A More Conducive Backdrop

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Indonesia Market

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Ou2H17

A More Conducive Backdrop

Summary:

Indonesia’s financial market of August constrained by the widening current account deficit and trade balance. Rupiah continued to be depreciated further, while the yields of government’s bond were upbeat. However, JCI was still capable

of rallying further. The positive sides were the bonds market consistently posting foreign funds inflow and subdued massive net sell in the stocks market.

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Market Recap August 2018

USDIDR & Government Bond Yield | Jul - Aug 2018

Source: Bloomberg, NH Korindo Research

Jakarta Composite Index | Jul - Aug 2018

• JCI : 6,018.46 (+1.38%)

• USDIDR : 14,710 (+2.05%)

• 10-year Government Bond Yield : 8.204 (+43.8 bps)

• Significant Factors Affecting Market in August 2018 : 1. Indonesia 2Q18 GDP Growth of 5.27% 2. 2Q18 Current Account Deficit

3. July Trade Deficit 4. 2019 State Budget

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Acceleration in GDP Growth

GDP Consumption Growth & Inflation | 1Q15 – 2Q18

GDP Growth | 3Q13 – 2Q18

• Indonesia’s 2Q18 GDP growth was at 5.27% the highest growth since the 4Q13. The domestic consumption is the major factor of acceleration in GDP. The consumption growth was at 5.14% y-y, the highest since 2Q14. The success in maintaining a low and stable inflation amid the upbeat consumption cycle in Ramadhan month and Idul Fitri festive are crucial factors accelerating consumption.

• On the other side, investment, a booster of the prior quarters GDP significantly lagged. The 2Q18’s growth in investment was at 5.87% y-y lower than the 1Q18’s growth

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Widening External Balance Deficit

Trade Balance (USD mn), Export and Import Growth (y-y)

Current Account Deficit (USD mn)

• The acceleration in the 2Q18’s GDP growth gave a negative effect of widening current account deficit. The 2Q18’s current account deficit was at USD8.0 billion or 3.04% of GDP. The deficit figures were the highest since the 2Q14.

• The widening current account deficit was highly affected by the high trade balance deficit of April and May, in particular amid the jump in import ahead of Ramadhan month and Idul Fitri festive.

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Maintaining Consistent Uptrend of Domestic Consumption

Retail Sales Growth (y-y)

Source: Bank Indonesia, NH Korindo Research

Consumer Confidence Index

Source: Bank Indonesia, NH Korindo Research

• Mirroring in the success of the 2Q18’s GDP growth acceleration and the preparation ahead of the politic year of 2019, the government prepared the draft of 2019’s state budget focusing on human resource (SDM) development. One of the 2019’s crucial budget policy is hike in civil servants’ salary.

• In June 2018 when Idul Fitri festive occurred, the indicator of consumers’ confidence index soared to its highest level of 128.1. In fact, the indicator of retail sales growth succeeded to show recovery. In May 2018, the retail sales reached 8.3%, higher than 6,6% of the 2017’s Idul Fitri festive.

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Expectancy of Rupiah Rebound amid Trend of Dollar Depreciation

Selected Currencies’ Depreciation against USD

USDIDR & Dollar Index

• Rupiah was depreciated by 2.05% from 14.414 in July 2018 to 14.710 in August 2018. The depreciation was still considerable in light of the pressure on emerging

countries’ currencies and the impact of financial crisis in Turkey. The rupiah depreciation was in contrast to its peers’ currencies depreciation.

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Awaiting Rebound in Forex Reserves

USDIDR & Forex Reserve (USD mn)

USDIDR & Benchmark Rate

• The effect of rupiah strengthening due to the hike in benchmark rate by Bank Indonesia (BI) significantly occurred in May-June 2018 when BI hiked benchmarked rate for

the first time after aggressively cutting benchmark rate in 2017. From May to June 2018, rupiah was capable of rallying from 14,200 to 13,800. The trend of depreciated rupiah until August signed that the policy of hiking benchmark rate only had impact of evading bigger depreciation similar to the depreciation experienced by Argentina, Brazil, and Turkey.

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Foreign Investors' Confidence on Indonesia’s Government Bond

Foreign Net Buy (IDR tn) in Indonesia Government Bond

Indonesia and US 10 year Gov’t Bond Yield

• Similar to rupiah movement and dollar index, the divergence of yields of Indonesia’s government bonds and the U.S. treasury emerged since August 2018. The yield of the U.S. treasury succeeded to decline to from its critical level of 3%. Meanwhile, the yield of Indonesia’s government bond still moved at around 8%. This backdrop caused the gap between the yield of the Indonesian government and the U.S. treasury to top 5% higher than the last-year average of 4.2%.

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Foreign Investors’ Net Buy Underpins JCI

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

Global Market Performance

• Indonesia was one of stock markets succeeding to post the hike in two-consecutive-month hikes amid the volatile global market in July and August 2018.

