Indonesia Strategy

15 April 2019 Strategy Overweight (Maintained)

Election 2019: Presidential Debate Round 5 End-2019 JCI target: 7,000

• Presidential Debate final round takeaways. On 13 Apr, the General Jokowi-Amin | stock basket TP Election Committee hosted the last round of the presidential debate, just a Waskita Karya (WSKT IJ) – BUY IDR2,700 few days prior to the election on 17 Apr. Presidential and VP candidates Wijaya Karya (WIKA IJ) – BUY IDR2,900 presented (-Ma’ruf Amin vs Prabowo-Sandiaga), discussing four Adhi Karya (ADHI IJ) – BUY IDR2,100 key topics: economic welfare, social welfare, finance & investments, and Perumahan Persero (PTPP IJ) – BUY IDR2,800 industrial. Additional discussion on digital economy, trade balance, state- owned enterprise (SOE) holding, and inequality were raised during the Q&A. Jasa Marga (JSMR IJ) – BUY IDR6,100 Semen Indonesia (SMGR IJ) – BUY IDR14,500 • Economic welfare: farmer and fishermen welfare. Candidates #01 (Jokowi-Ma’ruf Amin) will focus more on “hilirisasi” or down streaming via Bank Negara Indonesia (BBNI IJ) – BUY IDR11,500 industrialisation of agriculture and fishery products to increase value add of Bekasi Fajar (BEST IJ) – NR N/A exports. The duo also plan to leverage more on digital technology in the Surya Semesta Internusa (SSIA IJ) – NR N/A respective sectors to spur growth. Candidates #02 (- BRI Syariah (BRIS IJ) – NR N/A Sandiaga Uno) criticised Jokowi’s past 4.5 years of administration, claiming he had failed on the subject of economic welfare for farmers and fishermen, Prabowo-Sandiaga | stock basket TP citing unclear policies that favour imports more and not domestic production. Adaro Energy (ADRO IJ) – BUY IDR1,830 • Social welfare: productive poor women entrepreneurs as focus. Indo Tambangraya (ITMG IJ) – NEUTRAL IDR23,860 Candidates #01 talked about the “Mekaar” programme, in collaboration with United Tractors (UNTR IJ) – BUY IDR32,500 Permodalan Nasional Madani with >4m of low-income women as clients, Bank Central Asia (BBCA IJ) – NEUTRAL IDR28,400 micro Wakaf programme, as well as KUR (micro loan) lending to women HM Sampoerna (HMSP IJ) – NEUTRAL IDR3,700 entrepreneurs. Candidates #02 talked about a 7-step programme through Unilever Indonesia (UNVR IJ) – NEUTRAL IDR46,900 OK-OCE: registration, basic knowledge training, mentorship, assistance in Indosat Ooredoo (ISAT IJ) – NEUTRAL IDR2,800 acquiring license/permits, marketing, financial administration training, and Saratoga Capital (SRTG IJ) – NR N/A access to capital. Tower Bersama (TBIG IJ) – NR N/A • Finance and investment: widening the tax base. Candidates #01 cited the Mitra Pinasthika Mustika (MPMX IJ) – NR N/A very successful tax amnesty programme in 2016 and also the implementation of e-tax filing using online submissions. Furthermore, they argued that

