Indonesia Strategy
6 January 2020 Indonesia Strategy Overweight (Maintained) 12M JCI Target: 7,000 Smoother, But Slower Sails Ahead
Still cautiously optimistic, with a 7,000-pt 12-month JCI target (17x and RHB Indonesia’s Top 10 Picks TP 15x FY20-21F P/Es), 11% upside. Bottom-up stock picking will be key amidst Bank Central Asia (BBCA IJ) – BUY IDR40,000 the global macro volatility ahead. Seek out quality laggards and resilient yield plays. Given declining interest rates, we prefer selected bank, infrastructure, Bank Mandiri (BMRI IJ) – BUY IDR9,300 and property counters. Our telco and healthcare choices offer defensive stocks Semen Indonesia (SMGR IJ) – BUY IDR17,100 on potentially weakening purchasing power. We also prefer certain plantation Indosat (ISAT IJ) – BUY IDR4,000 stocks. Note that we added BMRI, BSDE, SCMA, ISAT, and DMAS to our Top Jasa Marga (JSMR IJ) – BUY IDR7,000 Picks to replace TLKM, BBRI, CTRA, WSKT, and MDKA. Puradelta Lestari (DMAS IJ) – BUY IDR382 New picks: BMRI’s asset quality has improved, and is now less likely to Astra Agro Lestari (AALI IJ) – BUY IDR16,160 undergo another kitchen-sinking exercise. BSDE looks to enjoy robust Surya Citra Media (SCMA IJ) – BUY IDR1,870 earnings growth, given its diversified market base, while SCMA may reap Bumi Serpong Damai (BSDE IJ) – BUY IDR1,930 opportunities on industry consolidation, signalled by its JV with MNC Group. Medikaloka Hermina (HEAL IJ) – BUY IDR4,800 ISAT is to book the fastest operational performance turnaround among the operators, driven by low-based 4G data traffic. DMAS is set to benefit from the Analysts expected acceleration in direct investments and Industry 4.0. Andrey Wijaya Benign FY20F earnings growth, with EPS growth of 11%. Similar to our +6221 5093 9846 sector picks, banks, cement, and industrial estates are the growth drivers. [email protected] Banks should continue to benefit from improving liquidity on a higher foreign direct investment (FDI) rate. Cement, a proxy to the infrastructure sector, should benefit from accelerated government projects in 2020. Continued Michael W Setjoadi strong data consumption growth should drive telcos’ ARPU in 2020. Overall, +6221 5093 9844 JCI earnings growth may be limited in 2020 (+11% YoY vs 2019F’s +6.6%). [email protected]
More stable political conditions should boost investment confidence. President Joko Widodo’s (Jokowi) new Cabinet – themed Onward Indonesia Recent related reports: (Indonesia Maju) – should ensure more political stability, which is the key factor Omnibus Law To Accelerate Growth to attract FDI. Just two months after its inauguration, this Cabinet has shown 3Q19 Earnings Growth, As Expected positive developments, eg introducing “omnibus” laws, and restructuring the New Cabinet – All About Check And Balance management teams of the state-owned enterprises (SOEs). Preview 3Q19: Slowdown To Likely Continue Positive on the Government’s second-term focus over the long term on Jokowi’s Second Term Inauguration more productive budget spending that will benefit the younger generation – the Top 10: TLKM, SMGR, JSMR, HEAL Added basis of our economy. Massive infrastructure projects are likely to continue, Top 10 Picks: Replacing HMSP With BBCA which should create a multiplier impact on industry and tourism. IDX-RHB Investment Summit 2019 Simplified laws and regulations to boost FDI growth. The Government will A Stock Picking Market; Add MDKA To Top10 propose omnibus laws to simplify regulations, especially those related to local
regulations and labour reforms. It will also reform tax regulations – eg income RHB Indonesia analysts: tax rate reduction and dividend tax abolishment – so that Indonesia becomes more competitive, in a bid to attract investors. We believe FDI is likely to be Andrey Wijaya – Strategy, Auto, Infra, Cement, Coal one of the main growth drivers of GDP in 2020. Michael Setjoadi – Strategy, Telco, Staples, Poultry Household consumption growth to moderate, but stay resilient. Direct Christopher Andre Benas – Banks, Plantation, Property subsidy cuts may translate to 900VA electricity tariff and fuel price hikes, which Jessica Ayu Pratiwi – Healthcare, Retail, Transportation may adversely impact low- to middle-class purchasing power. A shift in wallet Indonesia Research Team – Small/Mid Banks, Media, Metals share towards higher cost of national health insurance (JKN) premiums and Ahmad Nazmi – Regional Economist cigarette prices (post a c.25% excise tax hike) could further lower household Indonesia Fixed Income Team disposable income over the short to medium term. We are NEUTRAL on the consumer sector. % P/E (x) P/BV (x) Yield (%) Company Name Rating TP (IDR) Upside Dec-20F Dec-20F Dec-20F Bank Central Asia Buy 40,000 19.7 24.9 4.1 0.9 Bank Mandiri Buy 9,300 21.2 10.9 1.6 3.5 Semen Indonesia Buy 17,100 42.5 24.9 2.1 0.9 Indosat Ooredoo Buy 4,000 37.5 N/A 1.6 0.0 Jasa Marga Buy 7,000 35.3 16.4 1.6 1.2 Puradelta Lestari Buy 382 29.1 17.5 1.8 4.0 Astra Agro Lestari Buy 16,160 10.9 18.7 1.3 0.4 Surya Citra Buy 1,870 32.6 13.6 3.6 4.6 Bumi Serpong Buy 1,930 53.8 10.1 0.8 0.0 Hermina Buy 4,800 34.1 33.8 4.6 0.0 Source: Company data, RHB; Data is updated as at 30 Dec 2019
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Strategy - Indonesia Indonesia Strategy
6 January 2020
Table Of Contents
JCI Movement In 2019 3 Market Outlook 6 Sector Outlook 10 President Jokowi’s Focus In His Second Term 15 Stable Political Conditions An Economic Boost 16 2020 State Budget Expenditure Comes At a Great Price 18 Simplified Regulations To Boost FDI Growth 22 Economic Outlook 23 Fixed Income Outlook 33
Sector Outlook Reports Indonesia Banks 37 Indonesia Telco 38 Indonesia Automotive 39 Indonesia Consumer 40 Indonesia Cement 41 Indonesia Media 42 Indonesia Poultry 43 Indonesia Construction 44 Indonesia Property 45 Indonesia Healthcare 46
Appendices Valuation And Ratings Of Individual Stocks Under Coverage 47
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JCI Movement In 2019
Figure 1: JCI’s movement from Jan 2019 to mid-Dec 2019
Note: Share prices as at 30 Dec 2019 Source: Bloomberg, RHB
The JCI started with a fair momentum early this year, reaching its peak in Feb 2019 – the highest since early 2018. The steady IDR also served as a booster at the mean level of c.IDR14,190/USD (Jan-Apr 2019). Foreign reserves flipped to a surplus in Feb-Mar 2019 (USD1bn cumulative), after consecutive deficits since Oct 2018. However, external factors remained fraught with risks from China’s decelerating economic growth (1Q-3Q: 6.4-6% YoY, 2018: 6.4% YoY), which retracted to its lowest since the 1990s – marking a collateral effect of the prolonged trade war. For the first time since 2007, the US’ main signal for recession was revealed, as the yield spread between 10-year and 3-month notes was inverted in Mar 2019. The JCI’s biggest drop was recorded in early May 2019, followed by negativity resulting from a major demonstration held to protest the result of the presidential election. Further tariff increases from the US on China exports (USD550bn) and an unimproved economic performance put more pressure on Indonesian equities. The nation’s current account deficit widened (1Q19/2Q19: -3%, 1Q18/2Q18: -1.6%/-2.2%) with the USD/IDR falling to its lowest this year at IDR14,525/USD (as at 22 May 2019). The International Monetary Fund lowered the 2019 global economic growth target to 3.2% YoY (2018: 3.6% YoY). The JCI recovered slightly after Lebaran, but its performance remained lacklustre, dragged down by consumer, mining, and agriculture sectors – which account for 46% of the JCI. Furthermore, the retail sector recorded a slowdown in 9M19: +2.8% YoY vs 9M18: +7% YoY, while the Purchasing Managers’ Index (PMI) underperformed against the manufacturing sector. Meanwhile, global trade activity also slowed down. At this point, the JCI dipped and meandered around the lower support levels. Political instability had been a major concern for the JCI, with another massive demonstration in Sep 2019. Soon after, a resolution emerged, as President Jokowi swiftly formed his second-term Cabinet, which is expected to come up with policies to attract foreign investments through continued infrastructure initiatives. Bank Indonesia’s cutting of the benchmark rate to 5% was aimed to stimulate consumer spending, cushioned by well- maintained inflation levels (11M19 average: +3.1% YoY, 2019 target: +3.0±1% YoY). Rally at the end of the year. Some gains were seen as trust has started to build up on what was initially a questionable form of new cabinet arrangement for Jokowi’s second-term administration. Significant progress has been made by the new Cabinet on its development agenda.
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Figure 2: Global PMI vs global trade
Global trade activity (represented by shipping from seven developed countries) has cooled down, along with waning expectations of manufacturers’ output
The trend partly explains the impact of global uncertainty, which has toned down economic growth
Source: Bloomberg, RHB
Figure 3: YTD performance of regional equity markets (USD terms)
Regional developed index strengthened by 12.6% on average, with China in pole position
Indonesia is the third-most laggard. The positive gains were mostly helped by the IDR strengthening against the USD. YTD, the nominal trend for the JCI is at +1.7% YoY
Source: Bloomberg (as of 30 Dec 2019), RHB
Figure 4: YTD performance of regional currencies
The IDR has appreciated by 4.6% and is in second place after the THB, ie well above the regional average and in line with the steady increase in foreign reserves (+5% YTD)
However, the underlying factors behind the surge were not convincingly backed up by the improvement in export trade. 11M19 exports dropped 6.13% YoY
Source: Bloomberg (as of 30 Dec 2019), RHB
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Figure 5: Sector price performance (YTD 2019)
YTD 2019, the best-performing sectors relative to JCI are financial industry (+15% YTD), basic industry (+14%), and property (+13% YTD) Note that the basic industry sectors include chemicals, poultry, cement, and pulp & paper industries
Note: Data as at 30 Dec 2019 Source: Bloomberg, RHB Figure 6: Sector price performance based on coverage (YTD 2019)
Under RHB’s sector and company coverage, YTD 2019, the best-performing sectors are industrial estate (+73% YTD), transport (+39%), and healthcare (+28% YTD)
Note: Data as at 30 Dec 2019 Source: Bloomberg, RHB
Under our sector coverage, industrial estates gained the most during 2019, pulled up by DMAS, which gained 90% YTD on its stellar performance, with marketing sales boosted by Hyundai’s 70ha investment for its factory. Second was transport, which gained 39%, propped up by Garuda Indonesia’s (GIAA) 67% gain as it posted a turnaround story in 2019 after increasing average domestic ticket yields. Meanwhile, the worst-performing sectors include tobacco stocks – driven by a higher cigarette excise tax of 23% and concerns on volume decline, and media, ie SCMA, whose share price suffered a decline of 23% on its MSCI exclusion.
Figure 7: Foreign fund flows YTD
YTD mid-Dec 2019, over USD0.5bn in foreign funds have flowed out from Indonesia – excluding the Sumitomo acquisition fund for Bank Danamon Nonetheless, the current figure shows an improvement from the last two years
Note: Data as at 30 Dec 2019 Source: Bloomberg, RHB
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Market Outlook
We remain cautiously optimistic in our outlook for 2020, with a 7,000-pt 12-month JCI target (at 17x/15x FY20-21F P/Es), implying 13% upside. Given the downtrend in interest rates, we prefer certain banks, infrastructure, and property counters. Our telco and healthcare choices offer defensiveness amidst a potential environment of purchasing power. We also prefer selected plantation counters. Our Top 10 picks: i. Bank Central Asia (BBCA IJ, BUY, TP: IDR40,000) link to latest report (29 Oct); ii. Bank Mandiri (BMRI IJ, BUY, TP IDR9,300) link to latest report (10 Dec); iii. Semen Indonesia (SMGR IJ, BUY, TP IDR17,100) link to latest report (4 Dec); iv. Indosat (ISAT IJ, BUY, TP IDR4,000) link to latest report (20 Dec) v. Jasa Marga (JSMR IJ, BUY, TP: IDR7,000) link to latest report (3 Jan); vi. Astra Agro Lestari (AALI, BUY, TP: IDR16,160) link to latest report (4 Nov); vii. Surya Citra Media (SCMA IJ, BUY, TP: IDR1,870) link to latest report (5 Nov); viii. Bumi Serpong Damai (BSDE IJ, BUY, TP: IDR1,930) link to latest report (27 Nov); ix. Puradelta Lestari (DMAS IJ, BUY, TP: IDR382) link to latest report (7 Nov); x. Medikaloka Hermina (HEAL IJ, BUY, TP: IDR4,800) link to latest report (30 Oct). We have removed TLKM, BBRI, CTRA, WSKT, and MDKA from the list, and replaced them with BMRI, BSDE, SCMA, ISAT, and DMAS.
Figure 8: RHB Indonesia’s Top 10 picks Upside/ 2020E Price TP Market Cap Name Ticker Rating Downside EPS Growth P/E P/BV PEG Yield ROE (IDR) (IDR) (%) (USDm) (%) (x) (x) (x) (%) (%) 1 Bank Central Asia BBCA IJ Buy 31,800 40,000 19.7 59.3 12.4 24.9 3.9 2.0 0.9 17.6 2 Bank Mandiri BMRI IJ Buy 7,375 9,300 21.2 25.8 17.1 10.9 1.6 0.6 3.5 15.5 3 Semen Indonesia SMGR IJ Buy 12,300 17,100 42.5 5.1 75.4 24.9 2.2 0.3 0.9 8.9 4 Indosat Ooredoo ISAT IJ Buy 3,120 4,000 37.5 1.1 34.4 N/A 1.7 N/A 0.0 N/A 5 Jasa Marga JSMR IJ Buy 5,225 7,000 35.3 2.7 9.2 16.4 1.6 1.8 1.2 9.5 6 Puradelta Lestari DMAS IJ Buy 302 382 29.1 1.0 47.8 17.5 1.8 0.4 4.0 10.2 7 Astra Agro Lestari AALI IJ Buy 13,425 16,160 10.9 2.0 530.0 18.7 1.2 0.0 0.4 7.1 8 Surya Citra Media SCMA IJ Buy 1,445 1,870 32.6 1.5 12.0 13.6 3.7 1.1 4.6 25.6 9 Bumi Serpong Damai BSDE IJ Buy 1,255 1,930 53.8 1.7 (18.2) 10.1 0.8 (0.6) 0.0 8.0 10 Medikaloka Hermina HEAL IJ Buy 3,620 4,800 34.1 0.8 27.8 33.8 4.7 1.2 0.0 11.4
Note: Share prices as at 30 Dec 2019 Source: Bloomberg, RHB
In the banking sector, we lean towards the Big-4 banks due to their strong liquidity level vs their small/mid-sized peers. BBCA is our Top BUY. However, we have adjusted our pecking order, so BMRI has taken BBRI’s place. BMRI has shown promising asset quality improvements over the course of Kartika Wirjoatmodjo’s tenure as CEO. As such, credit cost has already improved to c.1.5% and normalised at this level, so the bank is less likely to undergo another kitchen-sinking exercise under its newly appointed CEO, Royke Tumilaar. Royke was formerly its director of corporate banking, which is BMRI’s core business. Its FY20F performance will be driven by lower cost of funds and LFR, as well as continued asset quality improvements. Meanwhile, we maintain our BUY call on BBRI. However, the recent cut in credit for business programme (or KUR) rates (ie subsidised micro and small & medium enterprise (SME) loans) by 1% should pose as a risk for the bank. Although the immediate impact should be limited for FY20 as the run rate for the loans varies, the uncertainty over the cut should dampen investor sentiment on the stock. In the residential property sub-sector, our Top Pick is now BSDE, replacing CTRA. BSDE is cheaply valued, at a 67% discount to NAV – which is slightly above -2SD from its 5-year mean. During 2H19, it was aggressive in launching products. It has a fresh strategy of launching unit fetching smaller ticket sizes (IDR800m-1.2bn), ie semi/fully furnished houses for first home buyers such as its successful Fleek Hauz and Imajihaus. This strategy seems to have worked, and 9M19 marketing sales accounted for 85% of its full-year target – even though 1H19 market sales were dismal due to the presidential election and Ramadhan. It already has a similar launch planned for Jan 2020 and, in our view, will launch more of such products going forward. We still have a BUY call on CTRA but will be waiting for significant progress in its fast-growing low-cost housing project in Maja.
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ISAT replaces TLKM due to its potential ability to outgrow its competitors – being the latest adopter of 4G, the company is set to enjoy continued strong data ARPU growth, outpacing TLKM. On the other hand, TLKM may face fiercer competition outside Java, which smaller operators are currently targeting. ISAT recorded stronger EBITDA growth in 9M19 vs other operators. All-in-all, we have BUY ratings on all Big-3 operator companies, including XL Axiata, as the sector is among the few defensive ones that may outperform the market’s earnings growth in 2020F, driven by continued strong growth in data traffic usage. We also included DMAS as a Top Pick, as it is a proxy to the industrial estates segment. FDI inflow should increase next year, especially with measures put in by the Government to improve its ranking in terms of ease of doing business, tax and non-tax incentives, and the awaited labour law reforms. Hyundai has already committed an investment of USD1.5bn through to 2030 – and will build its factory on land from DMAS. With a big principle investor in hand, the supply chain for this giant automaker should follow, in our view. Additionally, DMAS’ stellar FY19 and strong net cash position may translate to a generous dividend payout ratio next year. The company recorded a 210% dividend payout ratio in 2018. We are reiterating our OVERWEIGHT stance on media, on a positive turn of events with a collaboration between the two market leaders Media Nusantara Citra (MNCN) and SCMA (c.65% combined audience share) on joint content production as well as other potential cooperative activities still under discussion. The collaboration will result in healthier competition among the two FTA TV players, and possibly simultaneous rate card increases for FTA TV, which may revitalise the sector and trigger an upward rerating in the stocks. Our Top Pick is SCMA with a sector high ROE of 27%. The counter is currently trading at an attractive 15x P/E, slightly above -2SD of its 5-year mean. After its MSCI exclusion in November, selling pressure on the stock is relieved, and should rerate upwards on the potential rate card increase.
