Corporates Cross-sector

Indonesian Corporates Coronavirus and FX Screener More Than 50% of Issuers Have Moderate-to-High Exposure to Coronavirus Impact

Fitch Ratings has analysed our portfolio of 51 rated Indonesian “The coronavirus pandemic is a significant challenge for rated corporates on the international and national scale for the impact of Indonesian corporates. The government’s social restriction the coronavirus. We focus on each issuer’s sector exposure, rating measures and the resulting shocks to supply and demand are headroom and vulnerability to foreign-exchange (FX) risk. affecting a wide range of sectors. Issuers are insulated from immediate refinancing risks, with most sectors facing 2021 Fifty-five percent or 28 issuers are in one of the four more exposed maturities. Still, liquidity issues in the shorter term can be a brackets. These have ‘Low’ rating headroom with ‘High’ or driver of rating action for weaker issuers. The speed of ‘Moderate’ sector exposure to COVID-19, or ‘Moderate’ rating recovery and companies’ ability to recoup lost revenue and headroom with ‘High’ or ’Moderate’ sector exposure. Twenty-two manage liquidity will be critical in our assessment of the need percent or 11 issuers have moderate-to-high exposure to dollar- for rating action.” rupiah volatility, especially homebuilders, which borrow significantly from the offshore bond market for land acquisition. Olly Prayudi, Fitch Ratings The pandemic’s ultimate impact on ratings is highly uncertain and will depend on the eventual spread of the virus, the knock-on effect of measures introduced to control it, and how long those effects last. The impact is exacerbated for corporates in emerging-market countries such as Indonesia due to a depreciating currency. The rupiah has depreciated by 13% since the beginning of the year, with the biggest drop of around 20% in early April. Relative Rating Vulnerability The four red-to-pink-shaded cells represent the 55% of our portfolio that is in the more exposed brackets, based on the 51 Indonesian corporates we rate publicly. Related Research Indonesian Corporates Coronavirus Risk Screener Coronavirus May Add to Liquidity Strain for Some APAC Corporates (February 2020) (% of 51 publicly rated Fitch Ratings Scanning Corporate Issuers for Coronavirus Indonesian corporates) Rating headroom Vulnerability (March 2020) Low Moderate High Total Fitch Ratings' Approach to Maintaining Ratings during High 5.9 7.8 3.9 17.6 Sector Coronavirus Outbreak (March 2020) Moderate 21.6 19.6 17.6 58.8 exposure Coronavirus Screener for APAC Corporates (March 2020) Low 2.0 11.8 9.8 23.5 Coronavirus Data Traffic to Raise Capex for APAC Telecom Total 29.4 39.2 31.4

(March 2020) Source: Fitch Ratings Indonesia's Homebuilding Sector Outlook Revised to Negative on Coronavirus Stress (April 2020) Asian Crude Palm Oil Watch 1Q20 (April 2020)

Analysts

Olly Prayudi + 62 21 2988 6812 [email protected]

Hasira De Silva + 65 6796 7240 [email protected]

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Corporates Cross-sector Indonesia