aggressively forcing to increase tax collection ratio within a short period of Analysts time will negatively hit the economy on a big scale, and would rather do it gradually. Candidates #02 vowed to increase tax ratio to 16% (pre-1998 Henry Wibowo crisis) from the 10-11% level currently. They plan to increase participation +6221 2970 7056 rate by lowering the corporate and personal income tax rates. [email protected] • Industry: maximising the potential of Indonesia’s shariah economy. Both candidates have similar objectives to boost shariah business penetration in Indonesia, as the potential is big (the world’s largest Muslim population). Ghibran Al Imran • Q&A open session: e-sports, trade balance, SOE holding. When Jokowi +6221 2783 0888 asked about e-sports initiative (Mobile Legend competition), Prabowo [email protected] seemed to have be caught off guard, but Sandiaga managed to respond comfortably. Sandiaga then attacked Indonesia’s large current account deficit. Recent Related Report: Jokowi cited gradual improvement already seen in 1Q19 and with a brighter Indonesia Election 2019 : Reform Theme Under outlook (eg biofuel, refineries, etc). Last but not least, Prabowo seemed to Jokowi Vs Prabowo think that SOE holding companies have a negative impact to existing SOE companies, weakening their positions. Jokowi cited Indonesia Asahan Indonesia Strategy: 4Q18 Market EPS Grew 9%; OW at IDR7000 TP Aluminium (Inalum) as a successful example for SOE mining companies, which recently managed to issue a global bond to acquire 51% stake in Indonesia Outlook: Election Year To Sustain Domestic Freeport Indonesia. Jokowi also said that a SOE holding company for the Resilience infrastructure sector has been prioritised as next in line. • How to position ahead of Election Day. Election Day (17 Apr) will be a RHB Indonesia Analysts: public holiday in Indonesia and market will close. 18 Apr will be an important Henry Wibowo – Strategy, Banks, Media/Internet, Property day for capital market participants, as we expect big trading volume. If the Andrey Wijaya – Auto, Staples, Infrastructure latest public polls are correct (Figure 5), Jokowi will be re-elected as Michael Setjoadi – Retail, Tobacco, Poultry, Telco Indonesia’s next president for the 2019-2024 period. If that is the case, we Andrew Hotama – Coal & Mining, Metals believe that infrastructure-related names will rally – ie construction, toll roads, cement, and infrastructure banks – followed by industrial estates (beneficiary Alvin Baramuli – Banks, Multi-finance, Healthcare of potential labour reforms), and other laggard sectors, such as property and Christopher Andre Benas – Plantation, Property telcos. On the flipside, if Prabowo wins the election, we believe there will be a Ahmad Nazmi – Regional Economist temporary consolidation period, as the inauguration date should only be in October – six months after the election. We advise investors to buy USD- earners and defensive names in that case.

See important disclosures at the end of this report 1

Indonesia Strategy

15 April 2019

Figure 1: Summary of key debate points (fifth/last round)

Topic Jokowi-Ma’ruf Prabowo-Sandiaga Economic • Focusing on down-streaming and industrialisation of • Criticised Jokowi for not addressing the issue well during Welfare agriculture and fishery products to increase value added 4.5 years, as import and export policies were unclear Key focus: exports and does not seem to benefit farmers or fishermen farmers and • Synergise with start-ups and digital technology company • Indonesia to refer back to 1945 constitution Article 33, to fishermen’s in the sector to simultaneous growth industrialise and create more job opportunities especially welfare • Steps to achieve: (1) infrastructure, (2) human resource in the agriculture and fisheries sector development, (3) reorientation of government, and (4) development of the digital economy Social Welfare • Achievements: establishment of Mekaar programme in • 7-step programme through OK OCE: (1) registration, (2) Key focus: collaboration with Permodalan Nasional Madani with basic knowledge training, (3) mentorship, (4) assistance women’s over 4m low income women as clients (to be increased in acquiring licenses and permits, (5) marketing, (6) participation in the to 10m), ultra-micro (UMI) lending to more than 1.1m financial administration training, and (7) access to capital economy micro entrepreneurs • Continuation of programs such as micro Wakaf in Madrasah’s as well as Mekaar. • Continuation of KUR and UMI loans to lend capital with lower ticket sizes to women entrepreneurs in effort to boost their business and contribute more to the family economy Finance and • Achievements: brought in IDR114trn tax income via a tax • Promised to increase tax ratio to 16% from 10% Investment amnesty programme currently through the utilisation of IT to increase the Key focus: tax • Increasing convenience for tax payers to report tax transparency of the system ratio and managing through digitisation, such as e-filing to widen tax base • Multiple tax cuts are discussed; increasing non-taxable zakat and wakaf and gradually increasing the tax ratio income to increase the out-of-pocket consumption, • To intensively collect zakat and wakaf through the lowering the corporate tax rate to try to welcome more National Zakat Body and National Wakaf Body rather investments; all in effort to widen the tax base. than only receiving • Separating the Tax Directorate from the Ministry of Finance • The utilisation of IT in zakat and wakaf collection Industry • Achievements: establishment of National Sharia Finance • To support manufacture of halal products and services, Key focus: Committee, Indonesian halal standards as reference for especially to be exported by giving access to training maximizing global halal standard and capital Indonesia’s sharia • To open Halal Park next to Gelora Bung Karno Sports • Establishment of Haji Fund Bank to manage the Haji economy and complex, which is planned to be expanded into Halal Fund and becoming the largest shariah bank in ASEAN, finance District bigger than in Kuala Lumpur, Hong Kong, or London