Figure 9: The JCI – key statistics Market Data 2018 2019F 2020F 2021F EBIT growth (%) 5.5 8.5 10.7 11.5 Based on companies under our Earning growth (%) 7.2 6.6 11.0 13.0 coverage – which accounted for 75% P/E (x) 18.3 17.1 15.4 13.7 JCI’s market cap – FY20F earnings are PEG (x) 3.1 8.4 1.1 1.3 likely to grow 11.0% YoY (FY19F: 6.6% EV/EBITDA (x) 7.3 6.7 6.3 5.7 YoY) P/BV (x) 3.7 3.3 3.0 2.7 JCI is trading at c.15x FY20F P/E and Div. yield (%) 2.7 2.6 2.8 3.1 3x FY20F P/BV, offering an attractive Net gearing (%) 9.8 8.0 4.5 0.8 17.6% ROAE ROAE (%) 17.8 17.5 17.6 18.0 JCI’s dividend yield is c.2.8% ROAA (%) 7.4 7.3 7.4 7.6 ROIC (%) 10.9 11.9 13.5 17.1
Note: Data as at 30 Dec 2019 Source: Bloomberg, RHB
Figure 10: The JCI’s 8-year P/E band
The JCI is trading close to its 8-year mean
Note: Data as at 30 Dec 2019 Source: Bloomberg, RHB
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In our calculation, the JCI is trading at 15x and 13x FY20-21F P/Es, which is lower than its average 15.8x rolling forward P/E. In P/BV terms, the JCI is trading at 2.9-2.7x FY20-21F, near its 10-year mean, and offers attractive FY20-21F ROEs of 17.7-18.2%. Meanwhile, dividend yields are estimated to increase to 2.8-3.1% in FY20-21F, slightly higher than FY19F (2.6%). In line with the expected slower economic growth, its blended earnings growth is likely to be slower in 2020. In our calculation, based on companies under our coverage – which represent 75% of the JCI’s market capitalisation – FY20F earnings are likely to grow 11% YoY vs FY19F’s +6.6% YoY. This is partly due to International Financial Reporting Standard (IFRS) adjustments, on top of being dragged down by the tobacco, mining, and banking sectors. Tobacco sector earnings were mainly pressured by higher excise tax rates and a drop in cigarette sales. Meanwhile, the mining sector is slowing down on weak fuel-based commodities affecting realised ASPs – which could trend down due to the prolonged trade war. The banking sector’s slowdown should be due to the expected deceleration in earnings growth next year, as the expectation of slower loan growth amidst the current macroeconomic backdrop will impact loan demand and liquidity levels. FY20F earnings growth is likely to be driven by banks, plantation, cement, infrastructure & construction, industrial estate, and healthcare. We believe banking and financing companies are likely to benefit from the downtrend in the benchmark interest rate, which should boost loan growth. The cement and infrastructure sectors should benefit from government programmes to accelerate infrastructure projects, which were slow in 2019 (being an election year). Meanwhile, industrial estates’ earnings growth are likely to be boosted by higher direct investment coming into the country, thanks to the upcoming omnibus laws – especially on labour and tax reforms. The Government is expected to simplify labour regulations and lower tax rates to make investment in Indonesia more attractive. Hospitals should benefit from the higher state budget allocation. Lastly, the telecommunications sector is also attractive, driven by higher ARPU.
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Figure 11: FY20 earnings estimates Part 1 Rating EBIT growth (YoY %) Sector UW N OW RHB Street Banks √ 12.4 13.9 Telco √ 32.5 16.2 Automotive √ 8.7 8.0 Tobacco √ (9.4) (5.7) Staples √ 9.0 7.6 Retail √ 9.8 13.9 Media √ 12.1 7.7 Poultry √ 2.9 19.8 Mining & Energy √ (11.6) (5.7) Plantation √ 221.4 112.3 Cement √ 19.2 29.4 Infra & Construction √ 13.3 14.0 Industrial Estate √ 20.1 42.6 Property √ 6.9 3.7 Transport & Logistics √ (6.1) N/A Healthcare √ 11.6 10.5
Source: Bloomberg, RHB
Figure 12: FY20 earnings estimates Part 2 Earnings growth (YoY %) P/E (x) Sector RHB Street RHB Street Banks 16.1 14.1 17.1 17.5 Telco 23.4 17.6 16.8 16.6 Automotive 10.1 6.7 11.7 12.2 Tobacco (7.3) (6.1) 15.5 15.9 Staples 9.0 9.3 20.4 31.5 Retail 13.2 15.8 19.6 20.4 Media 12.0 8.8 13.6 13.6 Poultry 3.1 21.4 26.6 24.4 Mining & Energy (10.2) (3.9) 10.0 8.7 Plantation 424.4 146.7 20.8 20.9 Cement 47.2 44.9 31.4 29.8 Infra & Construction 15.5 10.0 10.9 11.4 Industrial Estate 27.3 42.4 16.3 11.1 Property (2.0) 1.1 13.3 15.1 Transport & Logistics (5.7) 22.1 8.8 9.0 Healthcare 10.6 10.4 33.6 33.9
Note: Data as at 30 Dec 2019 Source: Bloomberg, RHB
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Sector Outlook
Bank: Liquidity is key; OVERWEIGHT We maintain OVERWEIGHT on banks as it remains the backbone of Indonesia’s equity market. However, we view the outlook for 2020 in banks is not entirely bullish due to decelerating loan growth outlook on lower GDP growth expectations and sluggish loan demand. However, the tight liquidity situation in 2020 may improve as we already see FDI coming into Indonesia. We expect Hyundai’s commitment to enter Indonesia with FDI of USD1.55bn until 2030 to help ease liquidity in the system – especially if its supply chain and other companies follow suit. We think FDI will continue to be a key liquidity determinant in the coming years. Another factor to watch is the implementation of IFRS 9, which will go live starting Jan 2020. More conservative banks with conservative LLC levels should outperform, following the example of Malaysian banks. We maintain our preference for the Big-4 banks, which have better liquidity than their small-mid cap peers.
Telco: Continued data monetisation; OVERWEIGHT Maintain OVERWEIGHT, with TLKM and ISAT as Top Picks. The telco sector has been one of the best-performing sectors as the industry has started to see more rationalised tariff competition post SIM registration. As c.80% of costs are fixed, operators are set to enjoy continued high data traffic volume growth, which could lead to higher ARPU, driven by improvement in 4G user penetration and network quality. This is in line with the continued aggressive capex plans across the operators. TLKM targets to spend c.IDR37trn in capex, or 26% of sales – which is still higher than this year’s estimated c.IDR34trn. EXCL and ISAT are also maintaining their high capex targets in 2020, mainly to expand 4G network coverage outside Java and improve existing network speeds. EXCL targets to spend IDR7.5trn in capex, vs 2019’s IDR7trn, while ISAT’s at IDR10trn, up c.10% YoY.
Automotive: Road likely still bumpy in 2020; NEUTRAL Stay NEUTRAL. Domestic 4-wheeler (4W) vehicle wholesales growth will likely turn positive in 2020, on aggressive BI rate cuts (implying lower financing costs). However, higher vehicle taxes and fees – such as provincial motor vehicle transfer fees, and the luxury tax on low- cost green cars (LCGC) – may cap sales growth. Furthermore, competition should remain intense. That said, there are more investments cementing future growth for 4W vehicle manufacturing. Indonesia targets EVs to account for 20% of 4W vehicle production by 2025.
Tobacco: Bad news priced in, attractive valuations; NEUTRAL Upgrade to NEUTRAL from Underweight, as stock valuations have become attractive, after the 42% plunge in share prices post the 16-26% 2020F excise tax hike announcement. We potentially see significant margin expansion, despite a potential sales volume drop. Our sensitivity analysis suggests that a +5% ASP hike with -5% volume decline translates into +17% and +32% of Hanjaya Mandala Sampoerna (HMSP) and Gudang Garam’s (GGRM) EPS. As such, we prefer GGRM on large increase in EPS, despite a potential drop in sales volume. On valuation, GGRM trades at -3.5SD below its 3-year mean P/E, which makes it more attractive than HMSP’s -2.6SD.
Staples: Lower margins, but still resilient; NEUTRAL Maintain NEUTRAL as margins could normalise on potentially higher raw material prices and possible weak demand stemming from higher living expenses due to subsidy cuts and a jump in the National Health Insurance (or BPJS) premiums and cigarette prices. Preferred picks are Mayora Indah (MYOR) and Nippon Indosari Corpindo (ROTI). Global economic slowdown triggered by the US-China trade war slowed down MYOR’s export sales in 2019 and pressured its share price (-22.5% YTD). On ROTI, new factories with larger market penetration should be the growth driver for 2020. We expected the slowdown in GDP growth, coupled with subsidy cuts, to dampen purchasing power. Our economist estimates Indonesia GDP to moderate to 4.9% vs 5% in 2019. Household consumption growth is projected to moderate, but stay resilient. The weakness seen in 3Q19, especially lower consumer confidence, is expected to rebound slightly as concerns over political uncertainties dissipate. In addition, government measures to prop up consumption, such as interest rate cuts and social support measures to the needy, should provide some upside potential.
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Retail: Stay selective against headwinds; NEUTRAL Maintain NEUTRAL on Indonesia retailers due to the challenging macroeconomic outlook, especially for the low-mid income segment, ie Ramayana Lestari (RALS) and Matahari Department Store (LPPF). Planned subsidy cuts in 2020, coupled with e-commerce disruption, may dampen sales growth. As at YTD-9M19, sector earnings declined by 6% YoY – mainly dragged by LPPF and Erajaya Swasembada (ERAA) on lower sales productivity. In contrast, retailers that target affluent segments such as Ace Hardware Indonesia (ACES) and Mitra Adiperkasa (MAPI) have been performing relatively well this year, with 9% YoY bottomline growth, despite aggressive store expansions. Hence, we maintain our preference for high-end retailers MAPI and Sumber Alfaria Trijaya (AMRT) on strong fee-based income growth.
Media: Healthier competition ahead; OVERWEIGHT Maintain OVERWEIGHT on the sector, with a newly-started positive collaboration between SCMA and MNCN regarding joint content production for the over-the-top platform and movies, as well as other collaborations being discussed – which include healthier competition in ad rates and standardised collectable days for ad agencies. The collaboration will align the interests of both companies – which should lead to a rerating on both counters. We believe, if the cooperation is smooth – especially in increasing advertising rates and joint content production done to minimise content costs – this should support topline growth for both companies and translate to wider margins and sturdier earnings growth starting FY20. That said, we note that regulatory and execution risks remain present.
Poultry: More dependency on culling; NEUTRAL Maintain NEUTRAL on sector, with Japfa Comfeed (JPFA) as our Top Pick. On the back of higher GPS import quota in 2018-2019, we have started to see some oversupply conditions in 2H19. As a result, there were culling mandates in 2H to cut 8-10% of total national oversupply. We view that slower macroeconomic growth may dampen chicken consumption growth – so we could continue to see the oversupply persisting in 2020. On the bright side, proactive government culling regulations may translate to stable sector profitability. JPFA trades at a c.50% discount to Charoen Pokphand Indonesia (CPIN), with a similar cost and balance sheet structure. We believe CPIN is overvalued, at this stage.
Plantation: Bullish on CPO price; OVERWEIGHT Maintain OVERWEIGHT. Our view is based on the expectation that the CPO price will continue to increase, on declining production output for FY20F YoY – which would be due to prolonged dryness in FY19, as well as the lack of fertiliser application in the past two years. Meanwhile, demand should remain strong from China, due to the continuing African swine flu epidemic, while Indonesia’s B30 mandate should mop up excess supply. As such, we believe plantation stocks will also likely rerate on this price movement. Historically, CPO prices are the leading indicator for plantation companies’ P/Es. We maintain our CPO price assumptions of MYR2,200 per tonne for 2019 and MYR2,400 for 2020.
Cement: On the right path; OVERWEIGHT Keep OVERWEIGHT; Top Pick: Semen Indonesia (SMGR). Industry competition is likely to ease on slower production capacity growth and higher cement demand, driven by an acceleration in infrastructure projects post-election year. The market price war is softening too, as new players – eg Anhui Conch Cement and Semen Merah Putih – have started following their bigger peers and gradually increased selling prices. Local industry leader SMGR (55% market share) believes it can still raise prices to widen EBIT margins.
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6 January 2020
Infrastructure & Construction: Heating cylinders for future growth; OVERWEIGHT OVERWEIGHT; pecking order: Jasa Marga (JSMR)>Waskita Karya (WSKT)>Wijaya Karya (WIKA)>Perumahan Persero (PTPP)>Adhi Karya (ADHI). We expect infrastructure activities to accelerate post-establishment of the new Cabinet, after the sector saw slow construction and new contracts in 2019. Infrastructure remains the focus of Jokowi’s second-term administration. The Government is working hard to create the right environment to attract investments, and has prioritised simplifying regulations to facilitate this. Limited financing is the main constraint, but the state budget and PPP should be able to ease the financing process. Also, lower benchmark interest rates should boost earnings.
Industrial estates: Ready for Industry 4.0; OVERWEIGHT OVERWEIGHT on sector, supported by positive momentum for FDI. We have yet to see the trade war impact on Indonesia, but we believe there will be a higher inflow of FDIs after Jokowi’s recent inauguration, as he had promised more reforms to attract foreign funds. Labour law reforms is a key catalyst, and this should translate to higher marketing sales for all industrial estate companies. Hyundai has already pledged USD1.55bn to build its factory in Indonesia, which will be located in a DMAS estate. In our view, its supply chain will soon follow suit – which should benefit industrial players.
Property: No more overhang; turnaround in marketing sales; OVERWEIGHT Maintain OVERWEIGHT. We remain upbeat on the sector, as it will benefit from lower interest rates and an accommodative monetary policy in FY20. However, there are concerns that decelerating global economic growth will impact the demand for real estate. Nevertheless, we expect the focus to shift more towards first-home buyers rather than investors, vs the situation 4-5 years ago. We believe that FY20 will be a better year for most developers as it is after an election year, when there was uncertainty for potential buyers. Most company representatives we spoke to believe that FY20 should be a better year, as they will launch more products YoY.
Transport & logistics: Up and above; OVERWEIGHT We continue to like Indonesian airlines, supported by stable elevated domestic passenger yield and normalising declines in passenger volumes. The Government’s plan to allow the private sector to enter the aviation business in Indonesia should also be positive for the industry, as fuel accounts 20% of costs. Hence, we should see continued subsidies for international routes. We have a BUY rating on Indonesia’s national carrier, GIAA – the stock is trading at 30% discount to the regional peer average. The near-term catalyst is the announcement of GIAA’s new captain in Jan 2020, while the downsides include IFRS 16 adjustment and potential impairments from Sriwijaya Air earnings. We are also positive on the taxi industry, as low utilisation rates and heavy competition against ride-hailing services have bottomed. This is supported by the price floor regulation set by the Government in mid-2019 to ensure an equal playing field between regular taxis and ride-hailing services. We have a BUY rating on Indonesia’s largest taxi company, Blue Bird (BIRD). The recent ASP hike for BIRD’s regular taxi tariff and the return of Jakarta- Bandung traffic for Cititrans should support earnings growth next year. We also expect the regular taxi utilisation rate to improve by 1ppt, on continued partnerships with digital e-wallet services and completion of its Internet of Things system in 1H20.
Healthcare: Safe and sound; OVERWEIGHT Post outperforming JCI by +32% YTD, we maintain our overweight call on the sector with selective stock pick: Hermina Medikaloka (HEAL). Our positive stance is supported by a healthier national health insurance (JKN) outlook (premiums increasing and potential reimbursement tariff hikes), continued operational improvement, and ample room for the industry to expand from the currently underpenetrated healthcare services segment. We view that an INA-CBG tariff adjustment of up to 5-8% should be in place in 1H20, but this would just affect selective cases that have relatively lower volume. In addition, given rising requirements in getting JKN licenses for new hospitals and the importance of economies of scale to embrace JKN, we believe that the industry may consolidate further.
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6 January 2020
Coal: Still at risk with no strong catalysts ahead; UNDERWEIGHT The sector’s outlook remains dim on further risks, from weakened benchmark prices due to gradually slowing demand and stricter investment compliance levels required for fossil fuel businesses. We expect demand to be more focused from the emerging southern/south-east regions, where rapid infrastructure development is ongoing. Catalysts for the shorter term now lean on the weather factor, ie severity of winter in the northern regions lifting demand and heavy rainfall in Indonesia limiting supply. Companies under our coverage have been seen ramping up their production limits with more cost efficiencies, in an effort to bolster ASPs.