Commodity-Related and Homebuilding We have also revised our sector exposure on the coronavirus for the Indonesian construction sector to ‘Moderate’ from ‘Low’ as we Sectors Most Exposed now anticipate a lower contract burn rate and potential delays in government project awards. The government’s large-scale social Commodity-related sectors such as crude palm oil (CPO), coal- restriction (PSBB) policy in response to the pandemic is likely to mining related and oil and gas form 43% (12 out of 28) of the result in slower project completion and delayed customer issuers that are the most affected as they have ‘High’ sector payments although construction is among the sectors that are exposure due to weakening commodity prices following the allowed to operate under the measure. This will have a negative coronavirus outbreak. Some issuers under these sectors also had impact on profitability and cash flow generation. A prolonged ‘Low’ rating headroom before the outbreak, especially the CPO outbreak may cause project tender delays and slower new industry, which has been facing weak prices since 2019. contract wins. However, large construction companies such as PT Homebuilders are also among the most exposed despite their Wijaya Karya (Persero) Tbk (BB/AA-(idn)/Stable) and PT Waskita ‘Moderate’ sector exposure, as rating headroom for six issuers Karya (Persero) Tbk (A(idn)/Stable) still benefit from some under this sector is ‘Low’ due to soft property demand in 2019. revenue sustainability as order book/revenue was 4.3x and 2.8x, Thermal Coal Prices respectively, at end-2019. Newcastle 6,000kcal/kg Slower contract execution is also likely to lead to a growth (USD/tonne) deceleration for industries that support the construction industry 110 such as cement and precast concrete. Lower cement demand may 100 hamper the industries’ profit margin recovery as the improvement 90 in average selling prices in 2019 will be counterbalanced by 80 decreasing volume. 70 60 Changes in Consumer Behaviour and 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Spending Patterns 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 We think several consumer-related sectors have ‘Moderate’ sector Source: Fitch Ratings, Bloomberg exposure as the outbreak results in weaker purchasing power and CPO and Crude Oil Prices restricts consumer movement, which ultimately forces them to CPO (LHS) Brent crude oil (RHS) reassess their priorities in terms of purchases. Ministry of (USD/m tonnes) (USD/barrel) Manpower data show 2.8 million people are so far unemployed or 1,000 90 furloughed as a result of the outbreak. The Ministry of Finance also 80 recently announced that festive allowances will be lower for civil 800 70 servants this year, which may negate the effect of the Idul Fitri 60 holidays being moved to the end of the year from June 2020. 600 50 The PSBB measures have led to the closure of non-essential stores 40 in retail properties such as malls, with mostly only supermarkets 400 30 and pharmacies remaining open. PT Pakuwon Jati Tbk’s (PWON,

BB/Stable) and PT Ciputra Development Tbk’s (CTRA, BB-

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Mar19 Mar20 May 19 May /Negative) ‘Moderate’ sector exposure reflects the impact of the Source: Fitch Rarings, Malaysian Palm Oil Board, Bloomberg short-term closure on their malls, although a prolonged disruption may pressure operating earnings and their credit metrics. Evolving Sector Outlook and Exposure Grocery retailers such as PT Sumber Alfaria Trijaya Tbk (Alfamart, We revised the palm-oil sector’s outlook to negative from stable as AA-(idn)/Stable) are less susceptible in terms of store closure the industry is facing risks and challenges from weaker edible-oil exposure than retail property operators. Alfamart’s retail presence and biodiesel prices due to the impact of COVID-19 and the sharp is diversified through more than 15,000 stores across the nation fall in crude oil prices. We expect edible-oil consumption to drop and it is among companies that are allowed to operate during the on the global spread of the coronavirus, cutting demand. PSBB measures. However, we believe the impact on the grocery Indonesia’s domestic biodiesel consumption is also unlikely to retailing sector is ‘Moderate’ due to the potential of slower same- meet the government’s target as the sharp falls in crude oil and store sales growth on weaker purchasing power and supply chain diesel prices have made biodiesel costlier. disruptions if the restrictions on movement persist. Similarly, weaker economic conditions are likely to crimp property We believe that the exposure of the textile and garment demand, which prompted Fitch’s revision of the Indonesian manufacturing sector to the coronavirus disruptions is ‘Moderate’. homebuilding sector’s outlook to negative. We also raised the Retail-space closure also affects the demand for textiles and sector’s exposure to the coronavirus to ‘Moderate’ from ‘Low’ in garments, with potentially greater impact on the demand for light of the pace of the slowdown as Indonesia’s economy has been fashion-related textile products, especially ready-to-wear adversely affected due to its trade linkages with , its garments. Nevertheless, we think this is somewhat offset by the commodity focus and financial tightening from the currency resilient demand for essential wear - such as uniforms - and the depreciation.