Source: RHB, Presidential Candidates Debate Live Broadcast

Discussing digital economy, trade balance, SOE’s and inequality. During the Q&A session between candidates, the first topic of discussion was on e-sports where Jokowi plans to support by developing the digital infrastructure first (eg bandwidth, Palapa Ring, and 4G connectivity), a proper ecosystem, in an effort to push game developers in Indonesia and e-sport athletes. Prabowo refused to discuss the issue as it is less important. On trade balance, Jokowi indicated the 1Q19 trade balance should have a lower deficit of USD6.7bn from USD8bn in 4Q18. Efforts to lower the deficit were by building refineries, implementing B20, which would increase to B50 and B100 to lower oil imports and using LC’s for trades to avoid transfer pricing. The Prabowo-Sandiaga team promised to lower electricity prices. On SOE’s the Prabowo-Sandiaga team criticised the establishment for its mismanagement of SOE holdings, while Jokowi presented several achievements such as the acquisition of Mahakam and Rokan Blocks by Pertamina and Freeport Indonesia by Inalum to show the capabilities of SOE’s. And lastly, Ma’ruf Amin pointed out that both Prabowo and Sandiaga are included in the 1% elite that Prabowo stated are controlling Indonesia’s economy and that Prabowo’s tone in answering turned defensive.

Figure 2: Presidential debate schedule Date Theme Participant 17 Jan 2019 Law enforcement, human rights, corruption, and terrorism Both Energy, food, infrastructure, natural resources, and 17 Feb 2019 President only environment 17 Mar 2019 Education, health, employment, and social & cultural issues VP only 30 Mar 2019 Ideology, defence, and international relations President only Economic and social welfare, finance and investment, and 13 Apr 2019 Both industries

Source: RHB, Various media

See important disclosures at the end of this report 2

Indonesia Strategy

15 April 2019

Figure 3: Jokowi-Ma’ruf’s mega campaign (13 Apr 2019) Figure 4: Prabowo-Sandiaga’s mega campaign (7 Apr 2019)

Source: Kompas Source: Okezone

Figure 5: Electability poll – Jokowi vs Prabowo (Feb-Mar 2019)

100% 11.0% 12.3% 12.3% 15.3% 10.3% 10.4% 13.4% 13.2% 90% 20.9%

80% 30.9% 35.4% 33.6% 34.8% 70% 34.7% 33.3% 37.4% 33.6% 28.9% 60% 50%  Based on the average latest polls, 40% Jokowi has 53% votes as compared 30% 54.9% 58.7% Prabowo with 34%, implying a 19% 53.6% 54.1% 53.0% 51.4% 49.2% 50.2% 53.1% 20% lead. 10% 0% Charta Vox Populi Alvara CSIS SMRC LSI Denny Litbang Indo Average Politika Research JA Kompas Barometer Center

Joko Widodo - Ma'ruf Amin Prabowo Subianto - Sandiaga Uno Have not decided (and or not choosing)

Source: RHB, Bisnis Indonesia compilation

Figure 6: Political candidates and coalition parties President Candidate Vice President Candidate President Candidate Vice President candidate

VS

Joko Widodo Prof. Dr. K. H. Ma'ruf Amin Prabowo Subianto Sandiaga Uno Coalition Party Coalition Party

Indonesian Megawati Great Indonesia Movement Party Prabowo Subianto Democratic Party Soekarnoputri Party

National Awakening Nasional Demokrat Party

United People’s M. Romahurmuziy Oesman Sapta Sohibul Iman Development Party Conscience Party

Indonesia Solidarity Indonesian Justice Diaz Hendropriyono Democratic Party Party and Unity Party