Figure 13: Bank Indonesia’s benchmark rate (BI 7DRRR rate)
BI cut rates by 100bps in Jun-Oct 2019, by four times to 5.00% We think the prospect of further cuts are dependent only on worsening global conditions. Presently, a further reduction in the BI rate may not necessarily put the economy in a stronger position
Source: Badan Pusat Statistik, RHB
Figure 14: Indonesia’s GDP trend
3Q19 GDP grew by 5.02% YoY, from 5.05% in the previous quarter Weaker public spending post-election affected GDP growth in 3Q19, but was also exacerbated by the softening of private consumption and investment
Source: Badan Pusat Statistik, RHB
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6 January 2020
Figure 15: Indonesia’s current account deficit (CAD)
3Q19 CAD was at 2.8% of GDP (vs 3.3% in 3Q18). We believe the outlook should improve on the back of improved political stability Further efforts to promote exports through the B30 policy, while lowering imports following more moderate aggregate demand, should lead to an overall improvement in the trade balance – RHB economists have estimated the 2020 CAD at 2.7%
Source: Bloomberg, Bank Indonesia
Figure 16: Indonesia’s FX reserves
As at Nov 2019, FX reserves stood at USD127bn. This showed improvement as the IDR has also strengthened against the USD (+3.2% YTD)
Note: FX reserves as at Nov 2019 Source: Bloomberg, RHB
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6 January 2020
President Jokowi’s Focus In His Second Term For the next five years, President Jokowi is optimistic on pushing the nation out of the middle-income trap. He has emphasised on the national target, ie Indonesia is to achieve developed nation status by 2045, becoming the world’s fifth-largest country with GDP per capita of IDR320m (USD22,000), which translates to GDP of USD7trn. Jokowi said a series of innovations has to be carried out, focusing on knowledge and culture, and orientation to achieve results. Indonesia has benefited from a demographic bonus – the country has been blessed with a high proportion of the younger population. One of President Jokowi second-term administration’s main focus is to build superior human capital. In addition, the focus will continue to be on infrastructure development, supported by conducive political and economic ecosystems. To boost foreign and domestic direct investment, the Government is to simplify regulations by establishing omnibus laws. The Government’s focus over the next five years: i. Human capital: Developing a skilled workforce, and mastering science and information communication technology (ICT); ii. Infrastructure: Continuing development that connects production to distribution areas and easier access to tourism areas to create new jobs and accelerate economic growth; iii. Policy simplification: The Government will invite the Parliament to enforce two omnibus laws related to labour law and SME empowerment; iv. Bureaucracy simplification: A reform on the echelon classes, which will see simplification into two groups from four previously – replaced by functional positions that value expertise and competence; v. Economic transformation in manufacturing and services – which have higher added value – from a dependency on natural resources. We are positive that the Government’s next 5-year programmes should achieve their targets, supported by better workforce quality, social protection, and infrastructure developments. The development of massive infrastructure will continue, which should create a multiplier impact on industry and tourism development. Meanwhile, labour law simplification is likely to attract more foreign direct investments, and SME empowerment law should accelerate economic growth.
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6 January 2020
Stable Political Conditions An Economic Boost President Jokowi’s new Cabinet – themed Indonesia Maju – should ensure more political stability, which is the key factor to accelerate economic growth. The new Cabinet consists of 39 ministerial members (including spokespersons, secretaries, etc) – these, in turn, comprise 23 new faces and 16 members of the previous Cabinet. 49% of the Cabinet are professionals and 51% are from political parties – around 25% (five seats) from PDIP, 25% (five seats) from Golkar, 20% (four seats) from PKB, 20% (four seats) from Nasdem, and 10% (two seats) from Gerindra (which was an opposition party and is now a part of the ruling coalition). In just two months after its inauguration, the new Cabinet has made progress, eg introduced the omnibus laws and restructured the management teams of the SOEs. The new government is to submit the draft of the omnibus law – which is designed to simplify local/regional regulations, labour and tax reform – for Parliament to pass. This measure is to make investing in Indonesia more attractive. The SOE Ministry restructured the management teams and commissioners of GIAA, Perusahaan Listrik Negara (PLN), and Pertamina, and replaced them with abler candidates.
Figure 17: Cabinet seat allocations by political party
Source: Various, RHB
We believe stability is still a main objective in President Jokowi’s second term, being deemed as necessary for him to achieve the goals of his five focus programmes. This was made evident by his appointment of ex-military leaders, and former rival in the presidential election – Prabowo Subianto – as Defence Minister. This was to achieve political stability and reconciliation. His administration also appointed former military leader – Fachrul Razi – as the Minister of Religion to help tone down any potential radical and separatist issues. Edhy Prabowo, Gerindra vice chairman, has also been appointed as the Minister of Maritime Affairs & Fisheries. In our view, the president is clearly seeking Gerindra’s support for the 2019-2024 Cabinet. As seen in the 2020 State Budget, the biggest portion of allocations will go towards improving domestic stability. The national security budget (ie allocations to the Defence Ministry and police department) amounted to c.IDR236trn (+15.7% YoY).
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6 January 2020
Positive performances from new ministers The newly appointed ministers have shown positive performance in the two months since inauguration. Clean-up in SOEs. Some of the most observable actions were by newly appointed SOE Minister Erick Thohir, along with Vice Ministers Kartika Wirjoatmodjo and Budi Gunadi Sadikin. Within two months, the ministry has done a lot of cleaning up at the SOEs, including the overhaul in GIAA’s management team due to several cases of mismanagement. The ministry also plans to do further clean-up and streamlining of bureaucratic processes in the likes of Pertamina, Krakatau Steel, and Jiwasraya, among others. Towards better human resources through better planned education. We are also positive on efforts by the Education & Culture Ministry, with Nadiem Makarim, Go-Jek founder and former CEO, as the minister. The ministry has eliminated the national examination, which was viewed as inefficient and a large source of stress to students. It is proposing a more comprehensive competence assessment test, with the aim of developing human resources with higher competencies and critical thinking skills.
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6 January 2020
2020 State Budget Expenditure Comes At a Great Price 2020 will mark the first year of the 5-year National Medium-Term Development Plan 2020-2024. State Budget 2020’s allocations are focused on human capital development, social protection, and infrastructure development, although the Defence Ministry received the largest budget increments: +19.7% YoY or IDR21trn. This could be needed, as President Jokowi plans to roll out non-populist labour reform regulations. A 14% tax revenue growth target might be too aggressive. As at Aug 2019, Indonesia has only realised 56% of FY19’s tax revenue target with just 8% YoY growth expected. This could lead to a c.4% tax revenue shortfall, which should translate into a 2020 18% revenue growth target that might not be easy to attain. However, there is still room for the current account deficit (CAD) to widen from the current 2020 target of 1.7%, providing a bit of space for some expenditure realisation. Energy subsidy cuts to disadvantage the rising middle-income class. As the Government has become more selective in providing subsidies to the lowest income segment, the purchasing power of the rising middle income group could weaken. 3kg LPG tanks and 900VA electricity subsidies will be restricted to poor households. There is a potential increase in subsidised fuel prices too. The Government formulated State Budget 2020 with the theme The Acceleration of Competitiveness through Innovation and Strengthening the Quality of Human Resources. This also marked the beginning of the second period for President Jokowi and newly elected Vice President Professor Dr KH Ma’ruf Amin. Revenue is budgeted to grow 10% YoY to IDR2,223trn, driven by higher 14% tax revenue. In our view, this is a very aggressive target, given a revenue growth target of just 8% in 2019. Consequently, we are likely to see a shortfall of close to 4% – the Aug 2019 realisation is only at 56%. This could pose a realisation risk for expenditure. However, the Government only forecasts a CAD of 1.7% of GDP. In the past, it had spent CAD at 2.5% within a stable IDR environment. We think there is still room to maintain budgeted expenditures, in case tax revenue achievements are below their targets. On the flip side, expenditure allocated has increased to IDR2,540trn (+8% YoY), driven by higher central government expenditure – this is budgeted to increase to IDR1,684trn (+10% YoY). Meanwhile, rural transfer is allocated to increase to IDR857trn (+4% YoY).
Figure 18: 2020 State Budget (APBN) APBN APBN growth (IDRtrn) 2020 (% YoY) (∆ IDRtrn) Revenue 2,233 10% 211 Tax 1,866 14% 223 Excluding excise tax 1,643 14% 205 Non-tax 367 (3%) (11) Grant 0.5 14% 0 Expenditure 2,540 8% 186 Central government 1,684 10% 156 Rural transfer 857 4% 30 Primary balance (12) (40%) 8 Budget deficit (307) 5% (14) % to GDP (1.76) State financing 307 4% 11
Note: 2020 State Budget Source: Ministry of Finance, Badan Pusat Statistik, RHB
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6 January 2020
Figure 19: APBN breakdown – 2018 and 2019 APBN Realisation APBN APBN Realisation Realisation (%) APBN Realisation (IDRtrn) growth (%) growth 2018 Aug-18 2018FY Aug-18 2018FY (% YoY) 2019 Aug-19 Aug-19 (% YoY) Revenue 1,942 1,153 1,895 59% 98% 14% 2,022 1,189 59% 7% Tax 1,521 908 1,618 60% 106% 21% 1,643 920 56% 2% Excluding excise tax 1,316 - - - - 1,438 - - - Non-tax 407 240 275 59% 68% (11%) 378 268 71% 37% Grant 13.9 5 1.2 36% 9% 57% 0.4 1.0 218% (63%) Expenditure 2,202 1,303 2,221 59% 101% 11% 2,354 1,388 59% 6% Central government 1,444 802 1,454 56% 101% 15% 1,527 858 56% 5% Rural transfer 758 501 766 66% 101% 3% 827 531 64% 8% Primary balance (2) 12 (87) (651%) 4846% (32%) (20) (27) 132% (77%) Budget deficit (260) (151) (326) 58% 125% (6%) (293) (199) 68% (10%) % to GDP (1.8) (1.0) (2.2) 58% (1.8) (1.2) State financing 300 267 326 89% 109% (11%) 296 280 95% (9%)
Source: Ministry of Finance, RHB
Figure 20: APBN’s CAD
The Government only forecasts CAD at 1.7% of GDP In the past, the Government had a CAD of 2.5% within a stable IDR environment Therefore, we believe there is still room to maintain expenditure by enlarging the CAD, in case the tax revenue achievement comes in lower than targeted
Source: Ministry of Finance, RHB
The first priority included in the themed programme emphasises the quality enhancement of national human resources – it has to be compatible with the current dynamics on information and communications technology. For this reason, the education and health sectors are targeted to help fulfil this priority. The 2020 APBN has set aside funds amounting to IDR508.1trn, mostly allocated for student grants and research. The workforce quality is inseparable with the focus on the healthcare factor – 2020 APBN has allocated IDR132.2trn for this purpose. The second priority – the acceleration of infrastructure developments – paves the way for the transformation of a new industrial and cultural stage. The budget prepared for this amounted to IDR423.3trn. One of the newest priorities – starting in 2020 – is the Mandalika Circuit (slated for the 2021 MotoGP season) and preparation for 2020 National Sports Week. The third priority is the decentralisation of each autonomy and region. This is with regards to being more independent in terms of allocating the budget for their specific needs, so that the improvement of public services can be more efficiently realised. Included in the 2020 APBN, the budget for this has been set at IDR856.9trn. The fourth priority is a comprehensive social protection network, concentrating on the needs of low-income communities. The budget for social planning assistances for the 2020 APBN stood at IDR372.5trn.
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6 January 2020
The fifth priority is reforming government bureaucracy, which is needed to increase the integrity of the civil service by applying higher monthly wages and other bonuses with tidier institutional arrangements and supervisory reforms. Based on RAPBN 2020 figures, the amount for this priority segment is set at IDR261.3trn. Figure 21: 2020 APBN allocations in detail Objectives Distributions Information Fund Allocation IDRtrn IDRtrn Educational 508.1 School operations 63.0 54.6m students - 271,000 high schools KIP (Student cash 11.2 20.1m students (elementary - high school) disbursement) Classroom renovations 7.8 15,100 classrooms - 2,677 schools KIP college 6.7 818,100 students PAUD (Early Childhood 4.5 7.4m children Education) College-building renovations 4.4 87 college Others 410.5 - DPPN (National Education Grants for c.17,333 students - 104 research Student financing 29.0 Development Fund) 18.0 Research fund 5.0 Research implementation for national economy Cultural fund 1.0 Site and art rehabilitation College fund 5.0 Workforce quality enhancements Vocational training 10.0 Various training institutions 10.0 To target 2m early employment age JKN-KIS (National Health 132.2 c.97m members Healthcare Insurance) 48.8 Others 83.4 - Social planning Kartu Sembako (Staples 15.6m low-income families assistances 372.5 Subsidy) 28.1 PKH (National Family 10.0m low-income families Program) 29.7 Fertilizer subsidy 26.6 16.2m farmers Village fund 72.0 74,954 villages Housing down-payment 4.5 827,000 families Community development 15.1 Funding for ultra micro-micro enterprises Others 196.5 - Infrastructure 423.3 3.5 PT HK - Pekanbaru-Dumai & Terbanggi Besar-Kayu Agung toll roads 5.0 PT PLN - 100% national electrification PT SMF - Low-cost houses (102,500 units) and disaster relief (17,000 Acceleration for developments 2.5 units) 10.5 BLU LMAN - Land acquisition for 19 national projects 9.0 PPDPP - Mortgage for low-income families Others 392.8 - 187.6 Subsidy Non-energy 62.3 Implemented for fertiliser subsidies and public services Energy 125.3 Subsidy for diesel fuel and household gas, and electricity in certain tariffs Rural transfer 856.9 DAK Fisik 72.2 Equalising the access for public services DBH 117.6 50% of tobacco excise to be channelled for JKN-KIS program DID 15.0 Intensifying regional incentives fund To enhance the supervision for fund distribution inside special autonomies OTSUS & DAIS DIY 22.7 and areas Village fund 72.0 Average per village: IDR960.6mn DAK Non-Fisik 130.3 Increasing the workforce skill DAU 427.7 Strengthen the 25% allocation of infrastructure spending
Source: Ministry of Finance, RHB
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Figure 22: A comparison of APBN subsidies
Energy subsidy allocation to decline to IDR188trn in 2020 (from IDR212trn in 2019) This may lead to higher subsidised fuel and subsidised 3kg LPG tank prices In addition, the subsidised electricity tariff – especially in the 900KVA category that targets the medium-low segment – is likely to increase
Source: Ministry of Finance, RHB
Figure 23: Macro-economic assumptions for the 2020 APBN
2020 macro assumptions Metrics Metrics APBN GPD growth % 5.3 Inflation % 3.1 Exchange rate USD/IDR 14,400 Benchmark rate % 5.4 Oil price (USD/bbl) 63 Lifting oil ('000 bbl/day) 755 Lifting gas ('000 bbl/day) 1,191
Development targets Metrics Metrics APBN Unemployment % 4.8 - 5.0 Poverty % 8.5 - 9.0 Gini Ratio pts 0.375 - 0.380 Human Development Index pts 72.51
Source: Ministry of Finance, RHB
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6 January 2020
Simplified Regulations To Boost FDI Growth The Government will propose omnibus laws to simplify regulations, especially those related to local regulations and labour reform. It will also reform tax regulations – income tax rate reduction, dividend tax abolishment – so that Indonesia becomes more competitive, to attract investors. We believe that FDI is likely to be one of main growth drivers of GDP in 2020. President Jokowi revealed that the Government will propose omnibus laws to simplify local regulations. Currently, the processes to obtain local licenses and establish businesses are not the same across the country. In some regions, the process takes longer. By having more simplified regulations, the process is expected to be expedited. According to Finance Minister Sri Mulyani, the Government is still finalising the draft on the omnibus law, before it is submitted to Parliament for approval. The proposed omnibus law is meant to not only solve labour problems, but also simplify 11 interrelated issues, ie economic zones, research & development, and others that should later be in one system. Labour wages may be changed to a productivity-based wage system, from the minimum wage-based system. This is to create jobs and an even more effective employment environment. Proposed omnibus laws on tax reform: i. Corporate income tax reduction from 25% to 20% gradually. In 2021, it will be reduced to 22%, then 20% in 2023. For companies listed on the IDX, a 3% further reduction in income tax will be added; ii. Income tax for dividend abolishment; iii. Adjustment for income tax on interest income; iv. Territorial tax (a), where the taxpayer whose income is from abroad in the form of dividends or other business result is not taxable when the income or the business results are invested in Indonesia; v. Territorial tax (b) – Indonesian citizen (individual taxpayer) who has been abroad for more than 183 days will be regarded as a foreign tax subject. Meanwhile, foreigners who work in Indonesia will only be subjected to tax for income sourced from the Indonesia business; vi. VAT credit, taxable entrepreneurs can obtain credit VAT for goods and services which they have received/purchased from non-taxable entrepreneurs at a maximum of 80% of VAT; vii. Tax penalties and interest reduction where the penalty will be same as market interest rate (previously 2% per month); viii. E-commerce tax, where digital companies which operate in Indonesia are obliged to collect and pay taxes. By mid-Dec 2019, the Government has finalised and submitted the tax reform proposal to the Parliament. As such, it could be discussed for parliamentary approval in early 2020.
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6 January 2020
Economic Outlook Mounting challenges for growth Household consumption growth is projected to moderate but stay resilient. The weakness seen in 3Q19 – especially in terms of decreased consumer confidence – is expected to rebound slightly, as concerns over political uncertainties dissipate. In addition, government measures to prop up consumption – eg interest rate cuts and social support measures to the needy – should provide some upside potential. Investments, however, are projected to pick up on higher capital spending allocations in Budget 2020, which will be channelled towards infrastructure projects. In addition, reduction in political uncertainties and attractive tax packages are likely to entice private investments. Exports are likely to stay sluggish in 2020 amid a challenging global economic environment. While there is support from higher palm oil prices, other major commodity exports are expected to be hampered by weak demand and global prices. Several measures by the Government to improve exports should also provide some mitigation. Current account deficit likely to improve next year, mainly on a better trade surplus. Support would likely come from measures such as fuel subsidy revisions, implementation of the B30 biodiesel programme, focus on exports of value-added commodities, as well as the opening up of new markets. We think BI will likely cut rates in 2020 in view of a further weakness in growth, while inflation remains manageable. For 2019, we believe the central bank is done with its policy easing. We envisage the IDR to appreciate slightly, mainly on weakness in the USD.