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increasing demand for health-related textile products, such as 2020 and 2021. Pertamina's EBITDA rose sharply in the last masks and hazmat suits. Larger manufacturers, such as PT Sri downturn of 2016-2017, driven by downstream profits, but we Rejeki Isman Tbk (BB-/Stable) and PT Pan Brothers Tbk (B/Stable), think low crude prices will have an adverse impact this time around have the capability to rapidly adjust their production lines and are due to Pertamina's much larger upstream operations than four currently producing masks and hazmat suits, providing some years ago. The impact on upstream oil volume, however, is likely to revenue support. be limited as Pertamina’s upstream production is short of its refinery intake. Fitch expects downstream volume to drop in line Consumers’ cutback on non-essential spending will lead to weaker with lower demand, but unit profit is unlikely to be severely auto demand. Wholesale four-wheeler (4W) sales in February affected as Pertamina sells at lower-than-market prices as 2020 dropped to 79,000 units, the lowest in eight months. The stipulated by the government, and is reimbursed through various Association of Indonesia Automotive Industries on 9 April 2020 mechanisms to make up for the shortfall. Fitch does not expect revised its 4W sales projection for 2020 to 600,000 units from Pertamina’s current selling prices to fluctuate significantly and the 1,050,000 units earlier. The biggest- and second-largest state’s reimbursements to Pertamina will drop accordingly. automakers in Indonesia, PT Toyota Motor Manufacturing Indonesia and PT Astra Daihatsu Motor, respectively, have halted Indonesia’s electricity demand will decline by up to 1.2% in 2020, their operations in anticipation of lower demand. Nonetheless, we according to PLN management. At the same time, the company is have classified component supplier PT Astra Otoparts Tbk’s (AA- expected to offer discounts to some customers to help cushion the (idn)/Stable) industry exposure as ‘Moderate’ as it has revenue impact of the pandemic, which means volume and average tariffs diversification from selling replacement spare parts. will affect PLN’s revenue from the sale of electricity. However, the company works on a cost-plus model, with the government We think sectors that serve customers’ primary needs such as covering a shortfall (revenue from sales of electricity – [cost + 7% telecommunications and poultry producers have ‘Low’ sector margin]) through subsidies. The subsidies are considered part of exposure from the coronavirus. The greater need for data PLN’s ‘bb+’ SCP as it is mandated by legislation and hence not connectivity amid the pandemic will support demand for telecom construed as extraordinary support. services, although the longer-term effects of elevated data traffic may accelerate capex investment. Nevertheless, PLN’s SCP had been under pressure before the coronavirus. Its electricity tariffs have been frozen by the Demand for poultry and poultry-related products will remain government since late 2017. PLN’s customers are classified as resilient as it is the country’s main source of protein. Consumers subsidised and non–subsidised, with the non-subsidised also are stocking up on food due to their limited mobility. We believe effectively subsidised since late 2017. The revenue–cost gap for the government will ensure domestic supply chains remain subsidised customers is called a subsidy and known as uninterrupted, which should support poultry supplier PT Japfa compensation for non-subsidised customers. PLN receives Comfeed Indonesia Tbk’s (BB-/Stable) operations. A deeper and subsidies through a well-defined monthly payment mechanism, but prolonged outbreak may, however, affect Japfa’s ability to import compensation payments are ad hoc, pressurising PLN’s SCP as we soybean meal, disrupting its poultry feed production. We estimate expect leverage to rise. Japfa has about three months of soybean meal inventory currently. Sectors with long-term contracts such as utilities and Exposure to Currency Fluctuation telecommunication towers also have ‘Low’ exposure as their long- Twenty percent of Indonesian corporates have ‘Moderate’ to term contracts provide cash flow stability and visibility. ‘High’ exposure to rupiah depreciation against the US dollar. These corporates are exposed to the FX risk through their raw-material High Headroom from Parental Linkages, imports due to the country’s low manufacturing and production Varying Impact on SCPs base for the food and beverage, electronics and auto industries. They are also exposed to currency risks through their balance Thirty percent of corporates have high rating headroom to cushion sheets, including the homebuilding sector, which relies heavily on the impact of potential short-term disruption from the outbreak. the issuance of US dollar bonds for land acquisition. This arises from conservative leverage, including PT Serasi Autoraya (AA-(idn)/Stable) and Astra Otoparts, or linkages with USD/IDR Trend stronger parents such as PT Perusahaan Gas Negara Tbk (BBB-/ (IDR) AA+(idn)/Stable) and government-related entities such as PT 17,500 Pertamina (Persero) (BBB/Stable), PT Perusahaan Listrik Negara 17,000 (Persero) (PLN, BBB/Stable), and PT Pupuk Indonesia (Persero) 16,500 16,000 (AAA(idn)/Stable). 15,500 15,000 However, we believe the drop in economic activity will have 14,500 varying degrees of impact on Pertamina’s and PLN’s Standalone 14,000 Credit Profiles (SCP) although we think the linkages with the 13,500 government for both entities will remain strong due to their 13,000