Indonesian Unity Hary Tanoesoedibjo Moon Star Party Berkarya Party Hutomo Mandala Putra Party Source: RHB, Various media

See important disclosures at the end of this report 3

Indonesia Strategy

15 April 2019

Figure 7: Political candidates and coalition parties No. Party name Abbreviation number of seats for each Percentage (%) party in DPR 1 Partai Demokrasi Indonesia Perjuangan PDIP 109 19.46

2 Partai Golongan Karya PG 91 16.25

3 Partai Gerakan Indonesia Raya GERINDRA 73 13.04

4 Partai Demokrat PD 61 10.89

5 Partai Amanat Nasional PAN 48 8.57

6 Partai Kebangkitan Bangsa PKB 47 8.39

7 Partai Keadilan Sejahtera PKS 40 7.14

8 Partai Persatuan Pembangunan PPP 39 6.96

9 Partai Nasdem NASDEM 36 6.43

10 Partai Hati Nurani Rakyat HANURA 16 2.86

Total 560 100.00

Jokowi - Ma'ruf coalition 338 60.35 Prabowo - Sandiaga coalition 222 39.64 Source: RHB, Various media

Figure 8: Stocks that we think will outperform the market if Jokowi and Ma’ruf win Stocks that we think will outperform the market if Jokowi & Ma'Ruf Amin Win Company Ticker Rating Price (IDR) TP (IDR) % Upside Market Cap (USDm) Note 1 Waskita Karya WSKT BUY 2,000 2,700 35.0 1,860 Big Beneficiary of Jokowi's Infrastructure Masterplan - SOE Construction 2 Wijaya Karya WIKA BUY 2,130 2,900 36.2 1,356 Big Beneficiary of Jokowi's Infrastructure Masterplan - SOE Construction 3 Adhi Karya ADHI BUY 1,610 2,100 30.4 416 Big Beneficiary of Jokowi's Infrastructure Masterplan - SOE Construction 4 Perumahaan Persero PTPP BUY 2,250 2,800 24.4 933 Big Beneficiary of Jokowi's Infrastructure Masterplan - SOE Construction 5 Jasa Marga JSMR BUY 6,000 6,100 1.7 3,076 Big Beneficiary of Jokowi's Infrastructure Masterplan - SOE Tollroad 6 Semen Indonesia SMGR BUY 13,000 14,500 11.5 5,687 Big Beneficiary of Jokowi's Infrastructure Masterplan - SOE Cement 7 Bank Negara Indonesia BBNI BUY 9,650 11,500 19.2 12,579 Proxy for SOE Infrastructure Lending - SOE Bank 8 Bekasi Fajar BEST NR 278 N/A N/A 199 Labor Reform = FDI from Manufacturing = Higher demand for Industrial Estates 9 Surya Semesta SSIA NR 560 N/A N/A 184 Labor Reform = FDI from Manufacturing = Higher demand for Industrial Estates 10 BRI Syariah BRIS NR 525 N/A N/A 360 More initiatives to boost syariah banking penetration under Ma'ruf Amin Note: Share prices as at 12 Apr 2019 Source: Bloomberg, RHB

Figure 9: Stocks that we think will outperform the market if Prabowo and Sandiaga win Stocks that we think will outperform the market if Prabowo & Sandi Win Company Ticker Rating Price (IDR) TP (IDR) % Upside Market Cap (USDm) Note 1 Adaro Energy ADRO BUY 1,300 1,830 40.8 2,858 Defensive USD earner, Part of Saratoga Group 2 Indo Tambang Raya ITMG NEUTRAL 20,425 23,860 16.8 1,558 Defensive USD earner with double digit dividend yield buffer 3 United Tractors UNTR BUY 25,625 32,500 26.8 6,824 Defensive USD earner with exposure to Gold as safe haven 4 Bank Central Asia BBCA NEUTRAL 27,550 28,400 3.1 48,020 Most defensive bank/stock in Indonesia with lowest beta 5 HM Sampoerna HMSP NEUTRAL 3,610 3,700 2.5 29,905 Defensive consumer name with small free float 6 Unilever Indonesia UNVR NEUTRAL 49,450 46,900 (5.2) 25,976 Most defensive consumer name with lowest beta 7 Indosat ISAT NEUTRAL 2,730 2,800 2.6 983 Promise to be bought back by Government if Prabowo-Sandi Win 8 Saratoga Capital SRTG NR 3,760 N/A N/A 713 Private Equity company co-founded by Sandiaga Uno 9 Tower Bersama TBIG NR 3,800 N/A N/A 1,277 Tower company that is part of Saratoga Group 10 Mitra Pinasthika Mustika MPMX NR 1,135 N/A N/A 355 Auto and Financing company that is part of Saratoga Group Note: Share prices as at 12 Apr 2019 Source: Bloomberg, RHB