Domestic demand to hold steady 3Q19 GDP saw a boost in growth from net exports – this was due to a faster fall in imports and efforts to boost exports. On the domestic side, both household and government consumption slowed, partly due to the lack of impetus from election spending – the polls ended in 2Q19. Moreover, the domestic-oriented economic engine has been further disrupted by public protests prior to President Jokowi’s inauguration for his second term in office. As a result, Indonesia recorded GDP growth of 5% YoY in 3Q19, similar to 2Q19. However, a deeper examination of data showed the disparity in growth towards higher net export contributions, while domestic demand continued to weaken. For 2020, we expect both private and public consumption growth to moderate. This is likely to be eased by rounds of rate cuts by the central bank and an improvement in consumer confidence. For investment, the Government’s tax incentives and re-acceleration of infrastructure development should lead to a rise in contribution from this segment, in our view. On the other hand, global uncertainties are likely to remain prolonged, affecting external trade, but this should be partially mitigated by domestic measures to boost exports. On balance, we expect real GDP growth to moderate to 4.9% in 2020 after easing to an estimated 5.0% in 2019. We maintain a slightly pessimistic outlook on growth – although a possible upside is on the horizon if trade recovers and business confidence returns stronger.
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6 January 2020
Figure 24: GDP by expenditure components (% YoY, at constant 2015 prices)
2017 2018 2019 2017 2018 2019E 2020F 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q GDP 5.0 5.1 5.2 5.1 5.3 5.2 5.2 5.1 5.0 5.0 5.1 5.2 5.0 4.9 Consumption 4.1 4.7 4.8 4.8 5.2 5.2 5.1 5.3 5.7 4.6 4.6 5.1 5.0 4.8 Household 5.0 4.9 5.0 4.9 5.2 5.0 5.1 5.0 5.2 5.0 4.9 5.0 5.0 4.9 Government -1.9 3.5 3.8 2.7 5.2 6.3 4.6 5.2 8.3 1.0 2.1 4.7 4.4 4.0 Gross fixed capital formation 5.3 7.1 7.3 7.9 5.9 7.0 6.0 5.0 5.0 4.2 6.1 6.7 4.6 4.8 Domestic demand 5.6 5.9 5.4 5.8 5.4 5.2 5.5 4.4 5.6 5.9 5.1 5.6 4.8 4.8 Export of goods & services 2.7 16.5 8.4 5.9 7.6 8.1 4.3 -1.9 -2.0 0.0 9.1 6.5 -1.5 -0.5 Import of goods & services 0.2 15.4 11.9 12.6 15.2 14.0 7.1 -7.4 -6.8 -8.6 8.1 12.2 -6.9 -1.5
Note: F = forecast, E = estimate Source : BPS, RHB
Softer but resilient consumption growth Domestic demand is set to hold steady next year, in our view, primarily due to a slight rebound in investment growth as consumption moderates. Government efforts to re- accelerate infrastructure development should also add to public investment. These, however, will likely be weighed down by softer private and public consumption during the year. Nonetheless, consumption growth is expected to remain resilient. As such, we expect domestic demand to register a stronger growth of 4.9% in 2020 after slowing to an estimated 4.4% for 2019. Last year’s growth is likely to be affected by the Government’s deliberate move to limit infrastructure projects, which lowers the import of capital goods to keep the current account deficit in check. Growth in household consumption is expected to moderate to 4.9% in 2020 from +5% estimated for this year. The weakness seen in 3Q19, especially in the form of lower consumer confidence, is expected to rebound slightly as concerns over domestic political uncertainties dissipate. Meanwhile, the effects of commodity prices on income are expected to remain varied, as palm oil prices are set to rise but coal prices may see further downward pressure. On the positive side, government measures to prop up consumption, such as interest rate cuts and social support measures to the needy, should provide some lower limit. Given these factors, we expect the momentum in private consumption to lean slightly on the softer side, especially for the rest of the year and into 2020. Figure 25: 3Q19 GDP supported by net exports as domestic Figure 26: Consumer confidence did not pick up after the demand falters election
Source: BPS, RHB Source: BI, RHB
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6 January 2020
Figure 27: Purchases of big ticket items failed to pick up Figure 28: Loan growth softened as demand dried up after the election
Source: BPS, RHB Source: BI, RHB
For Government consumption, growth is expected to moderate to 4% in 2020, judging from the weaker growth in budget expenditure for next year. Comparatively, government consumption growth this year is set to be higher at 4.4%, amid significant spending done in 1H19 following the election. However, we already see some softening in government spending in 3Q19. So far, Oct 2019’s budget expenditure realisation shows an increase of 8% YoY, with annual allocations reaching 94.5%, from a rise in spending on social support that has increased 32.7% YoY. Social support spending was channelled towards: i. Disbursement of the Family Hope Programme (Program Keluarga Harapan), which has reached 100% of the ceiling; ii. Distribution of the health insurance programme (Jaringan Kesehatan Nasional), which has reached 99.7%; iii. Realisation of food aid, which has reached 76.8%, However, capital spending has contracted 6.1% YoY, with annual allocations only reaching 53.2% so far. The slowdown was partly due to the still-unresolved land compensation issues related to the housing and transport sectors, as well as security disturbances in Papua Province. For 2020, we expect growth in gross fixed capital formation (GFCF) to improve to 4.8% from an expected 4.6% in 2019. On the public investment side, we believe support will come from higher capital spending allocations at 8% YoY in 2020 (2019: -5.9%). These will be channelled towards infrastructure projects including: i. Improving connectivity through projects such as the Trans-Sumatra Highway, construction of three airports, 239km of railroads, and satellite launch for the Palapa Ring internet network (estimated in 2022); ii. Capacity improvement, including building of irrigation channels, 49 dams, as well as improving access to clean water and sanitation; iii. Providing housing for low-income communities (up to 7,000 units). Meanwhile, reduced political uncertainty and attractive investment packages are likely to entice private investment, in our opinion. Tax incentives available next year: i. Super deductible tax – tax reduction of up to 100% given to industries involved in vocational education programmes or in research & development activities; ii. Investment allowance – tax reduction of up to 100% for investments above IDR500bn in labour-intensive industries; iii. Mini tax holiday – tax reduction of up to 50% for investments under IDR500bn and above IDR100bn.
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On the downside, the still-uncertain global outlook is likely to keep business investment on a cautious path. We think GFCF has the potential to grow more rapidly, although it is unlikely that we will see the level of investments was experienced in 2018, in our view. Figure 29: Investment growth moderated further in 3Q19 Figure 30: Value of investments rose further in 3Q19, but was concentrated mainly in the tertiary sectors
Source: BPS, RHB Source: Indonesia Investment Coordinating Board, RHB
Exports to recover slightly Indonesia’s nominal exports are likely increase 5% YoY in 2020 from a contraction of 7.9% expected for 2019. Real exports are expected to stay sluggish at -0.5% (2019: -1.5%). Growth should primarily depend on the demand and prices of commodities. So far, the price outlook for palm oil is turning positive and is expected to continue into 2020. This is due to strong demand from China, following the shift in buyers’ preference towards palm oil instead of soybean oil. As it stands, the CPO price rose in Nov 2019, reaching over MYR2,600 per tonne. This has led to a positive YoY for the commodity’s price and export growth. Meanwhile, we see a gloomy outlook for coal prices for the rest of the year, as well as for the whole of 2020. Global coal demand is falling, as cheaper natural gas drives coal-to-gas switching in the US and Europe. In addition, decelerating economic growth in China has kept demand flat. For other commodities, Indonesia saw some support on nickel exports – this was due to the Government’s decision to push its export ban on the product starting Jan 2020 – instead of 2022 – to promote faster domestic downstream activities. As a result, nickel exports surged before the restrictions took place. The Government is also weighing on its intention to follow the same ban for other minerals such as bauxite, alumina, and copper concentrate, which we believe will likely push exports of said products via rush purchases but be negative for exports in the long run. Additional support to exports should also come in the form of better access to markets. So far, the ratification of free trade agreements with Chile and Australia should be positive for export growth. In addition, prospects for a ratification of the Regional Comprehensive Economic Partnership next year should be an added impetus.
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6 January 2020
Figure 31: Trade was in a contraction Figure 32: CPO prices recovered, but coal and crude oil prices faced continued pressure
Source: BPS, RHB Source: BPS, RHB
Figure 33: Exports performance remained mixed Figure 34: Exports to China increased, potentially due to rush purchases of commodities before export restrictions take effect
Source: BPS, RHB Source: BPS, RHB
Sectors to see a mixed performance Growth in the manufacturing sector is set to moderate, but be at a resilient 3.6% in 2020 (2019 estimate: 3.8%). This is attributed to robust growth in selected domestic- oriented segments, which are resilient against the impact of sluggish trade activity in sectors such as food & beverages (F&B) and textiles. So far in 3Q19, manufacturing growth was recorded at 4.1% YoY vs 3.5% in 2Q19. The F&B sub-sector, in particular, showed strong and robust growth. Manufacturing growth was also aided by the paper & printing and textile industries. Conversely, the refinery, rubber products, non-metallic quarrying, electrical & electronics, and transport equipment subsectors remained weak, partly due to sluggish export demand. Going forward, the outlook for manufacturing remains modest. The Markit Manufacturing PMI reading dropped to 47.7, pointing towards a contraction in manufacturing activity. The latest reading points to the steepest contraction in the manufacturing sector since Nov 2015, with new orders falling for the third straight month and at its fastest pace since late 2015. In addition, export sales dropped further amidst weakening global demand, while employment contracted amid renewed signs of spare capacity. In the construction sector, contribution from public infrastructure-related projects is expected to increase next year, following a higher budget allocation for infrastructure and the Government’s plan to accelerate the development of priority projects. On the other hand, the residential and commercial property markets have remained soft, with prices growing at rates of below 2% and 0%, which may provide limited support for property-related construction activity. However, the sector could find some support from looser lending rules to improve credit growth.
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6 January 2020
As a result, we expect construction growth to improve to 6% in 2020 after moderating to an estimated 5.7% in 2019. Figure 35: Markit Manufacturing PMI points towards Figure 36: Growth in residential house prices stabilising contraction in activity
Source: CEIC, RHB Source: CEIC, RHB
The agriculture sector’s value-add is projected to grow at a faster 4.2% in 2020 after an estimated stable growth of 3.9% in 2019. Support will likely come from higher palm oil prices, in our view, which may add to the value of production – although production volumes are expected be flat due to dry weather and low fertiliser application. In addition, strong growth in other components, particularly livestock and horticulture, should further add to the sector’s growth. Meanwhile, the mining industry’s performance is expected to remain weak, with growth projected at 1.3% in 2020, down from 1.5% in 2019. For crude oil, we expect prices to remain stable, but production is expected to rise to 754,000bpd, higher than the estimated 734,000bpd in 2019. This should add to the growth of the segment. Meanwhile, the Government expects natural gas production to decline to 1,072mboepd from 2019’s 1,191mboepd, with the price outlook remaining soft amid a global oversupply scenario. Coal, on the other hand, saw a weak price trend. Despite strong production expected in Indonesia, we think this subsector’s contribution is expected to be limited. Growth for the tertiary industry is expected to pick up to 6.2% this year after growing at a projected 5.8% in 2019. For 2020, tourism-related sectors are likely to see a boost as the new-growth industry. This is following the Government’s efforts to expedite the development of tourism infrastructure as a new source of FX earnings and to counterbalance the current account deficit. A rise in tourism should provide support for the accommodation and air transport sectors. Further support will also come from improvement of connectivity, including the completion of highways, ports, and railway lines. On the other hand, continued weaker business sentiment for next year could overshadow much of the developments in other services sectors. Continued decline in exports may affect the wholesale, shipping, and storage segments, while low interest rates could affect financial sector growth. Low domestic demand may also affect the growth of the retail and F&B industries.
Fiscal deficit may increase this year For FY19, the Government announced that the fiscal deficit is likely to widen to c.2-2.2% of GDP when compared to an earlier estimate of 1.93% amid lower revenue collection. Based on Oct 2019’s budget realisation, tax revenues are seen to be falling behind. This is particularly due to the value-added and luxury goods tax components, which contracted 4.2% YoY, with collection only reaching 59.2% of the projected budget. Much of this was due to the refund of overpaid taxes at the beginning of 2019 and lower retail spending amid slowing economic growth.
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6 January 2020
Figure 37: GDP by industrial origin (% YoY, at constant 2015 prices) 2017 2018 2019 2017 2018 2019E 2020F 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q GDP 5.0 5.1 5.2 5.1 5.3 5.2 5.2 5.1 5.0 5.0 5.1 5.2 5.0 4.9 Agriculture, forestry & fisheries 3.3 2.8 2.4 3.3 4.7 3.7 3.9 1.8 5.3 3.1 3.8 3.9 3.9 4.2 Mining & quarrying 2.1 1.8 0.0 1.1 2.6 2.7 2.2 2.3 -0.7 1.9 0.7 2.2 1.5 1.3 Manufacturing industries 3.5 4.9 4.5 4.6 3.9 4.4 4.2 3.9 3.5 4.1 4.3 4.3 3.8 3.6 Electricity & gas -2.5 4.9 2.3 3.3 7.6 5.6 5.5 4.1 2.2 3.7 1.5 5.5 3.3 3.5 Water supply & waste recycling 3.7 4.8 5.5 3.6 3.9 6.2 7.9 9.0 8.3 4.7 4.6 5.4 6.5 5.5 Construction 7.0 7.0 7.2 7.4 5.7 5.8 5.6 5.9 5.7 5.6 6.8 6.1 5.7 6.0 Trade & repair 3.5 5.2 4.5 5.0 5.2 5.3 4.4 5.3 4.6 4.7 4.4 5.0 4.8 4.9 Transport & storage 8.8 8.9 8.2 8.6 8.7 5.6 5.3 5.3 5.8 6.6 8.5 7.1 5.9 6.5 Accommodation, F&B 5.6 5.5 5.1 5.2 5.6 5.9 5.9 5.9 5.5 5.4 5.5 5.6 5.7 5.5 Information & communication 11.1 8.8 8.3 7.8 5.1 8.1 7.2 9.1 9.6 9.1 9.8 7.4 9.3 9.0 Financial & insurance activity 5.9 6.1 3.8 4.2 3.1 3.1 6.3 7.3 4.5 6.2 5.5 4.2 5.9 5.0 Real estate 3.7 3.6 3.7 3.2 3.1 3.8 4.2 5.5 5.7 6.0 3.7 3.6 5.6 4.8 Business services 8.2 9.4 9.2 8.0 8.9 8.7 8.9 10.4 9.9 10.2 4.9 8.6 10.2 9.3
Note: F = forecast, E = estimate Source: BPS, RHB
For 2020, the Government still expects an improvement in the fiscal deficit to 1.76% of GDP. However, with a revision of the 2019 revenue collection, the projection looks optimistic. This is because the revenue projection in the proposed 2020 Budget could face downward revisions, especially since the economy will likely continue to moderate further. Figure 38: Government budget and realisation (IDRtrn) Oct-19 2019 2020 2020F 2017 2018 realisation Outlook APBN RHB (value, IDRtrn) Revenue 1,666 1,944 1,509 2,165 2,233 2,120 Expenditure 2,007 2,213 1,798 2,461 2,540 2,450 Central government 1,265 1,455 1,121 1,634 1,684 1,632 Transfer to regions 682 698 677 827 857 818 Overall Balance -341 -269 -289 -311 -307 -330 % of GDP -250 -1.83 -1.8 -2.0* -1.76 -1.9 Government financing 367 306 373 311 307 330
Note: *Expectations following the Government’s announcement Note 2: F = forecast, E = estimate Note 3: APBN = Anggaran Pendapatan dan Belanja Negara (Indonesia Government State Budget) Source: Ministry of Finance, RHB
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6 January 2020
Weak demand for credit Growth in Indonesia’s money supply (M2) averaged 6.8% YoY in Jan-Sep 2019, which is almost stable when compared to a growth of 7% in the same period in 2018. By contrast, during the same timeframes, narrow money (M1) supply growth moderated to 5.5% YoY from 9.8% previously. For M2, the slight moderation in growth was the result of net domestic demand moderating slightly, but mitigated by the recovery in net foreign assets. The latter is itself a reflection of a smaller trade deficit, which improved especially in 3Q19. Overall, we expect the indicator to remain flattish at 8% for 2019 and this year. Meanwhile, loan growth moderated throughout much of 2019. Various measures have been implemented by Bank Indonesia (BI) to support credit growth, including lowering the reserve requirement, easing restrictions on property and auto loans, and expanding the scope of banks’ sources of funds. Nevertheless, demand for credit has remained muted, especially on commercial loans, as business sentiment is affected by domestic and global uncertainties. We believe loan growth will continue to see downward pressure as long as sentiment is weak. An improvement in the domestic political scene post President Jokowi’s inauguration, as well as a solid resolution to the US-China trade war, may bring back business confidence and desire for credit. We project demand for private credit at 8% for 2020 from 10% in 2019. Figure 39: Loan growth trending down while money supply Figure 40: Rise in net foreign assets offset by moderation stabilising in net domestic assets
Source: BI, RHB Source: BI, RHB
Current account deficit to recover further The improvement in the 3Q19 balance of payments current account deficit reflects the Government’s successful measures in reining in the high trade deficit. The current account deficit during this period was at 2.8% of GDP, a tad below 2.9% in the earlier quarter but far better than 3.6% recorded in 4Q18. For 2019, we expect the current account deficit to register at 2.7% of GDP. Meanwhile, the outlook for the current account position in 2020 is projected to improve due to continued improvements in exports as well as a reduction in imports. Measures to promote export growth – such as prioritising processed and value-added commodities, as well as opening up new markets through the free trade agreements – should provide some support. On imports, the move to revise the fuel price subsidy mechanism and implementation of the B30 biodiesel programme should effectively lower import demand for mineral fuel. Moderating consumption growth may also further reduce import demand. Overall, we expect the current account to record a smaller deficit of 2.5% of GDP for 2020. Meanwhile, the balance of payments is expected to record a positive net inflow in 2019 and this year – in tandem with the expected improvement in the current account deficit, together with continued capital inflows in the financial account. The net inflow is likely to contribute to a build-up in the country’s FX reserves next year. We project Indonesia’s FX reserves to improve to USD130bn as at end-2020 from USD128bn as at end-2019.
