Indonesia Industry Focus
Indonesian Multi-finance Companies
Refer to important disclosures at the end of this report
DBS Group Research . Equity 18 Apr 2017
Bridging gaps with the under-banked JCI : 5,616.50 Multi-finance companies are capillaries of the financial Analyst system that channels funds to the unbankable population; Sue Lin LIM +65 8332 6843 crucial to financial inclusion [email protected] Fragmented industry with the largest player capturing 8% Benedictus Agung SWANDONO +6221 3003 4935 of loan market share; most big players are backed by banks [email protected] or auto dealers Auto sales, the main driver of growth; multi-purpose financing gaining popularity; leasing and factoring may resurface with commodity prices recovering STOCKS/COMPANIES Performance Price Mkt Cap Target Price Undemanding valuations given high ROE in this high risk- (%) high return segment; BFIN is our preferred listed proxy; Rp US$m Rp 3 mth 12 mth Rating stock liquidity is however limited BFI Finance Ind (BFIN( 4,100 493 5,000 17.1 57.7 BUY Proxy to the unbankable population. Indonesia has among the lowest bankable population in the world at 36% of the country’s adult Clipan Finance (CFIN) 298 89.4 300 15.5 13.7 HOLD population. The government’s push towards improving financial Adira Dinamika Multifinance (ADMF) 6,625 471 Not Rated 4.0 105.0 N/A inclusion opens opportunities to the multi-finance companies which Astra Sedaya Finance (ASDF)* - - Not Listed N/A N/A N/A BCA Finance (BCAF)* - - Not Listed N/A N/A N/A are able to meet the financing needs of the lower income households. Federal International Finance (FIF)* - - Not Listed N/A N/A N/A These companies typically serve the non-banking population in Mandiri Tunas Finance (MTF)* - - Not Listed N/A N/A N/A Indonesia, providing them with access to financing. Execution and monitoring mechanisms are manual and labour intensive but have * Not listed proven to be effective. The risk profiles of multi-finance companies are Source: DBS Bank, DBSVI, Bloomberg Finance L.P. higher than banks but the returns are also more lucrative, judging from Closing price as of 13 Apr 2017 the well-managed multi-finance companies we have screened. Consumer financing is its driving force; new avenues opening Multi-finance companies: Market share of top 20 players While the multi-finance 8% up; potential M&A opportunities. 8% 7% 7% 7% companies largely focus on consumer financing, the regulators are 7% gradually opening more financing options. In 2014, Otoritas Jasa 6% 5% Keuangan (OJK) officially allowed multi-finance companies to finance 5% 4% multi-purpose loans, refinancing and infrastructure loans. Multi-finance 4% 3% companies used to see leasing for heavy equipment as a growth driver 3% 3% 3% 2% 2% 2% but that has since declined as commodities’ prices slumped three years 2% 2% 2% 2% 2% 1% 1% 1% ago. OJK is also working towards bridging the gap with banks in terms 1% 1% of regulations. We believe this move will gradually mitigate risks to the 0% multi-finance companies as an investment option, and perhaps, also an FIF
avenue to consolidate the currently fragmented sector as well as BFIN CFIN TAFS ASDF BCA F ADMF Oto M Orix I.F WOMF MPM F. CIMB F. potential M&A opportunities. Dipo S.F C.J. Power Bussan A.F Mandiri T.F Summit O.F Recovery in commodity prices and auto sales a positive boost; F,I Indomobil Mitsui Leasing Commodity Surya Artha N.F regulatory changes could add fuel to auto sales. Note: Based on outstanding on balance sheet net receivables. Data prices have held up quite well to date and are expected to boost represents 2015 numbers purchasing power in the near term. Receivable growth has also Source: Infobank, DBS Bank, DBSVI accelerated to +7.2% in February 2017 (vs -1% in January 2016). We expect the flow-through of this positive development to be gradual. Multi-finance companies: Financing activities y-o-y growth The visible turnaround for the auto industry would bode better for the Rp bn %growth multi-finance companies. The relaxation of down payment rules should 450 35% 32.3% also add fuel to auto sales. We expect financing growth to recover to 400 31.0% 30% 8% in 2017, driven by auto financing. 350 26.4% 25% 23.1% 300 20% BFIN is a good listed proxy; opportunities among the top 20 250 Selected listed multi-finance companies are 15.2% 15% multi-finance companies. 200 attractive; BFIN (BUY, TP Rp5,000) is our pick. The main concern 10% 150 investors may have is the limited stock liquidity. We highlight ADMF, 6.7% 100 4.1% 5.2% 5% BCAF, and MTF, which are subsidiaries to banks, and ASDF (4W market 50 -0.8% 0% leader) and FIF (2W market leader), which are Astra-related companies - -5% – these have strong parent companies. We believe they are 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Financing Financing growth y-o-y opportunities among smaller multi-finance companies, both organic and inorganic, in this current operating environment. Source: OJK, BI, DBSVI
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Industry Focus
Table of Contents
Investment Summary 3
Opportunities with the unbankable population 4
A. Financial inclusion, a key to growth 4 B. The multi-finance industry landscape 5 C. Prospects for the multi-finance industry 9 Key drivers to the multi-finance industry 11
A. Automotive industry 11 B. Leasing and heavy equipment 13 Key players and market position 15
A. 4-wheeler market 18 B. 2-wheeler market 19 Regulatory framework for multi-finance companies 20
Valuation and recommendation 23
A. Valuation tables 24 B. P/BV Bands 25 Company Guides 27
BFI Finance (BFIN) 28 Clipan Finance (CFIN) 36 Company Profiles (Non-rated) 44
Adira Dinamika Multifinance (ADMF) (Non-rated; Listed) 45 Astra Sedaya Finance (ASDF) (Non-rated; Not listed) 50 BCA Finance (BCAF) (Non-rated; Not listed) 55 Federal International Finance (FIF) (Non-rated; Not listed) 60 Mandiri Tunas Finance (MTF) (Non-rated; Not listed) 65
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Industry Focus
Investment Summary commodity prices might not sustain throughout the year but we believe the positive impact should be gradually felt. We Multi-finance companies – bridging gaps with the under- expect the auto industry to pick up in 2017, boosting the banked. Indonesia has among the lowest bankable population growth prospects of the multi-finance companies. in the world at 35.9% of the country’s adult population. Long-term potential, especially for 4W. The auto penetration Banking with the unbankable population includes looking at rate in Indonesia remains one of the lowest in the region. instances in micro lending, especially in the rural areas. The Based on data by Badan Pusat Statistik (BPS)/ Indonesian initiation of the branchless banking agenda has addressed this Statistics Centre and automotive association, in 2015 there are to some extent. But beyond that, the need to further reach out only 13.7m cars and 99m motorcycles outstanding on to the unbankable population lies in the hands of the multi- Indonesian roads (vs its population of 250m). The penetration finance companies which cover both urban and rural areas. rate for 4-wheeler vehicles (4W) is a mere 5%, lower than The government’s push towards improving financial inclusion other developing countries like Malaysia and Thailand. opens opportunities for the multi-finance companies which are However, 2-wheeler vehicles’ (2W) penetration is much higher able to meet the financing needs of the lower income at 40% in 2015. households. Multi-finance companies are licensed to offer a range of services, including leasing, consumer financing (bulk Fragmented industry; obvious market leaders. There are a total of its business), credit card financing and factoring. But unlike of 201 multi-finance companies, with the top 20 companies banks, they are not allowed to accept deposits. Similar to commanding 65% (financing) market share. Each of them banks, multi-finance companies are governed by Otoritas Jasa caters to its own niche by specialising in several categories Keuangan (OJK), the regulatory arm of the Minister of Finance such as products financed (4W, 2W, heavy equipment (HE), (MoF). etc) and by geographical reach. Multi-finance companies are typically owned by banks (both domestic and foreign), brand- Turning optimistic; three critical factors to watch. We expect holding sole agents (Agen Tunggal Pemegang Merek, ATPM) an improvement in financing demand in 2017. The Multi- of cars and foreign principals of car makers (e.g. Astra finance Company Association (APPI/Asosiasi Perusahaan International), and a few which are family/individual-owned. Pembiayaan Indonesia) recently announced its forecast of 10% The strong multi-finance companies are those affiliated to financing growth for 2017 on the back of an improving banks and ATPMs. The largest player, Astra Sedaya Finance economy and improved commodity price trends. We identified (ASDF) has only 8% market share, marginally higher among three critical factors that will drive multi-finance companies’ the top 6 multi-finance companies, which indicates how earnings in 2017: (1) lower credit cost, (2) higher NIM and fragmented the industry is. better growth, and (3) well controlled expenses. Note that some multi-finance companies had to accelerate provisions as Top players have better profitability metrics than banks. they had to change how NPLs were classified following stricter Compared to banks, multi-finance companies generate better regulations to streamline recognition similar to the banks; this returns. Generally, the major multi-finance players record caused provisions to be higher in 2016. We expect NIM higher ROE and ROA as the benefits of higher asset yield expansion in 2017 on the back of lower funding cost as the outweigh the negatives of higher cost of funds, operating cost, banks have started to price down their loans, which means and credit cost. The higher asset yield is due to the ability to multi-finance companies now enjoy lower funding costs via tap the unbankable market, an advantage that banks lack. But bank borrowings (one of the main sources of funding for it requires heavy infrastructure and labour to tap into this multi-finance companies). Meanwhile, asset yields are market while its elevated credit cost is due to the higher risk expected to stay constant as the interest rates offered to the profile of the customers compared to banks. customers are not sensitive towards the change in interest rate Opportunities among multi-finance companies. We believe environment. In addition, operating costs are expected to be they are opportunities among the multi-finance companies, flat as the companies have not been aggressive in expanding both organic and inorganic, in this current operating their service points. environment. Among the listed players, our pick would be Auto industry recovery, key driver for multi-finance companies’ BFIN. Indirect plays would be via banks which own the larger growth. With consumer financing dominating the multi- multi-finance companies such as BCAF (100% owned by Bank finance companies’ loan portfolio, the auto industry would be Central Asia, BBCA) and ADMF (Bank Danamon, BDMN). the key growth driver. Leasing growth relies mainly on heavy equipment financing which in turn unfortunately is dependent on commodity prices. Both these segments have been in the doldrums in the past two years. The near-term exuberance for
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Industry Focus
Opportunities with the unbankable population Indonesia: Many are excluded from the financial system 45% 42% Indonesia has among the lowest bankable population in the 40% 33% world at 35.9% of the country’s adult population. Banking 35% 31% 28% with the unbankable population includes looking at instances 30% 25% in micro lending, especially in the rural areas. The initiation of 20% 15% 13% the branchless banking agenda has addressed this to some 15% 11% extent. But beyond that, the need to further reach out to the 10% 8% unbankable population lies in the hands of the multi-finance 5% 0% companies which cover both urban and rural areas. The Borrowed from a financial Borrowed from familiy or friends government’s push towards improving financial inclusion institution opens opportunities for the multi-finance companies which are Indonesia East Asia & Pacfific able to meet the financing needs of the lower income Lower Middle Income Countries Thailand households. *The numbers are as % of adult population (age 15+) Source: Little Data Book on Financial Inclusion 2015, DBS Bank, DBSVI A. Financial inclusion, a key to growth Who are the unbankable? Reaching out the unbankable has The state of financial inclusion in Indonesia: Indonesia has become a challenge mainly due to Indonesia’s unique lagged behind other developing countries in terms of financial geographical features and underdeveloped infrastructure. inclusion. A survey conducted by World Bank in 2014 indicated Furthermore, the potential businesses in these areas are too small that only 36% of the adult population has a formal account in for financial institutions to set up their branches. The operating a financial institution. This is lower than the average of East cost to reach out to rural areas has outweighed the benefits due Asia and Pacific countries (69%), average of lower middle- to the small-scale nature of such operations. income countries (42%), and even ASEAN peers such as Thailand (78%). In terms of lending, the statistics is even less Indonesia: Geographical and economic mapping encouraging. Only 13% of the adult population borrowed from financial institutions. However it is quite surprising that 42% of these people prefer to borrow money from family or friends. This indicates that there are plenty of untapped markets for lending in Indonesia. Poor infrastructure and education are few reasons of why these markets remain isolated from the modern world.
Indonesia: Banking penetration rate 90% 78% 80% 69% 70% 60%
50% 42% 40% 36% 30% 20% 10%
0% * Banking penetration defined as percentage of respondents reported to Indonesia East Asia & Lower Middle Thailand Pacfific Income Countries have an account at a financial institution Note: BRI – Bank Rakyat Indonesia (Indonesia People’s Bank), BPR – Bank % of adult population with financial insititution account Perkreditan Rakyat (People’s Credit Bank/rural banks), BKD – Badan
*The numbers are as % of adult population (age 15+) Kredit Desa (Village Credit Board), LKBD – Lembaga Keuangan Bukan Bank (Non-bank Financial Fund) Source: Little Data Book on Financial Inclusion 2015, DBS Bank, DBSVI Source: KPMG
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Industry Focus
Indonesia: Economic pyramid can cope with the monthly instalment. They prefer financing companies that provide fast approval and easy service.
Auto-related loans dominate financing segments currently. 1-2 m Currently, consumer financing dominates c.70% of the total loan 1. Upper class: Conventional people >USD 22.1 a day banking and portfolio of multi-finance companies and this mainly involves insurance markets auto-related financing. However, as the market for automotive 2. Middle class: financing becomes more saturated, we should see other form of USD 4.5 - USD 22.1 a day 44 m people financing such as multi-purpose financing, refinancing and also infrastructure loans gathering growth pace. Furthermore, the 3. Poor: Microfinance government has allowed multi-finance companies to participate 203 m market B. The multi-finance industry landscape Note: Multi-finance companies: Financing activities (Aug 2016) Multi-finance companies’ customers are not typical banking customers. Consumer financing customers are mostly in the lower income bracket and deemed unbankable by larger banks. These consumers may not have sufficient collateral, Cars and motorcycles work in the informal sector, and may not have verifiable credit are collectively Leasing 27% history. Some do not have proper documentation such as a tax referred as identification (ID) card, which is needed to apply for a bank consumer loan. The implied higher risk also means multi-finance financing Factoring companies are able to charge higher rates than banks. Cost is Consumer 3% Financing also higher as multi-finance companies typically need a larger 70% network to remain close to its customer base. The business is also fairly labour intensive, especially for collections and sales. Service over pricing. Lower income customers are not sensitive Note: OJK changed breakdown category data since Sep 2016 towards interest rates charged on their loans as long as they Source: OJK, BI, DBS Bank, DBSVI Page 5 Industry Focus Change of financing classification by OJK from Sep 16. We Multi-finance companies: Automotive sales vs CPO price note that OJK has changed the classification for its financing activities from Sep 16. Rather than “by type”, the classification 4,500 9,000 4,000 8,000 is now “by purpose” – investment, working capital and multi- 3,500 7,000 purpose loans – appears to be more similar to the banks’ 3,000 6,000 classification. For example, the passenger 2W and 4W (for 2,500 5,000 2,000 4,000 personal use) financing is included under “multi-purpose 1,500 3,000 loans”. Commercial automotive financing with tenors of less 1,000 2,000 500 1,000 than two years is considered “working capital financing”, - - while tenors of more than 2 years fall into “investments -00 r-12 g p Jun-06 Jun-99 Jun-13 Oct-08 Oct-01 Oct-15 Feb-11 Feb-04 Feb-97 A Apr-05 financing”. Apr-98 Dec-09 Dec-02 Dec-95 Dec-16 Aug-07 Au Aug-14 CPO Price (MYR/ton) - LHS 4W ('000 units) - LHS Multi-finance companies: Financing activities (Feb 2017) 2W ('000 units) - RHS Source: Bloomberg Finance L.P., Gaikindo, AISI 28% Multi-finance companies: Financing activities y-o-y growth Rp bn %growth 450 35% 32.3% 400 31.0% 30% 350 26.4% 25% 23.1% 300 20% 59% 250 15.2% 15% 200 10% 150 13% 6.7% 100 4.1% 5.2% 5% 50 -0.8% 0% - -5% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Financing Financing growth y-o-y Investments Working Capital Multipurpose Source: OJK, BI, DBS Bank, DBSVI Note: OJK changed breakdown category data based on financing activities since Sep 2016. Source: OJK, DBS Bank, DBSVI Auto: Volume sales improvement after DP rule relaxation 30% LTV Relaxation Overall growth has moderated since 2011. Despite growing at 20% a faster rate compared to the banks, financing growth has 10% moderated in the past five years. There has been a confluence 0% of factors contributing to the moderating growth, the main -10% one being the steep fall in commodity prices apart from -20% regulatory changes. After the relaxation of the minimum down -30% payment (DP) regulation in June 2015 (please see details in the -40% table on page 21), automotive sales growth started to pick up -50% and swing into the positive territory. We noted, however, that Jul-16 Jul-15 Jan-16 Jan-15 Jun-16 Jun-15 Oct-16 Oct-15 Feb-16 Feb-15 Sep-16 Apr-16 Sep-15 Apr-15 Dec-16 Dec-15 Nov-16 Nov-15 Mar-16 Mar-15 Aug-16 Aug-15 May-16 4W sales recovered faster compared to 2W. We believe that May-15 4W y-o-y growth 2W y-o-y growth the low commodity price environment was more detrimental to the purchasing power of ex-Java buyers who usually rely on Source: Gaikindo, AISI, DBS Bank, DBSVI 2W transport. 4W sales, on the other hand, are more related to the economic activity in major cities and urbanised areas which experienced lesser impact from softer commodity prices. Page 6 Industry Focus Industry remains dominated by automotive financing activities, Factoring business is small. Factoring is a form of short-term particularly 4W. Automotive sales growth is the main driver for financing, typically involving tenors of less than one year. CFIN, financing. About 70%-75% of auto sales use financing, based one of the listed companies under our coverage, has a sizeable on checks with the industry players. The leasing business is also factoring business with c.11% market share in 9M16. CFIN dominant, and it usually involves support financing for heavy ramped up its factoring business in 2012 to channel its liquid equipment (HE) or machinery sales. assets as its leasing and consumer financing businesses were slowing. Factoring yields are similar to leasing at 15-17% and Leasing business is sensitive towards commodity price. The are fully collateralised by land and buildings. leasing business' contribution to total financing shrank to 27% in August 2016 from 34% in 2013. The weakness in this Main funding source remains bank borrowings. Bank segment is mainly caused by sluggish HE sales. Softer borrowings have been the preferred choice of funding for commodity prices, especially in the coal and CPO sectors, also multi-finance companies, contributing up to 77% of the total dragged down overall HE sales and, consequently, credit funding. However, bonds issuance had been robust in the past demand from the segment. Furthermore, the leasing of year. Note that only sizeable and credibly rated multi-finance machineries also contracted after some SMEs preferred to halt companies have access to such funding opportunities. The their expansion plans until the economy starts to pick up. industry’s gearing ratio is at 8.2x, which is still below the maximum gearing ratio of 10x under OJK’s regulation. Multi-finance companies: Financing correlation with CPO price Multi-finance companies: Funding composition (Feb 17) 80% 4,500 0.2% 70% 4,000 22.3% 60% 3,500 50% 3,000 40% 2,500 30% 2,000 20% 1,500 10% 0% 1,000 -10% 500 -20% 0 77.5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Leasing Growth CPO Price - RHS Borrowing Bonds Subordinated loan Source: Bloomberg Finance L.P., OJK Source: OJK Multi-finance companies: Financing correlation with coal price Multi-finance companies: Gearing ratio (2015) 80% 140 9 8.2 70% 8 120 7 6.6 60% 6.1 6.0 5.8 6 5.4 5.4 50% 100 5 4.3 40% 4.0 80 4 3.3 30% 3 2.2 60 2.1 1.9 20% 2 0.8 10% 40 1 0% 0 ADMF ASF TAFS MTF MPM BFI CFIN FIF CIMB BCAF Oto Mult. Oto WOMF Indomobil 20 Industry -10% -20% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 * All are non-listed companies except WOMF, ADMF, BFI, and CFIN; Leasing Growth Coal Price - RHS Data as of 2015 is more complete while gearing ratio did not move Source: Bloomberg Finance L.P., OJK much since then Source: BI, Infobank Page 7 Industry Focus Bond funding is gaining popularity. More multi-finance Multi-finance companies: Joint-finance and channelling companies are trying to tap into cheaper financing by issuing 140,000 131,495 131,577 bonds in the past few years. Currently, bond financing 116,383 120,000 110,055 contributes up to 22% of total financing (vs 11% in 2010). 