See important disclosures at the end of this report 4

Indonesia Strategy

15 April 2019

Figure 10: Indonesian market’s (JCI) 8-year P/E band (IDR) 8500 19.0x

7500 17.4x

15.8x 6500 14.1x  JCI is trading at 15 x FY19F P/E, about -0.5SD from its mean 5500 12.5x

4500

3500

2500 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: Data as at 12 Apr 2019 Source: Bloomberg, RHB

Figure 11: 2018-YTD 2019 foreign fund flows (USDm) 1,500 964 1,000 609 500 255  In 2018, foreign fund outflows totalled 132 117 54 USD3.7bn 0 (106) (66)  Very strong foreign fund inflow in Jan (224) (237) -500 2019 (USD964m) signalled an (460) (461) (647) encouraging start to the year -1,000 (760) (750) (1,085) -1,500

Note: Data as at 12 Apr 2019 Source: Bloomberg

Figure 12: Sector price performances relative to JCI (2019 YTD)

8.0% 5.6% 6.0% 3.6% 4.0% 3.1%  YTD-2019 best-performing sector relative to JCI is financial services 2.0% 0.4% 0.0% (+6% YTD) and infrastructure (+4% -2.0% YTD) -4.0% -2.3%  Note that the basic industry sectors -6.0% -4.1% include chemicals, poultry, cement, and -5.8% -5.6% -8.0% pulp & paper industries -10.0% -8.3% -9.3%

-12.0%

Mining

Trading

Property

Consumer

Agriculture

Infrastructure

BasicIndustry

Manufacturing Miscellaneous

Financial Services Note: Data as at 12 Apr 2019 Source: Bloomberg, RHB

See important disclosures at the end of this report 5

Indonesia Strategy

15 April 2019

Figure 13: Central bank’s benchmark rate (BI 7DRRR Rate)

6.5

6

5.5  During 2018, BI’s 7-Day Reverse Repo Rate was raised 175bps

5  We believe the rate cycle is already at peak levels and expect flat rate movements in 2019F. We are not ruling 4.5 out a 25bps cut in 4Q19

4

Jul-16 Jul-17 Jul-18

Apr-16 Oct-16 Apr-17 Oct-18 Oct-17 Apr-18

Jun-16 Jan-17 Jun-18 Jan-19 Jun-17 Jan-18

Feb-17 Feb-18 Mar-18 Mar-19 Mar-17 Feb-19

Sep-16 Aug-17 Nov-17 Dec-17 Sep-18 Dec-18 Aug-16 Nov-16 Dec-16 Sep-17 Aug-18 Nov-18

May-17 May-18 May-16 Source: Badan Pusat Statistik, RHB

Figure 14: Indonesia’s GDP trend

 4Q18 GDP growth was steady at 5.18% YoY

Source: Badan Pusat Statistik, RHB

See important disclosures at the end of this report 6

Indonesia Strategy

15 April 2019

Figure 15: Indonesia’s current account deficit 4,000 2.5

2,000 1.08 0.71 1.42 1.5 0 0.5 0.52 -2,000 0.44 -0.5  Indonesia’s 4Q18 CAD widened to 3.6% -4,000 of GDP (vs 3.3% of GDP in 3Q18). We -1.5 -6,000 believe this is the bottom, and the -2.03 outlook ahead should improve -2.41 -2.16 -2.5 -8,000 -3.01 -3.01 -10,000 -3.28 -3.5 -3.5 -3.71 -3.57 -4.24 -4.26