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6 January 2020
Figure 41: Balance of payments (USDbn) Components 2018 2019 2017 2018 2019E 2020F (USDbn) 3Q 4Q 1Q 2Q 3Q I. Current account -8.5 -9.2 -6.7 -8.2 -7.7 -17.5 -31.1 -29.8 -29.2 (% of GDP) -3.2 -3.6 -2.5 -2.9 -2.8 -1.7 -3.0 -2.7 -2.5 A. Goods (net) -0.5 -2.6 1.2 0.5 1.3 18.8 -0.4 1.2 2.8 B. Services (net) -1.8 -1.6 -1.6 -1.9 -2.3 -7.8 -7.1 -7.2 -7.1 C. Primary income (net) -8.0 -7.0 -8.1 -8.7 -8.4 -33.0 -30.4 -30.8 -32.0 D. Secondary income (net) 1.8 2.0 1.8 2.0 1.8 4.5 6.9 7.0 7.1 II. Capital & financial accounts 4.0 15.6 10.1 6.5 7.6 29.5 25.2 32.5 32.5 A. Capital account 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 B. Financial account 4.0 15.6 10.1 6.5 7.6 29.5 25.1 32.5 32.5 Direct investment (net) .5 1.6 5.8 5.4 4.8 19.3 13.8 21.0 20.8 Portfolio investment (net) -0. 10.5 5.2 4.6 4.8 20.9 9.3 15.5 16.8 Other investment (net) -0 -0. -6.0 -2.3 -2.4 -12.9 -6.2 -8.4 -8.2 III Total (I+II) -4.5 6.4 3.3 1.7 0.0 12.0 -5.9 2.7 3.3 IV. Net errors and omissions 01 -1.0 -0.9 -0.3 0.0 -0.4 -1.3 0.0 0.0 V. Balance of Payments -4.4 5.4 2.4 2.0 0.0 11.6 -7.1 2.7 3.3 Reserves position (EoP) 114.8 120.7 124.5 123.8 124.3 130.2 120.6 128.0 130.0
Note: F – forecast, E - Estimate Source: Ministry of Finance, RHB
Figure 42: Net foreign portfolio flows recorded a small net Figure 43: IDR hovers above the 14,000 mark while outflow in October reserves are at USD127bn
Source : Bloomberg, RHB Source : BI, RHB
Fuel subsidy revision could be staggered Indonesia’s headline inflation averaged at about 3.1% YoY in Jan-Oct 2019, while core inflation was at c.3.2% over the same period. It was 3.2% and 2.8% in the corresponding period of 2018. Headline inflation has started to soften, as the temporary impact from seasonally dry weather in the last few months begins to lapse. The indication for price development in the near term looks to be on the downside as domestic demand softens. However, if the plan for subsidy revision materialises next year, inflation is likely see upward pressure. So far, we expect the impact from the subsidy revision to be mildly negative, with the Government staggering any price adjustments to minimise the impact to inflation. The recent cancellation of planned gas price increases for industrial sector in Nov 2019 is also a testament to the Government’s reluctance to put pressure on prices. Going forward, we forecast inflation to stay stable at 3% in 2020, similar to the rate in 2019. Although consumer price expectations point to higher inflation risks for the 3-month and 6-month periods, we think softer domestic consumption should keep demand-pull inflation in check.
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6 January 2020
Figure 44: Headline and core CPI remain below targets Figure 45: Consumer price expectations point to a higher price outlook ahead
Source: BI, RHB Source: BI, RHB
Saving the monetary policy bullet for now Much of the worries that haunted Indonesia last year have largely been addressed. The IDR has stabilised at USD/IDR of 14,000 from the peak of 15,000 in Oct 2018 while the current account deficit has improved in recent months. This follows a series of measures by the Government that include raising key interest rates in 2018 by 175bps, alongside efforts to cut imports and boost exports. However, new concerns have emerged, as growth has started to take a hit, with investments drying up and commodity prices declining. As a result, the BI rate began to be lowered gradually by 100 bps to 5% so far this year. We think the central bank still has room to unwind the excess interest rate hike in order to stimulate growth. However, it needs to take into account the volatility the easing stance could project on the IDR. At the moment, the simultaneous rate cuts by the US Federal Reserve allows for the interest rate differential to remain wide, keeping the IDR in check. However, as global growth may weaken much further, appetite for risky assets could falter and put pressure on the currency. In addition, the impact from the rate cuts on the commercial lending rate has been muted. Last year, banks deferred from raising interest rates during the period of rising BI rates due to strong demand for loans. As loan demand has dried up, banks will likely delay any cut in interest rates, in our view, as they seek to improve margins and reassess strategies. As such, we think the central bank will likely hold back on making any further moves this year, focusing instead on macro-prudential policies to support loan growth. We believe BI still has room to ease its policy rate by another 50bps in 2020, as growth will likely continue to weaken further. Figure 46: BI paused the interest rate in its Nov 2019 meeting after cutting it by 100bps
Source: BI, RHB
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6 January 2020
Fixed Income Outlook Bond market volatility is likely to remain high, as uncertainties in the global market persist, and there still remains the possibility of a global slowdown. In the event of high volatility, a short-term trading strategy is the best option for investors to maximise returns. For investors with a short-term investment horizon or trading purpose, we recommend they trade on medium maturities of Indonesia Government Bonds (IGBs) that carry tenures of 5- 15 years – this is to maximise returns and minimise potential losses at the same time. For those with a long-term horizon or HTM, we recommend they purchase corporate bonds in the primary market, which offer higher coupon rates and yields than IGBs because corporate bond issuances may remain robust in 2020. After intensifying market turbulence last year, the Indonesian bond market registered a remarkable recovery in 2019. The Indonesia Composite Bond Index has increased 13.4% YTD, while the 10-year IGB yield dropped 97bps to 7.05% as at Nov 2019 – making it one of the best local currency bonds on the Asian bond market. Almost all emerging bonds reported lower yields since the beginning of the year, meaning that the IGB’s rally was also supported by global fund inflows into Emerging Markets (EM). There were at least four positive catalysts for the IGB rally this year: i. Foreign fund inflows still remained robust due to the upgrade on Indonesia’s sovereign rating to “BBB” by Standard & Poor’s (S&P) in May 2019; ii. BI aggressively cutting the reference rate as domestic inflation remained manageable and within target; iii. The decline in US Treasury yields as the US Fed’s stance turned dovish on concerns over a global recession; iv. Support from domestic investors remained high. Despite the positive bond market performances across the EM, other risks – eg the US- China trade war, Brexit, and geopolitical risks in several regions – persisted. Recent developments indicate that optimism on reaching trade deals faded after US President Donald Trump signed bills backing protesters in Hong Kong. The escalation of the US-China trade war has threatened the global economy – viewed as severe enough by the US central banking system to cut interest rates by 75bps last year. Foreign fund inflows remained robust in 2019 due to attractive yields and rating upgrades. In line with other emerging markets, foreign fund inflows to IGBs were still robust in 2019, as we had expected in early last year. Total foreign ownership in IGBs reached IDR2,741.3trn or net buys of IDR175.5trn YTD – this is based on a settlement date of 15 Nov 2019, or 3x the total foreign net buys for 2018, which amounted to IDR57trn. By tenor, foreigners mostly added to their portfolios by increasing more on short-end tenors (more than five years and less than 10 years), unlike the situation in early 2018, when foreign buyers headed for very short-end tenors, ie less than a year. Higher demand for longer durations from foreign investors showed that foreigners were still positive on Indonesia’s macro-economic outlook – and usually, these are the long-term investors. Attractive real returns, combined with the strengthening IDR, became the main reason foreigners stormed Indonesia’s bonds market in 2019. Currently, it can offer a 3.90% real return – higher than peers with similar ratings such as the Philippines (3.81%), Thailand (1.59%), and Vietnam (1.50%). Another catalyst supporting the bond market rally in 2019 was S&P’s decision on Indonesia’s sovereign rating. S&P upgraded Indonesia’s sovereign rating to BBB (stable outlook) this year, citing strong economic growth prospects and supportive policy dynamics, which expected to remain following the re-election of President Jokowi. The Indonesian economy is growing faster than peers that recorded a similar level of income – indicating that the Government’s policymaking has been effective in promoting sustainable public finances and balanced economic growth. Real GDP per capita growth in Indonesia is an impressive 4.1%, on a 10-year weighted- average basis when compared to an average of 2.2% across global sovereigns at a similar income level. This reflects the constructive economic dynamics in Indonesia despite a challenging external environment over recent years. Furthermore, consumption has been the leading contributor to real GDP growth, with investments also contributing a sizeable share over the past five years. These trends should remain in place if President Jokowi and his government continue to emphasise on investments in infrastructure and human capital.
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6 January 2020
In the meantime, the ratio of general government debt is projected to be stable over the next few years, reflecting the fairly steady projected fiscal balance. The government debt remained comfortably below 30% of GDP, given a contained fiscal deficit and consistent nominal GDP growth. From an external side, BI has taken a more proactive approach towards managing risks stemming from Indonesia’s external vulnerabilities. Furthermore, S&P believes the country does not face the extraordinary risk of a marked deterioration in the cost of external financing, based on its sustained strong access to the markets and foreign direct investments (FDIs), even during periods of acute external volatility. The upgrade put S&P’s rating on par with two other major credit rating agencies: Fitch Ratings and Moody’s Corp. The rating upgrade will be a boost for President Jokowi, who has pledged to bolster growth and expand an ambitious infrastructure drive estimated to cost over USD400bn in his second term. It puts Indonesia at the same level as Hungary and Uruguay, but a notch below the Philippines, which was upgraded by S&P a month prior. The long-term rating may be raised again if Indonesia’s external settings improve materially from the current levels, or if its fiscal settings improve over the next two years. Support from onshore investors might continue further. Looking at the bond fund flow data, although onshore banks and foreigners were still reported as the two highest net buyers this year, their total ownership to total outstanding government bonds was still relatively stable: Below 25% and 40%. In contrast, the participation of local investors – such as pension funds, and insurance and retail investors – in the IGB market has been increasing for the past few years. Support from onshore investors will be sustained in 2020 by several factors: i. Lowering deposit rate – in line with lowering BI reference rate this year and excess liquidity in the banking system; ii. Indonesia’s Financial Services Authority’s Rule No. 1 2016, which mandates pension funds and insurance companies to invest their assets into government bonds at a minimum of 20% and 30% in 2016 and 2017; iii. Domestic market obligations’ aggressive retail bonds issuance this year in an effort to deepen the financial markets and reduce foreigners’ dominance in the Indonesian bond market; iv. The Government plans to reduce withholding taxes in bonds for domestic investors. Total corporate bond issuances until mid-Nov 2019 reached IDR111.07trn. This figure is a slight increase when compared to the same period in 2018, or IDR106.86trn. The increase in corporate bond issuances was supported by several factors, which included: i. The central bank aggressively cutting the 7-Day Reverse Repo Rate by 100bps, which resulted in companies recording a lower cost of funds to issue bonds; ii. Improvements in some economic data, such as the IDR exchange rate, current account deficit, and inflation; iii. Both issuers and investors have more optimism on the outlook of the bond market in the future, after Jokowi was re-elected as president. As such, they believe his infrastructure development programmes and other policies can be sustained. Going forward, we expect corporate bond issuances in 2020 to reach IDR158trn – exceeding 2019’s level This is supported by the following factors: i. There is still room for the central bank to cut the benchmark interest rate by 50bps in 2020 to maintain the momentum of economic growth; ii. There are around IDR100trn of corporate bonds that will mature in 2020, so the need for refinancing remains high. The issuances of corporate bonds in 2020 will still be dominated by the financial sector which accounts for around 65% of the total issuances. In terms of ratings, companies rated AAA will also dominate next year’s bond issuances. There are around IDR62trn bonds with AAA ratings that will mature in 2020. Big names such as Telekomunikasi Indonesia (idAAA) and Perusahaan Listrik Negara (idAAA) will probably refinance their maturing bonds in 2020, which are worth IDR1.99trn and IDR2.25trn. Those issuances could raise investor appetites, as they need to diversify their portfolios beyond the financial sector.
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Strategy - Indonesia Indonesia Strategy
6 January 2020
Figure 47: Indonesia’s sovereign credit rating history
Source: Bloomberg, RHB
Figure 48: Maturing corporate bonds (by sector) Figure 49: Maturing corporate bonds (by rating)
Source: IDX, RHB Source: IDX, RHB
BI’s monetary policy-easing may continue to support growth. With the IDR trading at a stable range, inflation being within the target range, the current account improving, and growth showing bouts of moderation, the central bank embarked on an easing cycle in Jul 2019. So far, the benchmark rate has been cut by 100bps – and further cuts are likely. BI still needs to unwind the 175bps rate hike that was done in 2018 to stimulate growth. However, we think it needs to take into account the volatility the easing stance could project on the IDR. Excessive easing may put the local currency in jeopardy. At the moment, the simultaneous rate cuts by the US Fed allow for the interest rate differentials to remain, keeping the IDR in check. However, if global growth weakens much further, appetite for risky assets will falter and put pressure on the currency. As such, we think BI will likely want to see more stabilised fundamentals, especially on the current account side, before making any further moves. As growth likely continues to weaken, we believe the central bank still has room to ease its policy rate by another 50bps in 2020. Indonesia’s headline inflation averaged at about 3% YoY in Jan-Nov 2019, while core inflation was at 3.2% over the same period. The indication for price developments in the near term looks to be on the downside, as domestic demand softens. However, if the plan for subsidy revisions materialise in 2020, inflation is likely face upward pressure.
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6 January 2020
So far, we expect the impact from the subsidy revision to be mildly negative, with the Government staggering any price adjustments to minimise the impact to inflation. The recent cancellation of the planned increase in gas prices for the industrial sector in Nov 2019 is also a testament to its reluctance to pressure prices. We forecast inflation to stay stable at 3% in 2020, similar to the rate in 2019. Although consumer price expectations point to higher inflation, we think softer domestic consumption should keep demand-pull inflation in check. The current account deficit may recover further. The improvement in the 3Q19 balance of payments’ current account deficit reflects the Government’s successful measures in reining in the high trade deficit. The current account deficit in 3Q19 was at 2.8% of GDP, which is an improvement from 2.9% in the earlier quarter but far better than the 3.6% recorded in 4Q18. For the year, we expect the current account deficit to register at 2.7% of GDP. Meanwhile, the outlook for the current account position in 2020 is projected to improve, due to continued improvements in exports as well as reducing imports. Measures to promote export growth, such as prioritising processed and value-added commodities, as well as opening up new markets through the free trade agreements, should provide some support. Meanwhile, on imports, the move to revise the fuel price subsidy mechanism as well as the implementation of the B30 biodiesel programme should effectively lower import demand for mineral fuel. Moderating consumption growth may also further reduce import demand.
Overall, we expect the current account to record a smaller deficit of 2.5% of GDP for 2020.
Figure 50: Indonesia’s current account deficit
Source: Bloomberg, Bank Indonesia
See important disclosures at the end of this report 36
Indonesia Sector Update
6 January 2020 Financial Services | Banks Indonesia Banks Overweight (Maintained) Stocks Covered 13 Liquidity Is Key Ratings (Buy/Neutral/Sell): 9 / 2 / 2
Maintain OVERWEIGHT with the bank sector as a proxy for Indonesia Top Picks Target Price equity. We keep our OVERWEIGHT stance on the bank sector as it continues Bank Central Asia (BBCA IJ) IDR40,000 to become the backbone of Indonesia’s equity market. However, the outlook is Bank Mandiri (BMRI IJ) IDR10,000 not entirely bullish due to decelerating loan growth on lower GDP growth expectations and sluggish loan demand. We believe liquidity will improve as we Bank Jatim (BJTM IJ) IDR820 already see new FDI coming into Indonesia. Our Top Picks are Bank Central BTPN Syariah (BTPS IJ) IDR4,150 Asia, Bank Mandiri, Bank Jatim, and BTPN Syariah. Decelerating loan growth as GDP and exports contracted. We think the Analysts recent sluggish loan demand was due to slow global growth as a result of the trade war. Working capital loans, which accounted for 46% of total loans, only Andre Benas posted a 5.9% YoY growth in September 2019, the lowest in three years. This +6221 2970 7066 has contributed to slower consumption loan growth of only 6.8% YoY. However, [email protected] we still see some improvement in investment loans of +12.8% YoY, which Banking industry loan growth brings loan growth to 7.9% YoY in Sept 2019. The Financial Services Authority (OJK) forecasts loan growth at only c.8-9% YoY in FY20 in the absence of significant catalysts. Challenging liquidity for now, but might improve in FY20. As of 9M19, total deposits grew moderately by 7.5% YoY as liquidity tightened up. However, entering 4Q19, we see some improvement in liquidity as it has recovered from bottoming out in May 2019, with LDR at >95%. We expect Hyundai’s commitment to enter Indonesia with FDI investment of USD1.55bn until 2030 to help ease liquidity in the system. We think FDI will continue to be a key factor of liquidity in the coming years. Margin compression will persist. Bank Indonesia already cut its benchmark rate by 100bps YTD. Our economist expects another 25bps cut this year and potentially 50bps in FY20 as the central bank tries to stimulate growth by easing monetary policy. This would translate to lower yields as customers seek lower borrowing rates. Not all banks will be able to reprice their deposit rates as Source: OJK, RHB competition for third-party funding persists. To offset lower NIM, banks would have to compensate by growing loan volume, which we believe only the Big 4 banks would be able to do as they have higher repricing power and better cost of funds (CoF) than smaller banks. Implementation of IFRS 9. The International Financial Reporting Standard 9 (IFRS 9) will be implemented 1 Jan 2020 for Indonesian banks, which would see loan loss coverage increase. Many banks would take a significant amount from retained earnings, which will reduce capital adequacy ratios (CAR) c.100- 250bps, depending on the bank’s current loan loss coverage. Banks with already conservative coverage would benefit as they require smaller additional provision charges to the P&L. Big 4 banks will continue to dominate in FY20. We still prefer the Big 4 banks over smaller banks as they will continue to dominate the market with competitive advantages in loan repricing and cost of funds.