96,146 100,000 89,178 Some companies are also trying to tap into overseas bond 83,537 markets to find cheaper financing. However, foreign currency 80,000 67,225 bonds have lost its charm recently due to high hedging cost 60,000 (OJK requires all foreign currency liabilities to be fully hedged), 40,000 following the rupiah’s volatility in the past few years. 14,344 15,343 16,168 15,909 13,087 20,000 11,688 10,273 10,194 - Multi-finance companies: Bond contribution to total 2010 2011 2012 2013 2014 2015 2016 Feb-17 financing Channeling Joint Financing 25.0% 22.3% 21.8% Source: OJK, DBS Bank, DBSVI 19.8% 20.0% 17.9% 17.1% 17.2% Chunky NIM, thanks to lofty asset yield. The higher return is 13.9% mainly driven by higher NIM, thanks to the lofty asset yields. A 15.0% 11.2% multi-finance company can charge effective yields of up to 40%. However, the higher margin is usually associated with 10.0% higher operating costs. This is understandable because multi- finance companies typically operate in rural areas to reach the 5.0% untapped markets. This would require more personnel and branches (usually to conduct physical checks of collateralised 0.0% 2010 2011 2012 2013 2014 2015 2016 Feb-17 assets and repossessed assets). Multi-finance companies also faces slightly higher credit cost since their customers carry Source: OJK; DBSVI higher risks that that of bank customers. Joint-financing and channelling scheme. The alternative sources of funding for multi-finance companies are joint- Multi-finance companies: Asset yield (Aug 2016) financing or a channelling scheme with banks. Under joint- 30.0% financing, both the multi-finance company and bank ‘jointly’ 24.4% 25.0% contribute funds to the arrangement. The proportion of contribution by each party differs between agreements, and 20.0% 16.5% risks and returns are shared in the same proportion. Under 14.5% 15.0% channelling, full funding is originated from the bank. The bank bears all the risks, while multi-finance companies receive 10.0% a fee for managing the financing contracts for banks. As of 6.0% Feb 2017, joint-financing agreements reached Rp131tr, while 5.0% channelling was only Rp10tr. It is a win-win situation for both 0.0% parties; banks have access to a higher yielding asset, and Leasing Factoring Consumer 12M SBI Rate Finance Yield (RHS) financing companies receive funding to grow their asset base. Note: The latest data available is as at Aug 2016; subsequently reclassified Preference for joint-financing option. Joint-financing is more Source: OJK, BI, DBS Bank, DBSVI popular than channelling, contributing 25% and 2% to total managed receivables (on- and off-balance-sheet receivables) in Sticky pricing. Lending rates for multi-finance companies are Feb 2017, respectively. Banks prefer joint-financing to not sensitive towards policy changes. We have seen the BI rate channelling – given that multi-finance companies share the cut by 150bps since the beginning of 2016 and but the asset risk of delinquent loans, banks can expect better quality credit yields of the multi-finance companies have stayed relatively than if these companies merely acted as an agent under the unchanged. channelling scheme. Page 8 Industry Focus Multi-finance companies: Asset yield vs 12M SBI Rate Multi-finance companies: Credit cost 26% 8.0% 3.10% 24% 2.88% 7.5% 2.90% 22% 7.0% 20% 2.70% 18% 6.5% 2.50% 16% 2.36% 6.0% 2.24% 14% 2.30% 5.5% 2.13% 12% 10% 5.0% 2.10% 1.95% 1.82% 1.90% 1.77% 1.76% Blended Yield 12M SBI Rate (RHS) 1.70% Source: OJK, BI, DBS Bank, DBSVI 1.50% 2009 2010 2011 2012 2013 2014 2015 2016 Asset quality issues to be monitored; mostly regulatory driven. Source: OJK, BI, DBS Bank, DBSVI Multi-finance companies have been plagued with asset-quality deterioration during the previous economic downcycle, C. Prospects for the multi-finance industry bringing the NPL ratio to a high of 2.2% in August 2016, from 1.45% in Dec 2015. In September 2016, OJK changed Turning optimistic. We expect an improvement in financing its NPL recognition category to be more similar with that for demand this year. The Multi-finance Company Association the banks (five categories) from three categories previously. (APPI/Asosiasi Perusahaan Pembiayaan Indonesia) recently The reclassification saw the NPL ratio starting from a high of announced its forecast of 10% financing growth this year on 3.4% in Sep 2016. However, it moderated to 3.0% by end- the back of an improving economy and higher commodity Feb 2017. Moreover, we also witnessed the spike in credit prices. However, we believe it is an optimistic number as the cost which reached 2.51% in August 2016, ending the year at sustained positive growth needs to be supported by real 2.88%, vs 2.36% in December 2015. improvements in purchasing power and business confidence which we have yet to see. Multi-finance companies: NPL ratio 4.00% Multi-finance companies: Financing growth vs GDP growth 3.4% 3.50% 3.2%3.2%3.3%3.2% 3.0% 35.0% 6.5% 7% 6.2% 3.00% 6.1% 2.5% 2.2% 5.8% 2.2% 30.0% 2.50% 2.3% 2.2% 2.2% 32.3% 5.3% 6% 2.0%2.0% 2.0% 31.0% 5.0% 5.0% 2.00% 25.0% 4.7% 1.6% 1.6%1.6% 4.6% 5% 1.4%1.4%1.4% 1.50% 20.0% 23.1% 4% 1.00% 15.0% 0.50% 15.2% 3% 10.0% 8% 0.00% 6.7% 2% 5.0% ‐0.8% 5.2% NPL NPL* 0.0% 4.1% 1% 2009 2010 2011 2012 2013 2014 2015 2016 2017F *OJK reclassified NPL ratio for multi-finance companies to be more ‐5.0% 0% similar with that for banks since September. The reporting adjustment resulted in the spike of NPL ratio Total Financing (% y‐o‐y) Real GDP Growth (%y‐o‐y) Source: OJK, DBS Bank, DBSVI Source: OJK, BPS, DBS Bank, DBSVI Earnings growth traction should improve from here. We Multi-finance companies: Changes in NPL recognition Before Sep 2016 After Sep 2016 believe earnings should recover in 2017 on the back of lower Overdue 3 Category 5 Category credit cost due to improved commodity prices which can help On time payment Current 90 days in arrears Current Special Mention boost purchasing power, especially in the lower income 90-120 days in arrears Sub Standard segment. We do not expect much deviation on NIM due to the 120- 180 days in arrears Doubtful Doubtful stable yields and cost of funds of the multi-finance companies. more than 180 days in arrears Loss Loss Operating costs are also expected to be flat as the companies Note: Red font considered NPL Source: OJK, DBS Bank, DBSVI have not been aggressive in expanding their service points. Page 9 Industry Focus Multi-finance companies: Earnings growth attributed to the slowdown in the automotive business and 40% heavy equipment. A slight improvement in 2016 was triggered 33% 30% by some cost efficiency measures. We noted that ADMF and 27% 28% 30% MTF had successfully improved their cost-to-income ratio in 17% 19% 17% 20% 14% 2016 via network and employee rationalisation. 9% 10% 9% 10% 2% 2% 0% Multi-finance companies: Cost-to-income ratio -10% -3% % % -10% -16% 60.0 40.0 39.4 45.0 37.5 38.0 -13% 36.3 40.0 50.0 -20% 35.0 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 40.0 30.0 Industry Earnings Growth Average* 25.0 30.0 20.0 *Average earnings growth of BFIN and CFIN 20.0 15.0 Source: OJK, Companies, DBS Bank, DBSVI 10.0 10.0 5.0 0.0 0.0 Potential NIM expansion. We expect NIM expansion on the 2012 2013 2014 2015 2016 back of lower funding cost as the banks have started to price BCA Finance Mandiri Tunas Finance FIF down their loans, which means multi-finance companies now ASDF ADMF BFIN enjoy lower funding costs via bank borrowings. Meanwhile, CFIN Average asset yields are expected to be constant as the interest rates Source: Companies, DBS Bank, DBSVI offered to the customers are not sensitive towards the change in interest rate environment. Multi-finance customers typically Improvement in asset quality. Multi-finance companies are more concerned about monthly instalments (whether they reported lower NPL ratios in 2016. However, the multi-finance are able to pay), fast approval, and easy service more than companies we met were hesitant to turn bullish. Better interest rates. The higher reliance on bond financing could commodity price would be positive for their customers, lower funding costs. Bond financing has been gaining especially for commercial heavy equipment leasing and popularity and the data shows that bond financing portion is factoring but these customers need a sustained high on the uptrend. This might lower the blended cost of funds commodity price to help their distressed cash flow. However, further as bond financing is typically cheaper than bank we believe that positive asset-quality trends may come from financing. the portfolio shift towards customer financing and tighter financing approval. Multi-finance companies: NIM % % 35.0% 13.1% 12.9% 14.0% Multi-finance companies: NPL ratio 12.4% 12.0% 12.2% % % 30.0% 12.0% 2.5 1.21 1.40 25.0% 10.0% 1.13 1.09 1.20 20.0% 8.0% 2 0.96 1.00 1.00 15.0% 6.0% 1.5 0.80 10.0% 4.0% 5.0% 2.0% 1 0.60 0.0% 0.0% 0.40 2012 2013 2014 2015 2016 0.5 0.20 BCA Finance Mandiri Tunas Finance FIF 0 - ASDF ADMF BFIN 2012 2013 2014 2015 2016 CFIN Average - RHS BCA Finance Mandiri Tunas Finance FIF Source: Companies, DBS Bank, DBSVI ASDF ADMF BFIN CFIN Average - RHS Operating expenses should remain in check. Historically, cost Source: Companies, DBS Bank, DBSVI to income ratio were stable around 40%. The slight uptick in 2015 is mainly due to weakening profitability – largely Page 10 Industry Focus Key drivers for the multi-finance industry Auto penetration in developing countries 9,000 Malaysia, 32.17% With consumer financing dominating the loan portfolio of 8,000 multi-finance companies, the auto industry would be the key 7,000 growth driver. Leasing growth relies mainly on heavy 6,000 5,000 Thailand, 15.22% equipment financing which in turn unfortunately is dependent China, 4.52% 4,000 on commodity prices. Both these segments have been in the 3,000 Indonesia, 4.68% doldrums in the past two years. The near-term exuberance of US$ capita per GDP 2,000 India, 2.68% commodity prices might not sustain throughout the year but 1,000 we believe the positive impact would be moderate. We expect - the auto industry to pick up slightly this year, boosting the 0% 5% 10% 15% 20% 25% 30% 35% growth prospects of multi-finance companies. Car ownership ratio Source: CEIC, BPS, Gaikindo, DBS Bank, DBSVI A. Automotive Industry Outlook Improved auto sector outlook for 2017; expect a stronger Auto: 4W sales trend – recovery after being severely hit 2H17. 2016 industry sales came in slightly lower than our 1,400,000 CAGR: 5% expectation, with FY16 volume growing 4.8% y-o-y (we 1,200,000 forecasted 5% y-o-y). Meanwhile, 2W demand is still weak as 1,000,000 FY16 sales volume shrank 8%, mainly driven by weak ex-java sales due to sustained low commodity prices. We are less 800,000 optimistic about the 2W segment and expect only 2% volume 600,000 growth in FY17. Astra International’s management has guided 400,000 that sales in FY17 will be second-half-heavy while the first half of the year should see flat volume growth. 200,000 - 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Temporary support from commodity prices. Sustained high 2016F 2017F 2018F CPO prices should help automotive sales, especially in the ex- Java areas. However, purchasing power in the commodity- Source: Gaikindo, DBS Bank, DBSVI related regions has yet to show significant improvement so far. We believe the high commodity prices need to be sustained Auto: 2W sales trend – slower growth long enough to allow the positive effects to spill over to the 9,000,000 CAGR: 2% auto sector. Therefore, we only expect modest growth (c.5% 8,000,000 for 4W and c.2% for 2W) this year. 7,000,000 6,000,000 Long term-potential is still there, especially for 4W. The auto 5,000,000 penetration rate in Indonesia remains one of the lowest in the 4,000,000 region. Based on data by Badan Pusat Statistik (BPS)/Indonesian 3,000,000 Statistics Centre and automotive association, in 2015 there are 2,000,000 only 13.7m cars and 99m motorcycles outstanding on 1,000,000 Indonesian roads (vs its population of 250m). The penetration - 2016F 2017F 2018F 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 rate for 4W is a mere 5%, lower than other developing countries like Malaysia and Thailand. However, 2W penetration is much higher at 40% in 2015. Source: AISI, DBS Bank, DBSVI Page 11 Industry Focus Penetration is low, but is it that low? Only half the population Auto: Price segmentation based on income can buy a car. Despite the appeal of a low 4W penetration Annual Capability of GDP Annual monthly rate in Indonesia, we argue that only around half of the Nominal GDP per installment Ideal Price Indonesian population can afford a car. Income equality has Income Pop. 2016 Capita per family Segment Brackets (m person)* (Rp tr) (Rp m) (Rp m)** (Rp m)*** become the key feature in the Indonesian economy. This can Top 20% 34,046 5,988 176 8.8 350 be seen in the increase in Gini coefficient to 0.4 in 2016 vs Middle 40% 68,092 4,292 63 3.2 125 0.36 in 1996. Data from BPS indicates that the top 20% of Bottom 40% 68,092 2,134 31 1.6 60 the Indonesian population contributes to 48% of total Total 170,230 12,415 73 3.6 expenditure, as shown in the chart below. * Productive age (age 15-64) is 66.9% of total population, based on World Bank data in 2014 Indonesia: Inequality is an important feature **Assuming dual income and installment is maximum 30% of monthly income. Calculated as: annual GDP per capita* 2 * 30% / 12 100% *** ideal price segment is based on credit simulation on Astra Credit 90% 20% Top 20% Companies website assuming 25% down payment and 4 years tenor 80% 48% Source: BPS; Gaikindo; AISI; DBS Bank, DBSVI 70% 60% 40% Middle 40% 50% Small MPVs are favourite. The affordability analysis might 40% explain why the small multi-purpose vehicles (MPV) (Avanza, 35% 30% Xenia, Mobilio, and Ertiga) have become the favourite cars in 20% 40% Bottom 40% Indonesia. The prices of those cars fall in the income range of 10% 17% the top 20% and middle 40% segments. Some brands like 0% Expenditure Population Innova have also moved up to the higher-end target market segments to capture the more affluent customers. Source: BPS 2014, DBS Bank, DBSVI Auto: Price and units sold by top 10 brands in 2016 Indonesia: Auto loan penetration Innova (Rp350m) 50% 300 HR-V (Rp300m) 45% 250 40% Brio Satya (Rp240m) 35% Mobilio (Rp200m) 200 30% Avanza (Rp200m) 25% 150 Xenia (Rp170m) 20% Calya (Rp140m) 100 LCGC 15% BRV (Rp130m) 235,171 units/ 10% 50 Agya (Rp120m) 22.1% of total industry sales 5% Ayla (Rp110m) 0% - Motorcycle (Rp17m) 6.1mn - 50,000 100,000 150,000 200,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F Population (mn) 2W penetration 4W penetration Unit Sold in 2016 Note: Calculated as number of vehicles divided by national population Source:Gaikindo, DBS Bank, DBSVI Source: BPS, Gaikindo, AISI, DBS Bank, DBSVI LCGC segment has the lowest penetrated market; strong Affordability estimates. We estimate how much the price of a growth ability. We believe the middle 40% market offers the car an average Indonesian can afford in each segment. Using biggest potential due to its huge population. Based on the the nominal GDP per capita as a proxy of income, we assumption we have laid out earlier, people in this segment estimated that the top 20% of the working population (with can afford a car with price tags of around Rp125m. This might age 15-64) have an average annual income of Rp176m/year. be suitable for low-cost green cars (LCGC) which are usually Assuming 30% of the income is allocated to car installment, priced around Rp100m-150m per unit. This segment has been dual income, 25% down payment, and 4 years installment barely penetrated. LCGC sales have not even reached 1m units period, we believe that the families in this class can afford a vs the potential market of 51m units (assuming 102m people Rp350m car (please see the following table). in the middle segment use one car per two persons). Page 12 Industry Focus B. Leasing and heavy equipment Auto: Market size for each segment Million families Sluggish leasing growth in 2016. Leasing shrank by 12% in Aug 2016, the weakest growth since the GFC. Low commodity Regular Car Segment Top 20% 17 (Rp350m/unit) prices such as coal and CPO hit the demand for new heavy equipment (HE), resulting in a 44% contraction for Komatsu HE (the market leader in Indonesia) annual sales volume. LCGC Segment (Rp125m/unit) Middle 40% 34 Furthermore, the soft economic conditions also dragged down the sales of trucks and machinery, which eventually translate into low leasing demand. The leasing business is more cyclical by nature compared to consumer financing. Bottom 40% 34 Used Car/Motorcycle Segment (Rp60m/unit) Moderately higher coal prices in 2017. Our coal price Note: Number of families are calculated as working population (age assumption for FY17 onwards is at US$65 per ton, supported 15-64) divided by two. by supply and demand rebalancing following China’s intention Source: BPS, Gaikindo, DBS Bank, DBSVI to limit its coal production volume as well as the stickier-than- expected Chinese coal demand in the short to medium term. LCGC is gaining market share. LCGC car volume saw a Besides the China coal production cut, coal restocking for the significant increase in market share, especially during the 4Q16 winter season provided a short-term cushion for coal economic slowdown in 2015. The market share of LCGC cars prices. swelled to 22% in 2016 from 14% in 2014. The strong penetration rate is due to LCGC’s well-accepted value A recovery in sight, but we are not overly bullish on coal price proposition to the lower-income consuming class which is outlook. While the coal price benchmark has risen by more price sensitive. LCGC cars also offer better fuel efficiency. It than 25% in 2H16, we believe it is more due to supply can carry 5-7 passenger cars, which is also a strong selling disruption rather than demand improvement. We have not point for young families in Indonesia. seen any structural improvement in demand from key importers like China; beyond the upcoming capacity under Auto: LCGC is gaining market share construction. Beyond 2016, we believe the supply and demand 25% situation is improving, even though a structural supply and 22% demand recovery is not in sight yet. The higher coal price trend 20% of late is not expected to translate into a full-fledged coal price 16% 14% recovery cycle. 15% 10% Newcastle coal price trend and forecast (US$/ton) 140 5% 120 100 0% 2014 2015 2016 80 LCGC Share 60 40 Source: Gaikindo, DBS Bank, DBSVI 20 0 Source: Bloomberg Finance L.P., DBS Bank, DBSVI Page 13 Industry Focus Leasing: Hampered by low commodity prices Units Demand for heavy equipment leasing should recover. The 20,000 44% 50% leasing business is highly dependent on HE volume which in 18,000 39% 37% 40% turn depends on commodity prices. We expect the 16,000 14,000 30% improvement in HE sales to come from higher demand from 12,000 14% the mining and construction sectors. With a recovery in 12% 20% 10,000 commodity prices, we should at least expect the leasing 8,000 10% business of the multi-finance companies to stop sliding. 