A Way More Attractive Outlook

November 2018

NH Korindo Research Indonesia Market

A Way More Attractive Outlook

– Ou2H17

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’s decline was exacerbated by rising global crude prices fuelling investors’ fears of Indonesia’s externa l deficit potential for swelling further. However, trade balance surpluses halted pressures on JCI. We forecast that JCI still faces looming risks of global volatility. On the other side, investors need to keep their eyes on

JCI’s consistent cycle of reigning in a sluggish mood in November. Despite the patterned fact, JCI’s is exposed to

a significant rebound. Its forward P/E valuation nears to 2SD below the last 5-year average; therefore, it is dragged to the potential for rebound. We recommend TLKM, PGAS, and MAPI as top pick stocks in November. Market Recap October 2018

: 5.831,65 (-2,42%)

IHSG

: 15.203 (+2,01%)

USDIDR
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 Jakarta Composite Index | Sep - Oct 2018 Import Drops Driving Trade Balance Surplus

September’s trade balance booked surplus of USD227 million and outstripped August’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’s imports slid to USD14.6 billion or 13.8%, much lower than August’s decline of 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 as crude import dived 30.01% m-m from 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.

Trade Balance (USD mn) | Oct 2016 - Sep 2018 Crude Oil Import Volume (‘000 tons)

September’s depreciation 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

Exposed to Market Volatility, Forex Reserves Dived

September’s forex reserves amounted to USD114.8 billion, a lot lower than August’s forex reserve of USD117.9 billion and the lowest level since January 2017. The decline in September’s forex reserves of USD3.1 billion, by far is the largest since February 2018.
Bank Indonesia (BI)’s commitment 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%.

USD74 per barrel

WTI Oil Price & USDIDR | Aug 2018 - Sep 2018 Forex Reserve (USD bn) | Oct 2016 - Sep 2018 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’s deflation mainly arose from foodstuff expenditure posting deflation of 1.62% m-m, much deeper than August’s deflation of 1.10% m-m.
Overseeing September’s inflation 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 December amid 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%.

Monthly Inflation | Sep 2017 - Sep 2018 Annual Headline and Food Inflation | Sep 2017 - Sep 2018 Pause in Benchmark Rate Hike

BI’s Board of Governors Meeting on Monday and Tuesday, October 22nd and 23rd, 2018 decided to 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.
The projection of lower global economic growth than the prior estimate, paired with much higher global financial market volatility are factors underlining BI’s stance of keeping BI 7-day reverse repo rate unchanged. Massive rate hikes amid lower global economic growth inevitably prompt the domestic business backdrop to reign in a negative territory.

Benchmark Rate & USDIDR Benchmark Rate & 10-year Government Bond Yield Indonesian Rupiah Striving to Cushion Global Volatility

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.

USDIDR & Dollar Index Selected Currencies’ Depreciation against USD

The U.S. Treasury yield topping above 3.2% was the logical takeaway for Indonesia’s October highest yield.

Government Bond Yield Hitting Climax • In September’s Indonesia’s government bonds yield slumped hardest at 8.0%, yet in October it virtually snapped highest at 9.0%: a stark contrast to September’s yield.

We estimate Indonesia’s government bond yield hit its climax as the hike in the U.S. Treasury yield discontinued. Indonesia’s rocketing yield allured foreign investors to post net 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

Foreign Net Buy (Sell) Position in JCI (IDR tn) Global Market Performance

JCI: Minimizing Globally Negative Impacts

JCI posted the decline, yet the decline was much 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 sell in 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.

Telecommunication and Automotive Grasping October’s Rally

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 to the rally in TLKM’s stocks prices. Of note, TLKM is the largest cap. company in the infrastructure sector. The rally in TLKM’s stock prices was underpinned by the market’s expectancy of 3Q18’s recovery performance along with the rosier telecommunication industry.
Meanwhile, the rally in miscellaneous industry was prompted by the rally in ASII’s stocks prices. Sales performance of Indonesian’s automotive industry gets brighter, bolstering positive impacts on acceleration in profit growth.