TP % Upside P/E (x) P/BV (x) Yield (%) Company Rating (IDR) (Downside) Dec-20F Dec-20F Dec-20F Bank Central Asia Buy 40,000 18.4 28.6 4.8 0.9 Bank Rakyat Indonesia Buy 5,000 13.6 15.5 2.7 2.8 Bank Mandiri Buy 9,300 23.6 13.2 1.8 3.6 Bank Negara Indonesia Buy 9,125 16.6 9.2 1.2 3.8 Bank Danamon Trading 5,300 26.2 9.7 0.9 4.8 Bank Tabungan Negara BuySell 1,500 (31.5) 16.8 0.9 0.8 Bank CIMB Niaga Buy 1,380 40.8 7.0 0.6 2.9 Bank BTPN Buy 4,200 27.3 8.6 0.7 4.0 Bank Panin Neutral 1400 4.5 11.0 0.8 0.0 Bank Jabar Sell 1,400 2.9 7.5 1.0 6.8 Bank Jawa Timur Buy 820 20.6 7.5 1.1 7.4 Bank Permata Buy 1500 22.4 25.1 1.5 0.0 BTPN Syariah Buy 4150 1.5 24.5 6.1 1.7 Source: Company data, RHB; Data as at 30 December 2019
See important disclosures at the end of this report 37
Indonesia Sector Update
6 January 2020 Operators | Telecommunication Indonesia Telecommunication Overweight (Maintained) 2020 Outlook: Rising Data Monetisation; O/W Stocks Covered 3 Ratings (Buy/Neutral/Sell): 3 / 0 / 0 Last 12m Earnings Neutral
Revision Trend: Maintain OVERWEIGHT, ISAT as Top Pick. The telco sector is one of the Top Picks Target Price best performing large-cap sectors (outperforming JCI by 11% YTD), as the Indosat (ISAT IJ) – BUY IDR4,000 industry is seeing more rationalise tariff competition post SIM registration. As millennials enter the work force, higher purchasing power should support Telkom Indo (TLKM IJ) – BUY IDR4,700 ARPU growth. Improvement in 4G user penetration and network quality may XL Axiata (EXCL IJ) – BUY IDR3,850 also trigger higher data traffic volume and data ARPU. We like ISAT – a late adopter of 4G – with the sector’s largest EBITDA growth. Continued aggressive capex in 2020F to expand and improve 4G network quality. Companies are indicating that the capex cycle for 4G investment is Analyst not over yet. Post 2-3 years of heavy capex cycle, all three operators are targeting even higher capex in 2020F. TLKM targets to spend c.IDR37trn Michael W Setjoadi capex, or 26% to sales (+10% YoY). EXCL and ISAT also maintained its high +6221 2970 7059 [email protected] capex target in 2020F, mainly to expand 4G network coverage ex. Java and improve their existing network. EXCL targets to spend IDR7.5trn in capex (+7% YoY), while ISAT is at IDR10trn (c.10% YoY). Growing demand for network quality as millennials enter the work force. Millennials, c.34% of the Indonesian population (ages 23-32), have started to graduate and enter the work force, translating to larger pocket size. This could
be a growth catalyst for higher demand in better internet quality and more usage. Note that 3Q19 industry’s data traffic/sub average at 5-6GB/month, is still lower than Malaysia (10GB/month). Despite the exponential data growth in YTD share price performance (%) the past 2-3 years, we believe there is huge growth potential in data usage. Operators have been enjoying higher data ARPU, through upselling to larger data packages and faster network speed. Network expansion and more video streaming to boost data ARPU. Average Indonesians spend only USD1.8/month (IDR25,900) on data packages, or c.USD0.44/GB – one of the cheapest in the region. We believe increasing network speed and quality should boost more data consumption and ARPU. Our case study suggests that YouTube’s – one of the apps that uses the heaviest data traffic in Indonesia – default settings will automatically adjust the video quality based on the user’s internet speed and screen quality. For 4G in the Jakarta area, YouTube usually sets it at 720p quality, which consumes 1.3GB/hour, while the average Indonesian spends 59 minutes/day for YouTube (much lower than Singapore: 80mins/day and Thailand: Source: Bloomberg, RHB (as at 30 Dec 2019) 114mins/day). In Thailand, a survey found that users in rural areas spend more
time on YouTube than in urban areas. In addition, Instagram, with 60m users this year (+33% YoY), is gaining popularity for its video content ie IG story and IGTV, which could also trigger higher data usage. Pecking order: ISAT>EXCL>TLKM. We have BUYs on all three operators, with preference over ISAT for its largest operational improvement seen in 2019 (9M19 EBITDA growth: +40% YoY). EXCL, being the early adopter of 4G, has seen operational improvement somewhat plateau over the medium term. We continue to like EXCL, most stable number of subs and least impacted to data migration ahead, but market has high expectation on the stock, given it is the Street sector Top Pick. TLKM is still one of the large-cap companies that is defensive and laggard. Despite some data migration trend that should still persist in 2020, Telkomsel has the largest data growth potential with the current 4G users of just 66% of total subs, coupled with strong fixed broadband growth.
Market Cap % Upside EV/EBITDA (x) EBITDA Growth Company Rating TP (IDR) (IDRtrn) (Downside) Dec-19F Dec-19F TLKM IJ BUY 387.3 4,700 20.2% 6.4 13.7 ISAT IJ BUY 33.7 4,000 22.2% 5.8 18.9 EXCL IJ BUY 15.8 3,850 37.5% 5.5 30.6 Source: Bloomberg, RHB (as at 30 Dec 2019)
See important disclosures at the end of this report 38
Indonesia Sector Update
6 January 2020 Consumer Cyclical | Auto & Autoparts Indonesia Auto Neutral (Maintained) Stocks Covered 2 Road Likely Still Bumpy In 2020; NEUTRAL Ratings (Buy/Neutral/Sell): 1 / 1 / 0 Last 12m Earnings Neutral Revision Trend: Stay NEUTRAL. Domestic 4W vehicle wholesales growth will likely turn Pecking Order Target Price positive in 2020, on aggressive BI rate cuts (ie lower financing costs). Astra Otoparts (AUTO IJ) – BUY IDR2,100 However, higher vehicle taxes and fees – such as provincial motor vehicle Astra International (ASII IJ) – NEUTRAL IDR6,700 transfer fees, and the luxury tax on low-cost green cars (LCGC) – may cap
sales growth. Furthermore, competition should remain intense. That said, Analysts there are more investments cementing future growth for 4W vehicle manufacturing. Indonesia targets EVs to account for 20% of 4W vehicle Andrey Wijaya production by 2025. +6221 5093 9846 [email protected] Domestic 4-wheeler (4W) vehicle sales growth likely to turn positive, but competition remains stiff. After booking negative sales growth this year, we believe 2020 domestic 4W vehicle sales will likely increase, but competition should remain stiff. New players Hyundai and Volkswagen are building local manufacturing plants. Hyundai targets to begin commercial production in 2H21, with annual capacity starting at 150k units pa. The plant will be able to expand to 250k units pa when it reaches full capacity. Hyundai aims to National and ASII’s 4W wholesale (‘000 units) establish 100 dealers locally by 2021 (currently c.33 dealers) to boost domestic sales. This intense competition is likely to pressure Astra International’s (ASII) domestic market share. Higher motor vehicle transfer fees (BBNKB). The Jakarta Provincial Government has increased the BBNKB to 12.5% from 10%, effective 11 Dec 2019. Jakarta 4W sales account for c.19% of national car sales. Other regions like Banten also started raising the BBNKB starting 11 Mar 2019. The higher BBNKB should increase 4W selling prices in Jakarta, which may tone down sales volume growth in the area. Luxury tax to be based on carbon emissions. The Government plans to revise the luxury goods sales tax on cars (PPnBM), where the vehicle tax will no longer be based on engine capacity, but rather by its fuel emission (carbon tax). The planned law has been in circulation since Jul 2019. The Ministry of Source: Company data, RHB Finance stated the tax rules will be released soon – although no specific date has been given. Note that in 2014, the zero PPnBM tax rate was imposed to Previous reports: entice carmakers to manufacture low-cost vehicles. The revocation of the 0% Wake-Up Call for The Auto Industry luxury tax on LCGC may increase selling prices. 4W Sales: Oct Growth Momentum Continues 4W vehicles manufacturing likely to increase. There will be more Better Sep-19 4W Wholesales, Still Lower YoY investments cementing the future growth of the 4W vehicles industry ahead. Financing Eases, But Higher Tax On LCGC In addition to the Government’s target for electric vehicles (EVs) to reach a August 4W Wholesale: Better MoM 20% share of 4W production by 2025 (see our 16 Aug note), the investments Welcoming Esemka, a New Local Brand reflect sustainable demand in the future. This is also supported by future Indonesia Auto: Weak July Wholesales optimisation measures in developing EV batteries – eg an export ban on nickel Long Road To EV Mass Production will start on 1 Jan 2020. We see Astra Otoparts (AUTO) as a key beneficiary 4W Outlook Softens; D/G To NEUTRAL of increased developments in the national vehicle manufacturing industry. Cyclicality As Expected; Ramping Up In 2H19 Massive New Investments Ahead, OW 2-wheeler (2W) vehicles wholesales likely to maintain moderate growth Lower 5M19 Sales, Expect Better In 2H19 in 2020, driven by higher income from commodity prices, especially CPO. Likely Newcomer, Renault Triber, In July Based on data from the Indonesia Motorcycle Industry Association, national 2W vehicle monthly wholesales accelerated in Oct 2019 and hit a YTD peak, following the CPO price rally during the period.
TP % Upside P/E (x) P/BV (x) Yield (%) Company name Rating (IDR) (Downside) Dec-20F Dec-20F Dec-20F Astra Otoparts BUY 2,100 69.4 8.3 0.5 4.2 Astra International NEUTRAL 6,700 (3.2) 11.8 1.8 4.2 Note: All prices as at 30 Dec 2019 Source: Company data, RHB
See important disclosures at the end of this report 39
Indonesia Sector Update
6 January 2020 Consumer | Consumer Staples and Discretionary Indonesia Consumer Neutral (Maintained) 2020F Outlook: Selective Value Seeker Stocks Covered 13 Ratings (Buy/Neutral/Sell): 8 / 5 / 1 Last 12m Earnings Neutral
Revision Trend: Maintain NEUTRAL, sector Top Picks: GGRM, MAPI, MYOR, and ROTI. Top Picks Target Price Potential subsidy cuts, changes in lifestyle spending behaviour, and shift in Mayora Indah (MYOR IJ) – BUY IDR2,600 wallet share given higher JKN premium and cigarette prices have made us Nippon Indosari (ROTI IJ) – BUY IDR1,600 very selective on consumer stocks. Some undervalued (GGRM and MYOR) Mitra Adiperkasa (MAPI IJ) – BUY IDR1,300 stocks are trading at c.2.5-3SD below their 3-year mean P/E, while others (MAPI and ROTI) offer operational turnaround growth stories. On a brighter Gudang Garam (GGRM IJ) – BUY IDR66,000 note, a more stable political environment and rising commodity prices, especially CPO prices, should provide some countermeasures. Analysts Margins to potentially normalise amidst slowdown in purchasing power. Some soft commodity prices are rising, which could normalise fast-moving Michael W Setjoadi consumer goods’ (FMCG) inflated margins in 2019. Note that food FMCG +6221 5093 9844 [email protected] companies could still see positive earnings growth in 2019 mainly due to margin expansion, but industry sales volume was relatively flat/negative YoY. Aside from higher than usual margins, 2020F average consumer wallet share could shift due to higher cost of living, ie c.20% rise in cigarette prices, and Jessica Pratiwi 60-100% increase in national healthcare insurance (JKN) premium. We view +6221 5093 9985
that the government would only delay the electricity tariff hike for 24.4m 900 [email protected]
volt ampere (VA) households, as the electricity subsidy budget has been cut for 2020. We estimate GDP growth to moderate to 4.9% vs 5% in 2019, with Indo consumer staples share prices YTD household consumption growth projected to moderate but stay resilient. Staples: Premium justification may no longer be valid. In the past, Indonesia consumer staples (UNVR, INDF) were valued at a premium due to their vast distribution network, leading to strong barriers to entry. However, rising online platform companies (ie Mitra Tokopedia and Bukalapak) offer seamless distribution channels for small mom & pop stores and numerous thriving logistic players (JNE, J&T, SiCepat, etc) due to the vast growing e- commerce sector. This should slowly lower the barriers to entry for newcomers that are lacking in distribution networks against listed FMCG manufacturers. As such, we should see a continued sectoral de-rating for FMCG. Retail: Low-single digit SSSG next year, and maintain preference for
high-end retailers (MAPI). Nowadays, consumers are pampered with Source: Bloomberg, RHB as at 30 Dec 2019 multiple shopping channels (ie e-commerce, social media platform, and
specialty stores) with numerous promotions, intensifying competition. With Indo retail share prices YTD this, coupled with expected weak purchasing power in 2020, we forecast that most retailers under our coverage will have low-single digit SSSG in 2020F. Given that 30-40% of costs are fixed, EBIT margins could see some corrections. Low-mid fashion retailers (ie RALS and LPPF) may suffer the most with SSSG of just c.0-1% in 9M19. Hence, we prefer MAPI, being least exposed to the low- to mid-end market segment and with strong growth in its active wear subsidiary due to rising penetration in this segment. Selective picks: GGRM, MAPI, MYOR, and ROTI. Post selling pressure on GGRM (higher-than-expected excise tariff hike) and MYOR (weak 2019 performance), valuations have become attractive at this stage with solid fundamentals. MAPI and ROTI have the best growth potential on operational turnaround stories. MAPI’s growth should mainly stem from Map Aktif Adiperkasa (MAPA IJ, NR) and Starbucks, given the underpenetrated market. Source: Bloomberg, RHB as at 30 Dec 2019 For ROTI, new plants should provide new revenue stream in new markets.
Mkt Cap TP % Upside PE (x) Yield (%) Company Rating (USDm) (IDR) (Downside) Dec-20F Dec-20F HMSP BUY 17,529 2,500 19.0 16.3 6.7 GGRM BUY 7,318 66,000 24.5 11.2 6.4 INDF BUY 4,993 8,900 12.3 12.9 3.3 MYOR BUY 3,296 2,600 26.8 22.9 0.8 AMRT BUY 2,761 1,100 25.0 28.8 1.4 MAPI BUY 1,259 1,300 23.2 15.9 1.3 ROTI BUY 578 1,600 23.0 25.2 0.9 ERAA BUY 411 1,900 5.8 13.5 1.1 Source: Bloomberg, RHB (as at 30 Dec 2019) – BUY stocks only, sorted by market cap
See important disclosures at the end of this report 40
Indonesia Sector Update
6 January 2020 Basic Materials | Cement
Indonesia Cement Overweight (Maintained) Better Onward Demand Indicated; Stay O/W Stocks Covered 2 Ratings (Buy/Neutral/Sell): 1 / 1 / 0 Last 12m Earnings Positive
Revision Trend: Keep OVERWEIGHT; Top Pick: Semen Indonesia (SMGR). Cumulative Nov Top Pick Target 2019 national cement sales turned positive – a constructive signal towards a gradual cement demand improvement ahead. We think the bulk cement Semen Indonesia (SMGR IJ) – BUY IDR17,100 portion’s rise (+53bps MoM) over bag during the month indicates hastened future infrastructure projects, given easing political tensions. Moreover, the Analyst
demand trend keeps pushing from Eastern Indonesia – growth is starting to outpace Java’s. SMGR’s market share was partly subdued by Indocement Andrey Wijaya Tunggal Prakarsa’s (INTP) higher-than-average Oct-Nov 2019 sales. +6221 5093 9846 [email protected] Excellent yearly sales growth in Nov 2019. Domestic sales came in at 7.7m
tonnes during this month (+9.7% YoY), with an understandable 3.3% drop MoM on Oct 2019’s high base – a 2-year high. 11M19 domestic sales stood at 63.2m tonnes (-0.3% YoY, or the lowest deterioration rate since Apr 2019). Combined with consistently high export achievements (Nov 2019: 0.6m tonnes, or -1.7% MoM, +15.4% YoY), 11M19 national sales came in with a positive score of +1% YoY – a constructive momentum since the last positive growth booked in Apr Cement sector’s 4-year average P/E band 2019. Cement bulk market share in Nov 2019 expanded to 28.4% (Oct 2019: 27.9%), with the bag portion at 71.6% (Oct 2019: 72.1%) – this signals an acceleration in infrastructure projects post 2018-1H19’s politics cycle. Faster eastern region growth continues. By region, growth contributors have seen a change towards Indonesia’s eastern regions: A combined growth of 7.4% YoY (11M19: 10,825m tonnes, or 17% of domestic sales). This outpaced the well-developed region of Java, which booked a 0.9% YoY contraction (11M19: 35,373m tonnes, or 56% of local sales). Improvements in farmers’ wages in Kalimantan – post a CPO price surge – and smelter project developments in Sulawesi were seen as boosters for the region, in our view.
Market share improvement by INTP – not so from SMGR. During Nov 2019, Source: Companies data, RHB SMGR – including Solusi Bangun Indonesia (SBI) – booked a domestic sales volume of 3.8m tonnes (-6.1% MoM, +44.8% YoY). This translated into a Previous reports: combined market share of 53% (Oct 2019: 54.5%). Contractions were seen at On the Right Path; Still OVERWEIGHT both SMGR (-92bps) and SBI (-69bps), but remained in range vis-à-vis the Robust Sales Momentum In October; O/W combined average portion of 53.2% since SBI’s inception in Feb 2019. INTP booked a positive feat in Nov 2019: A 10.8% YoY hike to 1.8m tonnes (-2.2% ASP Hike, Lower Costs Boost 3Q19 Numbers MoM), which brought 11M19 domestic sales to 16.5m tonnes (-0.2% YoY). Sep 2019 Sales Starting To Pick Up; O/W INTP’s market share during this month widened subtly to 25.6% (Oct 2019: Likely To See a Silver Lining; O/W 25.3%), boosted mostly by fairly high sales during the Oct-Nov 2019 period. Still OVERWEIGHT; Rainbow After The Rain The demand recovery signal is starting to be seen from this point onwards, Sales Likely To Grow In 2H19 emphasised by Nov 2019’s positive cumulative growth. This factor is also in line with our summarised thesis: Limited increase in 2020 capacity, stable Low Cycle May End Soon political environment that leads to approved infrastructure projects, ASPs normalising with all cement players starting to increase selling prices, and managed energy costs on weakened coal prices, which will likely remain until 1H20. Downside remains, though, with major disruptions coming from stricter over-dimension and over-loading requirements – leading to higher trucking costs – and slower-than-expected property marketing sales.