6,000 -5% -5% -8% 0% 4,000 -12% -10% 2,000 - -20% 2008 2009 2010 2011 2012 2013 2014 2015 8M16 HE Industry Sales Leasing Growth - RHS Note: HE sales as of 3Q16; the latest data available is as at Aug 2016; subsequently reclassified Source: companies, OJK, DBS Bank, DBSVI; Page 14 Industry Focus Key players and market position Multi-finance companies: Market share of top 20 players 8% 8% 7% Who’s who in the Indonesian multi-finance industry? The 7% 7% 7% industry is very fragmented. As mentioned above, there are a 6% 5% total of 201 multi-finance companies, with the top 20 5% 4% companies commanding 65% (financing) market share. While 4% 3% 3% 3% 3% 2% 2% 2% we profile all the multi-finance companies in the industry by 2% 2% 2% 2% 2% 1% 1% business type and ownership, we will focus on the top 1% 1% 1% companies to analyse their strategies and profitability. We will 0% also narrow our analysis on the multi-finance companies by FIF BFIN CFIN TAFS ASDF BCA F ADMF Oto M Orix I.F Orix focusing on consumer financing which forms the bulk of their WOMF MPM F. CIMB F. Dipo S.F C.J. Power Bussan A.F Bussan business. T.F Mandiri Summit O.F Indomobil F,I Indomobil Mitsui Leasing Surya Artha N.F Note: Based on outstanding on balance sheet net receivable. Data Fragmented market. The industry is fragmented and each represents 2015 numbers company caters to its own niche. The top 20 multi-finance Source: Infobank, OJK, DBS Bank, DBSVI companies have a combined market share of 65%. Each of them caters to its own niche by specialising in several Multi-finance companies: Breakdown by business type categories such as product financed (4W, 2W, HE, etc) and 100% 1% 4% 9% 4% geographical reach. The biggest player (Astra Sedaya Finance, 90% ASDF) only has 8% market share, marginally higher among the 80% 44% 42% top 4 companies. Some multi-finance companies invest in 70% 58% 62% huge branch network, such as BFIN (204 branches) and Adira 60% 50% 100% 100% 100% 100% Finance (201) for local presence and to gain the local 96% 89% 96% 19% 40% knowledge in specific geographical areas. 30% 58% 20% 41% 38% 37% Synergy with banks and automotive players. Multi-finance 10% companies are typically owned by banks (both domestic and 0% 2% foreign), brand-holding sole agents (ATPM) of cars and foreign FIF BFIN CFIN TAFS ASDF BCA F ADMF principals of car makers (e.g. Astra), and a few which are Oto M 4W 2W Others Mandiri T.F Summit O.F family/individual-owned. The strong multi-finance companies Indomobil F,I are those affiliated to banks or car makers and ATPMs. ATPMs Note: Others include leasing, factoring, and multi-purpose financing; seek to team up with multi-finance companies to support their data represents 2015 numbers sales. Some ATPMs have their own financing companies. The Source: Company annual reports & websites, DBS Bank, DBSVI Astra Group, which is the ATPM for Toyota, Daihatsu and Isuzu cars and Honda motorcycles, has Astra Sedaya Finance, Multi-finance companies: Breakdown by ownership Toyota Astra Finance for 4W/car financing and Federal International Finance for 2W/motorcycle financing. The AUTO RELATED BANK RELATED Indomobil Group also has its own financing firms – Indomobil Finance Indonesia for 4W/car financing and Suzuki Finance Adira FIF Indonesia for 2W/motorcycle financing. ASDF BCA Finance MPM Finance Clipan Finance TAFS Mandiri TF CIMB Niaga AF Indomobil Fin. INDEPENDENT BFIN Oto Multiartha Summit Oto F. Source: DBS Bank, DBSVI Page 15 Industry Focus Top players have better profitability metrics than banks. Multi-finance companies: Comparison with banks Compared to banks, multi-finance companies generate better Multifinance returns. Generally, the major multi-finance players record Companies Banks (Rp bn) (Rp bn) higher ROE and ROA as the benefits of higher asset yield NIM 12.9% 7.14% outweigh the negatives of higher cost of funds, operating cost, Credit Cost 2.89% 1.64% and credit cost. The higher asset yield is due to the ability to Opex/loan 8.00% 3.6% tap the unbankable market, an advantage that banks lack. But NPL 1.11% 2.18% it requires vast infrastructure to tap into this market while the (All ratios using average three years of data for banks and multi- high credit cost is due to the high risk profile of customers. finance covered in this report) Note: Data represents 2016 numbers Source: OJK, BI, DBS Bank, DBSVI Multi-finance companies (vs banks): ROE 60% 56% Leveraging on banks’ balance sheet through joint financing to 50% enhance ROE. Multi-finance companies, especially the ones related with banks, often use joint financing to enhance 40% returns and therefore ROE. That explains why BCAF, MTF, and 29% 30% 30% ADMF can offer lower effective loan rates for their products 21% 20% 20% 18% but can yet enjoy astronomical asset yields and ROEs. This is 20% 17% 16% 15% 15% 12% 12% 13% the key benefit of having a bank as a shareholder; as it can use 10% 8% 10% 8% the bank’s balance sheet to grow more aggressively and 0% achieve higher ROE. Automotive-related companies also can FIF use joint financing/channelling but the portion is usually BFIN BBRI BBNI TAFS BTPN BMRI BBTN ASDF PNBN BBCA BCA F ADMF BDMN Oto M Dipo S.F smaller. Take ASDF, for example. Comparatively, it does not Note: Data represents 2015 numbersMandiri T.F have a significant joint financing portion for its managed Source: Infobank, OJK, BI, DBS Bank, DBSVI receivables and has relatively low asset yield and ROE. Multi-finance companies vs banks: ROA 18% 16% 16% 14% 12% 10% 8% 6% 6% 6% 4% 3% 3% 3% 4% 2% 3% 2% 2% 2% 2% 2% 2% 2% 1% 1% 0% FIF BBRI BFIN BBNI TAFS BMRI BTPN BBTN ASDF PNBN BBCA BCA F ADMF Oto M BDMN Dipo S.F Dipo Mandiri T.F Notes: Data represents 2015 numbers Source: Infobank, OJK, BI, DBS Bank, DBSVI Page 16 Industry Focus Multi-finance companies: Top 20 players (by asset size) – 2015 Company Asset Financing Liabilities Equity Gearing Major ROE Number 2015 2015 2015 2015 Ratio Product of (Rp bn) (Rp bn) (Rp bn) (Rp bn) Financed Branches Astra Sedaya Finance 30,392 27,542 24,699 5,693 4.34 4W% 18.1% 61 Central Java Power 29,880 24,425 24,088 5,792 4.31 Power Plant 25.3% N/A Federal International Finance 28,734 25,962 23,011 5,723 4.02 2W% 29.2% 169 Adira Dinamika Multi Finance 27,744 24,919 23,383 4,361 5.36 4W, 2W 15.8% 654 Oto Multiartha 22,288 19,717 17,301 4,986 3.25 4W 8.3% 72 Toyota Astra Financial Services 17,804 15,986 15,548 2,256 7.17 4W 15.1% 27 Dipo Star Finance 14,304 11,967 12,087 2,216 4.74 4W 20.9% 31 BFI Finance Indonesia 11,770 9,898 7,751 4,019 1.93 Multipurpose 17.0% 204 Summit Oto Finance 10,575 9,120 6,655 3,920 1.73 2W 6.1% 133 Mandiri Tunas Finance 9,203 8,482 8,030 1,173 6.55 4W 29.6% 88 Indomobil Finance Indonesia 8,913 8,085 7,597 1,316 4.90 4W, 2W 6.4% 80 Bussan Auto Finance 8,880 7,566 7,276 1,604 5.07 4W, 2W 0.2% 188 BCA Finance 6,824 5,707 4,634 2,190 2.12 4W 56.2% 60 Orix Indonesia Finance 6,727 4,950 4,533 2,194 2.11 4W, 2W, HE 9.9% 10 Surya Artha Nusantara Finance 6,693 5,260 5,285 1,408 3.66 HE 7.9% 15 Clipan Finance 6,647 6,430 3,048 3,599 0.85 4W 8.4% 45 CIMB Niaga Auto Finance 6,438 5,903 5,459 979 5.73 4W, 2W, HE 8.6% 68 Mitsui Leasing Capital Indonesia 5,910 5,638 4,860 1,051 4.78 4W, HE 7.0% 15 Wahana Ottomitra Multiartha 5,306 4,190 4,451 856 6.02 2W 2.2% 99 Mitra Pinasthika Mustika Finance 5,240 4,671 3,548 1,692 2.19 4W, 2W, HE 1.3% 91 Notes: Data represents 2015 numbers Source: Infobank, OJK, BI, DBS Bank, DBSVI Multi-finance companies: Shareholding structure of the top 20 players Company Shareholder 1 Shareholder 2 Astra Sedaya Finance PT Astra International 75% PT Bank Permata Tbk.25% Central Java Power Summit Power Capital Limited (UK) 50% Summit Power Global Management I B.V (Netherlands) 25% Federal International Finance PT Astra International, Tbk. 99,99% PT Asrya Kharisma 0,01% Adira Dinamika Multi Finance PT Bank Danamon Indonesia 75,00% Mega Value Profit Limited 17,42% Oto Multiartha Sumitomo Corporation 85% PT Sumitomo Indonesia 10% Toyota Astra Financial Services PT Astra International 50%; Toyota Financial Services Corporation 50% Dipo Star Finance MC Automobile Holding Asia B.V. 85% PT MC Auto Consulting Indonesia 10% BFI Finance Indonesia Trinugraha Capital & Co SCA 44,10% Lainnya 55,90% Summit Oto Finance Sumitomo Corporation 85,00% PT Sumitomo Indonesia 10,00% Mandiri Tunas Finance Bank Mandiri 51% PT Tunas Mobilindo Parama 49% Indomobil Finance Indonesia PT Indomobil Sukses International, Tbk. 99,875% PT IMG Sejahtera Langgeng 0,125% Bussan Auto Finance Mitsui & Co., Ltd Japan 58,33% Yamaha Motor Co.,Ltd Japan 17,67% BCA Finance PT Bank Central Asia Tbk. 99,58% PT Bank Central Asia Tbk. 99,58% Orix Indonesia Finance Orix Corporation 96,02% Yayasan Kesejahteraan Karyawan BI 3,98% Surya Artha Nusantara Finance PT Sedaya Multi Investama 60% Marubeni Corporation, Jepang 35% Clipan Finance PT Bank Pan Indonesia, Tbk. 54,35% Public 45,65% CIMB Niaga Auto Finance PT Bank CIMB Niaga Tbk. 99,94% - Mitsui Leasing Capital Indonesia JA Mitsui Leasing, Ltd. 85% PT Matahari Artha Nusantara 15% Wahana Ottomitra Multiartha Tbk PT Bank Internasional Indonesia 62,00% PT Wahana Makmur Sejati 17,59% Mitra Pinasthika Mustika Finance PT Mitra Pinasthika Mustika Tbk 59,99% JACCS Co, Ltd 40,00% Notes: Data represents 2015 numbers Source: Infobank, OJK, BI, DBS Bank, DBSVI Page 17 Industry Focus Multi-finance companies: Joint-financing arrangements Joint-financing & Joint-financing Joint-financing Effective Interest Rate Yield on Consumer ROA FY16 Channelling Joint-financing Partner Facility Amount Portion Offered Financing FY16 (%) Portion* (bn) Agreement BCA Finance 89% Bank BCA n.a 95% 7% - 27% 35% 14% 14,1%- 4W Mandiri Tunas 64% Bank Mandiri 20,500 99% 21.8% 2W 20% 2.9% Finance 15.5% - Others TAFS Unlimited 70%-99% PT Bank Permata Tbk 6,100 90%-99% PT Bank Permata Tbk - 3,000 90%-99% Syariah PT Bank Commonwealth 3,000 70%-99% PT Bank CIMB Niaga 2,500 70%-99% FIF 16% PT Bank CIMB Niaga - 25.1% - 42.6% 28% 6.1% Syariah 3,000 90%-99% PT Surya Artha Nusantara Finance 2,000 70%-99% PT Bank Sahabat Keluarga 1,000 70%-99% PT Astra Sedaya Finance 300 70%-99% PT Bank Panin Syariah 500 90%-99% PT Bank Permata Tbk 10,700 90% PT Bank Commonwealth 2,000 90% PT Sahabat Finansial ASDF 22% 7.1% - 29.6% 16% 3% Keluarga 1,000 90% PT Bank CIMB Niaga Tbk 1,000 90% PT Bank OCBC NISP Tbk 500 90% PT Bank Danamon n.a 99% 17%-22% - 4W ADMF 40% 24% 3.7% PT Bank Commonwealth n.a 99% 33% - 41% - 2W PT Bank Rakyat Indonesia 600 Channelling 16% – 21%- 4W BFIN 18% PT Bank Mandiri Tbk 500 95% 38%-41% - 2W 21% 6.3% PT Bank Maybank Indonesia 14%-18% - Prop. Tbk 0.5 95% CFIN 3% PT Bank Pan Indonesia Tbk 2,000 Channelling 17.20% 16% 3.1% * % of managed receivables, gross of unearned interest Source: Annual reports, DBSVI, DBS Bank A. 4-wheeler (4W) market space Top 4W players: Market share in terms of unit financed BCAF 4W market dominated by Astra and bank-backed parentage. We Others 15% 23% note that the top six players that dominate this segment have 77% of the estimated new 4W financing market in terms of unit financed. Astra Sedaya Finance (ASDF) is the market leader in this ASDF segment, thanks to the backing of its automotive distributor and ADMF 18% bank parent, Bank Permata. In terms of nominal value of new 6% financing, however, BCAF is the market leader with Rp30.7tr new bookings in FY16 (including joint financing), thanks to the OTO M 14% strong consumer banking franchise which enables it to tap into MTF customers in the affluent class segment. TAFS 13% 11% Assuming 70% of new 4W domestic sales using financing Source: Companies, DBS Bank, DBSVI Page 18 Industry Focus Top 4W players: New bookings for new 4W in 2016 Top 2W players: Market share movement Thousands Unit 40.0% 34.6% 133 140 35.0% 31.5% 120 114 100 99 30.0% 24.0% 26.6% 100 24.2% 82 25.0% 80 18.1% 18.1% 20.0% 22.4% 17.2% 17.5% 60 48 15.0% 40 7.9% 7.2% 7.8% 7.6% 20 10.0% 5.7% - 5.0% ASDF BCAF** OTO M* MTF TAFS ADMF 0.3% 0.3% 0.3% 0.3% 0.1% 0.0% New 2012 2013 2014 2015 2016 FIF ADMF WOMF MTF *Data for Oto Multiarta (OTO M) is a management target in 2016 ** Data for BCAF is an estimation based on disclosed market share Notes: Assuming 70% of new 2W sales using financing. WOMF Source: Companies, DBS Bank, DBSVI number for 2016 using annualised 9M16 number. Source: Companies, DBS Bank, DBSVI Top 4W players: Market share movement 20.00% Top 2W players: Market share in 2016 18.00% 16.00% 14.00% 34.6% 12.00% 42.1% 10.00% 8.00% 6.00% 4.00% 2012 2013 2014 2015 2016 BCAF ASDF MTF TAFS OTO M ADMF 0.1% 5.7% 17.5% Source: Companies, DBS Bank, DBSVI FIF ADMF WOMF MTF Others B. 2-wheeler (2W) market space Notes: Assuming 70% of new 2W sales using financing. WOMF number for 2016 using annualised 9M16 number. 2W market dominated by FIF and ADMF. In the new 2W Source: Companies, DBS Bank, DBSVI financing segment, we see three dominant players in this segment – led by Federal International Finance (FIF), Adira Top 2W players: Market share of 2W brands 80% 74% Dinamika Multifinance (ADMF), and WOM Finance (WOMF). In 69% 64% 70% 61% the past five years, we note that FIF has consistently been 58% increasing market share, supported by Honda’s strong 60% performance. We understand that nearly half of Honda’s sales 50% are financed through FIF. Honda saw its market share rise 40% 34% 32% 30% 28% gradually to 74% in FY16 from 58% five years ago; this has 30% 23% been the main driver for FIF’s strong performance. 20% 2% 6% 5% 10% 2% 2% 3% 2% 2% 1% 0% 2012 2013 2014 2015 2016 Honda Yamaha Suzuki Others Source: Gaikindo Page 19 Industry Focus Regulatory framework for multi-finance companies Membership requirement in other organisations: Multi-finance companies must join the membership of the Regulated by OJK. Multi-finance companies are licensed to appointed credit bureau. offer a range of services, including leasing, consumer Multi-finance companies must join the membership of the financing, credit card financing and factoring. These appointed association. companies target the financing needs of the lower income households. But unlike banks, they are not allowed to accept Credit bureau: deposits. Similar to banks, multi-finance companies are Multi-finance companies can subscribe to credit history governed by OJK, the regulatory arm of the Minister of data for customers from Bank Indonesia (BI checking) and Finance (MoF). Prior to the formation of OJK in 2011, multi- Pefindo (private credit rating agency/credit bureau). finance companies were under the purview of Bapepam. Multi-finance companies can also retrieve information on blacklisted customers from the relevant association OJK issued 28/POJK.05/2014 to regulate the licensing and the (APPI/Asosiasi Perusahaan Pembiayaan Indonesia). institution of multi-finance companies. The main takeaways from the regulation include: Merger and acquisition: OJK defines controlling shareholder as >=25% ownership Steps to incorporate a multi-finance company: of a person or entity or proven to have been controlling the company directly or indirectly. Establishment of Limited Liability Company. Limited liability company is the most common legal entity for a Approval from OJK must be obtained before a change in multi-finance company in Indonesia. For further details in controlling shareholder. establishing a limited liability company, please refer to the Acquisition cost for new 4W dealership: Indonesian Investment Coordinating Board (BKPM/Badan By releasing SE OJK No.1/seojk.05/2016, OJK puts the cap Koordinasi Penanaman Modal) website on acquisition cost (commission paid to the dealer in % http://www.bkpm.go.id/en/investment-procedures terms of the revenue from one customer) at 15%. Obtain licence from OJK. The directors need to obtain a Regulators also put a cap of 20% acquisition cost for 2W licence from OJK. The proposal needs to follow the financing, based on our checks with industry players. formats and be attached with all the documents required in accordance to 28/POJK.05/2014. Regulations/restrictions in operating a multi-finance company. Fit and proper test for the directors and commissioners. OJK also stipulates the conduct of a multi-finance company. The OJK will decide in 30 days or less after all the documents table below summarises the requirements/restrictions: have been submitted properly. If OJK perceives the documents to be incomplete, OJK will notify the applicant in 20 days or less. Multi-finance companies: Regulations/restrictions for operating a multi-finance company Companies that already have obtained the licence must start the business in two months or less. Requirement/restrictions under POJK No 29/POJK.05/2014 Non Performing Financing max 5% Capital requirements: Financing to Asset Ratio min 40% Minimum Equity Rp100bn Minimum paid-up capital of Rp100bn (USD7.5m) for a Gearing Ratio max 10% limited liability entity. Foreign currency liabilities must be fully hedged Maximum foreign ownership is 85% of paid-up capital. Cannot gather deposits directly from customers For publicly listed entity: Maximum floating shares of Source: OJK, DBS Bank, DBSVI 85%. Local ownership needs to be maintained at a minimum level of 15% of the non-listed shares. NPL classification similar to banks now. Multi-finance companies have started to implement an NPL classification that Foreign labour restriction: is similar to that for banks (NPL as loans with 90 days past due) Companies can only hire a non-Indonesian employee as effective from Jan 2016. It has also been reflected in the Sep consultant, advisor, or high-ranked officials (director or 16 NPL figures, which jumped to 3.4% from 2.2% in Aug 16 one level below directors. (refer to the earlier section on page 9). However, there are still deviations for the write-off policies, depending on the level of conservatism. Page 20 Industry Focus Collection and write-off policies may vary; provisions are During the boom times for 2W and 4W in 2010-2013, some regulated. Multi-finance companies may implement different multi-finance companies gave out financing without any down collection and write-off policies. Adira Finance, for example, payment requirement. implements a 210-day automatic write-off policy while Mandiri Tunas Finance implements 180 days. Provisioning, however, is Relaxing the LTV criteria. In 2015, OJK relaxed the stringent LTV more regulated. The companies need to set aside 100% regulation to stimulate the sluggish economic growth. OJK has provisioning after 180 days overdue. further relaxed the minimum down payment requirement in May 2016 by issuing circular letter OJK NO.47/SEOJK.05/2016. With LTV regulation for auto financing. The loan-to-value (LTV) the new regulation, the minimum down payment was relaxed to regulation has been an effective tool that is often used by OJK as low as 5% for multi-finance companies with NPLs lower than to manage the multi-finance industry. Prior to 2013, there 1%. This is a significant relaxation compared with the previous were no LTV criteria instituted for multi-finance companies. regulation which required 15%-20% down payment. Despite that, there were some multi-finance companies which were more prudent than others (having their own LTV criteria). Multi-finance companies: Minimum down payment regulation changes Current Regulation Previous Regulation NPF 5% NPF>5% For Before ≤ Syariah June NPF 1% Regulatory framework of the multi-finance companies Source: Indonesian Multi-finance Companies Association (APPI/Asosiasi Perusahaan Pembiayaan Indonesia) Page 21 Industry Focus Multi-finance companies: How regulatory changes affected financing growth in the multi-finance industry In March 2012, BI implemented 40% minimum down payment of 25% for 2W, and 30% for 35% OJK issued non-commercial 4W. 29/POJK.05/2014 30% which enabled MFCs to disburse mutipurpose and 25% In June 2015, BI infrastructure relaxed minimum Further relaxation of financing down payment 20% down payment to 15% for 2W and 20% regulation. Miniimum down payment can be 15% for non-commercial 4W. as low as 5%, depends on NPL level 10% 5% 0% -5% -11 -12 -13 -14 -15 r-11 r-12 r-13 r-14 g g g g g p p p p Jun-15 Jun-16 Jun-11 Jun-12 Jun-13 Jun-14 Oct-11 Feb-12 Oct-12 Feb-13 Oct-13 Feb-14 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Feb-17 Feb-11 A A A Apr-15 Apr-16 A Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Au Aug-16 Au Au Au Au Source: BI, OJK, DBS Bank, DBSVI Page 22 Industry Focus Valuation and recommendation (Panin Bank) through a channelling arrangement. CFIN is also underleveraged with a gearing ratio of below 1x and still has Trading at a discount to banks. The listed multi-finance ample of room to grow. companies are trading at a significant discount to the banks despite the fact that most of them have superior ROE. The Indirect plays via banks for unlisted multi-finance companies: strong and established ones such as BFIN and ADMF have Bank Central Asia (BBCA) – BCAF. BCAF’s business is much better NIM which compensates for their higher mainly in new 4W financing, with some used 4W operating costs and credit costs. This translates into higher financing. It targets the top-tier customers with lower risk ROE levels. Some other good names such as ASDF, BCAF, MTF by offering very competitive pricing. It uses BBCA’s balance and FIF are not listed. The listed multi-finance companies are sheet through a joint-financing arrangement with low cost trading at a significant discount compared to the banks. On of funds, which