A More Conducive Backdrop

  September 2018

  NH Korindo Research Indonesia Market

A More Conducive Backdrop

• – Ou2H17

  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.

  In September, we estimate that the financial market will be more conducive. The expectancy of improving trade balance and forex reserves will boost investors’ confidence. The divergence between rupiah vs. U.S. dollar index and the yield of

  Indonesian government vs. U.S treasury sparked a light that rebound in rupiah and bonds market are possible to occur in September. The widely-open valuation room and JCI’s cycle of September enable JCI to rally further in September.

  We recommend BBNI, AALI, and UNTR’s as top-pick stocks. Market Recap August 2018

  : 6,018.46 (+1.38%)

• JCI

  : 14,710 (+2.05%)

• USDIDR

  : 8.204 (+43.8 bps)

• 10-year Government Bond Yield • 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

  5. Global Pressure from Turkey Crisis & Escalating US-China Trade War

  Jakarta Composite Index | Jul - Aug 2018 USDIDR & Government Bond Yield | Jul - Aug 2018 Acceleration in GDP Growth

• 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 of 7.95%. The rupiah depreciation since the early of 2018 and the decrease in the number of working days occurring in Idul Fitri festive are the main reasons underlining the lagging investment growth.

  GDP Growth | 3Q13 GDP Consumption Growth & Inflation | 1Q15

• – 2Q18
• – 2Q18

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.
• The widening deficit urged the Indonesian government to implement the import tightening over the capital goods and consumption goods. On the other side, the government started to implement B20 mandatory regulating 20% of fuel content to derive from CPO refinery. This regulation aims at curbing crude imports.

  Maintaining Consistent Uptrend of Domestic Consumption Retail Sales Growth (y-y) Consumer Confidence Index

• 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.
• The maintainable trend of purchasing power indicator ant the government’s concerted stimuli are estimated to backed the stable acceleration in GDP growth until 2019.

  The government targeted the realistic GDP growth of 5.3% in 2019. Expectancy of Rupiah Rebound amid Trend of Dollar Depreciation

• 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.
• In August, the U.S. dollar was depreciated, yet it gave no significant impact of rupiah appreciation. In August, the pressure on rupiah was mainly triggered by the internal factor: widening current account deficit. The divergence between the index dollar and USDIDR gave a room for rupiah strengthening in September to grow wider. The release of August’s trade balance expected to be improving is capable of reversing the trend of rupiah depreciation.

  USDIDR & Dollar Index Selected Currencies’ Depreciation against USD Awaiting Rebound in Forex Reserves

• 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.
• The current forex reserves are the crucial factor for halting the trend of rupiah depreciation. July’s forex reserves was USD118.3 million declining USD1.5 million from

USD119.8 in June. The government’s concerted effort to boost exports amid the high world’s mineral commodity price likely backs rebound in the forex reserves

  starting in September.

  USDIDR & Benchmark Rate USDIDR & Forex Reserve (USD mn) Foreign Investors' Confidence on Indonesia’s Government Bond

• 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%.

• We estimate that the prospect of Indonesia’s government bond yield will get better in September. Albeit the lingering global pressure, foreign investors have booked net

  buy on the Indonesia’s government bond of July and August of IDR9.1 trillion and IDR7.9 trillion, respectively. It signed that foreign investors started to expect Indonesia to carry on a fundamental improvement, particularly in form of external balance.

  Foreign Net Buy (IDR tn) in Indonesia Government Bond Indonesia and US 10 year Gov’t Bond Yield 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.

• Rally in JCI aligned with the trend of foreign investors’ activities. The trend of massive foreign net sell from February to June has been ended.

  Agriculture and Finance Sectors Leading Rally • 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.

• The finance sector, the biggest market cap contributor for JCI, consistently posted rally within the last-2 month. The rally was spurred by the acceleration in growth of 11.34% y-y in Indonesia-based banking credit.

