018 with performance fitting our estimate.

Price date as of Oct 31, 2018 52wk range (Hi/Lo) 4,420 / 3,250 Free Float (%) 47.9

Data, internet & IT Service 52.5% Cellular voice & SMS 30.4%

Others 17.1% _{Share Price Performance} _{Telkomsel and Indihome Subcribers | 3Q16 –}_3Q18 IDR bn FY2017 FY2018E FY2019E FY2020E

Revenue 128,256 134,807 149,039 167,069

y-y _10.2% _5.1% _10.6% _12.1%

EBITDA 64,609 63,642 70,398 79,030 Net profit _22,145 _20,829 _24,335 _26,964 EPS (IDR) 220 210 246 272

y-y _14.4% _-5.9% _16.8% _10.8%

NPM _17.3% _15.5% _16.3% _16.1%

ROE 20.3% 18.0% 19.1% 18.9%

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Top Recommendation : Perusahaan Gas Negara (PGAS

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Gas Distribution)

• 3Q18 Review: Growth of 65% q-q in Net Profit

In 3Q18, we estimate that PGAS posts the revenue of USD841 million (+2% q-q or +12% y-y), the growth of 65% q-q or 99% y-y to USD107 million in the net profit; the growth of 12.8% in the net profit margin (vs. 7.9% in 2Q18, and 7.1% in 3Q17). Meanwhile, on a cumulative basis, 9M18’srevenue grew by 13.7% y-y to USD2.46 billion.

• Prediction of Gas Distribution in 3Q18: Favorable Dry Season

We predict that the gas distribution volume will be boosted by the growth in the number of electric consumption by the commercial segment (non-industry) in 3Q18, the prolonged dry season causing the hike in the use of air conditioners, and the decline in the electric supply by hydropower plant (PLTA) due to drying rivers.

• Re-Focusing on Downstream Segment

PGAS plans for becoming a company running its business in gas distribution and transmission akin to business it run in 2014. Saka Energi, its subsidiary, running its business in upstream oil exploration will be sold in 2019. The amalgamation of PGAS and Pertagas into sub-holding gas under Pertamina results in 2 main positive factors 1) Strong bargain power to consumers because of its dominance over 98% of gas distribution and transmission market; and 2) Gas supply from Pertamina, focusing on upstream oil and gas exploration.

Price date as of Oct 31, 2018 52wk range (Hi/Lo) 2,860 / 1,505 Free Float (%) 43.0

IDR bn FY2017 FY2018 FY2019E FY2020E

Net Rev. 2,970 3,405 3,931 4,205

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Top Recommendation: Mitra Adiperkasa (MAPI

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Retail)

• Outperformance Continuity

We project thatMAPI’s3Q18 revenue buoys much higher than 15%—FY18’s growth target on the back of varied positive catalyst, e.g. Asian Games event, Jakarta Great Sale Festival, Hari Belanja Diskon Indonesiainevitably prompting sales posted by F&B, retails, and active wears segment to soar.

In 2Q18, its revenues and net profits rockets by 16.9% y-y to IDR4.8 trillion and 20.0% y-y to IDR140 billion, respectively. The creeping-higher revenues were snapped up by sales posted by the retails and F&B segments posting by far the highest growth figure of 19.9% y-y and 22.8% y-y, respectively.

• Further Buoyant Performance

Overseeing the few-year-consistent trend of the 2H’s bigger revenue portion than the 1H’srevenue and 2018’sorganic expansion of 60,000 sqm, we project that MAPI is likely successful in achieving the growth target of 15% in FY18’s revenue. The loom of further rupiah depreciation has no significant impacts on its revenue yet, for it has been passed on the new products. Of note, MAPI passes the upward prices only on new products. However, it should be cautious about the government’s policy of imports reduction, particularly imported apparels.

Price date as of Oct 31, 2018 52wk range (Hi/Lo) 945 / 595 Free Float (%) 49.9

IDR bn FY2017 FY2018E FY2019E FY2020E

Revenue 16,306 18,974 21,303 23,497

y-y _15.2% _16.4% _12.3% _10.3%

EBITDA 1,803 2,412 2,832 3,180 Net profit ₃₃₅ ₈₆₃ ₉₅₈ _1,252 EPS (IDR) 202 52 58 75

y-y _60.5% _158.0% _11.0% _30.6%

NPM _2.1% _4.5% _4.5% _5.3%

ROE 9.0% 18.6% 17.5% 19.4%

P/E 30.8x 15.7x 14.1x 10.8x

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