translates into lower pricing for the average, the listed multi-finance companies trade at 0.8x FY16 products offered. BV vs banks‘ 1.3x FY16 BV. We have used historical BV as most Bank Mandiri (BMRI) – MTF. MTF is consistently growing of the other listed multi-finance companies do not have market share for its new 4W financing business, thanks to consensus forecasts. the strong synergies with its bank and dealer parentage. Bank Danamon (BDMN) – ADMF. ADMF has a strong track Upside is attractive but discount with the banks will still record, brand name, and network across Indonesia. It had prevail. We highlight that multi-finance companies generally previously focused on the 2W financing business and 4W have riskier business models as well as governance issues. commercial segment. However, its new 4W financing Furthermore, there are also views that multi-finance companies business is gaining importance as ADMF is trying to can still enjoy their current niche position because the banks rebalance its business portfolio following the weak are still getting good margins from the bigger ticket size loans. commercial and 2W performance in the past few years. This means that the banks (without any multi-finance ADMF also derives a lot of synergies with its bank parent companies as subsidiaries or associates) could decide to enter (BDMN) in terms of cross-selling bank, insurance, and the financing business if they want to. financing products. The gap in regulatory supervisory and corporate governance Astra International’s gold mine – ASDF, FIF, and TAFS. ASDF, will narrow. The regulators have been proactively issuing FIF, and Toyota Astra Financial Services (TAFS) are the supportive regulations for multi-finance companies. Recently, subsidiaries of the Astra Group and part of its automotive OJK has pushed for multi-finance companies to adopt NPL business value chain. They mostly offer Astra-related brands recognition and provisioning policies that are similar to banks’. such as Toyota and Daihatsu for 4W and Honda for 2W. Both Going forward, we would not discount the possibility of the ASDF and FIF are the market leaders in the new 4W and 2W introduction of more uniformed regulations vis-à-vis banks, financing space, thanks to the support of the Astra Group including capital requirements. which has also been performing well in the past few years. BFIN (BUY, TP Rp5,000) is our top pick. We like BFIN for its Opportunities among multi-finance companies. We believe unique business model that has proven to be resilient even they are opportunities for the smaller multi-finance players, during economic downturns. It has a strong value proposition both organic and inorganic, in this current operating that is supported by its back-end processes, which enables it to environment. For example, when Bank Maybank Indonesia expand into the refinancing business. BFIN is currently (BNII) sold WOM Finance (WOMF) to Reliance Group, WOMF’s underleveraged with a net gearing of below 2x, much lower share price spiked up by 43%. than the industry average and regulatory limit. We believe that its currently high ROE of c.20% can further improve if it Key concern: Stock liquidity. The main concern investors may decides to gear up and grow more aggressively, albeit have is the limited stock liquidity. The size of these companies prudently. is also much smaller compared to the banks. CFIN (HOLD, TP Rp 300) has a lot of potential. CFIN offers a Key risks for the sector. Weakening automotive business and wider range of financing products: leasing, consumer financing lower commodity prices. A spike in inflation can also erode the (mostly used cars), and factoring. Recently, it is expanding its purchasing power of middle- to low-income earners which are new 4W financing business by teaming up with its bank parent the main customers of multi-finance companies. Page 23 Industry Focus A. Valuation tables Multi-finance companies: Peer valuation table (listed and under coverage) Banking Group Market Price Target Rating PE (x) CAGR PBV (x) ROE (%) Net div cap Price (%) (US$m) (Rp/s) (Rp/s) FY16A FY17F FY18F ^ (%) FY16A FY17F FY18F FY17F FY17F BFI Finance 494 4,100 5,000 BUY 6.7x 5.5x 0.0x 12.6 1.6x 1.5x 1.4x 19.7 6.0 Clipan Finance 90 298 300 HOLD 3.6x 5.1x 0.0x 22.5 0.3x 0.3x 0.3x 7.5 0.0 Simple average 5.2x 5.3x 0.0x 17.5 1.0x 0.9x 0.8x 13.6 3.0 ^ Refers to 2-year EPS CAGR for FY16-18F Multi-finance companies: Peer valuation table (listed but not under coverage) Banking Group Market Price PE (x) CAGR PBV (x) ROE (%) Net div cap (%) (US$m) (Rp/s) FY14A FY15A FY16A ^ (%) FY14A FY15A FY16A FY16A FY16A Adira Finance 471 6,625 8.4 10.0 6.6 13% 1.64 1.52 1.33 21.6 5.0 Buana Finance 109 880 13.1 23.4 27.1 -31% 1.31 1.34 1.32 4.9 2.0 Batavia Prosperindo 60 500 12.4 16.3 20.1 -21% 1.56 1.36 1.35 6.8 4.4 Radana Bhaskara 56 320 14.4 15.2 n.m -98% 1.73 1.50 0.01 0.0 1.1 Indomobil Multi Jasa 100 308 10.7 16.4 9.7 5% 0.79 0.75 0.20 2.1 - Mandala Multifinance 148 1,485 6.4 8.0 7.7 -9% 1.42 1.23 1.09 15.0 1.3 Tifa Finance 11 140 4.2 7.5 8.6 -30% 0.53 0.51 0.49 5.8 5.0 Verena Multi Finance 9 113 4.6 46.9 17.5 -49% 0.40 0.40 0.39 2.3 - Wahana Ottomitra 53 202 11.7 43.3 11.7 0% 0.82 0.93 0.86 7.7 - Simple average 9.5 20.8 13.6 -20% 1.1 1.1 0.8 7.3 2.1 ^ Refers to 2-year EPS CAGR for FY14-16A Indonesian Banks: Peer valuation table Net Market Target ROE div Banking Group cap Price Price Rating PE (x) CAGR PBV (x) (%) (%) (US$m) (Rp/s) (Rp/s) FY16A FY17F FY18F ^ (%) FY16A FY17F FY18F FY17F FY17F Bank Central Asia 32,252 17,350 18,400 BUY 20.7x 16.6x 14.5x 19.7 3.8x 3.2x 2.7x 21.0% 1.4% Bank Danamon 3,447 4,770 5,900 BUY 14.6x 10.7x 8.5x 30.7 1.3x 1.2x 1.1x 11.2% 1.8% Bank Mandiri 20,496 11,650 12,800 HOLD 19.7x 13.1x 9.8x 41.8 1.8x 1.7x 1.5x 13.4% 2.3% Bank Negara Indonesia 8,823 6,275 6,600 HOLD 10.3x 9.3x 7.9x 14.3 1.3x 1.2x 1.1x 13.7% 2.9% Bank Rakyat Indonesia 23,622 12,700 15,000 BUY 11.9x 10.7x 9.6x 11.2 2.1x 1.8x 1.6x 18.4% 2.8% Bank Tabungan Negara 1,820 2,280 2,300 HOLD 9.0x 7.9x 7.3x 11.0 1.2x 1.1x 1.0x 14.9% 3.3% Bank Tabungan Pensiunan Nasional 1,154 2,620 3,500 BUY 8.5x 9.5x 8.8x -2.0 0.9x 0.8x 0.8x 9.3% 0.0% Panin Bank 1,689 930 1,100 BUY 9.3x 8.4x 7.4x 12.5 0.7x 0.7x 0.6x 8.1% 0.0% Weighted average 16.5x 13.0x 11.0x 21.7 2.5x 2.1x 1.9x 17.1% 2.1% Simple average 13.0x 10.8x 9.2x 17.4 1.7x 1.5x 1.3x 13.8% 1.8% Weighted average (ex BBCA) 14.2x 11.1x 9.2x 22.8 1.8x 1.6x 1.4x 15.1% 2.5% Simple average (ex BBCA) 11.9x 10.0x 8.5x 17.1 1.3x 1.2x 1.1x 12.7% 1.9% ^ Refers to 2-year EPS CAGR for FY16-18F Closing price as of 13 April 2017 Source: Companies, Bloomberg Finance L.P., DBS Bank, DBSVI Page 24 Industry Focus B. P/BV bands Multi-finance companies: Forward P/BV bands (listed and under coverage) P/BV band: BFI Finance (BFIN) P/BV band: Clipan Finance (CFIN) PBV (X) PBV (X) 0.9 1.6 0.8 +2SD, 0.74 0.7 1.4 0.6 +1SD, 0.60 +2SD, 1.29 1.2 0.5 +1SD, 1.16 Mean, 0.45 0.4 Mean, 1.02 1.0 0.3 -1SD, 0.31 -1SD, 0.88 0.2 0.8 -2SD, 0.16 -2SD, 0.75 0.1 0.6 0.0 12 13 14 15 16 17 12 13 14 15 16 17 Source: Companies, Bloomberg Finance L.P., DBS Bank, DBSVI Multi-finance companies: Historical P/BV bands (listed but not under coverage) P/BV band: Adira Finance (ADMF) P/BV band: Buana Finance (BBLD) PBV (X) (x) 3.5 1.2 3.0 +2SD, 2.85 1.0 1.04 2.5 +1SD, 2.23 0.8 0.83 2.0 0.6 0.63 1.5 Mean, 1.61 0.42 1.0 -1SD, 0.98 0.4 0.5 0.2 0.21 -2SD, 0.36 0.0 0.0 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 12 13 14 15 16 17 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 P/BV band: Batavia Prosperindo (BPFI) P/BV band: WOM Finance (WOMF) (x) (x) 8.0 1.5 1.43 7.0 1.3 6.0 1.1 1.10 5.0 4.80 0.9 4.0 3.99 0.77 0.7 3.0 3.18 0.5 2.37 0.44 2.0 1.55 0.3 1.0 0.1 0.11 0.0 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 -0.1 Source: Companies, Bloomberg Finance L.P., DBS Bank, DBSVI n Page 25 Industry Focus P/BV band: Radana Bhaskara Finance (HDFA) P/BV band: Indomobil Multi Jasa (IMJS) (x) (x) 2.5 2.5 2.0 2.0 1.82 1.5 1.5 1.52 1.22 1.0 1.0 0.91 0.5 0.61 0.5 0.0 Oct-14 Oct-15 Oct-16 0.0 Apr-14 Apr-15 Apr-16 Apr-17 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 P/BV band: Mandala Multifinance (MFIN) P/BV band: Tifa Finance (TIFA) (x) (x) 1.6 2.0 1.8 1.4 1.45 1.6 1.2 1.42 1.12 1.4 1.2 1.0 1.13 1.0 0.8 0.79 0.8 0.83 0.6 0.6 0.47 0.53 0.4 0.4 0.2 0.23 0.2 0.14 0.0 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 0.0 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 P/BV band: Verena Multi Finance (VRNA) (x) 0.9 0.8 0.74 0.7 0.6 0.61 0.5 0.47 0.4 0.34 0.3 0.2 0.20 0.1 0.0 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Companies, Bloomberg Finance L.P., DBS Bank, DBSVI Page 26 Industry Focus Company Guides Page 27 Indonesia Company Guide BFI Finance Ind Version 5 | Bloomberg: BFIN IJ | Reuters: BFIN.JK Refer to important disclosures at the end of this report DBS Group Research . Equity 7 Apr 2017 BUY Maintaining positive momentum Last Traded Price ( 6 Apr 2017): Rp4,200 (JCI : 5,680.20) Strong deliveries; maintain BUY. BFI Finance (BFIN) stands out as Price Target 12-mth: Rp5,000 (19% upside) (Prev Rp3,700) one of the best performers among its peers with double-digit Potential Catalyst: Stronger-than-expected growth; potential M&A earnings growth, coupled with a stable non-performing loan Where we differ: We are the only house covering the stock (NPL) ratio. This was despite the dismal performance of the Indonesian multi-finance industry amid the soft economy and Analyst asset-quality deterioration. BFIN’s strategy to put more weight Sue Lin LIM +65 8332 6843 [email protected] on refinancing since 2015 has paid off since demand had Benedictus Agung SWANDONO +6221 3003 4935 slowed for heavy equipment and dealer financing. Its excellent [email protected] back-end capability is a strong foundation for its refinancing business. We nudged up our earnings by 8%/9% for FY17F/18F What’s New and accordingly our TP to 5,000 after we imputed higher Strong deliveries in FY16 with positive outlook assumptions for receivable growth and net interest margin FY16 earnings were 11% higher than our estimate (NIM). on stronger-than-expected receivable growth Maintain positive momentum in 4Q16. BFIN's FY16 net profit of Rp798bn (+23%y-o-y) represented 111% of our full-year Non-dealer business maintains positive traction estimate. The performance was underpinned by a strong 4Q16 Maintain BUY with higher TP of Rp5,000 while net profit of Rp245bn (+15% q-o-q; +25% y-o-y). Total FY17F/18F earnings are lifted by 8%/9% receivables grew 16.7% y-o-y, driven by the strong momentum in non-dealer financing (+23% y-o-y). Fee income grew strongly and opex was kept in check. NPL inched down to 0.91%. Price Relative Unique business model is its key asset. Despite remaining cautious on the multi-finance industry, we are more positive on BFIN’s outlook. Our preference for BFIN over Clipan Finance (CFIN; HOLD), the other multi-finance company we cover, is due to its proven resilience and unique direct financing model. BFIN is also expected to maintain a generous dividend payout policy of around 48%, thus implying an attractive dividend yield. Valuation: Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F Maintain BUY. We raised our TP to Rp5,000 after we revised up Pre-prov. Profit 1,298 1,437 1,645 1,855 our FY17F/18F earnings by 8%/9% and imputed a lower risk free Net Profit 798 884 1,018 1,150 rate assumption of 8%. Our TP is based on Gordon Growth Net Pft (Pre Ex.) 798 884 1,018 1,150 Model – 19% ROE, 9% growth rate, and 15.2% cost of equity – Net Pft Gth (Pre-ex) (%) 22.8 10.7 15.1 13.0 EPS (Rp) 509 561 646 730 and this implies 1.6x FY17F BV. EPS Pre Ex. (Rp) 509 561 646 730 EPS Gth Pre Ex (%) 22 10 15 13 Key Risks to Our View: Diluted EPS (Rp) 507 561 646 730 Tougher competition may hamper profitability. Sustained PE Pre Ex. (X) 8.2 7.5 6.5 5.8 Net DPS (Rp) 210 253 281 323 weakness in the commodity and automotive markets may also Div Yield (%) 5.0 6.0 6.7 7.7 drag down growth and erode asset quality. ROAE Pre Ex. (%) 19.3 19.7 20.2 21.6 ROAE (%) 19.3 19.7 20.2 21.6 At A Glance ROA (%) 6.6 6.7 6.9 7.1 Issued Capital (m shrs) 1,597 BV Per Share (Rp) 2,700 3,008 3,373 3,373 Mkt. Cap (Rpbn/US$m) 6,706 / 503 P/Book Value (x) 1.6 1.4 1.2 1.2 Major Shareholders (%) Earnings Rev (%): 8 9 N/A Trinugraha Capital & Co (%) 43.7 Consensus EPS (Rp): 518 595 N/A Fil Ltd (%) 0.7 Other Broker Recs: B: 1 S: 0 H: 0 Commonwealth Bank (%) 0.2 Source of all data on this page: Company, DBS Bank, DBSVI, Bloomberg Free Float (%) 55.4 Finance L.P. 3m Avg. Daily Val (US$m) 0.01 ICB Industry : Financials / General Financial ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: MA, PY Company Guide BFI Finance Ind WHAT’S NEW Maintaining positive momentum Highlights Outlook Strong 4Q16 earnings. BFIN's FY16 net profit of Rp798bn Management maintains positive outlook; aggressive branch (23%y-o-y) represented 111% of our full-year estimate on expansion. Management is maintaining its positive outlook, stronger-than-expected receivable growth and fee income. which is fuelled by its optimism in the refinancing business. It 4Q16 net profit came in at Rp245bn (+15%q-o-q; +25%y-o- is planning to add 50 additional outlets (mostly in Java, y). Sumatera, Bali, and East Timor). Going forward, management targets 20% new bookings growth, driven by non-dealer Higher spreads from higher asset yield; strong fee income. financing. Interest spread increased 65bps y-o-y mainly due to higher asset yields from a higher proportion of non-dealer financing. More optimistic on the leasing business; staying away from Fee income grew 15.8%, mainly driven by strong new new 4W financing. Management is more optimistic on the bookings and receivable growth leasing business this year compared to last year. The recent improvement in commodity prices has prompted Operating costs and credit costs kept in check. Operating management to expand in the commodity-driven regions costs rose 8% y-o-y with cost-to-income ratio inching up such as Sumatera. The leasing will be driven by smaller-ticket 17bps to 47%. The efficiency ratio was kept in check despite machineries with an average duration of 15-18 months while the aggressive expansion of 38 new outlets to 305 outlets waiting for demand for heavy equipment machineries to pick nationwide. Credit costs, however, were lower at 1.8% (vs up. 2.17% in FY15). Expect asset quality to stabilise. Management expects asset Strong receivable growth driven by refinancing business. quality to stabilise towards the normal c.1.2% level (higher Total receivables grew 16.7% y-o-y, faster than the growth of than last year’s 0.93%), aided by improving commodity managed receivables at 6.5%, mainly due to a lower portion prices. Elsewhere, management has guided for credit cost to of off-balance sheet joint-financing. The strong growth was remain stable (with a maximum increase of 10bps). The driven by strong non-dealer financing growth at 23% y-o-y. recent change of write-off policy to 210 days overdue (from Despite the non-dealer financing portion hitting its targeted 270 days) should not affect its credit cost. By regulation, 50% mark, management is maintaining its focus on this multi-finance companies have to set aside 100% provisions segment and does not rule out the possibility of further for loans that are 180 days overdue. expansion. Expecting higher opex. Higher opex may come from rapid Lower NPL mainly due to higher write-offs due to change in branch expansion and also improvements in system and write-off policy. NPL improved to 0.91% from 1.33% a year technology. ago, helped by a higher write-off rate (gross write-off rate of 2.15% from 1.83% in 2015). On a quarterly basis, its write- NIM to remain elevated. The high NIM should be supported off rate spiked from 1.67% in 9M16 due to change in the by greater contribution of non-dealer financing (which offers write-off policy to 210 days overdue from the previous 270 higher asset yields compared to 4W). The recent rating days overdue. upgrade by Fitch may also allow BFIN to price its bond at a lower rate. Tax rate normalised. BFIN booked tax provisions in 1H16 to cushion against potential additional tax expenses from the Valuation and recommendation undergoing tax investigation. However, it has stopped Maintain BUY. We raised our TP to Rp5,000 after revising up booking these tax provisions in 2H16 and the tax rate for our FY17F/18F earnings by 8%/9% and imputed a lower risk FY16 has normalised to c.20% from 26% previously. free rate assumption of 8%. Our TP is based on Gordon Gearing ratio remained low at 1.76x. Gearing ratio is slightly Growth Model – 19% ROE, 9% growth rate, and 15.2% cost higher at 1.76x from 1.63x the previous year. But the gearing of equity – and this implies 1.6x FY17F BV. level is way below the regulated 10x level. ASIAN INSIGHTS VICKERS SECURITIES Page 25 Company Guide BFI Finance Ind Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq FY2015 FY2016 % chg yoy Net Interest Income 373 413 441 18.4 6.8 1,447.9 1,629.7 13% Non-Interest Income 185 193 228 23.2 17.9 670.6 805.1 20% Operating Income 557 606 669 20.0 10.3 2,118.5 2,434.8 15% Operating Expenses (260) (268) (311) 19.9 16.1 (1,052.8) (1,136.5) 8% Pre-Provision Profit 298 338 358 20.0 5.8 1,065.6 1,298.3 22% Provisions (27.1) (81.2) (51.3) 89.3 (36.9) (230.2) (273.3) 19% Associates 0.0 0.0 0.0 nm nm - - nm Exceptionals 0.0 0.0 0.0 nm nm - - nm Pretax Profit 271 257 306 13.1 19.3 835.5 1,025.0 23% Taxation (75.3) (43.4) (61.6) (18.2) 41.8 (185.2) (226.6) 22% Minority Interests 0.0 0.0 0.0 nm nm - nm Net Profit 196 213 245 25.2 14.7 650.3 798.4 23% Growth (%) Net Interest Income Gth 1.9 3.5 6.8 Net Profit Gth 24.3 18.2 14.7 Key ratio (%) NIM 15.3 15.5 15.7 NPL ratio 1.1 1.4 0.7 Cost-to-income 46.6 44.2 46.5 Source of all data: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 3, Company Guide BFI Finance Ind Margin Trends CRITICAL DATA POINTS TO WATCH Earnings Drivers: Strong growth of non-dealer financing. Managed receivables (on and off balance sheet) grew 6.5% last year while total receivables (balance sheet only) grew 16.7%, driven by strong non-dealer financing and a lower portion of off-balance sheet financing. Looking at the improvement in asset quality last year, management indicated that it is comfortable to take on more risk this year and has guided for c.20% increase of new bookings but with a lower financing duration. We expect the strong growth momentum in the non-dealer business, along Gross Loan & Growth with the improvement in the commodity-related business, to support a sustainable 12%-13% loan growth going forward. Diverse products. BFIN offers a variety of products including dealer new/used 4W financing, as well as non-dealer 4W and 2W financing. There are also heavy equipment and machinery leasing. However, management will continue to focus on the non-dealer financing business with the portfolio targeted to be maintained at the current 50% level. Loan-to-Deposit Ratio Trend Possible NIM improvement. Further expansion in the non-dealer business can increase asset yield further. The yields from non- dealer 4W and 2W financing can be up to 20% and 40%, respectively, much higher than dealer financing yields of 15- 16%. Elsewhere, the bond rating upgrade from Fitch and lower interest rate environment may enablep BFIN to lower its cost of funds further. Non-interest income supported by financing growth. About 60% of BFIN’s non-interest income is upfront fees worth 2-3% of loan size, while 40% are other fees such as late and Cost & Income Structure transaction penalty charges. NPL and credit cost to stabilise. We believe NPL and credit cost can be maintained at current levels, as the economy and automotive market should stabilise this year. We expect NPL to hover around 1.2%, while credit cost should be flattish. Higher opex due to expansion. We expect higher operating expenses to stem from its aggressive expansion plan. Last year, BFIN added 38 new outlets to the 267 existing outlets across the nation (14% growth y-o-y). This year, it targets to add 35- 50 outlets. Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page /- Company Guide BFI Finance Ind Asset Quality Balance Sheet: Funding is not an issue. Funding is not an issue this year as BFIN continues to utilise bond issuances and bank borrowings. Currently, bonds contribute c.40% of the funding and no significant change is expected. USD debt exposures are about 30% of its total debt and are fully hedged. NPLs should stabilise. Management expects NPL to be stable at around c.1.2% level. The company recently changed its write - off policy on its automotive loans to 210 days overdue from 270 days previously. ROE (%) Gearing ratio remains low. The company’s gearing ratio has been at 1.4-1.8x historically. BFIN is well-capitalised and carries low solvency risk. Going forward, management expects the gearing ratio to be at 1.5-2.0x. Share Price Drivers: Near-term resilience will support valuation; M&A will boost multiples over the long term. BFIN’s diversified portfolio and unique direct financing business will continue to deliver sustainable earnings in the long term. BFIN is also an attractive M&A target given its cheap valuation, and also that it is one of the few sizeable multi-finance companies not directly backed by Forward PE Band (x) a bank. Key Risks: Upside risk from sustained high commodity prices. Sustained high commodity prices can support demand for leasing. Leasing usually has a higher ticket size and longer duration compared to non-dealer financing. Thus, leasing could be a significant addition to receivable growth. Slower-than-expected growth; more intense competition. The slower growth of consumer financing would be a downside PB Band (x) risk to our forecast. Tougher competition can also lower yields and erode NIM. Company Background BFI Finance (BFIN) is a financing company that focuses on consumer financing, both dealer generated and direct lending. The major shareholder with a 44.95% stake is a consortium comprising TPG Capital, Northstar Equity Partners and Boy Garibaldi Thohir. Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page /. Company Guide BFI Finance Ind Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Gross Loans Growth 15.6 16.8 11.9 12.0 13.2 Yld. On Earnings Assets 17.6 18.4 19.6 19.5 19.6 Avg Cost Of Funds 11.1 10.6 10.9 10.7 10.7 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Interest Income 1,448 1,630 1,872 2,151 2,444 Non-Interest Income 671 805 886 992 1,111 Operating Income 2,119 2,435 2,758 3,143 3,555 Operating Expenses (1,053) (1,137) (1,321) (1,498) (1,700) Pre-provision Profit 1,066 1,298 1,437 1,645 1,855 Provisions (230) (273) (318) (357) (399) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 836 1,025 1,119 1,288 1,455 Taxation (185) (227) (235) (271) (306) Minority Interests 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 650 798 884 1,018 1,150 Net Profit bef Except 650 798 884 1,018 1,150 Growth (%) Net Interest Income Gth 12.1 12.6 14.9 14.9 13.6 Net Profit Gth 8.9 22.8 10.7 15.1 13.0 NIM improvement due to better funding mix Margins, Costs & Efficiency (%) Spread 6.6 7.8 8.7 8.8 8.9 Net Interest Margin 11.8 12.4 13.3 13.4 13.4 Cost-to-Income Ratio 49.7 46.7 47.9 47.7 47.8 Business Mix (%) Cost to income ratio Net Int. Inc / Opg Inc. 68.3 66.9 67.9 68.4 68.8 slightly higher due to Non-Int. Inc / Opg inc. 31.7 33.1 32.1 31.6 31.2 branch expansion Fee Inc / Opg Income 25.6 29.2 28.4 27.9 27.6 Oth Non-Int Inc/Opg Inc 6.1 3.9 3.8 3.7 3.6 Profitability (%) ROAE Pre Ex. 17.0 19.3 19.7 20.2 21.6 ROAE 17.0 19.3 19.7 20.2 21.6 ROA Pre Ex. 6.1 6.6 6.7 6.9 7.1 ROA 6.1 6.6 6.7 6.9 7.1 Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page // Company Guide BFI Finance Ind Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Net Interest Income 373 377 399 413 441 Non-Interest Income 185 185 200 193 228 Operating Income 557 561 599 606 669 Operating Expenses (260) (269) (288) (268) (311) Pre-Provision Profit 298 292 311 338 358 Provisions (27.1) (74.6) (66.3) (81.2) (51.3) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Pretax Profit 271 218 245 257 306 Taxation (75.3) (57.5) (64.1) (43.4) (61.6) Minority Interests 0.0 0.0 0.0 0.0 0.0 Net Profit 196 160 180 213 245 Growth (%) Net Interest Income Gth 1.9 1.1 5.9 3.5 6.8 Net Profit Gth 24.3 (18.2) 12.8 18.2 14.7 Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Cash/Bank Balance 777 165 283 625 40.0 Government Securities 0.0 0.0 0.0 0.0 0.0 Inter Bank Assets 0.0 0.0 0.0 0.0 0.0 Total Net Loans & Advs. 9,898 11,583 12,856 14,291 16,079 Investment 0.0 0.0 0.10 0.0 0.0 Associates 0.0 0.0 0.0 0.0 0.0 Strong receivable growth Fixed Assets 450 414 415 414 411 to continue Goodwill 0.0 0.0 0.0 0.0 0.0 Other Assets 645 313 313 313 313 Total Assets 11,770 12,476 13,868 15,643 16,843 Customer Deposits 0.0 0.0 0.0 0.0 0.0 Inter Bank Deposits 0.0 0.0 0.0 0.0 0.0 Debts/Borrowings 7,318 7,656 8,656 9,856 11,056 Others 434 565 472 472 472 Minorities 0.0 0.0 0.0 0.0 0.0 Shareholders' Funds 4,019 4,255 4,740 5,315 5,315 Total Liab& S/H’s Funds 11,770 12,476 13,868 15,643 16,843 Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page /0 Company Guide BFI Finance Ind Financial Stability Measures (%) FY Dec 2015A 2016A 2017F 2018F 2019F Balance Sheet Structure Loan-to-Deposit Ratio 135.3 151.3 148.5 145.0 145.4 Net Loans / Total Assets 84.1 92.8 92.7 91.4 95.5 Investment / Total Assets 0.0 0.0 0.0 0.0 0.0 NPL to normalise to the Cust . Dep./Int. Bear. Liab. 0.0 0.0 0.0 0.0 0.0 historical level of Interbank Dep / Int. Bear. 0.0 0.0 0.0 0.0 0.0 c.1.2% Asset Quality NPL / Total Gross Loans 1.2 0.7 1.2 1.2 1.2 NPL / Total Assets 1.2 0.9 1.3 1.3 1.3 Loan Loss Reserve Coverage 126.6 154.4 173.2 226.7 274.4 Provision Charge-Off Rate 2.3 2.3 2.4 2.4 2.4 Capital Strength Total CAR 0.0 0.0 0.0 0.0 0.0 Tier-1 CAR 0.0 0.0 0.0 0.0 0.0 Source: Company, DBS Bank, DBSVI Target Price & Ratings History Source: DBS Bank, DBSVI Analyst: Sue Lin LIM Benedictus Agung SWANDONO ASIAN INSIGHTS VICKERS SECURITIES Page /1 Indonesia Company Guide Clipan Finance Version 6 | Bloomberg: CFIN IJ | Reuters: CFIN.JK Refer to important disclosures at the end of this report DBS Group Research . Equity 12 Apr 2017 HOLD Steering through headwinds Last Traded Price ( 11 Apr 2017): Rp296 (JCI : 5,627.90) Slow growth persists; HOLD. The leasing and factoring Price Target 12-mth: Rp300 (1% upside) (Prev Rp250) businesses contribute to 22% and 20% of CFIN’s portfolio, Potential Catalyst: Sustained high commodity prices respectively, and are the main cause of its weak performance Where we differ: We are the only house that covers the stock last year. This year, Clipan Finance (CFIN) is planning to expand its new 4W financing business by channelling Panin Bank’s 4W financing this year. We expect single-digit receivable growth this Analyst year while earnings recovery should mainly come from higher Sue Lin LIM +65 8332 6843 [email protected] NIM. High credit cost should taper off over time. However, we Benedictus Agung SWANDONO +6221 3003 4935 expect higher operating costs due to the employee addition and [email protected] branches expansion for the new 4W business. Hence, we cut our earnings by 11%/18% for 17F/18F accordingly but we What’s New bump up our TP to Rp300 to reflect a lower risk-free rate assumption of 8% (vs 8.5% previously). Slow growth, dragged by leasing and factoring Better-than-expected 4Q16 earnings due to higher NIM. Net business, will likely persist profit in FY16 came in at Rp205bn (-28% y-o-y), 23% higher Better-than-expected FY16 earnings on higher- than of our full-year earnings forecast mainly due to better- than-expected NIM, especially in 4Q16 where NIM spiked to than-expected NIM 8.6% (vs 8% in 3Q16). However, slow loan growth (flat y-o-y), Expanding its new 4W financing business higher provisions (32% y-o-y) and higher opex (14% y-o-y) Maintain HOLD with higher TP of Rp300/share caused earnings to contract 28% y-o-y. NPL remained high at 3% (flat y-o-y) with credit cost higher at 3.6% vs 2.7% in FY15. Expanding 4W financing business. CFIN is teaming up with its Price Relative parent, Panin Bank, to expand its new 4W financing business. CFIN will receive commission for every loan it underwrites but the loans will be on PNBN’s book. It has appointed a new director responsible for this business and targets to book Rp2.5tr 4W financing this year. CFIN is also planning to enter the refinancing business for 4W, in which it will give out multipurpose loans and take 4W as collateral. Higher operating costs from the new initiatives should be expected. Valuation: Despite the lower earnings forecast, we bump up our TP to Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F Rp300 after imputing a lower risk-free rate assumption of 8% Pre-prov. Profit 511 585 620 669 (vs 8.5% previously). Our TP (based on Gordon Growth Model Net Profit 205 297 308 375 – 8% ROE, 6% growth rate, and 14.5% cost of equity) implies Net Pft (Pre Ex.) 205 297 308 375 0.27x FY17 BV. Net Pft Gth (Pre-ex) (%) (28.3) 44.4 3.8 21.8 EPS (Rp) 54.4 78.6 81.6 99.3 Key Risks to Our View: EPS Pre Ex. (Rp) 54.4 78.6 81.6 99.3 Slow growth and deteriorating asset quality. A key risk would EPS Gth Pre Ex (%) (28) 44 4 22 be slower-than-expected receivables growth and further Diluted EPS (Rp) 54.4 78.6 81.6 99.3 deterioration of asset quality. Low commodity prices and slow PE Pre Ex. (X) 5.4 3.8 3.6 3.0 realisation of infrastructure projects will also soften demand Net DPS (Rp) 0.0 0.0 0.0 0.0 and increase NPL ratios for the leasing segment further. Div Yield (%) 0.0 0.0 0.0 0.0 ROAE Pre Ex. (%) 5.6 7.5 7.2 8.2 ROAE (%) 5.6 7.5 7.2 8.2 At A Glance ROA (%) 3.1 4.2 4.1 4.6 Issued Capital (m shrs) 3,985 BV Per Share (Rp) 1,006 1,085 1,167 1,266 Mkt. Cap (Rpbn/US$m) 1,179 / 88.8 P/Book Value (x) 0.3 0.3 0.3 0.2 Major Shareholders (%) Earnings Rev (%): (11) (18) N/A Bank Pan Indonesia TBK 54.4 Consensus EPS (Rp): 59.0 78.0 N/A Mackenzie Financial Corporation 13.8 Other Broker Recs: B: 1 S: 0 H: 1 Free Float (%) 31.9 3m Avg. Daily Val (US$m) 0.01 Source of all data on this page: Company, DBS Bank, DBSVI, Bloomberg ICB Industry : Financials / General Financial Finance L.P. ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY Company Guide Clipan Finance WHAT’S NEW Waiting for the tide Better-than-expected 4Q16 earnings due to higher NIM. Net Branch expansion and employee addition. CFIN would see profit in FY16 came in at Rp205bn (-28% y-o-y), 23% higher personnel-related expenses at significantly higher levels this than of our full-year earnings forecast mainly due to better- year, as it is planning to aggressively hire new staff to support than-expected NIM, especially in 4Q16 where NIM spiked to its 4W financing and 4W refinancing business. Management 8.6% (vs 8% in 3Q16). However, higher provisions (32% y-o- has guided that the number of employees could rise to almost y) and higher opex (14% y-o-y) was a drag on earnings. NPL 2,000 from c.1,500 currently . In addition, CFIN is planning to remained high at 3% (flat y-o-y) with credit cost higher at add 10 new branches this year (from five per year previously). 3.6% vs 2.7% a year ago. Receivable is virtually flat with fund Outlook borrowings declining 6%y-o-y. Gearing stayed low at 0.7x (lower than 0.8x last year). Expecting modest 7% receivable growth this year. Management has set a modest 7% receivable growth target – Improvement in leasing and factoring has yet to be seen. driven by the consumer financing segment. The newly Despite the recent coal price improvement, management introduced new 4W financing and used 4W refinancing will be expects the business in the heavy equipment sector to remain the main driver in this segment. challenging. The factoring business is also facing tough conditions with higher NPLs and write offs. Both the leasing Better NIM this year due to lower cost of funds. Cost of funds and factoring businesses have become the main culprits is expected to be lower this year as the banks have started to behind CFIN’s weak performance in 2016. Management is price down corporate loans following sustained low policy planning to maintain a careful stance in these two areas. The rates. Elsewhere, asset yield is expected to remain constant underwriting standard in the leasing business has become since multi-finance companies tend to compete on service more conservative than before. rather than pricing. Therefore, we expect NIM to be higher this year. New initiatives in consumer business. Management thinks that expansion is only feasible in the consumer business. The Expecting higher operating costs. Aggressive branch expansion company plans to expand its new 4W financing business by and employee addition should increase operating expenses this channelling Panin Bank’s 4W financing. CFIN will receive year. Management expects these operational costs to be the commission for every loan it underwrites but the loans will be main drag on earnings. on PNBN’s book. It has appointed a new director responsible Valuation and recommendation for this business and targets to book Rp2.5tr 4W financing this year. Maintain HOLD, TP bumped up. Despite the lower earnings forecast, we bump our TP to Rp300 after imputing a lower Entering 4W refinancing business. Furthermore, CFIN is also risk-free rate assumption of 8% (vs 8.5% previously). Our TP planning to enter the refinancing business for 4W, in which it (based on Gordon Growth Model – 8% ROE, 6% growth rate, will give out multipurpose loans and take 4W as collateral. The and 14.5% cost of equity) implies 0.27x FY17 BV. refinancing business should yield c.17%, with estimated cost of fund at 9.5%, cost of credit 2%, and overhead cost at 2%. ASIAN INSIGHTS VICKERS SECURITIES Page 37 Company Guide Clipan Finance Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2015 3Q2016 4Q2016 % chg yoy % chg qoq FY2015 FY2016 % chg yoy Net Interest Income 137 146 168 22.5 14.8 602 562 -7% Non-Interest Income 48.1 35.0 42.1 (12.6) 20.2 141 150 6% Operating Income 185 181 210 13.4 15.8 743 711 -4% Operating Expenses (57.9) (45.3) (60.5) 4.4 33.4 (174) (198) 14% Pre-Provision Profit 127 136 149 17.5 9.9 569 513 -10% Provisions (67.8) (74.4) (57.1) (15.9) (23.2) (179) (237) 32% Associates 0.0 0.0 0.0 nm nm Exceptionals 0.0 0.0 0.0 nm nm Pretax Profit 60.2 62.4 93.2 54.7 49.3 392 278 -29% Taxation (19.6) (15.0) (25.2) 29.0 68.2 (103) (71) -32% Minority Interests 0.0 0.0 0.0 nm nm - - Net Profit 40.7 47.4 68.0 67.0 43.4 288 207 -28% Growth (%) Net Interest Income Gth (17.3) 15.8 14.8 Net Profit Gth (33.2) 12.8 43.4 Key ratio (%) NIM 9.2 8.0 8.6 NPL ratio 3.0 2.4 3.0 Loan-to deposit N/A N/A N/A Cost-to-income 31.3 25.0 28.8 Total CAR N/A N/A N/A Source of all data: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 38 Company Guide Clipan Finance Margin Trends CRITICAL DATA POINTS TO WATCH Earnings Drivers: Maintaining conservative stance. Management has guided for 7% receivables growth this year, driven by consumer financing and the newly introduced refinancing business. About 89% of its consumer financing loan book is derived from used 4Ws, which have shown resilient demand. Leasing is driven by non- heavy equipment leasing such as automotive (commercial vehicles), shipping, and machineries. Expanding consumer 4W financing business. Management Gross Loan & Growth thinks that expansion is only feasible in the consumer business. The company plans to expand its new 4W financing business by channelling Panin Bank’s 4W financing. CFIN will receive commission for every loan it underwrites but the loans will be on PNBN’s book. It has appointed a new director responsible for this business and targets to book Rp2.5tr 4W financing this year. Currently, the new 4W financing contributes a mere 6.4% of total financing in FY16. CFIN is also planning to enter into the 4W refinancing business which offers a higher yield than the new 4W financing. Loan-to-Deposit Ratio Trend Expecting higher NIM. NIM should be higher on the back of lower cost of funds as borrowing rate should adjust lower this year. Furthermore, a higher off-balance-sheet financing portion from the 4W channelling business will also contribute to interest income. NPL and credit cost should stabilise. We expect credit cost to normalise from last year’s high level of 3.6%. Higher coal price this year should also help customers, especially in the leasing business. Cost & Income Structure Higher operating costs from initiatives. CFIN would see significantly higher personnel-related expenses this year, as it is planning to aggressively hire new staff to support its 4W financing and 4W refinancing business. Management has guided that the number of employees could rise to almost 2,000 from c.1,500 currently. In addition, CFIN is planning to add 10 new branches this year (from five per year previously). Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 39 Company Guide Clipan Finance Asset Quality Balance Sheet: Low gearing. CFIN has kept its gearing ratio below 1x, leaving ample room for growth and funding opportunities. CFIN usually utilises medium-term notes and bank borrowings for funding. However, the company has yet to announce major funding plans for this year. Unlike its competitors, CFIN does not seem keen to reduce cost of funds through cheaper offshore financing and prefers to stick with safer domestic borrowings without having to deal with exchange rate risks. NPL should taper off. 2016 was a tough year. NPL remained elevated at 3%. Most NPLs came from the heavy equipment ROE (%) leasing segment which contributes 70% of its leasing portfolio and 15% of its total financing portfolio. With better coal price this year, we expect NPL to start tapering off. CFIN does not have an automatic write-off policy and reviews its loans on a case-by-case basis. CFIN remains confident in recovering 70% of its loan loss provision. Share Price Drivers: Consistent quality growth. Accelerating growth through the 4W financing business, while maintaining a low opex, is the main challenge this year. Forward PE Band (x) Thin liquidity of its stock. The thin trading liquidity is a major constraint for many investors, and could cap any share price upside. Key Risks: Asset-quality risk. Further asset-quality deterioration could still happen if the high commodity price starts to unwind. Further weakness in GDP growth and purchasing power could also affect the consumer financing business. Further slowdown in factoring. Since factoring is a niche PB Band (x) market, demand may be capped or continue to slow down (like in past few quarters). Company Background Clipan Finance (CFIN) provides consumer financing, leasing and factoring services. The multi-finance company was established in 1982 and is part of the Panin Group; currently, Panin Bank has a 54.4% stake. Its leasing business targets the transportation, mining and plantation sectors, and consumer financing focuses on new and used cars. Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 40 Company Guide Clipan Finance Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Gross Loans Growth 0.6 0.8 7.0 9.0 10.4 Customer Deposits Growth N/A N/A N/A N/A N/A Slow loan growth to Yld. On Earnings Assets 14.8 13.4 13.9 13.7 13.9 persist Avg Cost Of Funds 12.2 11.5 11.6 11.1 11.1 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Interest Income 602 562 656 707 778 Non-Interest Income 142 150 154 166 181 Operating Income 743 711 811 874 958 Operating Expenses (175) (201) (225) (254) (289) Pre-provision Profit 568 511 585 620 669 Provisions (178) (235) (190) (210) (169) Associates 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 390 276 396 411 500 Taxation (103) (70.6) (98.9) (103) (125) Minority Interests 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 286 205 297 308 375 Net Profit bef Except 286 205 297 308 375 Growth (%) Net Interest Income Gth (1.0) (6.6) 16.8 7.8 9.9 Net Profit Gth (28.1) (28.3) 44.4 3.8 21.8 Expecting higher NIM this year due to lower Margins, Costs & Efficiency (%) cost of funds Spread 2.6 1.9 2.3 2.6 2.8 Net Interest Margin 9.2 8.5 9.2 9.2 9.4 Cost-to-Income Ratio 23.6 28.2 27.8 29.0 30.2 Business Mix (%) Net Int. Inc / Opg Inc. 81.0 79.0 81.0 81.0 81.2 Non-Int. Inc / Opg inc. 19.0 21.0 19.0 19.0 18.8 Fee Inc / Opg Income 12.9 15.9 14.6 14.9 15.1 Oth Non-Int Inc/Opg Inc 6.1 5.1 4.5 4.1 3.8 Profitability (%) ROAE Pre Ex. 8.4 5.6 7.5 7.2 8.2 ROAE 8.4 5.6 7.5 7.2 8.2 ROA Pre Ex. 4.3 3.1 4.2 4.1 4.6 ROA 4.3 3.1 4.2 4.1 4.6 Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 41 Company Guide Clipan Finance Quarterly / Interim Income Statement (Rpbn) FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Net Interest Income 137 122 126 146 168 Non-Interest Income 48.1 33.3 39.2 35.0 42.1 Operating Income 185 155 165 181 210 Operating Expenses (57.9) (41.6) (51.1) (45.3) (60.5) Pre-Provision Profit 127 113 114 136 149 Provisions (67.8) (46.0) (59.4) (74.4) (57.1) Associates 0.0 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 Provisions remained Pretax Profit 60.2 67.5 54.9 62.4 93.2 elevated on a quarterly Taxation (19.6) (17.4) (12.9) (15.0) (25.2) basis Minority Interests 0.0 0.0 0.0 0.0 0.0 Net Profit 40.7 50.1 42.0 47.4 68.0 Growth (%) Net Interest Income Gth (17.3) (11.0) 3.6 15.8 14.8 Net Profit Gth (33.2) 23.0 (16.0) 12.8 43.4 Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Cash/Bank Balance 30.4 30.3 311 334 209 Government Securities 0.0 81.6 0.0 0.0 0.0 Inter Bank Assets 0.0 0.0 0.0 0.0 0.0 Total Net Loans & Advs. 6,409 6,397 6,772 7,314 8,073 Investment 0.0 0.0 0.0 0.0 0.0 Associates 0.0 0.0 0.0 0.0 0.0 Fixed Assets 101 118 94.4 87.7 80.5 Goodwill 0.0 0.0 0.0 0.0 0.0 Other Assets 106 118 118 118 118 Total Assets 6,647 6,744 7,294 7,853 8,480 Customer Deposits 0.0 0.0 0.0 0.0 0.0 Inter Bank Deposits 0.0 0.0 0.0 0.0 0.0 Debts/Borrowings 2,874 2,742 2,992 3,242 3,492 Others 174 203 207 207 210 Minorities 0.0 0.0 0.0 0.0 0.0 Shareholders' Funds 3,599 3,799 4,096 4,404 4,778 Total Liab& S/H’s Funds 6,647 6,744 7,294 7,853 8,480 Source: Company, DBS Bank, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 42 Company Guide Clipan Finance Financial Stability Measures (%) FY Dec 2015A 2016A 2017F 2018F 2019F