  Sector Performance Major Agriculture & Finance Stocks Performance Open Room for Further Rally

• 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.
• Top pick stocks in September: BBNI, AALI, and UNTR

  Forward P/E JCI Seasonality Monthly Return in September Recommendation: Bank Negara Indonesia (BBNI

• – Bank)

  Dec 2018 TP 9,675

• Acceleration in 2Q18’s Net Profit BBNI enjoyed the surge of 19.0% y-y to IDR3.8 trillion in the 2Q18

  Consensus Price

  ’s net profit. The 2Q18’s growth in net

  9,136

  profit beat the 1Q18 ’s net profit of 13.0%. The highest growth since 4Q16 in interest income and net

  TP to Consensus Price

• 5.9%

  interest income respectively buoyant of 16.3% and 17.1% were potent drivers for the acceleration in net

  vs. Last Price +24.0% profit.

  Last Price (IDR) 7,800 Price date as of Aug 31, 2018

• NIM Recovery

  52wk range (Hi/Lo) 10,175 / 6,750

  Thanks to the 2Q18 ’s net interest margin (NIM) of 5.6% so that BBNI enjoyed rosier net internet income.

  Free Float (%)

  Outstanding sh. (mn) 18,649

  BBNI succeeded to whittle away the cost of deposit from 3.0% to 2.8% despite the slight decline of loan

  Market Cap (IDR bn) 145,460 yield from 10.3% to 10.2%. Market Cap (USD mn) 9,756 Avg. Trd Vol

  25.83 • Improvement in Credit Quality

• – 3M (mn)

  The 2Q18 ’s non-performing loan (NPL) ratio settling at 2.16% marked the further decline in NPL figures

  Avg. Trd Val 195.50

• – 3M (bn)

  snapping at its highest level of 3.12% in 3Q16. The current NPL figures were the lowest since the 2Q15 of

  Foreign Ownership 19.1%

  2.15%. On the other hand, the trend of lagging credit growth ceased as it enjoyed the growth of 11.1% in

  Interest Income Breakdown:

  the 2Q18 ’s credit (vs. the 1Q18’s credit of 10.8%). The low NPL and the recovery in credit are the logical

  Loan 86.3% takeaway for the profit growth in 2018-2019.

  Non-Loan 13.7% Net Profit Growth & NPL Ratio Share Price Performance

  IDR bn FY2016 FY2017 FY2018E FY2019E Int. Income 43,768 48,178 55,837 64,525 y-y 18.6% 10.1% 15.9% 15.6%

  Op. Rev.

  41,299 45,212 50,071 58,554 Net profit 11,339 13,616 15,866 19,744 EPS (IDR)

  608 730 851 1,059 y-y 25.1% 20.1% 16.5% 24.4%

  NIM 6.0% 5.4% 5.4% 5.5%

  Recommendation: Astra Agro Lestari (AALI

• – CPO)

  Dec 2018 TP 16,925

• AALI’s Performance Reliant on CPO Prices 73% production of

  Consensus Price

  Indonesia’s CPO is exported; thus, CPO’s prices are highly dependable to the overseas

  13,532

  market. Despite Indonesia’s 57% dominance of world’s CPO export market share, CPO prices decreased

  TP to Consensus Price

• 25.1% by 20% since the early of 2017 to the present time. It is attributable to the pressure on vegetables oil.

  vs. Last Price +25.4% Last Price (IDR) 13,500

• B20 Mandatory Spurring Demand for CPO

  Price date as of Aug 31, 2018

  The installed capacity of Indonesia-based biodiesel producers reached nearly 12 million KL; however, to

  52wk range (Hi/Lo) 15,575 / 10,125

  the present time, the used capacity was around 25%-30%. Overseeing the possibility of increment of 12

  Free Float (%)

  20.3

  million KL in biodiesel production, we estimate that CPO’s feedstock used can reach 11 million tons of

  Outstanding sh. (mn) 1,925

  CPO. As a comparison, the Indonesia’s total CPO production is estimated to reach nearly 40 million tons

  Market Cap (IDR bn) 25,983

  as the domestic consumption in 2018 reach 10 million tons in 2018. The government expects that the B20

  Market Cap (USD mn) 1,743 mandatory will be capable of boosting CPO to reach IDR14,000, if the assumption of crude prices of around USD100 per barrel applies. Avg. Trd Vol

  1.35

• – 3M (mn) Avg. Trd Val

  16.23

• – 3M (bn)
• Awaiting 2019’s Spectacular Performance

  Foreign Ownership 5.3% AALI posted the growth of 5.6% in sales from IDR8.5 trillion in the 1H17 to IDR9.0 trillion in the 1H18.