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Agriculture and Finance Sectors Leading Rally

Major Agriculture & Finance Stocks Performance

Sector Performance

• 5 sectors out of JCI’s 9 sectors rallied, while the remaining 4 sectors were bearish in August 2018.

• The agriculture sector was top gainer of September as it was backed by the government plan to implement the B20 mandatory with a view to reducing crude imports. This backdrop likely spurs the demand for CPO.

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Open Room for Further Rally

JCI Seasonality Monthly Return in September

Forward P/E

• JCI’s P/E forward valuation is currently lower than the 5-year average of 15.3x. If the valuation is estimated to be capable of reaching 15.3x, JCI is likely potential for hiking to 6,375 in the end of 2018.

• Based on September’s movement cycle within the last 5 years, JCI only experienced a steep correction of 6.3% in 2015. Thus, the chance of massive correction in September 2018 is quite low.

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Recommendation: Bank Negara Indonesia (BBNI

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Bank)

• Acceleration in 2Q18’s Net Profit

BBNI enjoyed the surge of 19.0% y-y to IDR3.8 trillion in the 2Q18’s net profit. The 2Q18’s growth in net

profit beat the 1Q18’s net profit of 13.0%. The highest growth since 4Q16 in interest income and net interest income respectively buoyant of 16.3% and 17.1% were potent drivers for the acceleration in net profit.

• NIM Recovery

Thanks to the 2Q18’s net interest margin (NIM) of 5.6% so that BBNI enjoyed rosier net internet income. The 2Q18’s NIM was more buoyant than the 4Q17 and the 1Q18’s NIM of 5.4% and 5.5%, respectively. BBNI succeeded to whittle away the cost of deposit from 3.0% to 2.8% despite the slight decline of loan yield from 10.3% to 10.2%.

• Improvement in Credit Quality

The 2Q18’s non-performing loan (NPL) ratio settling at 2.16% marked the further decline in NPL figures snapping at its highest level of 3.12% in 3Q16. The current NPL figures were the lowest since the 2Q15 of 2.15%. On the other hand, the trend of lagging credit growth ceased as it enjoyed the growth of 11.1% in the 2Q18’s credit (vs. the 1Q18’s credit of 10.8%). The low NPL and the recovery in credit are the logical

Share Price Performance Net Profit Growth & NPL Ratio

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Recommendation: Astra Agro Lestari (AALI

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CPO)

• AALI’s Performance Reliant on CPO Prices

73% production of Indonesia’s CPO is exported; thus, CPO’s prices are highly dependable to the overseas market. Despite Indonesia’s 57% dominance of world’s CPO export market share, CPO prices decreased by 20% since the early of 2017 to the present time. It is attributable to the pressure on vegetables oil.

• B20 Mandatory Spurring Demand for CPO

The installed capacity of Indonesia-based biodiesel producers reached nearly 12 million KL; however, to the present time, the used capacity was around 25%-30%. Overseeing the possibility of increment of 12 million KL in biodiesel production, we estimate that CPO’s feedstock used can reach 11 million tons of CPO. As a comparison, the Indonesia’s total CPO production is estimated to reach nearly 40 million tons as the domestic consumption in 2018 reach 10 million tons in 2018. The government expects that the B20

mandatory will be capable of boosting CPO to reach IDR14,000, if the assumption of crude prices of around USD100 per barrel applies.

• Awaiting 2019’s Spectacular Performance

AALI posted the growth of 5.6% in sales from IDR8.5 trillion in the 1H17 to IDR9.0 trillion in the 1H18. However, its net profit declined by 25% from IDR1.04 trillion in the 1H17 to IDR783 billion in the 1H18. The

decline was caused by the gross profit edging down from 24% in the 1H17 to 18% in the 1H18. We estimate that AALI likely performs the spectacular performance in 2019 underlined by the B20 mandatory.

Dec 2018 TP 16,925

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Recommendation: United Tractors (UNTR

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Heavy Machinery & Mining Contracting)

Dec 2018 TP 44,750

Share Price Performance Revenue Composition | 2015 - 2019E

• 1H18’s Net Income: Positive Impacts of Recovery in Coal Prices

UNTR posted the net profit of IDR5.74 trillion growing by 60% y-y and 20% q-q. The growth was the positive impacts of the recovery in the global coal prices. Meanwhile, the demand for heavy machinery and

mining contractor grew by 24% y-y and 32% y-y, respectively. Furthermore, the sales volume surged 37% y-y inclining from 1,751 units to 2,400 units. Of note, while Komatsu dominates the total sales of heavy machinery in Indonesia by 36%, PAMA dominates market shares by 35%.

• Demand: Making Best Use of Momentum

We oversee that in ahead years the prospect of mining contractor and demand for heavy machinery is still promising because of a number of positive catalysts, such as 1) the increment of 100 million tons in coal production by China’s authority, 2) the high demand for coal by China and India, 3) a way more conducive weather, 4) trend of dollar appreciation against rupiah, and 5) the trend of rallying coal prices (the average of USD90-USD95 per ton FY18E-FY19E: our estimate).

• Martabe: Best Exploration

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