Balance Sheet Structure Loan-to-Deposit Ratio 223.0 233.3 226.3 225.6 231.2 Net Loans / Total Assets 96.4 94.8 92.8 93.1 95.2 Investment / Total Assets 0.0 0.0 0.0 0.0 0.0 Cust . Dep./Int. Bear. Liab. 0.0 0.0 0.0 0.0 0.0 Interbank Dep / Int. Bear. 0.0 0.0 0.0 0.0 0.0 Asset Quality NPL / Total Gross Loans 2.3 2.0 2.0 1.4 1.4 NPL / Total Assets 2.3 1.9 1.9 1.4 1.4 Credit cost to taper off over time Loan Loss Reserve Coverage 74.7 136.2 185.1 329.5 333.0 Provision Charge-Off Rate 2.7 3.6 2.7 2.7 2.0 Capital Strength Total CAR 0.0 0.0 0.0 0.0 0.0 Tier-1 CAR 0.0 0.0 0.0 0.0 0.0 Source: Company, DBS Bank, DBSVI Target Price & Ratings History Source: DBS Bank, DBSVI Analyst: Sue Lin LIM Benedictus Agung SWANDONO ASIAN INSIGHTS VICKERS SECURITIES Page 43 Industry Focus Company Profiles (Non-rated) Page 44 Indonesia Company Focus Adira Dinamika Multifinance Bloomberg: ADMF IJ | Reuters: ADMF.JK Refer to important disclosures at the end of this report DBS Group Research . Equity 18 April 2017 NOT RATED Ready for growth Reason for Report : A proxy for the multi-finance industry Potential Catalyst: Higher-than-expected growth amid improving Improved auto sector outlook should lend support efficiency. to positive receivables growth this year Operating efficiency in internal process as well as Analyst Sue Lin LIM +65 8332 6843 [email protected] digitisation should help bottom-line Benedictus Agung SWANDONO +6221 3003 4935 [email protected] Expecting lower credit cost, thanks to better economic growth and commodity prices Synergies with BDMN for sustained growth ahead Financials FY Dec (Rp bn) 2013A 2014A 2015A 2016A Expecting positive growth momentum. Adira Dinamika Pre-prov. Profit 3,561 2,870 2,679 3,370 Multi Finance (ADMF) should see 5-10% new bookings in 2017, Net Profit 1,707 792 665 1,009 supported by improvements in the automotive industry. NPL is expected to stay below 2% while credit costs is also expected to Net Pft (Pre Ex.) 1,707 792 665 1,009 head lower, supported by better commodity prices which help EPS (Rp) 1,707 792 665 1,009 lift income, especially in the non-Java areas. NIM and credit cost EPS Pre Ex. (Rp) 1,707 792 665 1,009 should depend on ADMF’s strategy for its portfolio mix. Used EPS Gth (%) 23 (54) (16) 52 vehicle financing should offer higher yields but should also be EPS Gth Pre Ex (%) 23 (54) (16) 52 associated with higher credit costs. ADMF has proven its ability Diluted EPS (Rp) 1,707 792 665 1,009 to keep its operating cost stable since 2013 by improving the PE Pre Ex. (X) 3.94 8.49 10.12 6.66 efficiency in internal process as well as through digitisation. Net DPS (Rp) 709 2,700 390 333 Div Yield (%) 11.99 10.75 40.91 5.91 Synergistic benefits with BDMN. Bank Danamon (BDMN) is ROAE Pre Ex. (%) 30.9 15.8 15.8 21.6 the major shareholder of ADMF with a 92% stake. Synergy ROAE (%) 30.9 15.8 15.8 21.6 within subsidiaries is one of the key initiatives introduced by ROA (%) 6.0 2.6 2.3 3.6 BDMN since its CEO joined in 2015. BDMN channels lending BV Per Share (Rp) 6,022 4,034 4,361 4,977 through ADMF and cross-sells other products to ADMF’s P/Book Value (x) 1.31 1.10 1.64 1.51 customers. ICB Industry : Financials Key risks: Intensifying competition and higher credit cost. ICB Sector: Financial Services We believe intensifying competition, especially with Astra- Principal Business: Adira Dinamika Multifinance (ADMF) is a related finance companies, should be the major risk since Astra subsidiary of Bank Danamon (BDMN). It mainly provides financing is the market leader in both 2W and 4W segments. Moreover, for 2W and 4W (both commercial and passenger), higher credit cost has been the major cause of earnings Source of all data on this page: Company, DBS Vickers fluctuations in the past three years and may still be a problem going forward if economic growth and/or commodity prices weaken. Trading at 1.51x 16A P/BV. ADMF is listed on the Indonesian Stock Exchange, comparable to the two other multi-finance companies under our coverage (BFIN and CFIN). But ADMF’s free float is smaller at 7.9% (vs BFIN at 57.2%) At A Glance Issued Capital (m shrs) 1,000 Mkt. Cap (Rpbn/US$m) 6,750 / 509 Major Shareholders (%) Bank Danamon Tbk 92% Free Float (%) 8% 3m Avg. Daily Val (US$m) 0.04 ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY Company Focus At Adira Dinamika Multifinance Company Background ADMF: Financing portfolio (2016) Solid support from the group. Adira Dinamika Multi Finance Durables 1% (ADMF) was established as a multi-finance company in 1990 by Raphael Adi Rachmat, Linda Rachmat and Yus Winata. It was a part of the Triputra Group, a conglomerate with many businesses, including a motorcycle dealership, auto parts 2W manufacturing, and auto parts retail. After ADMF went public, 4W 48% 51% Bank Danamon (BDMN) has since become major shareholder with a 95% stake after exercising its call options over the years. After a small divestment in 2016, BDMN currently holds a 92.1% stake in ADMF. Source: Company, DBS Vickers Financial Analysis Focused almost solely on consumer financing. Auto sales is the ADMF: NPL ratio 8.00% main driver of ADMF’s income since 99% of its managed 6.84% portfolio is derived from automotive financing, with the 7.00% 6.22% 6.34% remaining 1% contributed by durable goods. Administration fee 6.00% income is the second largest contributor, which goes hand in 5.00% 4.34% hand with new bookings. 4.00% 3.25% 3.00% 1.73% 1.59% Strong presence across Indonesia. ADMF is the third largest 2.00% 1.39% 1.30% 1.52% multi-finance company in Indonesia with c.7% market share in 1.00% 2016. ADMF offers 2W and 4W financing, leasing, and multi- 0.00% purpose financing. It has the second largest market share for 2012 2013 2014 2015 2016 2W financing and significant presence in commercial 4W NPL Credit Cost financing. It has the largest network, with 518 business Source: Company, DBS Vickers network spread across the Indonesian archipelago. ADMF: Business network Strong brand and network. ADMF has strong brand 800 reduce number of service points by 22% recognition not only among auto buyers, but also the 700 since 2013. 23 15 dealerships. It has proven a strong track record to be a reliable 600 107 97 67 partner to support financing auto sales. One of the reasons is 500 400 the support of major shareholder, BDMN. The bank has a joint 341 334 290 300 financing arrangement with ADMF and cross-sells other 523 products to ADMF’s customers. The company is diversified in 200 terms of auto segment and brands. 100 196 199 201 0 Expanding alternative business. The company also expanding its 2013 2014 2015 2016 multi-purpose financing business by offering financing for Total branch representative office kiosk outlet Umrah (religious trip to Mecca). The CEO expects the business Source: Company will help to contribute to its non-auto products to grow at double digit this year. ADMF: Number of employees No material asset-quality issues. ADMF has been able to keep 30000 28519 reduce number of its NPL ratio below 2% even during the downturn of the 26098 employees by 30% since 2013 automotive industry in 2015. It considers an asset to be non- 25000 21351 performing when repayment is 90 days past due. It also has an 20087 automatic write-off policy after 210 days overdue. ADMF tries 20000 to maintain asset quality by increasing intensity of collection, 15000 improving approval process, and adopting more prudent risk management. 10000 Enhancing efficiency. ADMF, like its parent, is undergoing a 5000 transformation process to rationalise costs and enhance efficiency to adapt to the weakening auto market. The number 0 of business networks and employees has been gradually aligned 2013 2014 2015 2016 to the operational activities requirement as the company Source: Company, DBS Vickers continues to enhance its internal process through digitisation. ASIAN INSIGHTS VICKERS SECURITIES Page 46 Company Focus Adira Dinamika Multifinance Funding sources. ADMF’s bond funding proportion is one of deepen its relationship with its customers and attempt to the highest in the industry, thanks to its good reputation and bundle products (auto + insurance products); (2) Improve long track record which enabled it to tap into the bond efficiency – As part of its efficiency efforts, ADMF had reduced market. The bond market typically has a lower interest rate its number of outlets in the past two years where nearby compared to bank borrowings, which should help lower its outlets were combined. ADMF has moved to digitise its blended cost of funds. In 4Q16, ADMF settled its matured business. The success of these two efforts combined was bonds and mudharabah bonds amounting to Rp2.4tr. But evident in 2016 where opex remained flat. Digitising its ADMF is prepared to issue new bonds to finance its growth. business processes will be a multi-year exercise. Expect more ADMF typically issues Rp2-3tr new bonds every year. efficiency gains to emerge from here; (3) Growing new businesses – Multifinance companies were allowed to finance ADMF: Funding source in FY16 multi-purpose loans, re-financing and infrastructure loans in 2014. ADMF should be able to tap on its rich customer base, coupled with its strong relationships with auto dealers and vendors. In addition, cross-selling opportunities with BDMN are also part of the group transformation agenda. We should 43% expect more ADMF-BDMN synergies going forward. Over 2016, we understand that ADMF had benefited from lower 57% funding costs, thanks to BDMN. Recovery and its prospects. Despite setbacks, ADMF has consistently maintained its market share ranking at #2 for the Bank Loans Bond 2W business with a market share of 13-14%, after Federal International Finance (FIF), Astra’s 2W multi-finance company. Source: Company, DBS Vickers ADMF’s 4W business remains small with a market share of only 4-5%. ADMF saw a recovery in its new sales for both 2W ADMF: Gearing and ROE and 4W in 4Q16. ADMF expects 2017 new bookings of 5- 7.0 35% 10%. We understand that ADMF is gradually shifting its 31% portfolio towards 4W given its better prospects expected. 6.0 29% 30% 5.7 Indonesia’s 4W penetration is low. With rising GDP per capita 5.0 25% 4.7 22% in coming years, the growth prospects for the 4W business 4.0 4.0 20% 3.6 3.7 should outweigh the more saturated 2W market. The company 16% 16% 3.0 15% expects NPL to stay below 2%. ADMF is exposed to USD debt 2.0 10% but it is fully hedged using cross-currency swaps. NIM is 1.0 5% expected to head lower – if ADMF continues to enlarge the - 0% new 4W financing portion due to its lower yield. However, 2012 2013 2014 2015 2016 credit cost is expected to head lower since 4W financing is Gearing ROE - RHS typically less risky than 2W financing. Source: Company, DBS Vickers Key Risks: intensifying competition. Outlook Reliance on auto industry. ADMF’s financing is dominated by ADMF’s transformation story. Similar to its parent company, auto financing (99% of its receivables portfolio), while the rest BDMN, ADMF has also been going through a transformation is contributed by durable goods. Fluctuations in automotive phase. ADMF’s business has been hurt the past three years due industry sales should directly affect ADMF’s revenue. to a combination of regulatory changes (changes in down payment regulations and increase in minimum wages) and a Intense competition. Competition would likely emerge from slowdown in the auto industry (due to lower commodity Astra-related financing companies since Astra is the market prices). In 2015, ADMF conducted a review of its business leader in both 2W and 4W sales in Indonesia. model, particularly for its operations. Regulatory changes. As 2W financing targets the lower income Three key things top management’s agenda: (1) The need to segment, it is therefore more sensitive towards down payment defend ADMF’s household branding and ensuring its footprint regulations. remains strong throughout Indonesia – ADMF would need to ASIAN INSIGHTS VICKERS SECURITIES Page 47 Company Focus Adira Dinamika Multifinance Key Assumptions FY Dec 2012 2013 2014 2015 2016 Consumer financing picked Gross Consumer Financing Gth 69.6 22.0 (2.7) (10.0) 5.1 up along with the 4W automotive industry last year Yld. On Earnings Assets 20.1 18.5 19.8 21.4 24.1 Avg Cost Of Funds 8.3 8.3 10.0 10.1 9.0 Income Statement (Rpbn) FYDec 2012 2013 2014 2015 2016 ConsumerFinancingIncome 4,180 5,271 6,233 6,343 6,707 OtherIncome 2,545 2,902 2,260 1,985 1,898 TotalIncome 6,725 8,173 8,493 8,328 8,605 OperatingExpense (4,107) (4,504) (5,381) (5,385) (5,043) Pre-ProvisionProfit 2,617 3,669 3,111 2,943 3,561 Provision (750) (1,278) (1,809) (1,778) (1,652) Pre-TaxProfit 1,868 2,282 1,061 901 1,718 Tax (477) (575) (268) (236) (708) NetProfit 1,391 1,707 792 665 1,009 NetProfitbefExcept 1,391 1,707 792 665 1,009 Growth(%) NetInterestIncomeGth 20.7 16.9 6.8 4.1 18.0 NetProfitGth (11.4) 22.8 (53.6) (16.1) 51.8 Margins,Costs&Efficiency(%) Spread 11.8 10.2 9.8 11.3 15.1 NetInterestMargin 14.4 12.5 12.3 13.6 17.4 Cost-to-IncomeRatio 52.7 44.3 52.1 54.3 48.0 BusinessMix(%) NetInt.Inc/OpgInc. 44.4 43.3 45.2 48.1 54.4 Non-Int.Inc/Opginc. 37.8 36.0 27.4 24.6 22.6 Profitability(%) ROAEPreEx. 29.4 30.9 15.8 15.8 21.6 ROAE 29.4 30.9 15.8 15.8 21.6 ROAPreEx. 6.6 6.0 2.6 2.3 3.6 ROA 6.6 6.0 2.6 2.3 3.6 Source: Company, DBSVickers ASIAN INSIGHTS VICKERS SECURITIES Page 48 Company Focus Adira Dinamika Multifinance Balance Sheet (Rpbn) FYDec 2012 2013 2014 2015 2016 Cash and Cash Equivalents 2,249 1,264 879 1,060 490 Consumer Financing (net) 22,389 28,505 27,990 24,919 25,321 Fixed Asset 290 283 296 243 225 Derivative Receivables - - - - - Deferred Tax Asset - - - - - Other Assets 533 942 766 1,522 1,607 Total Assets 25,460 30,994 29,931 27,744 27,643 Fund Borrowing 8,286 11,252 12,454 11,388 11,620 Bonds 9,802 10,984 10,725 9,088 8,433 Taxes Payable 146 89 64 58 34 Deferred Tax Liabilities 396 347 144 - - Other Liabilities 1,796 2,301 2,510 2,849 2,580 Shareholders' Funds 5,036 6,022 4,034 4,361 4,977 Total Liab& S/H’s Funds 25,460 30,994 29,931 27,744 27,643 Cash and Cash Equivalents 2,249 1,264 879 1,060 490 Consumer Financing (net) 22,389 28,505 27,990 24,919 25,321 Fixed Asset 290 283 296 243 225 Financial Stability Measures (%) FYDec 2012 2013 2014 2015 2016 Balance Sheet Structure Consumer Financing/ Total 87.9 92.0 93.5 89.8 91.6 At NPL remained low due to Earning Asset/ Total Asset 96.8 96.0 96.5 93.6 93.4 disciplined 210 days overdue Debt/Total Liability 88.6 89.0 89.5 87.6 88.5 write-off policy Borrowings/ Int. Bear. Liab. 45.8 50.6 53.7 55.6 57.9 Bonds/ Int. Bear. Liab. 54.2 49.4 46.3 44.4 42.1 Asset Quality NPL / Total Gross Loans 1.4 1.3 1.5 1.7 1.6 NPL / Total Assets 3.1 2.5 3.1 3.6 3.2 Loan Loss Reserve Coverage 94.3 162.8 189.7 174.3 185.4 Provision Charge-off rate (3.2) (4.3) (6.2) (6.8) (6.2) Capital Strength Gearing Ratio 3.6 3.7 5.7 4.7 4.0 Source: Company, DBSVickers ASIAN INSIGHTS VICKERS SECURITIES Page 49 Indonesia Company Focus Astra Sedaya Finance Bloomberg: n.a | Reuters: n.a Refer to important disclosures at the end of this report DBS Group Research . Equity 18 April 2017 NOT LISTED/NOT RATED The big 4W kahuna Reason for Report : A proxy for the multi-finance industry Well positioned to grow with the automotive Potential Catalyst: Automotive sales improvement industry due to its size and Astra group’s support Analyst Benedictus Agung SWANDONO +6221 3003 4935 Proven resilience even during the economic [email protected] downcycle while maintaining high ROE levels Sue Lin LIM +65 8332 6843 [email protected] Good access to capital markets both local and foreign, which enable it to use low cost financing Financials Asset quality below industry average despite the FY Dec (Rp bn) 2013A 2014A 2015A 2016A spike in credit cost. Efficiency ratio remained in Pre-prov. Profit 1,948 2,122 2,161 2,279 check Net Profit 1,011 1,138 969 934 Integral part of Astra group’s value chain. Astra Sedaya Net Pft (Pre Ex.) 1,011 1,138 969 934 Finance (ASDF) is an integral of Astra Group’s 4W automotive EPS (Rp) 1,418 1,197 1,020 983 business. It holds the largest financing of around 20% of Astra EPS Pre Ex. (Rp) 1,418 1,197 1,020 983 International’s (ASII) total car sales. While 75%-80% of ASDF’s EPS Gth (%) 22.2 (15.6) (14.9) (3.6) financing is related to Astra’s brands, it is also supported by EPS Gth Pre Ex (%) 22.2 (15.6) (14.9) (3.6) Bank Permata (10th largest bank in Indonesia) as its shareholder Diluted EPS (Rp) 1,418 1,197 1,020 983 Net DPS (Rp) 566 2,872 425 652 (25% ownership). ASDF also benefits from its scale with 414k ROAE Pre Ex. (%) 24 24 18 16 customers – 27-30% of them being quality repeat customers; ROAE (%) 23.4 24.1 23.9 18.1 this should help keep its asset quality in check. ROA (%) 3.3 3.3 3.4 3.2 BV Per Share (Rp) 4,516 5,064 5,693 5,831 Sound financial performance and profitability. ASDF has been consistently booking positive growth in pre-provision ICB Industry : Financials profit in the past decade. It also showed resilience during the ICB Sector: Financial Services Principal Business: Astra Sedaya Finance (ASDF) focuses on downturn of the automotive industry during 2014-2015 by providing consumer financing for new and used cars and is part of maintaining high-teens ROEs despite higher credit cost. Its NPL the Astra Group's value chain is maintained at 0.2% due to its disciplined 150-days overdue Source of all data on this page: Company, DBS Bank, DBS Vickers write-off policy. Its strong footprint allowed ASDF to tap into a wider range of financing sources such as banks and capital markets, both local and foreign. Key risks: Intensifying competition. It could face tougher competition in the 4W segment, as other multi-finance companies also target Astra’s products. We believe BCA Finance and Mandiri Tunas Finance could be serious competitors in light of the strong support from their bank parents. At A Glance Major Shareholders (%) Astra International Tbk 75% Bank Permata Tbk 25% ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY Company Focus Astra Sedaya Finance Company Background ASDF: Financing portfolio (2016) Solid support from the group. Astra Sedaya Finance (ASDF) Others started operations as PT Raharja Sedaya back in 1982 to 5% support the automotive sales of Astra Group. Since 1994, the Syariah company has continuously developed the Astra Credit 13% Companies (ACC) brand. Currently, the company is 75% Used 4W owned by Astra International (ASII) and 25% by Bank Permata 15% (90% consortium by ASII (50%) and Standard Chartered New 4W 67% (50%)). Part of Astra Group’s value chain. ASDF has the biggest market share in the Indonesian multi-finance industry in terms of total financing (8% market share in 2016), supported by Astra Source: Company, DBS Vickers Group’s strong automotive franchise. ASII has been able to consistently maintain more than 50% market share in ASDF: New booking as a percentage of ASII’s car sales Indonesia. 90% of its 4W financing is related to Astra’s main Portion Units 30.0% 500,000 25.6% brands such as Toyota, Daihatsu, and Isuzu. ASDF also holds 450,000 25.0% 22.5% the largest financing of around 22.5% of Astra group’s total 20.0% 400,000 18.3% 20.0% 350,000 car sales in 2016. ASDF is not restricted from financing non- 15.8% 300,000 Astra brands. 15.0% 250,000 157,246 200,000 10.0% 120,000 132,967 95,567 102,272 150,000 56,000 100,000 5.0% 48,696 36,126 45,880 38,891 Financial Analysis 50,000 New 4W sales remained the main contributor. Auto sales is the 0.0% - main driver of ASDF’s income since 95% of its portfolio is in 2012 2013 2014 2015 2016 auto financing, with the remaining 5% contributed by fleet Astra Car Sales - RHS ASDF New Booking - RHS financing. The company also disburses multi-purpose loans ASDF shares of Astra Sales* although the contribution remained small. Administration fee *Assuming ASDF only sells Astra’s brands income is the second largest contributor, which goes hand-in- Source: Company hand with new bookings. Access to funding remains a competitive strength. ASDF has a ASDF: NPL Ratio strong access to funding. It has a solid record in capital markets (both local and offshore). ASDF’s bond funding 4.0% proportion is one of the highest in the industry, thanks to its 3.5% 3.0% 3.5% good reputation and long track record which enabled it to tap 3.2% 2.5% into the bond market. Currently the IDR bond market is more 2.0% 2.2% 2.2% 2.0% competitive but the company can shift into offshore 1.5% 1.0% 0.6% borrowings when the swap cost come down. Having a bank as 0.5% 0.5% 0.5% 0.5% a shareholder (Bank Permata) should also add more flexibility 0.5% 0.0% for funding. 