Sector Performance Major Misc. Industries & Infrastructure Stocks Performance More Attractive Valuation

JCI’s return 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.
Despite JCI’s narrowing 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 from JCI’s decline to accumulate stocks with positive prospects ahead of year-end rally.

Forward P/E JCI Seasonality Monthly Return in November Top Recommendation: Telekomunikasi Indonesia (TLKM

– Telco Operator)

Dec 2019 TP 4,700

Rosier Quarter Earnings Fitting our extimate, TLKM is capable of posting 3Q18 ’s better performance than 2Q18’s performance.

Consensus Price 4,224 On a quarter basis, operational profit surged 57%; EBITDA rose 35.5%; net profit jumped 86.7%. TP to Consensus Price +11.3%

Meanwhile, revenue increased 8.8% underpinned by increment in all segments but fixed line voice sliding vs. Last Price

23.7% 3.9%.

Last Price (IDR) 3,800

Telkomsel also suffered from decline in the number of its subscribers from 177.9 million at the end of June Price date as of Oct 31, 2018

2018 into 167.8 million at the end of September 2018. Despite of decline in the number of subscribers, 52wk range (Hi/Lo) 4,420 / 3,250

Telkomsel remained to post growth of 10.1% q-q, with the digital segment posting hike of 16.2% q-q in Free Float (%)

47.9 sales. It well matches its transformation into digital-based telecommunication company. Outstanding sh. (mn) 99,062

At the end of September 2018, Indihome’s total subscribers (digital services of fixed broadband internet,

Market Cap (IDR bn) 382,380 fixed phone, and interactive TV) reached 4.7 million subscribers, growing 101% compared to the same

Market Cap (USD mn) 25,170 period of 2017. In August and September, TLKM charged its 700,000 subscribers for hiking prices at the

Avg. Trd Vol 109.97

– 3M (mn)

range of IDR5,000-IDR15,000, prompting increment in Indihome’s ARPU from IDR251,000 to IDR258,000

Avg. Trd Val 389.07

– 3M (bn) q-q.

Foreign Ownership 28.7%

In 9M18, TLKM ploughed IDR24.9 trillion into capex. The capex allocated to the mobile segment was

Sales Breakdown: concentrated on BTS construction. At the end of September 2018, it constructed 183,283 units of BTS.

Data, internet & IT Service 52.5% Now, it is improving its performance; therefore, it is likely to close 2018 with performance fitting our

Cellular voice & SMS 30.4% estimate. Others

17.1%

Share Price Performance Telkomsel and Indihome Subcribers |

3Q16

– 3Q18

IDR bn

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% Top Recommendation : Perusahaan Gas Negara (PGAS

– Gas Distribution)

Dec 2019 TP 2,600

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

Consensus Price 2,622 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

TP to Consensus Price -0.8% (vs. 7.9% in 2Q18, and 7.1% in 3Q17). Meanwhile, on a cumulative basis, 9M18

’s revenue grew by 13.7% vs. Last Price

17.1% y-y to USD2.46 billion.

Last Price (IDR) 2,220

Price date as of Oct 31, 2018

Prediction of Gas Distribution in 3Q18: Favorable Dry Season

52wk range (Hi/Lo) 2,860 / 1,505 We predict that the gas distribution volume will be boosted by the growth in the number of

Free Float (%)

43.0 electric consumption by the commercial segment (non-industry) in 3Q18, the prolonged dry season

Outstanding sh. (mn) causing the hike in the use of air conditioners, and the decline in the electric supply by hydropower plant

24,242 (PLTA) due to drying rivers. Market Cap (IDR bn) 55,028 Market Cap (USD mn) 3,606

Re-Focusing on Downstream Segment

Avg. Trd Vol

89.01

– 3M (mn)

PGAS plans for becoming a company running its business in gas distribution and transmission akin to Avg. Trd Val 185.01