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Indonesian Corporate Portfolio FX Risk Distribution of this protection stems from the large residual US dollar cash balance from the company’s rights issue last year, as well as the re- High 8% contracting of its derivative options in 1Q20, which resulted in another one-time inflow of around USD60 million. However, we Moderate expect Lippo to burn through most of its cash balance this year 14% amid its challenges in meaningfully increasing property pre-sales amid the difficult environment. The company’s coverage ratio drops to around 15% at 20,000 rupiah per US dollar if the US dollar cash is excluded.

Low PT Modernland Realty Tbk (MDLN, B/Stable) and PWON are the 78% next most protected against a weakening of the rupiah, with 20%- Source: Fitch Ratings 25% coverage if the rupiah weakens to 20,000 per US dollar. In addition to derivatives, PWON’s coverage ratio benefits from Homebuilders’ Significant FX Mismatch Partially Hedged around USD20 million of cash and equivalents. Indonesian homebuilders form the single biggest subsector among PT Alam Sutera Realty Tbk (ASRI, B/Negative) has the least domestic corporates with the largest foreign-currency mismatch, protection, with a coverage ratio of 4% across all three scenarios. as most of their debt is denominated in US dollars while cash flows This is because the exchange rate of around 16,500 rupiah per US are mostly rupiah-based. Many homebuilders use call spread dollar at present is higher than the upper limit of ASRI’s call spread options to cover the entire face value of their US dollar bonds, option, which means any further weakening in the local currency albeit across a usually narrow exchange-rate range, which is only will not provide additional protection. The Negative Outlook on partly effective in mitigating currency risk. Some companies hold ASRI’s ratings reflects the refinancing risk on the remaining large cash balances in US dollars instead of, or in addition to, USD115 million of its April 2021 bond in light of the disruption in derivatives, and are better protected against currency capital markets amid the global health crisis. depreciation than those that use derivatives exclusively. PT Agung Podomoro Land Tbk (APLN, CCC+) stands out among Most homebuilders are rated in the ‘B’ category or lower and the homebuilders as having adopted the widest protection using generally do not generate sufficient free cash flows or maintain call spread options, with the full notional value of its bonds enough liquidity to cover maturing debt, exposing these companies covered between 15,000–35,000 rupiah per US dollar. At the to periodic disruptions in capital markets. Timely refinancing of current exchange rate of around 16,500, this provides around 6% maturing debt therefore plays a more important role in Fitch’s of coverage over APLN’s US dollar liabilities, including its USD127 rating assessment of these issuers than their exposure to foreign- million loan due in March 2021, which the company has left currency risks. unhedged. Nevertheless, APLN’s protection increases rapidly to We have stressed homebuilders’ hedges across three scenarios for 18% as the currency moves towards our stress case of 20,000 the rupiah versus the US dollar as shown in the chart below. rupiah per US dollar, benefitting from the wide corridor on its derivative instrument. Indonesian Homebuilders Partially Hedged Against FX Risk PT Kawasan Industri Jababeka Tbk (KIJA, B/Stable) has a Value of derivative assets and/or US dollar cash as a % of US dollar liabilities moderate coverage ratio of around 10%-12% across our three (%) IDR16,500:USD1 IDR17,500:USD1 IDR20,000:USD1 scenarios. KIJA also benefits from recurring operating cash flows 45 that are partly denominated in US dollars, stemming from its 40 power-purchase agreement with the government, which acts as an 35 30 additional mitigating factor against currency risk. 25 20 CTRA, like KIJA, has a moderate coverage ratio of around 11%- 15 10 18% under our depreciation scenarios for the dollar 5 0 against the rupiah. CTRA’s balance sheet also has the lowest FX PWON ASRI APLN KIJA MDLN CTRAᵃ BSDE LPKR exposure in terms of total debt compared with the other a For CTRA, IDR/SGD rates of 11,380, 12,069, and 13,333 have been used Indonesian homebuilders. Source: Fitch Ratings, companies ‘Low’ FX Exposure for Two-Thirds of Issuers PT Bumi Serpong Damai Tbk (BSDE, BB-/Stable) maintains large US dollar cash and cash-like investments instead of using The majority of the rated Indonesian corporates have ‘Low’ derivatives, and this serves as a natural and more effective hedge. exposure to FX volatility risk, largely due to their strategy of Consequently, BSDE is the most protected against a further borrowing in a currency that matches their earnings. Commodity- weakening in the local exchange rate. We estimate BSDE's related sectors borrow in US dollars as their prices are linked to coverage ratio, defined as US dollar cash and equivalents and the dynamics of global markets and priced in US dollars. Domestic- derivative assets/US dollar bonds and loans, to remain at 42% focused sectors such as retailing and construction adopt the same across our three scenarios. strategy by borrowing in rupiah. Large domestic names within these sectors such as Alfamart and state-owned contractors such PT Lippo Karawaci TBK (LPKR, B-/Negative) has the next highest as Waskita Karya and Wijaya Karya also enjoy solid funding access coverage ratio of 27%-31% across our scenarios. A significant part with domestic banks.