  Sales Breakdown:

  However, its net profit declined by 25% from IDR1.04 trillion in the 1H17 to IDR783 billion in the 1H18. The

  CPO 85%

  decline was caused by the gross profit edging down from 24% in the 1H17 to 18% in the 1H18. We

  Palm Kernel 14% estimate that AALI likely performs the spectacular performance in 2019 underlined by the B20 mandatory. Others

  1% Share Price Performance AALI CPO Sales Trend | 2014 - 2018

  IDR bn FY2016 FY2017 FY2018E FY2019E Sales 14,121 17,306 17,882 20,594 y-y 8.1% 22.5% 3.3% 15.2%

  EBITDA 3,728 4,240 3,388 5,192 Net profit 2,007 2,010 1,624 2,462 EPS (IDR) 1,043 1,044 844 1,279 y-y 224.2% 0.2% -19.2% 51.6%

  NPM 14.2% 11.6% 9.1% 12.0%

  Recommendation: United Tractors (UNTR

• – Heavy Machinery & Mining Contracting)

  Dec 2018 TP 44,750

• 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

  Consensus Price 45,383

  positive impacts of the recovery in the global coal prices. Meanwhile, the demand for heavy machinery and

  TP to Consensus Price

• 5.6%

  mining contractor grew by 24% y-y and 32% y-y, respectively. Furthermore, the sales volume surged 37%

  vs. Last Price +30.1%

  y-y inclining from 1,751 units to 2,400 units. Of note, while Komatsu dominates the total sales of heavy

  Last Price (IDR) 34,400 machinery in Indonesia by 36%, PAMA dominates market shares by 35%.

  Price date as of Aug 31, 2018

• Demand: Making Best Use of Momentum

  52wk range (Hi/Lo) 40,500 / 29,500

  We oversee that in ahead years the prospect of mining contractor and demand for heavy machinery is still

  Free Float (%)

  40.5

  promising because of a number of positive catalysts, such as 1) the increment of 100 million tons in coal

  Outstanding sh. (mn) 3,730

  production by China’s authority, 2) the high demand for coal by China and India, 3) a way more conducive

  Market Cap (IDR bn) 128,317

  weather, 4) trend of dollar appreciation against rupiah, and 5) the trend of rallying coal prices (the average

  Market Cap (USD mn) 8,634 of USD90-USD95 per ton FY18E-FY19E: our estimate). Avg. Trd Vol

  4.04

• – 3M (mn)
• Martabe: Best Exploration

  Avg. Trd Val 138.32

• – 3M (bn)

  UNTR acquired Martabe mining worth IDR13.22 trillion or 95% of total share ownership on August 8th,

  Foreign Ownership 18.9%

  2018; the acquisition was potential for beefing up UNTR’s total assets by 33.1% y-y from IDR93.5 trillion in

  Revenue Breakdown:

  the FY18E to IDR124.3 trillion in the FY19E. In the end of 2017, Martabe’s gold reserves grew by 46.8%

  Mining Contracting 47.3%

  y-y inclining from 3.2 million ounces to 4.8 million ounces, while its silver reserves grew by 36.1% y-y

  Construction Machinery 35.7% hiking from 27.2 million ounces to 36 million ounces or equal to the additional 6 year mining operation. Others

  17.0% Revenue Composition | 2015 - 2019E Share Price Performance

  IDR bn FY2016 FY2017 FY2018E FY2019E Sales 45,539 64,559 78,725 102,945 y-y -7.7% 41.8% 21.9% 30.8%

  EBITDA 10,173 14,596 18,931 22,851 Net profit 5,002 7,403 10,821 12,019 EPS (IDR) 1,384 1,984 2,900 3,222 y-y 29.8% 47.9% 46.2% 11.1%

  NPM 11.0% 11.5% 13.7% 11.7%

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