EPS P/E PEG P/BV Yield % Up/ growth TP (x) Dec (x) (%) Company Rating (down- Dec (IDR) Dec 20F Dec Dec side) 20F 20F (%) 20F 20F (%) Semen BUY 17,100 42.5 24.9 0.3 75.4 2.1 0.9 Indonesia Indocement NEUTRAL 20,500 7.8 38.1 2.2 17.7 2.9 2.1 Note: All prices as at 30 Dec 2019 Source: Company data, RHB
See important disclosures at the end of this report 41
Indonesia Sector Update
6 January 2020 Communications | Media Indonesia Media Overweight (Maintained) Healthier Competition Ahead; OVERWEIGHT
Maintain sector OVERWEIGHT. Surya Citra Media and Media Nusantara Indonesia Media Stocks TP Citra held a joint press conference announcing their future collaboration, Surya Citra Media (SCMA IJ) - BUY IDR1,870 yesterday. SCMA and MNCN president directors Sutanto Hartono and David Media Nusantara Citra (MNCN IJ) - NR N/A Audy signed a MoU signifying this at a ceremony in Jakarta. Key points cover joint content production on exclusive content for OTT platforms and joint production for movies. Earlier, at MNC Vision Network’s analyst briefing, MNC Analysts group founder Hary Tanoesoedibjo also said there were other potential collaborations. Indonesia Research Team +6221 5093 9888 Joint production for exclusive content. The key point stated in the MoU is [email protected] a plan for joint production for exclusive original content for the over-the-top
(OTT) platforms of both companies (SCMA’s Vidio.com and MNCN’s RCTI+)
as well as joint movie production. This is positive for both, as it provides more original content, while costs will be shared. Currently Vidio.com has already produced three original series. Although the details are still being worked out, a JV production company may be set up to produce content. Other potential collaborations. Hary Tanoesoedibjo also said that other potential collaborations between both parties are on the table for discussion: i. No undercutting of ad rates, thereby supporting topline growth. The discussion between the two market leaders in the free-to-air (FTA) TV universe on growing ad rate cards next year will be positive for both companies. This should support topline growth, while engendering healthier competition between the two. As such, this should support a rerating for both stocks, after several years of de-rating over concerns on the outlook of FTA TV. This is especially so, with the emergence of other means of media advertising such as the digital platforms. The FTA TV business is also supported by international fast-moving consumer goods (FMCG) advertisers as well as internet companies with special activations in FTA TV, which are returning to TV to park their ads – as it is a more suitable medium to reach their target customers, ie the mid- to lower-income segment. ii. Better collection days for healthier balance sheets. Both companies plan to limit collection days for payables from advertising agencies to three months payable, from four months previously. And this period will shorten to two months payable for their customers. All of this spells a healthier balance sheet ahead for both companies. We reiterate our OVERWEIGHT rating on the sector with this positive collaboration aligning the interests of both companies – which should lead to a rerating on both counters. We believe, if the cooperation is smooth – especially in increasing their advertising rates and joint content production done to minimise content costs – this should support topline growth for both companies and translate to wider margins and sturdier earnings growth starting FY20. Both counters are currently trading at an attractive 15x (SCMA) and 9x (MNCN) FY20 P/E. That said, we note that regulatory and execution risks remain present.
TP % Upside P/E (x) P/BV (x) Yield (%) Company Name Rating (IDR) (Downside) Dec-20F Dec-20F Dec-20F Surya Citra Media BUY 1870 32.62% 13.57 3.61 4.60 Media Nusantara NR N/A N/A N/A N/A N/A Visi Media Asia NR N/A N/A N/A N/A N/A Source: Company data, RHB
See important disclosures at the end of this report 42
Indonesia Sector Update
6 January 2020 Consumer Staples | Poultry Indonesia Poultry Neutral (Maintained) 2020F Outlook: More Dependency On Culling Stocks Covered 2 Ratings (Buy/Neutral/Sell): 1 / 0 / 1 Last 12m Earnings Negative
Revision Trend: Remain NEUTRAL, Top Pick: JPFA. The 8.8% and 4% increases in 2018 Indonesia Poultry stocks Target Price and 2019 GPS import quotas suggest a continued DOC oversupply of 1-1.5 Japfa Comfeed Indonesia (JPFA IJ) – IDR2,050 years. In 2H19, the Government gave instructions for several rounds of BUY culling, amounting to 8-10% of total national supply. Expected weaker purchasing power due to slow macroeconomic growth and subsidy cuts may Charoen Pokphand Indonesia IDR4,600 dampen chicken consumption growth in 2020F. This could lead to continued (CPIN IJ) – SELL oversupply and higher dependency on the government culling policy. Continued oversupply in 2020F could increase dependency on the Analyst
government culling policy. Day-old chicks (DOC) supply in 2H19 rose on an Michael W Setjoadi 8.8% increase in 2018 grandparent stock (GPS) import quota to 707,000 +6221 2970 7059 chicks. As such, most of the government cullings took place in 2H19 (six of [email protected] seven cullings YTD), which we had expected since beginning 2019. Note, the GPS import quota is an early indicator of the DOC supply outlook for 1.5 years ahead. Following the oversupply in 2H19, the Government has revised down the quota to 735,000 (4% higher than 2018) from the previous target of 787,000 chicks (+11% YoY). This would create a further oversupply in our view, given the 707,000 quota in 2018 had already resulted in numerous cullings. Lower 2020F-2021F earnings forecasts on higher supply outlook. We Monthly DOC and broiler prices (IDR) revise 2020F DOC and broiler ASPs down 2.5-3% YoY on weak 9M19 results and higher supply outlook. As a result, we have cut Japfa Comfeed and Charoen Pokphand Indonesia’s earnings forecasts by 6.3-14.1% (see our 31 Oct 2019 JPFA and 1 Nov 2019 CPIN reports). Proactive government = stable profit. Based on our ground checks, broiler prices have been more stable, averaging at IDR17,104/kg YTD. Nov 2019 prices recorded at 2% YoY and -0.3% MoM. Seasonally, 4Q chicken prices are stronger QoQ, supported by the festive season. In 2H19, the Government took proactive measures to reduce oversupply. Going into 2020, we expect a similar trend as in 2H19, ie 8-10% oversupply and higher sector reliance on government cullings. Feed, the strong profit pillar, seeing lower normalised margins. Contributing 85-91% to 9M19 operating profit, feed has always been the core Source: Company data, RHB profitability pillar for integrated poultry companies. Post corn and import bans since 2017, feed EBIT margins collapsed, but started to normalise in 2019 as Indonesia poultry share prices YTD feed millers used alternative raw materials. However, this meant lower EBIT mean levels on stricter government regulations in taking up expensive domestic corn supply. In addition, corn harvest seasonality resulted in higher working capital requirement and investment for corn silos. We also note that JPFA has a higher feed EBIT margin than CPIN. Attractive valuations on JPFA post KKR Jade Investments’ divestment, overvalued for CPIN. Both companies have similar cost structures, balance sheet positions, and places within the industry cycle. Currently, JPFA is trading at 10.5xP/E, a 65% discount compared to CPIN, at 30.2xP/E – which rationalises our preference for the former. Downside risk includes higher- than-expected soft commodity prices while upside risk is higher demand which could absorb oversupply, increase sales volume, and support selling prices. Source: RHB, Bloomberg as at 30 Dec 2019
TP % Upside P/E (x) P/BV (x) Yield (%) Company Name Rating (IDR) (Downside) Dec-19F Dec-19F Dec-19F Japfa Comfeed BUY 2,050 34% 10.5 1.7 4.8 Charoen Pokphand SELL 4,600 -29% 30.2 5.1 1.7 Source: RHB, Bloomberg as at 30 Dec 2019
See important disclosures at the end of this report 43
Indonesia Sector Update
6 January 2020 Infrastructure | Toll Roads & Construction Construction Overweight (Maintained) Heating Cylinders For Future Growth; O/W Stocks Covered 5 Ratings (Buy/Neutral/Sell): 5 / 0 / 0 Last 12m Earnings Positive
Revision Trend: OVERWEIGHT; pecking order: JSMR>WSKT>WIKA>PTPP>ADHI. We Pecking Order Target Price expect infrastructure activities to accelerate post-establishment of the new Jasa Marga (JSMR IJ) – BUY IDR7,000 Cabinet, after the sector saw slow construction and new contracts in 2019. Waskita Karya (WSKT IJ) – BUY IDR2,700 Infrastructure remains the focus of President Joko Widodo’s second-term administration. The Government is working hard to create the right Wijaya Karya (WIKA IJ) – BUY IDR2,900 environment to attract investments, and has prioritised simplifying regulations PP Persero (PTPP IJ) – BUY IDR2,800 to facilitate this. Limited financing is the main constraint, but the State Budget Adhi Karya (ADHI IJ) – BUY IDR2,100 and PPP should be able to ease the financing process. Also, lower benchmark interest rates should boost earnings. Analysts
Infrastructure activities likely to accelerate. Infrastructure is still the focus of President Joko Widodo’s second-term administration. In the next five years, Andrey Wijaya infrastructure projects will focus on connectivity that will benefit small +6221 5093 9846 industries, special economic zones, tourism, agriculture and fisheries. This [email protected]
plan includes toll roads, MRT and dam construction. After a slow 2019 for
construction activities and new contracts, we expect infrastructure activities to accelerate, thanks to a more stable political situation. Sector’s P/E band (6-year average) The Government will open tenders for seven toll roads ahead. Meanwhile, the (x) construction of MRT Phases 2 and 3 is likely to start in 2020. Water 35 sustainability and security will be next focus, after toll roads and the MRT. 30 Indonesia has spotlighted 37 priority projects to be the focus in 2018-2022, 25
and these are estimated to cost USD180bn (IDR4,197trn). 20
Simplified regulations to quicken investment process. The Government 15
is working hard to create the right environment to attract investments. 10 Simplified regulations have been a key priority. In 2020, it will implement 5 omnibus laws, partly to simplify local regulations to be in line with central 0 policies. Earlier this year, it cut down the number of permits required to invest 2013 2014 2015 2016 2017 2018 2019
in power plants by more than 75% (vs 259 just a few years ago). Major PE -2 Stdev -1 Stdev Mean +1 Stdev +2 Stdev regulations have also been passed to support the land acquisition process. Source: RHB, Bloomberg The Government has also issued guarantees – for credit, business viability, public-private partnerships (PPP) – to boost infrastructure projects. Past reports: State Budget and PPP support financing. Initial plans indicate that about Ground Checks: Sumatera’s Economic Clutch 40% of national infrastructure funding will come directly from the Government, Beneficiaries Of BI Rate Cut; O/W and around 25% will come from various SOEs. The Government expects the Infrastructure Budget Recorded New High; O/W private sector to invest the remaining 35%. Infrastructure Holding Company – New Era; O/W In the 2020 State Budget, the allocation for infrastructure hit a new high of Infra Still a Key Focus for Jokowi's 2nd Term IDR419trn (+5% YoY). The PPP scheme in 2020 will include 11 projects New Toll Projects, Lower Bond Taxes; O/W valued at IDR19.7trn (USD1.38bn). The 238km of railway track to be Solid 4M19 Secured New Contracts; O/W Likely Higher State Budget For Infra In 2020 construction cost IDR3.62trn (USD254m), while rehabilitation of 229km of railway tracks will cost IDR1.59 trn (USD112m). Lower benchmark interest rates should boost earnings. Bank Indonesia’s (BI) recent rate cut (by 100bps) should be positive for infrastructure players, since these companies are usually highly leveraged, due to the high capital expenditure required for financing projects. Heavily-leveraged firms like Jasa Marga, Waskita Karya and Adhi Karya are the biggest beneficiaries of lower financing costs. Meanwhile, Perumahan Persero has the strongest interest coverage among the construction companies under our coverage.
TP % Upside P/E (x) P/BV (x) Yield (%) Company Name Rating (IDR) (Downside) Dec-20F Dec-20F Dec-20F Jasa Marga BUY 7,000 35% 16.5 1.6 1.2 Waskita Karya BUY 2,700 82% 5.4 0.9 3.6 Wijaya Karya BUY 2,900 46% 8.6 1.0 2.3 PP Persero BUY 2,800 77% 4.8 0.5 4.0 Adhi Karya BUY 2,100 79% 4.5 0.5 3.6 Note: All prices as at 30 Dec 2019 Source: Company data, RHB
See important disclosures at the end of this report 44
Indonesia Sector Update
6 January 2020 Property | Real Estate
Indonesia Property Overweight (Maintained)
No More Overhang; Turnaround In Marketing Sales Stocks Covered 8 Ratings (Buy/Neutral/Sell): 7 / 0 / 1 Last 12m Earnings Negative
Revision Trend: Maintain OVERWEIGHT. We remain upbeat on the sector, as it will benefit Top Picks Target Price from lower interest rates and accommodative monetary policy in FY20. Bumi Serpong Damai (BSDE IJ) IDR1,930 However, there are concerns that decelerating global economic growth will Summarecon Agung (SMRA IJ) IDR1,600 impact the demand for real estate. Nevertheless, we expect the focus to shift more towards first-home buyers rather than investors, vs the situation 4-5 Puradelta Lestari (DMAS IJ) IDR382 years ago. Top Picks: BSDE, SMRA, and DMAS as a proxy to the industrial estates property market. Analyst Presales to improve. We believe that FY20 will be a better year for most developers as it is after an election year, when there was uncertainty for Andre Benas potential buyers. Most company representatives we spoke to believe that +6221 5093 9847 FY20 should be a better year, as they will launch more products YoY. 1H19 [email protected] property project launches were disrupted due to the presidential election. We estimate blended marketing sales for large property developers under our coverage to hit IDR20trn in end-FY19. We estimate that FY20 marketing sales will grow by 5-6% YoY. Property developer blended marketing sales The year of the first-home buyer. We believe that with the slowdown of the global economy, investors are less keen to park their money in real estate looking forward, in contrast to the situation during the commodities boom in 2010-2014. For FY19, there were successful marketing sales on products priced between IDR800m and IDR1.6bn. We see SMRA, CTRA, and recently BSDE moving their product mix more towards this price range targeting the mid- to low-end segment, and we believe this trend will continue into FY20. Industrial land sales have been robust. Industrial land sales picked up, largely due to DMAS. With Hyundai announcing its investment into Indonesia late last month, we believe more manufacturers are set to enter the Indonesian market and purchase industrial land. As such, there is a great possibility that the Government will reform labour laws and implement tax Source: Company data, RHB holidays to attract FDI. We expect the outlook for industrial land sales to remain bright, as Hyundai’s supply chain may also enter the picture. Industrial estates blended marketing sales Good infrastructure, better logistics. Infrastructure will remain a focus for President Joko Widodo’s second term. We think good infrastructure development is a strong factor that could lure investors. New toll roads in Jakarta-Cikampek, and Patimban Port are some examples of new developments that would improve logistics costs. This in turn would benefit industrial estate players with access to said infrastructure. As Patimban Port may have a soft launch in mid-2020, we expect SSIA to record a hike in marketing sales. Maintain OVERWEIGHT on the property sector. We still believe that when the interest rate decreases, demand for real estate picks up – especially for first-home buyers. Additionally, strong FDI inflow next year will benefit Source: Company data, RHB industrial estate players. Our Top Picks are CTRA and SMRA for property developers, while we like DMAS in the industrial property segment, on the potential entry of Hyundai’s supply chain from FY20 onwards.