2012 2013 2014 2015 2016 Conservative down payment policy. Although according to the NPL Ratio Credit Cost new regulation the company is able to provide 5% loan to Source: Company, DBS Vickers value, management is maintaining its conservative stance by keeping the average down payment policy at 25%. ASDF: Number of branches and employees No material asset-quality issue. ASDF has been able to keep its NPL ratio below 1% during the economic slowdown in 2015. It 10.00 30.0% 9.00 23.4% 24.1% 23.9% considers an asset to be non-performing when repayment is 90 8.00 25.0% 7.00 18.1% days past due. It also has an automatic write-off policy after 150 16.3% 20.0% 6.00 days overdue. The company has its own collection team and will 5.00 15.0% 5.69 5.45 only outsource the collectoin if it is becoming special case. 4.00 5.13 3.00 4.19 4.23 10.0% Expansion plans. Management targets to add 5-8 more outlets 2.00 5.0% on top of the existing 75 outlets this year. The outlets expansion 1.00 - 0.0% will follow the expansion of the automotive dealerships. 2012 2013 2014 2015 2016 Gearing Ratio ROE Source: Company, DBS Vickers ASIAN INSIGHTS VICKERS SECURITIES Page 51 Company Focus At Astra Sedaya Finance Funding sources. ASDF’s bond funding proportion is one of the ASDF: Funding source in FY16: highest in the industry, thanks to its good reputation and long track record which enabled them to tap into the bond market. Bond market typically has a lower interest rate compared to bank borrowings, which should help lower its blended cost of Borrowings funds. ASDF also does joint financing which consists of 20%- 40% 25% of its loan portfolio. Gearing remains low. Gearing stood at 4.2x in FY16, much Bonds below the industry average at 8x and maximum regulated level 60% of 10x. We also note that this level is below the 10-year average of 4.8%. These should indicate that the company still have room for growth and help lift its ROE back to the c.23% level (from 16% in FY16). Source: Company, DBS Vickers Huge customer base is an advantage. ASDF has a large customer base with around 414k customers and 27-30% of ASDF: Gearing and ROE them are repeat customers. A large customer database is very important for multi-finance companies in Indonesia due to the 10.00 30.0% absence of a strong credit bureau for the industry. This will 9.00 23.4% 24.1% 23.9% 25.0% help ASDF to lower delinquencies and maintain its strong asset 8.00 7.00 18.1% quality. 16.3% 20.0% 6.00 5.00 15.0% 5.69 5.45 4.00 5.13 Outlook 4.19 4.23 10.0% It expects 4%-5% growth of 4W sales, not much different 3.00 2.00 5.0% than last year’s 5% growth. We believe the company will 1.00 continue to grow in line with the automotive industry going - 0.0% forward. Upside might come from the heavy equipment 2012 2013 2014 2015 2016 leasing business due to the coal industry’s rebound this year. Gearing Ratio ROE Source: Company, DBS Vickers, DBS Bank Key Risks: Intensifying competition. It could face tougher competition in the 4W segment, as other multi-finance companies also target Astra’s products. We believe that BCA Finance and Mandiri Tunas Finance could pose a credible threat due to the strong support from their bank parents. ASDF: Shareholding structure Source: Company ASIAN INSIGHTS VICKERS SECURITIES Page 52 Company Focus Astra Sedaya Finance Key Assumptions FY Dec 2012 2013 2014 2015 2016 Consumer financing picked Consumer Financing Gth 32.3 21.4 9.1 (9.5) 12.1 up along with the 4W automotive industry last year Leasing Gth 40.4 24.9 (2.4) (14.9) (17.4) Yld. On Earnings Assets 16.1 15.0 15.4 16.3 16.0 Avg Cost Of Funds 8.9 8.0 8.8 9.7 9.2 Income Statement (Rpbn) FYDec 2012 2013 2014 2015 2016 Net Interest Income 1,914 2,265 2,496 2,561 2,646 Non-Interest Income 283 295 397 414 467 Operating Income 2,197 2,560 2,893 2,975 3,113 Operating Expenses (605) (612) (771) (814) (834) Pre-provision Profit 1,592 1,948 2,122 2,161 2,279 Provisions (533) (649) (648) (915) (1,080) Provisions remained Associates - 1 2 3 3 elevated in the past two Exceptionals - 1 2 3 3 years party due to the Pre-tax Profit 1,059 1,301 1,478 1,252 1,205 automatic write-off Taxation (276) (334) (376) (302) (296) policy Minority Interests - 1 2 3 3 Preference Dividend - 1 2 3 3 Net Profit 783 969 1,106 956 915 Net Profit bef Except 783 969 1,106 956 915 Growth(%) Net Interest Income Gth 24.3 18.3 10.2 2.6 3.3 Net Profit Gth 30.2 22.2 12.6 (14.9) (3.6) Margins, Costs & Efficiency (%) Spread 7.1 7.0 6.6 6.5 6.8 Net Interest Margin 8.9 8.3 8.0 8.3 8.7 Cost-to-Income Ratio 27.5 23.9 26.7 27.4 26.8 Business Mix (%) Net Int.Inc/Opg Inc. 87.1 88.5 86.3 86.1 85.0 Non-Int. Inc/Opg inc. 12.9 11.5 13.7 13.9 15.0 Fee Inc/Opg Income 5.7 6.6 8.1 8.3 8.7 Oth Non-Int Inc/Opg Inc 7.1 4.9 5.6 5.6 6.3 Profitability (%) ROAE PreEx. 23.4 24.1 23.9 18.1 16.3 ROAE 23.4 24.1 23.9 18.1 16.3 ROA PreEx. 3.3 3.3 3.4 3.2 3.0 ROA 3.3 3.3 3.4 3.2 3.0 Source: Company, DBSVickers ASIAN INSIGHTS VICKERS SECURITIES Page 53 Company Focus At Astra Sedaya Finance Balance Sheet (Rpbn) FYDec 2012 2013 2014 2015 2016 Cash/Bank Balance 713 697 1,316 821 510 Government Securities - - - - - Interbank Assets - - - - - Total Net Loans & Advs. 23,260 28,336 30,617 27,542 29,976 Investment - - - - - Associates - - - - - Fixed Assets 151 154 147 139 372 Goodwill - - - - - Other Assets 766 1,815 1,223 1,890 620 Total Assets 24,890 31,002 33,303 30,392 31,478 Customer Deposits - - - - - Interbank Deposits - - - - - Debts/Borrowings 19,960 25,647 27,322 23,866 24,439 Others 1,040 849 967 833 1,257 Minorities - - - - - Shareholders ‘Funds 3,890 4,506 5,014 5,693 5,782 Total Liab & S/H’s Funds 24,890 31,002 33,303 30,392 31,478 Financial Stability Measures(%) FYDec 2012 2013 2014 2015 2016 Balance Sheet Structure Consumer Financing/Tota lAsset 93.5 91.4 91.9 90.6 95.2 Debt/Total Liability 95.0 96.8 96.6 96.6 95.1 NPL remained low due to disciplined 150 days overdue Borrowings/Int. Bear. Liab. 56.9 53.9 50.2 37.8 39.8 write-off policy Bonds/Int. Bear. Liab. 43.1 46.1 49.8 62.2 60.2 Asset Quality NPL/Total Gross Loans 0.17 0.19 0.20 0.21 0.19 NPL/Total Assets 0.46 0.47 0.51 0.54 0.63 NPL(absolute) 49.0 66.0 76.0 73.0 75.0 Liabilities Measure Gearing Ratio 5.13 5.69 5.45 4.19 4.23 Liability/Equity 5.40 5.88 5.64 4.34 4.44 Source: Company, DBSVickers ASIAN INSIGHTS VICKERS SECURITIES Page 54 Indonesia Company Focus BCA Finance Bloomberg: n.a | Reuters: n.a Refer to important disclosures at the end of this report DBS Group Research . Equity 18 April 2017 NOT LISTED/NOT RATED Aiming for the top of the class Reason for Report : A proxy for the multi-finance industry The multi-finance arm of Bank Central Asia (BBCA) Potential Catalyst: Automotive sales improvement Mainly uses the parent’s balance sheet to offer Analyst Benedictus Agung SWANDONO +6221 3003 4935 competitive rates to compete for top-tier [email protected] customers Sue Lin LIM +65 8332 6843 [email protected] The business model allowed BCAF to increase market share while keeping asset quality under control Financials FY Dec (Rp bn) 2013A 2014A 2015A 2016A Targets customers in the urban/city areas, Pre-prov. Profit 1,264 1,358 1,437 1,548 enabling it to incur lower credit cost and expenses Net Profit 935 1,001 1,047 1,139 Multi-finance arm of BBCA. BCA Finance (BCAF) is the multi- Net Pft (Pre Ex.) 935 1,001 1,047 1,139 finance arm of Bank Central Asia (BBCA) which was the largest EPS (Rp) 47 50 52 57 private bank in Indonesia. The business model is generally based EPS Pre Ex. (Rp) 47 50 52 57 on using its parent’s balance sheet for joint financing, thus EPS Gth (%) 28.2 7.0 4.6 8.7 offering customers a very competitive rate. BCAF targets the EPS Gth Pre Ex (%) 28.2 7.0 4.6 8.7 lowest risk customers which are typically price-sensitive by Diluted EPS (Rp) 47 50 52 57 Net DPS (Rp) 20 20 20 20 behaviour. The business model has enabled BCAF to ROAE Pre Ex. (%) 81 76 56 45 consistently increase market share in the new 4W financing ROAE (%) 80.7 76.2 56.2 44.7 business. Moreover, BCAF also does financing for used 4W but ROA (%) 16.1 16.3 15.3 14.0 it typically does not include joint-financing schemes with its BV Per Share (Rp) 1,110 1,552 2,210 2,929 parent. ICB Industry : Financials BCAF ICB Sector: Financial Services Strong profitability metrics and sound asset quality. Principal Business: BCA Finance is a multi-finance arm of Bank BCA has been able to book c.50% ROE in the past five years. It is and focuses on providing new 4W financing. also able to consistently keep credit cost below 1%, thanks to Source of all data on this page: Company, DBS Vickers its success in capturing the best-tier customers. NPL is also maintained at around 1%. Key risks: Intensifying competition. It could face tougher competition in the 4W segment, as other multi-finance companies also target Astra’s products. We believe Astra- related multi-finance companies and Mandiri Tunas Finance could pose competitive threats in view of the strong support from their parents. At A Glance Major Shareholders (%) Bank Central Asia Tbk. 99.58% BCA Finance Limited 0.42% ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY Company Focus At BCA Finance Company Background BCAF: Financing portfolio based on location Bank-backed parentage. BCA Finance (BCAF) became a Others subsidiary of Bank Central Asia (BBCA) after the Salim group 20% relinquished control of BCAF in 1996. BCAF is basically the financing arm of BBCA to disburse both new and used 4W loans. The 2W business is mainly operated by Central Santosa Pekanbaru 2% Finance, another subsidiary of BBCA. Semarang 3% Bandung Jabodetabek 5% 60% Financial Analysis Surabaya Competitive pricing in urban city areas. BCAF competes for the 8% upper high-end segment for new 4W financing in the urban/city areas with low credit risk by offering competitive pricing, thanks Source: Company, DBS Vickers to joint-financing schemes from its parent which have low cost of funds. Recently, the company launched a promotional rate of 3.6% flat for 36 days, equivalent to 7.01% p.a. effective rate BCAF: New booking and market share (which was lower than competitor’s cost of funds). BCAF also M arket Share Units 18.00% 250,000 expanded into the riskier used 4W financing business but 15.30% 16.00% 13.03% 13.24% usually this does not include joint-financing from the parent. 14.00% 12.80% 200,000 11.07% 12.00% Joint-financing scheme. The joint-financing scheme requires 150,000 10.00% BCAF to pay 9.5% to the parent and take the spread between 8.00% 100,000 the effective yield plus a fee income. BCAF is responsible for 6.00% handling the underwriting process and collection. 4.00% 50,000 2.00% Access to funding remains a competitive strength. Aside from 0.00% - 2012 2013 2014 2015 2016 joint financing with its parent, BCAF has solid funding New Booking - RHS Market Share New 4W capability. BCAF’s bond funding proportion is one of the highest in the industry, thanks to its good reputation and long Source: Companies; *Assuming BCAF only sells Astra’s brands track record which enabled it to tap into the bond market which typically has a lower interest rate compared to bank BCAF: Promotional material borrowings. Conservative down-payment policy. Loan to value (LTV) is usually lower than 80% despite the regulation that allows BCAF to give a higher LTV. The company has its NPL maintained at 1- 3% and therefore the new regulation should allow it to give down payment as low as 10%. The high down payment also reflects BCAF’s strategy to capture low-risk customers. NPL and credit costs remained low. Credit cost has been able to be maintained at below 1% in the last four years while its NPL hovers at around the 1% level. The consistently low credit cost and NPL prove that being conservative has its benefits. Source: Company, DBS Vickers Expansion plans. BCAF has no intentions to add a significant number of new branches but prefers to leverage on its parent’s BCAF: NPL Ratio vast network. BCAF’s target market is the affluent middle class 1.80% 1.60% 1.63% living in urban areas, which should be covered by the current 1.40% 1.50% BBCA network. 1.20% 1.01% 1.00% 1.20% 0.82% 0.80% 0.66% 0.54% 0.53% 0.60% 0.73% 0.38% 0.40% 0.20% 0.00% 2012 2013 2014 2015 2016 NPL Credit Cost Source: Company, DBS Vickers ASIAN INSIGHTS VICKERS SECURITIES Page 56 Company Focus BCA Finance Joint financing for new 4W business. BCAF uses its parent’s balance sheet to grow in the new 4W financing business BCAF: Managed receivable on consumer financing portfolio through joint-financing agreements with BBCA. The joint- On Balance financing portion contributes up to 89% of consumer Sheet 11% financing managed receivable portfolio in FY16. The high joint financing portion explains why BCAF can enjoy high asset yields despite offering very competitive rates to its customers. Meanwhile, internal funding is mostly contributed by bond financing. Gearing remains low. Gearing stood at 1.4x in FY16, much below the industry average at 8x and maximum regulated level of 10x. We also note that this level is the lowest in five years. However, BCAF’s funding is mainly off-balance sheet which is Joint Financing not reflected in the gearing ratio. 89% Source: Company, DBS Vickers Leveraging BBCA vast network. 35%-40% BCAF’s customers are from the parent’s branches which are also BBCA’s BCAF: Gearing and ROE customers who have good credit records. This will help BCAF Gearing (x) to manage delinquencies and maintain its strong asset quality. ROE 5.00 81% 90% 76% 4.50 80% 4.00 70% Outlook 3.25 56% BBCA plans to grow its car financing business through BCA 3.50 54% 60% 3.00 45% 2.21 50% Finance. However, management stated that the company will 2.50 2.19 40% only ride through the industry growth. We expect the 4W 2.00 1.51 1.36 industry to grow at 5% this year. However BCAF can grow 1.50 30% 20% more than that by taking up more market share. 1.00 0.50 10% - 0% 2012 2013 2014 2015 2016 Key Risks: Intensifying competition. It could face tougher competition in the 4W segment, as other multi-finance Gearing Ratio ROE companies – especially the Astra-related companies such as Source: Company, DBS Vickers Astra Sedaya Finance and Toyota Astra Finance – vie for a bigger slice of the market. BCAF: Market share and new booking M arket Share Units BCAF: Funding source in FY16 18.00% 250,000 15.30% 16.00% 13.03% 13.24% 14.00% 12.80% 200,000 11.07% 12.00% 150,000 10.00% Borrowings 8.00% 100,000 42% 6.00% 4.00% 50,000 Bond 2.00% 58% 0.00% - 2012 2013 2014 2015 2016 New Booking - RHS Market Share New 4W Source: Company, DBS Vickers Source: Company, DBS Vickers ASIAN INSIGHTS VICKERS SECURITIES Page 57 Company Focus At BCA Finance Key Assumptions FY Dec 2012 2013 2014 2015 2016 Consumer Financing Gth 29.0 16.3 (3.0) 8.9 19.6 High asset yield mainly due Leasing Gth 276.7 60.2 3.4 (9.9) (8.4) to significant chunk of joint- Yld. On Earnings Assets 34.3 33.1 35.2 36.0 34.8 financing portion Avg Cost Of Funds 9.7 7.6 8.7 9.1 8.1 Income Statement (Rpbn) FYDec 2012 2013 2014 2015 2016 Net Interest Income 1,206 1,448 1,616 1,706 1,905 Non-Interest Income 189 247 263 370 439 Operating Income 1,395 1,695 1,878 2,075 2,344 Operating Expenses (375) (431) (520) (638) (796) Pre-provision Profit 1,019 1,264 1,358 1,437 1,548 Provisions (46) (20) (28) (38) (36) Provisions remained low Associates - - - - - Exceptionals - - - - - Pre-tax Profit 973 1,243 1,329 1,399 1,512 Taxation (243) (308) (329) (352) (374) Minority Interests - - - - - Preference Dividend - - - - - Net Profit 730 935 1,001 1,047 1,139 Net Profit bef Except 730 935 1,001 1,047 1,139 Growth (%) Net Interest Income Gth 12.3 20.1 11.6 5.6 11.7 Net Profit Gth 8.8 28.2 7.0 4.6 8.7 Margins, Costs & Efficiency (%) Spread 24.6 25.4 26.6 27.0 26.6 Net Interest Margin 29.2 28.4 29.7 30.6 30.1 Cost-to-Income Ratio 26.9 25.4 27.7 30.8 33.9 Business Mix (%) Net Int.Inc/Opg Inc. 86.5 85.4 86.0 82.2 81.3 Non-Int. Inc/Opg inc. 13.5 14.6 14.0 17.8 18.7 Fee Inc/Opg Income 12.7 12.9 12.1 16.0 16.8 Oth Non-Int Inc/Opg Inc 0.9 1.6 1.9 1.8 1.9 Profitability (%) ROAE PreEx. 54.0 80.7 76.2 56.2 44.7 ROAE 54.0 80.7 76.2 56.2 44.7 ROA PreEx. 15.1 16.1 16.3 15.3 14.0 ROA 15.1 16.1 16.3 15.3 14.0 Source: Company, DBSVickers ASIAN INSIGHTS VICKERS SECURITIES Page 58 Company Focus BCA Finance Balance Sheet (Rpbn) FYDec 2012 2013 2014 2015 2016 Cash/Bank Balance 4 3 5 3 5 Government Securities - - - - - Interbank Assets - - - - - Total Net Loans & Advs. 4,610 5,426 5,274 5,707 6,785 Investment - - - - - Associates - - - - - Fixed Assets 28 30 109 180 198 Goodwill - - - - - Other Assets 201 340 741 934 1,165 Total Assets 4,843 5,798 6,128 6,824 8,152 Customer Deposits - - - - - Interbank Deposits - - - - - Debts/Borrowings 2,688 3,541 3,390 3,314 3,959 Others 926 1,167 1,203 1,321 1,291 Minorities - - - - - Shareholders ‘Funds 1,229 1,090 1,536 2,190 2,902 Total Liab & S/H’s Funds 4,843 5,798 6,128 6,824 8,152 Financial Stability Measures (%) FYDec 2012 2013 2014 2015 2016 Balance Sheet Structure Consumer Financing/Total Asset 95.2 93.6 86.1 83.6 83.2 Debt/Total Liability 74.4 75.2 73.8 71.5 75.4 Borrowings/Int. Bear. Liab. 6.2 19.7 38.2 27.0 42.3 NPL maintained at low levels Bonds/Int. Bear. Liab. 93.8 80.3 61.8 73.0 57.7 Asset Quality NPL/Total Gross Loans 0.73 0.82 1.63 1.50 1.20 NPL/Total Assets 0.69 0.75 1.37 1.23 0.99 NPL(absolute) 229.5 183.4 96.9 97.4 100.0 Provision Coverage Ratio 1.01 0.38 0.54 0.66 0.53 Liabilities Measure Gearing Ratio 2.19 3.25 2.21 1.51 1.36 Liability/Equity 2.94 4.32 2.99 2.12 1.81 Source: Company, DBSVickers ASIAN INSIGHTS VICKERS SECURITIES Page 59 Indonesia Company Focus Federal International Finance Bloomberg: n.a | Reuters: n.a Refer to important disclosures at the end of this report DBS Group Research . Equity 18 Apr 2017 NOT LISTED/NOT RATED The king of two-wheeler financing Reason for Report : A proxy for the multi-finance industry The market leader for new 2W financing; strong Potential Catalyst: Automotive sales improvement surprise support from the Astra Group Analyst Benedictus Agung SWANDONO +6221 3003 4935 Strong presence in Java and Sumatera, [email protected] contributing up to 61% and 19%, respectively, of Sue Lin LIM +65 8332 6843 [email protected] total asset portfolio in FY16 Good access to both capital market and bank funding with low cost of funds Financials FY Dec (Rp bn) 2013A 2014A 2015A 2016A NPL remained stable at below 1% with credit costs Pre-prov. Profit 2,168 2,502 2,762 3,129 still on the downtrend Net Profit 1,205 1,307 1,507 1,806 Federal Net Pft (Pre Ex.) 1,205 1,307 1,507 1,806 Fruitful synergy with Honda motorcycles. International Finance (FIF) is a captive finance company for EPS (Rp) 4,305 4,669 5,381 6,449 Honda motorcycles. FIF focuses on its operation to finance EPS Pre Ex. (Rp) 4,305 4,669 5,381 6,449 Honda sales while around 30% of Honda sales are financed EPS Gth (%) 7.1 8.5 15.3 19.8 EPS Gth Pre Ex (%) 7.1 8.5 15.3 19.8 through FIF. Honda has consistently gained more market share, Diluted EPS (Rp) 4,305 4,669 5,381 6,449 reaching 74% in FY16 (from 53% five years ago). Moreover FIF Net DPS (Rp) - - - - is also growing its used motorcycle business with new bookings ROAE Pre Ex. (%) 29 29 29 34 growing at 30% CAGR 2012-2016, making up to 24% of FY16 ROAE (%) 30.3 29.0 29.3 29.2 new bookings. These helped FIF to continuously record positive ROA (%) 5.9 5.6 5.2 5.2 new booking trends (14.8% CAGR 2012-2016). BV Per Share (Rp) 4,600 4,820 5,831 5,061 FIF has been able to deliver strong ICB Industry : Financials Continuous improvement. profitability with its ROE averaging 29% in the past decade. The ICB Sector: Financial Services Principal Business: Astra Sedaya Finance (ADMF) focuses on company is able to lower its credit cost to 1.8% in FY16 from providing consumer financing for new and used cars, and is part of 8.7% a decade ago. NPL is maintained at below 1% due to its Astra Group's value chain disciplined 150-day overdue write-off policy. The huge customer Source of all data on this page: Company, DBS Vickers, DBS Bank base enables FIF to extract data for better screening process, which should allow it to maintain its good asset quality. Its strong record and business stability allowed FIF to tap into a wider range of financing sources such as banks and capital markets, both local and foreign. Key risks: Inflation. Management believes that inflation is the main risk. 65% FIF customers’ income level is less than Rp4m. The volatile price of basic needs could have an impact on customers’ purchasing power and ability to make payments. At A Glance Major Shareholders (%) Astra Internaltional Tbk 99.9% Arya Kharisma 0.00004% ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY Company Focus Federal International Finance Company Background FIF: Booking composition by product (2016) An Astra International subsidiary. Federal International Finance Multipurpose Car (FIF) is a subsidiary of PT Astra International Tbk (ASII) and 7% 2% started its business in consumer financing, factoring, and leasing. Since 1996, FIF has transformed its business line by Used 2W focusing on the Honda motorcycle financing segment. FIF has 24% also expanded towards the used 2W segment. Beyond motorcycle, FIF also offers electronic & home appliances financing services and also car financing. FIF is 99.9% owned New 2W 67% by ASII. Financial Analysis Source: Company, DBS Vickers, DBS Bank Riding on Honda’s strong momentum. FIF is the market leader FIF: New booking as a percentage of Honda sales in the 2W financing space, specialising in financing new Honda '000 Units % from total honda motorcycles. In 2016, 33% of Astra’s 2W Honda sales were 6,000 49% financed by FIF. Honda has proven itself to be the dominant 47% 48% 48% 5,000 4,697 5,051 4,381 47% player by increasing its market share to 74% in 2016 4,089 4,454 46% compared to 53% a decade ago. 4,000 45% 45% 44% 2W financing remained the main contributor. Auto sales is the 3,000 44% main driver of FIF’s income since 91% of its portfolio is 2W 43% 43% 2,000 1,462 1,428 1,436 42% financing, with the remaining 9% contributed by multi-purpose 1,188 1,314 1,000 41% and car financing. FIF also have SPEKTRA as one of the multi- 40% purpose financing products to finance electronics, furniture, - 39% household furnishing, and hand tractor. However, the 2012 2013 2014 2015 2016 contribution remained small at 6.9%. FIF New 2W Honda Honda Sales FIF Share - RHS Good funding capabilities. FIF has a good access to funding Source: Company, DBS Vickers, DBS Bank both banks and capital markets. The company received Note: 68-72% of Honda sales use financing syndicated loans amounting to USD200m-USD550m, with FIF: NPL ratio and credit cost Sumitomo Mitsui Banking Corporation (SMBC) as facility agent from various foreign banks. In the past three years, FIF has 4.0% 3.7% issued bonds totalling Rp20tr with an issuance size of Rp5tr-9tr 3.5% 3.1% 2.8% per year and has a good track record in paying interest and 3.0% 2.6% 2.5% principal. 