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Most of the issuers within the telecommunications sector also We classify sectors that rely on imported raw materials such as have ‘Low’ FX exposure – with the exception of PT Smartfren food, beverage and tobacco as having ‘Moderate’ exposure, arising Telecom Tbk (CCC+(idn)). Telco operators generally have some US from their raw-material purchases. PT Mayora Indah Tbk dollar debt exposure to match their network-related capex needs. (AA(idn)/Stable) offsets its FX exposure from its costs by having Operators such as PT Indosat Tbk (BBB/AAA(idn)/Stable) and PT more than 50% of its revenue denominated in US dollars while XL Axiata Tbk (BBB/AAA(idn)/Stable) used to have some portion Japfa hedges 100% of its US dollar exposure in the absence of of US dollar debt in their balance sheets but they have fully corresponding US dollar income. refinanced them using rupiah borrowings to minimise their exposures.

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Indonesian Corporates Coronavirus Screener - Rating Headroom, Sector and FX Exposure National Long-Term Sector Rating headroom FX Issuers Sectors IDR Rating Outlook exposure before outbreak exposure PT PP Properti Tbk Property/real estate - BBB+ Negative Moderate Low Low PT Ciputra Residence Property/real estate - A+ Negative Moderate Low Low PT Agung Podomoro Land Tbk Property/real estate CCC+ - Moderate Low High PT Alam Sutera Realty Tbk Property/real estate B - Negative Moderate Low High PT Bumi Serpong Damai Tbk Property/real estate BB- - Stable Moderate High Low PT Kawasan Industri Jababeka Tbk Property/real estate B A- Stable Moderate Moderate High PT Lippo Karawaci TBK Property/real estate B- BB+ Negative Moderate Low Moderate PT Modernland Realty Tbk Property/real estate B - Stable Moderate Moderate Moderate PT Pakuwon Jati Tbk Property/real estate BB - Stable Moderate High Moderate PT Ciputra Development Tbk Property/real estate BB- - Negative Moderate Low Low PT Bali Towerindo Sentra Tbk Telecommunications - BBB+ Stable Low Moderate Low PT Smartfren Telecom Tbk Telecommunications - CCC+ Low Low High PT Indosat Tbk Telecommunications BBB AAA Stable Low Moderate Low PT Profesional Telekomunikasi Indonesia Telecommunications BBB- AA+ Positive Low High Low PT Telekomunikasi Indonesia Tbk Telecommunications BBB - Stable Low High Low PT Tower Bersama Infrastructure Tbk Telecommunications BB AA- Stable Low Moderate Low PT XL Axiata Tbk Telecommunications BBB AAA Stable Low Moderate Low PT ABM Investama Tbk Metals & mining B+ - Negative High Low Low PT Adaro Indonesia Metals & mining BBB- - Stable High Moderate Low PT Bayan Resources Tbk Metals & mining BB- - Stable High High Low PT Bukit Makmur Mandiri Utama Metals & mining BB- - Stable High Moderate Low PT Golden Energy Mines Tbk Metals & mining B+ - Stable High Moderate Low PT Indonesia Asahan Aluminium (Persero) Metals & mining BBB- - Stable Moderate High Low PT Indika Energy Tbk Metals & mining BB- - Negative High Low Low PT Sinar Mas Agro Resources and Technology Tbk Natural resources - A Negative Moderate Low Low PT Sawit Mas Sejahtera Natural resources - A Negative Moderate Low Low PT Ivo Mas Tunggal Natural resources - A Negative Moderate Low Low PT Sawit Sumbermas Sarana Tbk Natural resources B- BBB- Stable Moderate Low Low PT Tunas Baru Lampung Tbk Natural resources B+ A Stable Moderate Low Low PT Aneka Gas Industri Tbk Chemicals - A- Stable Low Moderate Low PT Pupuk Indonesia (Persero) Chemicals - AAA Stable Moderate High Moderate PT Chandra Asri Petrochemical Tbk Chemicals BB- - Stable Moderate Moderate Low PT Barito Pacific Tbk Diversified manufacturing B+ - Stable Moderate Moderate Low PT Pan Brothers Tbk Diversified manufacturing B A- Stable Moderate Moderate Low PT Sri Rejeki Isman Tbk Diversified manufacturing BB- A+ Stable Moderate Moderate Low PT Medco Energi Internasional Tbk Energy (oil & gas) B+ - Stable High Moderate Low PT Pertamina (Persero) Energy (oil & gas) BBB - Stable High High Low PT Saka Energi Indonesia Energy (oil & gas) BB - Negative High Low Low PT Geo Dipa Energi (Persero) Utilities - A RWP Low High Low PT Perusahaan Gas Negara Tbk Utilities BBB- AA+ Stable Low High Low PT Perusahaan Listrik Negara (Persero) Utilities BBB - Stable Low High Low PT Serasi Autoraya Transportation - AA- Stable Moderate High Low PT Buana Lintas Lautan Tbk Transportation B+ A- Stable Moderate Moderate Low PT Soechi Lines Tbk Transportation B - Stable Moderate Moderate Low PT Waskita Karya (Persero) Tbk Construction - A Stable Moderate Moderate Low

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Corporates Cross-sector Indonesia

Indonesian Corporates Coronavirus Screener - Rating Headroom, Sector and FX Exposure (Cont.) National Long-Term Sector Rating headroom FX Issuers Sectors IDR Rating Outlook exposure before outbreak exposure PT Wijaya Karya (Persero) Tbk Construction BB AA- Stable Moderate High Low PT Mayora Indah Tbk Food, beverage & tobacco - AA Stable Moderate Moderate Moderate PT Japfa Comfeed Indonesia Tbk Food, beverage & tobacco BB- A+ Stable Low Moderate Moderate PT Astra Otoparts Tbk Auto & Related AA- Stable Moderate High Moderate PT Sumber Alfaria Trijaya Tbk Retailing - AA- Stable Moderate High Low PT Waskita Beton Precast Tbk Building material - BBB- Stable Moderate High Low

Source: Fitch Ratings

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Corporates Cross-sector Indonesia

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