-12,000 -4.5

Jun-10 Jun-13 Jun-15 Jun-16 Jun-18 Jun-11 Jun-12 Jun-14 Jun-17

Mar-11 Mar-13 Mar-14 Mar-16 Mar-17 Mar-10 Mar-12 Mar-15 Mar-18

Dec-11 Dec-13 Dec-14 Dec-16 Dec-17 Dec-10 Dec-12 Dec-15 Dec-18

Sep-10 Sep-12 Sep-14 Sep-15 Sep-17 Sep-18 Sep-11 Sep-13 Sep-16 Current Account Deficit (LHS) Current Account Deficit (% of GDP) (RHS)

Source: Bloomberg, Bank Indonesia

Figure 16: Indonesia’s FX reserves

FX Reserve (USDbn) USD/IDR 140 16,000

120 14,000  As at Dec 2018, FX reserves stood at USD120bn, -USD11bn YTD, but still higher than in 2015, at an average of USD107.7bn

100 12,000

80 10,000

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-14 Dec-17 Dec-18 Dec-15 Dec-16

Sep-15 Sep-16 Sep-17 Sep-18 Sep-14 Note: FX reserves as at 31 Dec 2018 Source: Bloomberg, RHB

See important disclosures at the end of this report 7

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Singapore United States RHB Securities Singapore Pte Ltd and/or its subsidiaries and/or associated This report was prepared by RHB and is being distributed solely and directly to companies do not make a market in any securities covered in this report, “major” U.S. institutional investors as defined under, and pursuant to, the except for: requirements of Rule 15a-6 under the U.S. Securities and Exchange Act of 1934, as (a) - amended (the “Exchange Act”). Accordingly, access to this report via Bursa Marketplace or any other Electronic Services Provider is not intended for any party The staff of RHB Securities Singapore Pte Ltd and its subsidiaries and/or its other than “major” US institutional investors, nor shall be deemed as solicitation by associated companies do not serve on any board or trustee positions of any issuer RHB in any manner. 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This report is confidential and not any other relationship (including a shareholding of 1% or more in the securities intended for distribution to, or use by, persons other than the recipient and its covered in this report) that may create a potential conflict of interest, except for: employees, agents and advisors, as applicable. Additionally, where research is (a) - distributed via Electronic Service Provider, the analysts whose names appear in this report are not registered or qualified as research analysts in the United States and Hong Kong are not associated persons of Auerbach Grayson AG or such other registered U.S. The following disclosures relate to relationships between RHBHK and companies broker-dealer as appointed by RHB from time to time and therefore may not be covered by Research Department of RHBSHK and referred to in this research report: subject to any applicable restrictions under Financial Industry Regulatory Authority (“FINRA”) rules on communications with a subject company, public appearances and RHBSHK hereby certifies that no part of RHBSHK analyst compensation was, is or personal trading. Investing in any non-U.S. securities or related financial instruments will be, directly or indirectly, related to the specific recommendations or views discussed in this research report may present certain risks. The securities of non- expressed in this research report. U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on non-U.S. securities or related RHBHK had an investment banking services client relationships during the past 12 financial instruments may be limited. Foreign companies may not be subject to audit months with: -. and reporting standards and regulatory requirements comparable to those in the United States. The financial instruments discussed in this report may not be suitable RHBHK has received compensation for investment banking services, during the past for all investors. Transactions in foreign markets may be subject to regulations that 12 months from: -. differ from or offer less protection than those in the United States. RHBHK managed/co-managed public offerings, in the past 12 months for: -.

OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST On a principal basis. RHBHK has a position of over 1% market capitalization of: -. Malaysia RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for: (a) -

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Additionally, please note the following:

Ownership and material conflicts of interest: RHBSHK policy prohibits its analysts and associates reporting to analysts from owning securities of any company covered by the analyst.

Analyst as officer or director: RHBSHK policy prohibits its analysts, and associates reporting to analysts from serving as an officer, director, advisory board member or employee of any company covered by the analyst.

RHBHK salespeople, traders, and other non-research professionals may provide oral or written market commentary or trading strategies to RHB clients that reflect opinions that are contrary to the opinions expressed in this research report.

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