1.8% 2.0% No material asset-quality issues. FIF has been able to keep its 1.5% 1.2% 1.0% NPL ratio below 1% even during the slump in the motorcycle 0.3% 0.3% 0.4% 0.4% industry in 2015-2016. It considers an asset to be non- 0.5% 0.0% performing when repayment is 90 days past due with automatic 2012 2013 2014 2015 2016 write-off policy after 150 days overdue. Management believes NPL Ratio Credit Cost that almost all of their customers are non-bankable and Source: Company, DBS Vickers, DBS Bank emphasises the importance of data customer data coverage and FIF: Number of branches and employees quality for the screening process. However, management remains confident of maintaining its strong asset quality, as 20,000 18,675 18,000 16,788 30% of the customers are recurring customers which should be 15,363 15,429 15,754 less risky than new ones. 16,000 14,000 Expansion plans. Management targets new bookings to reach 12,000 Rp36tr this year, while outlets and branches expansion will track 10,000 8,000 the dealership expansion. 6,000 4,188 4,550 3,443 3,557 3,924 4,000 2,000 0 2012 2013 2014 2015 2016 Employee Account Managed Source: Company, DBS Vickers, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 61 Company Focus At Federal International Finance Funding source. Bond financing formed a significant 39% of FIF: Funding source in FY16 FIF’s funding, thanks to its good reputation and long track record which enabled it to tap into the bond market. The bond market typically has a lower interest rate compared to bank borrowings, which should help lower its blended cost of funds. Bonds 39% FIF also does joint financing, which consists of 19% of its total portfolio in FY16. Borrowings Gearing remains low. Gearing stood at 4.6x in FY16, the 61% highest in the past four years due to FIF’s rapid growth, thanks to Honda’s improving market share. However, the low gearing level is much lower than the industry average at 8% and the regulated threshold of 10x. Source: Company, DBS Vickers Huge customer base is its advantage. FIF has a large customer FIF: Gearing and ROE base with around 4.5m active customers and 30% of them are 5.00 4.60 60% repeat customers. A large customer database is very important 4.50 4.15 3.74 50% since most of them are non-bankable and therefore do not 4.00 3.54 3.47 3.50 have credit records. The exclusive and huge customer base 34% 40% 3.00 30% 29% 29% 29% should enable FIF to do better credit screening, which could 2.50 30% translate into improving asset quality. 2.00 20% 1.50 1.00 10% Outlook 0.50 We believe the company will continue to grow in line with - 0% 2012 2013 2014 2015 2016 Honda sales going forward. Upside might come from the rapid Gearing Ratio ROE - RHS growth of used motorcycle financing and the strong performance of multi-purpose financing through SPEKTRA. Source: Company, DBS Vickers FIF: Customers distribution based on income Management believes that inflation is Key Risks: Inflation. Above 4 mn 35.1 the main risk. 65% FIF customers has income less than Rp4m. 3.5 mn < Income <= 4 mn 10.5 The price volatility of basic needs could have an impact on 3 mn < Income <= 3.5 mn 10 customers’ purchasing power and ability to make payments. 2.5 mn < Income <= 3 mn 15.3 2 mn < Income <= 2.5 mn 11.3 1.5 mn < Income <= 2mn 10.8 1 mn < Income <= 1.5 mn 5.6 Income <= 1 mn 1.4 0 5 10 15 20 25 30 35 40 % of customers Source: Company, DBS Vickers FIF: Customer payment method (2016) Cash, 32% Credit, 68% Source: Company, DBS Vickers ASIAN INSIGHTS VICKERS SECURITIES Page 62 Company Focus Federal International Finance Key Assumptions FY Dec 2012 2013 2014 2015 2016 Strong financing growth Consumer Financing Gth 8.4 8.8 23.0 11.1 6.6 despite the downturn in 2W industry sales Asset Gth 10.0 12.5 17.9 13.2 2.4 Yld. On Earnings Assets 28.4 26.8 26.9 27.7 28.6 Avg Cost Of Funds 9.1 8.8 9.3 10.2 10.0 Income Statement (Rpbn) FYDec 2012 2013 2014 2015 2016 High asset yield in the 2W Net Interest Income 4,078 4,092 4,603 5,259 5,975 financing business is the Non-Interest Income 168 173 154 139 145 main reason behind the high ROE level Operating Income 4,246 4,265 4,757 5,397 6,120 Operating Expenses (2,066) (2,098) (2,255) (2,635) (2,991) Pre-provision Profit 2,179 2,168 2,502 2,762 3,129 Provisions (683) (565) (763) (719) (518) Associates - - - - - Exceptionals - - - - - Pre-tax Profit 1,497 1,602 1,739 2,043 2,611 Taxation (372) (397) (432) (537) (805) Minority Interests - - - - - Preference Dividend - - - - - Net Profit 1,125 1,205 1,307 1,507 1,806 Net Profit bef Except 1,125 1,205 1,307 1,507 1,806 Growth (%) Net Interest Income Gth 9.2 0.4 12.5 14.2 13.6 Net Profit Gth 4.3 7.1 8.5 15.3 19.8 Margins, Costs & Efficiency (%) Spread 19.3 17.9 17.7 17.5 18.6 Net Interest Margin 21.8 20.4 20.1 19.9 20.9 Cost-to-Income Ratio 48.7 49.2 47.4 48.8 48.9 Business Mix (%) Net Int. Inc / Opg Inc. 96.1 95.9 96.8 97.4 97.6 Non-Int. Inc / Opg inc. 3.9 4.1 3.2 2.6 2.4 Fee Inc / Opg Income - - - - - Oth Non-Int Inc/Opg Inc 3.9 4.1 3.2 2.6 2.4 Profitability (%) ROAE Pre Ex. 30.3 29.0 29.3 29.2 33.8 ROAE 30.3 29.0 29.3 29.2 33.8 ROA Pre Ex. 5.9 5.6 5.2 5.2 6.1 ROA 5.9 5.6 5.2 5.2 6.1 Source: Company, DBS Vickers, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 63 Company Focus At Federal International Finance Balance Sheet (Rpbn) FYDec 2012 2013 2014 2015 2016 Cash/Bank Balance 957 575 437 131 241 Government Securities - - - - - Inter Bank Assets - - - - - Total Net Loans & Advs. 17,195 18,832 23,267 25,962 28,001 Investment - - - - - Associates - - - - - Fixed Assets 246 247 284 285 310 Goodwill - - - - - Other Assets 731 1,868 1,390 2,356 859 Total Assets 19,129 21,522 25,378 28,734 29,411 Customer Deposits - - - - - Inter Bank Deposits - - - - - Debts/Borrowings 14,017 15,064 19,028 21,389 22,804 Others 1,152 2,118 1,763 1,623 1,651 Minorities - - - - - Shareholders' Funds 3,960 4,340 4,586 5,723 4,955 Total Liab& S/H’s Funds 19,129 21,522 25,378 28,734 29,411 Financial Stability Measures (%) FYDec 2012 2013 2014 2015 2016 Balance Sheet Structure Consumer Financing/ Total 89.9 87.5 91.7 90.4 95.2 At Debt/Total Liability 92.4 87.7 91.5 92.9 93.2 Asset quality remained stable Borrowings/ Int. Bear. Liab. 44.7 46.0 74.4 67.6 61.1 despite the soft economic environment Bonds/ Int. Bear. Liab. 55.3 54.0 25.6 32.4 38.9 Asset Quality NPL / Total Gross Loans 1.23 0.35 0.35 0.37 0.38 NPL / Total Assets 1.19 0.32 0.34 0.35 0.37 NPL (absolute) 227.2 69.6 86.1 100.9 110.3 Provision Coverage Ratio 578.8 1,871.0 1,731.3 1,523.7 1,185.9 Liabilities Measure Gearing Ratio 3.54 3.47 4.15 3.74 4.60 Liability/Equity 3.83 3.96 4.53 4.02 4.94 Source: Company, DBS Vickers, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 64 Indonesia Company Focus Mandiri Tunas Finance Bloomberg: n.a | Reuters: n.a Refer to important disclosures at the end of this report DBS Group Research . Equity 18 Apr 2017 NOT LISTED/NOT RATED Breaking boundaries Reason for Report : A proxy for the multi-finance industry Potential Catalyst: Automotive sales improvement surprise Impressive growth in the past five years, making it one of the major players in new 4W financing Analyst Benedictus Agung SWANDONO +6221 3003 4935 Strong synergy between Bank Mandiri and Tunas [email protected] Ridean that are MTF’s shareholders Sue Lin LIM +65 8332 6843 [email protected] Proven ability to keep asset quality under control and high ROE at 25%-29% Financials Target to compete for top-tier customers going FY Dec (Rp bn) 2013A 2014A 2015A 2016A forward. Pre-prov. Profit 394 532 700 876 In the past five years, Net Profit 176 234 307 335 Climbing to the top of the league. Mandiri Tunas Finance (MTF) has become a significant player in Net Pft (Pre Ex.) 176 234 307 335 the 4W financing business with a market share of 13.3% in EPS (Rp) 7 9 12 13 EPS Pre Ex. (Rp) 7 9 12 13 FY16 (from 5.8% in 2012) in terms of new units booked. It has EPS Gth (%) (84.9) 32.7 31.1 9.3 established good networks with trademark holding sole agents EPS Gth Pre Ex (%) (84.9) 32.7 31.1 9.3 (ATPM/Agen Tunggal Pemilik Merk) and automotive dealers, Diluted EPS (Rp) 7 9 12 13 providing MTF with the opportunity to tap into a wider range of PE Pre Ex. (X) N/A N/A N/A N/A brands and segments. Synergies with its bank shareholder (Bank Net DPS (Rp) 16 109 16 16 Mandiri) and automotive dealer shareholder (Tunas Ridean) Div Yield (%) N/A N/A N/A N/A have also yielded positive results. ROAE Pre Ex. (%) 29 30 30 25 ROAE (%) 24.8 29.0 29.6 29.7 Sound financial performance and profitability. MTF has ROA (%) 2.7 3.1 3.2 3.3 been consistently booking positive net profit growth in the past BV Per Share (Rp) 696 908 1,193 1,563 five years, showing resilience during the downturn of the P/Book Value (x) N/A N/A N/A N/A automotive industry over 2014-2015. It also able to maintain ICB Industry : Financials high ROE levels (25%-29%) mainly due to stable credit costs ICB Sector: Financial Services that averaged 3.3% in the past five years. Its NPL is higher than Principal Business: Mandiri Tunas Finance's business is mainly in its peers at 1.5% in FY16 mainly due to write-off policy new 4W financing. Currently, it also growing its 2W and multi- differences. purpose financing businesses. The company is supported by a bank and automotive dealer shareholder. Key risks: Intensifying competition. It could face tougher competition in the 4W segment, as other multi-finance companies also target Astra’s products. We believe MTF will likely to face stiff competition from BCA Finance, Astra Sedaya, and Adira Finance. At A Glance Major Shareholders (%) Bank Mandiri Tbk 51% Tunas Ridean Tbk 49% Source of all data on this page: Company, DBSVI, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY Company Focus At Mandiri Tunas Finance Company Background MTF: Asset breakdown in FY16 Mandiri Tunas Finance (MTF) started operations as PT Tunas Others Financindo Corporation in 1989 to support the 4W sales of the 7% 4W Fleet Tunas Ridean Group. In 2009, Bank Mandiri Tbk (BMRI) 15% acquired 51% of the shares and changed the company’s name to Mandiri Tunas Finance. 49% of the remaining shares are 2W Retail 2% still owned by PT Tunas Ridean Tbk (which was owned by the Jardine Group who also owns Astra International). Geographically, 68% of the portfolio is concentrated in Java and Bali. 4W Retail 76% Financial Analysis Source: Company, DBSVI New 4W sales remained the main contributor. Auto sales, especially 4W, is the main driver of MTF’s income since 91% of MTF: New booking and market share its portfolio is 4W related, while the remaining came from 2W Unit Person 200,000 14.8% 16.0% 13.3% and heavy equipment leasing. The company started to disburse 180,000 14.0% 11.8% 160,000 multi-purpose loans last year, although the contribution 12.0% 140,000 remained small. Non-interest income contribution is an 120,000 8.3% 10.0% 100,000 8.0% important contributor with 38% contribution to operating 5.8% income in FY16. The fees include administration, insurances 80,000 6.0% 60,000 4.0% premium fees, and insurance handling fees. 40,000 20,000 2.0% Synergy with Tunas. MTF has established a strong synergy with - 0.0% its automotive shareholder Tunas Ridean Tbk (TURI). About 2012 2013 2014 2015 2016 New Bookings 4W New New Bookings 4W Used 15% of MTF’s new bookings came from Tunas while 39% of Market Share Tunas’ automotive sales were financed by MTF, according to management. Source: Companies; *Assuming MTF only sells Astra’s brands Conservative growth. Management indicated that it is MTF: NPL ratio targeting top-tier customers with a minimum down payment 4.5% of 25%. This segment should contribute 60%-70% of new 4.0% 3.5% 3.8% lending going forward. The same conservative strategy is also 3.0% 3.0% 3.1% used in the commercial segment. MTF will compete on service 2.5% 2.9% 2.8% quality by offering an easy application process (two days 2.0% 1.5% 1.2% 1.2% approval for dealer reference and one day approval for bank 1.5% 1.1% 1.0% reference) and competitive pricing. Geographically, the 1.0% 0.5% company would like to penetrate more into Jabodetabek 0.0% (greater Jakarta) and East Java in the hope of improving its 2012 2013 2014 2015 2016 asset quality. NPL Ratio Credit Cost NPL below industry. MTF has been able to keep its NPL ratio Source: Company, DBSVI below 2% during the economic slowdown. It considers an asset MTF: Number of branches and employees to be non-performing when repayment is 90 days past due. The Unit Person 93 company has no automatic write-off policy but it will 100 88 91 4,000 90 3,500 automatically assign 100% provisions for loans 180 days past 77 3,725 80 68 3,577 3,329 3,000 due. 70 2,500 Expansion plans. In FY16 MTF has 91 branches and 21 satellites. 60 2,793 50 2,371 2,000 Management targets to add four new satellite offices and eight 40 1,500 30 new branches to potential regions to improve market 1,000 penetration. 20 10 500 - - 2012 2013 2014 2015 2016 Branches Employee - RHS Source: Company, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 66 Company Focus Mandiri Tunas Finance Synergy with Bank Mandiri. MTF’s majority shareholder, BMRI, MTF: Funding source in FY16 is the biggest bank in Indonesia in terms of asset. This allows MTF to have strong funding capability through joint financing (that contributes to 64% of consumer financing portfolio FY16) and bank borrowings from its parent. Under joint- Bonds financing agreements, 99% of the loans will be financed by 37% BMRI which will also bear the credit risk. However, BMRI will stop the joint-financing scheme once the NPL exceeds the 2% level. Borrowings 63% Strong external funding capabilities. MTF also has strong footprints in the capital market with multiple series of bonds and medium-term notes issuance. This has enabled MTF to tap into cheaper bond financing that contributed 37% of its total Source: Company, DBSVI financing in FY16. Gearing at moderate level. Gearing stood at 6.1x in FY16, below the industry average at 8x but higher than its comparable MTF: Gearing and ROE peers such as Astra Sedaya Finance. However, this level is below 6.60 31% the 6-year average of 6.45x. These should indicate that the 30% 30% 6.50 29% 30% company still have room for growth, which could help lift its 6.50 29% 6.40 6.45 ROE back to the c.29% level enjoyed in the 2013-2015 period. 6.41 28% 6.30 Strong network. MTF has well established networks with 27% 6.20 6.25 trademark holding sole agents and automotive dealers, 25% 26% 6.10 25% providing MTF with the opportunity to tap into a wider range of 25% 6.00 brands and segments. 6.05 24% 5.90 23% 5.80 22% Outlook 2012 2013 2014 2015 2016 The company will maintain conservative stance by targeting Gearing ROE - RHS best-tier customers with a minimum down payment of 25% and expected contribution of 60%-70% from funding. It Source: Company, DBSVI would shift to areas with lower risks such as Jabodetabek and East Java. Management will also enhance its operating efficiency and grow its other businesses such as fleet financing and multi-purpose financing. Key Risks: Tough competition in the new 4W segment. It could face tougher competition in the 4W segment, as other multi-finance companies also target Astra’s products. We believe MTF will likely to face stiff competition from BCA Finance, Astra Sedaya, and Adira Finance. MTF: Shareholding structure Source: Company ASIAN INSIGHTS VICKERS SECURITIES Page 67 Company Focus At Mandiri Tunas Finance Key Assumptions FY Dec 2012 2013 2014 2015 2016 Strong financing growth in Consumer Financing Gth 17.2 22.0 31.1 33.9 22.2 the past five years has made MTF as one of the biggest Leasing Gth 745.1 88.1 26.5 (22.9) 38.1 players in the new 4W Yld. On Earnings Assets 16.9 19.0 18.6 19.2 18.8 financing space Avg Cost Of Funds 9.9 11.3 10.8 10.8 11.3 IncomeStatement (Rpbn) FYDec 2012 2013 2014 2015 2016 Net Interest Income 348 483 622 827 953 Non-Interest Income 180 239 343 457 575 Operating Income 528 723 965 1,284 1,528 Operating Expenses (251) (329) (433) (584) (652) Pre-provision Profit 277 394 532 700 876 Provisions (121) (157) (220) (289) (427) Associates - 1 2 3 3 Provisions were kept in check despite the Exceptionals - 1 2 3 3 automatic 100% Pre-tax Profit 156 239 316 417 455 provisioning after 180 Taxation (39) (61) (78) (104) (114) days overdue Minority Interests - 1 2 3 3 Preference Dividend - 1 2 3 3 Net Profit 117 180 242 319 347 Net Profit bef Except 117 180 242 319 347 Growth (%) Net Interest Income Gth 36.8 38.9 28.7 33.0 15.2 Net Profit Gth 77.2 51.3 32.7 31.1 9.3 Margins, Costs & Efficiency (%) Spread 7.0 7.8 7.8 8.4 7.5 Net Interest Margin 8.9 9.9 9.9 10.4 9.6 Cost-to-Income Ratio 47.6 45.5 44.8 45.5 42.7 Business Mix (%) Net Int.Inc/Opg Inc. 65.9 66.9 64.5 64.4 62.4 Non-Int. Inc/Opg inc. 34.1 33.1 35.5 35.6 37.6 Oth Non-Int Inc/Opg Inc 34.1 33.1 35.5 35.6 37.6 Profitability (%) ROAE PreEx. 24.8 29.0 29.6 29.7 25.3 ROAE 24.8 29.0 29.6 29.7 25.3 ROA PreEx. 2.7 3.1 3.2 3.3 2.9 ROA 2.7 3.1 3.2 3.3 2.9 Source: Company, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 68 Company Focus Mandiri Tunas Finance Balance Sheet (Rpbn) FYDec 2012 2013 2014 2015 2016 Cash/Bank Balance 166 191 273 92 258 Government Securities - 1 2 3 3 Interbank Assets - 1 2 3 3 Total Net Loans & Advs. 4,045 5,124 6,660 8,482 10,499 Investment - 1 2 3 3 Associates - 1 2 3 3 Fixed Assets 28 44 75 103 141 Goodwill - 1 2 3 3 Other Assets 149 281 414 526 506 Total Assets 4,388 5,644 7,432 9,218 11,419 Customer Deposits - 1 2 3 3 Interbank Deposits - 1 2 3 3 Debts/Borrowings 3,440 4,438 5,739 7,332 8,925 Others 419 514 789 698 1,005 Minorities - 1 2 3 3 Shareholders ‘Funds 529 688 895 1,173 1,474 Total Liab & S/H’s Funds 4,388 5,642 7,428 9,212 11,413 Financial Stability Measures(%) FYDec 2012 2013 2014 2015 2016 Balance Sheet Structure NPL remained low despite the Consumer Financing/Tota lAsset 92.2 90.9 89.7 92.2 92.1 absence of automatic write- Debt/Total Liability 89.1 89.6 87.9 91.3 89.9 off policy Borrowings/Int. Bear. Liab. 78.2 73.0 74.8 74.8 62.8 Bonds/Int. Bear. Liab. 21.8 27.0 25.2 25.2 37.2 Asset Quality NPL/Total Gross Loans 1.19 1.13 1.10 1.17 1.49 NPL/Total Assets 3.67 3.71 3.80 4.15 4.97 NPL(absolute) 161.0 209.0 281.9 382.3 567.3 Provision Coverage Ratio 18.2 37.2 52.8 55.7 43.0 Liabilities Measure Gearing Ratio 6.50 6.45 6.41 6.25 6.05 Liability/Equity 7.30 7.20 7.30 6.85 6.74 Source: Company, DBSVI ASIAN INSIGHTS VICKERS SECURITIES Page 69 Industry Focus DBS Bank, DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 12 Apr 2017 18:10:03 (WIB) Dissemination Date: 17 Apr 2017 17:49:52 (WIB) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd, PT DBS Vickers Sekuritas Indonesia (''DBSVI''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd, PT DBS Vickers Sekuritas Indonesia (''DBSVI''). The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. 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They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. Page 70 Industry Focus DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. 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Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. Compensation for investment banking services: 4. DBS Bank Ltd, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Bank Central Asia, Bank Tabungan Negara, BFI Finance Indonesia, Bank Rakyat Indonesia, Adira Dinamika Multifinance, BCA Finance and Astra Sedaya Finance as of 31 Mar 2017. 5. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from Bank Rakyat Indonesia as of 31 Mar 2017. 6. 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DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. 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DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888 e-mail: [email protected] Company Regn. No. 196800306E Page 73