– 3M (bn)

business it run in 2014. Saka Energi, its subsidiary, running its business in upstream oil exploration will be Foreign Ownership 15.7% sold in 2019. The amalgamation of PGAS and Pertagas into sub-holding gas under Pertamina results in

Sales Breakdown:

2 main positive factors 1) Strong bargain power to consumers because of its dominance over 98% of gas Gas Distribution 78.1% distribution and transmission market; and 2) Gas supply from Pertamina, focusing on upstream oil and gas

Exploration Oil & Gas 18.9% exploration. Other

3.0%

Revenue & Net Profit | 2012 – 2020F

Share Price Performance

IDR bn FY2017 FY2018 FY2019E FY2020E Net Rev.

2,970 3,405 3,931 4,205

y-y 1.2% 14.7% 15.4% 7.0%

EBITDA 515 780 465 673

Net profit 145 352 423 450

EPS (IDR) 82 206 247 263

y-y

-58.4% 151.7% 19.8% 6.5%

NPM

4.9% 10.3% 10.8% 10.7% Top Recommendation: Mitra Adiperkasa (MAPI

– Retail)

Dec 2018 TP 945

Outperformance Continuity We project that

Consensus Price MAPI’s 3Q18 revenue buoys much higher than 15% — FY18’s growth target on the back

1,009 of varied positive catalyst, e.g. Asian Games event, Jakarta Great Sale Festival, Hari Belanja Diskon

TP to Consensus Price

6.4% Indonesia inevitably prompting sales posted by F&B, retails, and active wears segment to soar.

vs. Last Price +18.1%

Last Price (IDR) 800

In 2Q18, its revenues and net profits rockets by 16.9% y-y to IDR4.8 trillion and 20.0% y-y to IDR140 Price date as of Oct 31, 2018 billion, respectively. The creeping-higher revenues were snapped up by sales posted by the retails and

52wk range (Hi/Lo) 945 / 595 F&B segments posting by far the highest growth figure of 19.9% y-y and 22.8% y-y, respectively. Free Float (%)

49.9 Outstanding sh. (mn) 16,600

Further Buoyant Performance

Market Cap (IDR bn) 13,197 Overseeing the few-year-consistent trend of the 2

H’s bigger revenue portion than the 1H’s revenue and Market Cap (USD mn) 869 2018

’s organic expansion of 60,000 sqm, we project that MAPI is likely successful in achieving the growth target of 15% in FY18 Avg. Trd Vol

’s revenue. The loom of further rupiah depreciation has no significant impacts on its

12.69

– 3M (mn)

revenue yet, for it has been passed on the new products. Of note, MAPI passes the upward prices only on Avg. Trd Val

10.38

– 3M (bn)

new products. However, it should be cautious about the government’s policy of imports reduction, Foreign Ownership 24.9% particularly imported apparels.

Revenue Breakdown:

Retail Sales 72.0% Department Stores 14.9% Others

13.1%

Quarterly Revenue | 3Q16 Share Price Performance

– 3Q18E

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

y-y 60.5% 158.0% 11.0% 30.6%

NPM

2.1% 4.5% 4.5% 5.3%

Thank You

DISCLAIMER This report and any electronic access hereto are restricted and intended only for the clients and related entities of PT NH Korindo Sekuritas Indonesia

This report is only for information and recipient use. It is not reproduced, copied, or made available for others. Under no circumstances is it considered as a selling offer or solicitation of securities buying. Any recommendation contained herein may not suitable for all investors. Although the information hereof is obtained from reliable sources, its accuracy and completeness cannot be guaranteed. PT NH Korindo Sekuritas Indonesia, its affiliated companies, employees, and agents are held harmless form any responsibility and liability for claims, proceedings, action, losses, expenses, damages, or costs filed against or suffered by any person as a result of acting pursuant to the contents hereof. Neither is PT NH Korindo Sekuritas Indonesia, its affiliated companies, employees, nor agents are liable for errors, omissions, misstatements, negligence, inaccuracy contained herein.

A Way More Attractive Outlook