TP % Upside P/E (x) P/BV (x) Yield (%) Company Name Rating (IDR) (Downside) Dec-20F Dec-20F Dec-20F Pakuwon Jati Buy 780 37% 10.9 1.4 1.5 Bumi Serpong Buy 1,930 54% 10.1 0.8 - CiputraDamai Buy 1,480 42% 14.9 1.1 1.0 SummareconDevelopment Buy 1,600 59% 27.5 1.0 1.3 AlamAgung Sutera Sell 260 9% 5.3 0.4 - Puradelta Lestari Buy 382 29.1 17.4 1.8 3.7 Surya Semesta Buy 1,085 65.6 10.9 0.7 1.8 BekasiInternusa Fajar Buy 330 52.8 6.1 0.4 3.3 industrial estate Source: Company data, RHB; Data as at 30 December 2019
See important disclosures at the end of this report 45
Indonesia Sector Update
6 January 2020 Healthcare | Hospitals and Pharmaceuticals Indonesia Healthcare Overweight (Maintained) 2020F Outlook: Immune, Yet Selective Stocks Covered 3 Ratings (Buy/Neutral/Sell): 2 / 1 / 0 Last 12m Earnings Positive
Revision Trend: Keep OVERWEIGHT, Top Pick: HEAL. Going into 2020, we maintain our Top Pick Target Price positive sector stance, supported by healthier JKN outlook (premium increase Medikaloka Hermina (HEAL IJ) – BUY IDR4,800 and potential reimbursement tariff hike), continued operational improvement, and ample room for growth due to underpenetrated healthcare services. Given rising JKN licence requirements for new hospitals and the importance of economies of scale to embrace JKN, the industry may consolidate further. On Analysts seasonality factors, 4Q19F is likely to improve YoY, but weaken QoQ. Potential elimination of deficit in JKN could raise reimbursement tariffs. Jessica Pratiwi We view that a 5-8% Indonesian Case Base Groups (INA-CBG) tariff +6221 5093 9845 adjustment should be on the cards in 1H20, but on selective cases. Assuming [email protected] 100% YoY increment in Class I and II premiums and 40% downgrade to Class III (Figure 11), the National Social Health Insurance (JKN) should still post a surplus balance. This should translate to stronger industry EPS growth, with Michael W Setjoadi Medialoka Hermina benefitting the most, given its highest exposure to JKN +6221 5093 9844 patients. [email protected]
Cost efficiency to embrace JKN profitably, digital innovation is next. After five years of JKN implementation, we believe hospital operators view the key strategy to maintain profitability is cost efficiency. All three major listed hospital Indonesia hospitals’ EV/EBITDA and EPS companies have integrated their medical procurement systems to increase growth (2020F) bargaining power to reduce drug costs (c.25% of total costs), while ensuring sufficient generic drug supply. Other cost-efficiency measures include integrating IT systems, which should shorten administrative work, lower labour costs, and accelerate reimbursement paperwork for insurance companies. Industry consolidation thesis remains intact. As centralised product procurement generates economies of scale, smaller hospital chains may not be sustainable in competing against large corporates. Note that JKN’s reimbursements could take up to 120 days, prolonging working capital needs. Hospitals likely to outperform in 4Q. On low-base earnings in 2018, we should see accelerating growth for hospital counters. Hospitals’ working capital is expected to improve as the Ministry of Finance recently injected IDR20trn into JKN. HEAL should be the main beneficiary, given its highest receivables exposure to JKN at IDR763bn, followed by Siloam International Hospitals Source: Company data, RHB, Bloomberg, as at 30 Dec 2019 (SILO IJ, NR) (c.IDR400bn) and Mitra Keluarga Karyasehat (IDR124bn). Margins are likely to be flattish on several new hospital openings. Indonesia healthcare stock prices YTD HEAL as sector Top Pick, supported by solid volume growth from JKN and private patients, as well as attractive valuations. Despite strong performance this year, HEAL’s share price is the most laggard among peers YTD. We stay NEUTRAL on MIKA given its stretched valuations at +1.3SD and potential volume slowdown in 1Q20 due to a high-base effect this year. Downgrade KLBF’s TP from IDR2,000 to IDR1,850. We cut KLBF’s 2020- 2021F EPS by 1-2% on continued unfavourable sales mix and lower sales assumption for consumer health divisions. However, we continue to like its long-term initiatives to increase value-added products and reduce import dependency. Over the past three years, KLBF has faced declining margins due to unfavourable sales mix (ie higher unbranded generic drug sales).
Downside risks: Improvement in Puskesmas clinics may reduce JKN patient Source: RHB, Bloomberg as at 30 Dec 2019 referral traffic. The country’s social insurance administration organisation (BPJS Kesehatan) plans to provide clearer guidelines on patient referrals from clinic to hospital. According to BPJS, there is too much traffic being referred at the hospital level, which is costly.
% Upside EV/EBITDA (x) P/BV (x) Yield (%) Company Rating TP (IDR) (Downside) Dec-20F Dec-20F Dec-20F HEAL Buy 4,800 34.0% 12.6 4.7 0.0 KLBF Buy 1,850 14.1% 17.6 4.0 1.7 MIKA Neutral 2,900 8.6% 32.3 7.5 0.9 Source: Company data, RHB, Bloomberg, as at 30 Dec 2019
See important disclosures at the end of this report 46
Strategy - Indonesia Indonesia Strategy
6 January 2020
Appendix Figure 1: Valuation and ratings of individual stocks under coverage (part 1) YTD Company Rating Price Target Mkt cap Earning growth (%) PE (x) PBV (x) ROAE (x) perf. (IDR/s) (IDR/s) (USDbn) (%) 19F 20F 21F 19F 20F 21F 19F 20F 21F 19F 20F 21F Banks 145.8 14.7% 10.1 15.6 13.4 18.8 16.4 14.5 2.9 2.6 2.3 16.1 16.3 16.4 Bank BRI BUY 4,280 5,000 37.8 16.9% 5.2 14.5 13.9 15.5 13.5 11.9 2.5 2.2 1.9 17.1 17.3 17.4 Bank Mandiri BUY 7,375 9,300 24.7 0.0% 12.2 17.1 14.5 12.3 10.5 9.2 1.7 1.6 1.4 14.5 15.5 16.0 Bank Central Asia BUY 31,800 40,000 56.2 22.3% 13.8 12.4 12.2 26.6 23.7 21.1 4.5 3.9 3.4 18.0 17.6 17.2 Bank BNI BUY 7,650 9,125 10.2 -13.1% 6.5 21.9 15.2 8.9 7.3 6.3 1.3 1.1 1.0 14.1 15.8 16.2 Bank BTN SELL 2,170 2,150 1.6 -14.6% (65.5) 97.3 3.5 23.7 12.0 11.6 1.0 1.1 1.2 4.2 8.7 9.8 Bank Danamon BUY 4,190 4,200 2.9 -44.9% (14.1) 19.8 24.5 12.2 10.1 8.1 0.9 0.8 0.7 7.6 8.2 9.5 Bank CIMB Niaga BUY 950 1,725 1.7 3.8% 1.2 8.6 13.2 6.8 6.2 5.5 0.6 0.5 0.5 8.6 8.7 9.2 Bank Panin NEUTRAL 1,240 1,300 2.1 8.3% 2.3 7.8 7.2 9.4 8.7 8.1 0.7 0.7 0.6 7.5 7.4 7.4 BTPN BUY 3,190 4,150 1.9 -7.3% 28.7 12.6 5.0 10.3 9.1 8.7 0.6 0.6 0.5 9.9 8.7 8.5 Bank Permata BUY 1,275 1,490 2.6 104.0% 57.0 9.7 9.4 25.3 23.0 21.1 1.5 1.5 1.4 6.1 6.6 7.0 BTPN Syariah BUY 4,100 4,150 2.3 128.4% 34.9 22.0 20.0 24.3 19.9 16.6 5.9 4.9 4.1 27.9 27.1 26.9 Bank Jabar SELL 1,405 1,400 1.0 -31.5% (3.0) 6.1 5.6 9.2 8.7 8.2 1.1 1.1 1.0 12.9 13.0 13.0 Bank Jatim BUY 685 820 0.7 -0.7% 9.5 33.0 31.3 7.4 5.6 4.3 1.1 1.0 0.9 15.6 18.9 22.0
Telco 32.0 13.8% 3.1 22.3 15.7 22.3 16.9 13.6 3.4 3.1 2.8 16.9 18.1 19.4 Telkom BUY 3,990 4,700 28.3 6.4% 13.7 15.8 15.6 19.3 16.7 14.4 3.6 3.3 2.9 19.8 20.7 21.5 XL Axiata BUY 3,240 3,850 2.5 63.6% (114.8) 119.0 52.9 71.0 32.4 21.2 1.9 1.8 1.7 2.6 5.6 8.2 Indosat BUY 3,120 4,000 1.2 85.2% (2.7) (22.9) (56.9) (7.2) (9.4) (21.8) 1.4 1.7 1.8 (20.2) (16.3) (8.0)
Automotive 20.3 -16.7% 0.5 10.0 13.6 12.7 11.5 10.2 1.9 1.7 1.6 15.1 15.4 16.1 Astra International NEUTRAL 6,850 6,700 19.9 -16.7% 0.1 9.9 13.6 12.8 11.6 10.2 1.9 1.7 1.6 15.3 15.6 16.3 Astra Otoparts BUY 1,210 2,100 0.4 -17.7% 20.3 14.6 12.4 8.1 7.1 6.3 0.5 0.5 0.5 6.3 6.9 7.4
Tobacco 24.3 -42.5% 16.2 (6.7) 8.1 14.2 15.2 14.0 5.2 5.5 5.5 35.5 33.2 36.7 Gudang Garam BUY 52,025 66,000 7.2 -37.8% 30.2 (10.2) 8.1 9.9 11.0 10.2 1.9 1.8 1.7 21.0 17.2 17.6 HM Sampoerna BUY 2,060 2,500 17.2 -44.5% 10.4 (5.3) 8.0 16.0 16.9 15.7 6.5 7.0 7.0 41.5 39.8 44.6
Staples 40.8 -4.0% 11.5 12.3 10.5 23.1 20.7 18.8 4.3 3.9 3.5 18.9 19.0 19.0 Indofood Sukses BUY 7,750 8,900 4.9 4.0% 11.3 16.1 11.4 14.7 12.6 11.4 1.9 1.7 1.6 13.3 14.3 14.7 Indofood CBP NEUTRAL 11,450 11,700 9.6 9.6% 9.8 8.3 9.1 26.6 24.5 22.5 5.5 5.0 4.6 21.9 21.3 21.2 Mayora Indah BUY 2,020 2,600 3.2 -22.9% 7.3 21.1 13.2 24.5 20.2 17.9 4.7 4.0 3.4 20.4 21.2 20.6 Nippon Indosari BUY 1,305 1,600 0.6 8.7% 65.6 (1.7) 12.7 28.2 28.7 25.5 2.6 2.5 2.3 9.6 8.8 9.3 Unilever Indonesia NEUTRAL 41,225 46,900 22.5 -9.2% (19.0) 2.6 6.7 42.1 41.0 38.5 55.6 54.2 49.7 114.6 133.8 134.8
Poultry 9.3 -8.8% (22.3) 2.9 11.7 28.7 27.9 24.9 4.8 4.3 4.0 17.4 16.3 16.6 Charoen Pokphand SELL 6,800 4,600 8.0 -5.9% (22.6) 2.8 11.8 31.6 30.7 27.5 5.3 4.8 4.4 17.5 16.4 16.6 Japfa Comfeed BUY 1,575 2,050 1.3 -26.7% (20.9) 3.5 10.9 10.8 10.4 9.4 1.8 1.6 1.4 17.1 16.1 16.2
Mining & Energy 14.5 -3.0% 0.6 (8.8) 0.7 9.2 10.0 10.0 1.5 1.4 1.3 17.1 14.6 13.6 Bukit Asam SELL 2,580 2,170 2.1 -40.0% (22.5) (7.9) 4.3 7.6 8.3 8.0 1.6 1.5 1.5 23.6 20.5 20.4 United Tractors NEUTRAL 21,175 21,700 5.7 -22.6% (12.2) (6.9) (1.7) 8.1 8.7 8.8 1.3 1.2 1.2 17.4 14.9 13.6 Adaro Energy NEUTRAL 1,590 1,360 3.6 30.9% 5.4 (28.5) 3.2 8.0 11.2 10.9 0.9 0.9 0.8 11.7 8.0 8.0 Indo Tambangraya SELL 11,050 10,430 0.9 -45.4% (50.1) (7.4) 0.9 6.6 7.2 7.1 1.0 1.0 1.0 14.3 14.3 14.6 Timah BUY 825 2,000 0.4 9.3% 101.6 24.3 8.3 5.7 4.6 4.3 0.8 0.7 0.6 15.4 16.8 16.1 Merdeka Copper Gold BUY 1,085 1,450 1.7 55.0% 62.3 16.4 (3.4) 19.4 16.7 17.2 3.9 3.2 2.7 21.4 20.4 16.6
Cement 10.5 7.7% (5.2) 46.4 24.2 45.9 32.8 26.8 2.7 2.6 2.5 5.9 8.3 9.8 Semen Indonesia BUY 12,300 17,100 5.2 7.0% (47.0) 75.4 30.7 44.7 25.5 19.5 2.3 2.2 2.0 5.2 8.9 10.8 Indocement NEUTRAL 20,000 20,500 5.3 8.4% 36.3 17.7 17.8 47.1 40.0 34.0 3.1 3.0 3.0 6.6 7.6 8.8
Transportation 1.5 37.3% (111.7) (0.8) 14.7 10.1 9.7 8.4 1.1 1.0 0.9 13.8 11.4 11.6 Blue Bird BUY 2,890 3,300 0.5 0.7% (11.5) 17.2 19.5 17.9 15.2 12.8 1.3 1.2 1.2 7.5 8.3 9.4 Garuda Indonesia BUY 498 750 0.9 67.1% (179.8) (11.3) 12.1 6.3 7.1 6.3 1.0 0.9 0.8 17.0 12.6 12.5 IKT BUY 690 1,400 0.1 -57.9% 10.8 3.5 14.5 5.1 5.0 4.3 0.8 0.8 0.7 17.2 16.0 16.5
Infra 6.5 8.7% (11.8) 9.6 20.4 12.0 11.0 9.0 1.3 1.1 1.0 11.3 11.5 12.3 Jasa Marga BUY 5,225 7,000 2.7 22.1% (5.0) 9.2 28.6 18.1 16.6 12.9 1.8 1.6 1.4 9.7 9.5 11.1 Waskita Karya BUY 1,445 2,700 1.4 -14.0% (36.4) 19.1 16.7 7.8 6.5 5.6 1.0 0.8 0.7 13.2 13.9 14.1 Wijaya Karya BUY 2,050 2,900 1.3 23.9% 9.9 8.6 9.8 9.7 8.9 8.1 1.2 1.1 1.0 12.5 12.5 12.4 PT PP BUY 1,650 2,800 0.7 -8.6% 16.8 5.5 16.2 5.8 5.5 4.8 0.6 0.5 0.4 13.0 12.3 12.8 Adhi Karya BUY 1,225 2,100 0.3 -22.7% 17.8 21.3 17.0 5.8 4.7 4.1 0.6 0.6 0.5 11.5 12.6 13.3 Acset Indonusa BUY 1,030 2,250 0.1 -33.8% (836.6) (212.2) 42.9 (5.4) 4.8 3.3 0.6 0.5 0.4 (10.3) 11.5 14.7
Retail 7.5 -3.4% 30.5 17.7 14.4 23.2 19.5 17.2 4.5 3.9 3.4 24.3 23.9 22.2 Matahari Dept. Store SELL 3,700 3,200 0.7 -33.9% 32.0 (1.0) (2.4) 7.2 7.2 7.4 6.3 4.4 3.4 84.1 72.2 52.2 Mitra Adiperkasa BUY 1,030 1,300 1.2 28.0% 21.8 20.9 15.1 19.1 15.8 13.7 3.1 2.7 2.3 15.4 18.0 17.9 Ace Hardware NEUTRAL 1,550 1,600 1.9 4.0% 8.3 7.0 12.5 25.5 23.8 21.1 5.6 5.0 4.5 23.3 22.3 22.5 Erajaya Swasembada BUY 1,625 1,900 0.4 -26.1% (69.3) 62.8 69.0 19.8 12.2 7.2 1.1 1.0 0.9 5.5 8.6 13.3 Ramayana Lestari NEUTRAL 1,035 1,100 0.5 -27.1% 3.8 (3.2) 7.6 12.1 12.5 11.6 1.0 1.0 1.0 11.2 8.2 8.5 Sumber Alfaria BUY 855 1,100 2.5 -8.6% 70.3 26.6 13.4 31.2 24.6 21.7 5.1 4.5 3.9 17.6 19.4 19.4 Buyung Poetra BUY 900 1,000 0.2 23.3% 42.6 30.9 20.1 18.1 13.9 11.5 3.4 2.9 2.5 20.3 22.8 23.4
Media 1.5 -22.7% (7.8) 12.0 12.3 15.6 13.9 12.4 4.1 3.7 3.3 25.3 25.6 26.1 Surya Citra Media BUY 1,445 1,870 1.5 -22.7% (7.8) 12.0 12.3 15.6 13.9 12.4 4.1 3.7 3.3 25.3 25.6 26.1
Property 6.5 2.0% 35.3 0.5 4.7 13.9 13.5 12.9 1.2 1.1 1.0 11.9 11.4 10.7 Alam Sutera SELL 242 260 0.3 -22.4% (10.4) 1.6 2.6 5.5 5.4 5.2 0.5 0.4 0.4 8.8 8.2 7.8 Bumi Serpong BUY 1,255 1,930 1.7 0.0% 125.3 (18.2) 5.6 8.3 10.1 9.6 0.8 0.8 0.7 10.5 8.0 7.8 Ciputra Development BUY 1,060 1,480 1.4 5.0% 4.2 5.6 2.5 16.0 15.1 14.8 1.2 1.2 1.1 8.1 7.9 7.6 Summarecon Agung BUY 1,030 1,600 1.1 28.0% 7.3 9.5 7.2 30.8 28.1 26.3 1.0 1.0 0.9 6.8 7.1 7.2 Pakuwon Jati BUY 570 780 2.0 -8.1% 1.4 8.1 4.4 9.6 8.9 8.5 1.6 1.4 1.2 19.1 19.7 18.0 Source: RHB
See important disclosures at the end of this report 47
Strategy - Indonesia Indonesia Strategy
6 January 2020
Figure 1A: Valuation and ratings of individual stocks under coverage (part 2) Company Rating Price Target Mkt cap YTD perf. Earning growth (%) PE (x) PBV (x) ROAE (x) (IDR/s) (IDR/s) (USDbn) (%) 19F 20F 21F 19F 20F 21F 19F 20F 21F 19F 20F 21F Industrial Estate 1.4 72.6% 15.8 69.5 23.2 29.8 16.8 14.9 1.5 1.5 1.5 6.6 8.9 9.8 Puradelta Lestari BUY 302 382 1.0 89.9% 11.1 47.8 0.9 26.4 17.9 17.7 1.8 1.8 1.8 7.3 10.2 10.1 Bekasi Fajar BUY 212 330 0.1 1.9% 3.8 (22.5) 27.5 4.7 6.0 4.7 0.5 0.4 0.4 10.1 7.3 8.7 Surya Semesta BUY 700 1,085 0.2 40.0% 43.9 222.6 118.8 60.7 18.8 8.6 0.8 0.8 0.7 1.4 4.3 8.8
Healthcare 8.9 28.4% 18.0 11.1 10.5 37.4 33.5 30.4 5.8 5.3 4.8 16.1 16.2 16.3 Medikaloka BUY 3,620 4,800 0.8 41.4% 97.9 27.8 18.5 43.7 34.2 28.9 5.2 4.7 4.1 9.9 11.4 12.0 Mitra Keluarga NEUTRAL 2,680 2,900 2.7 70.2% 17.3 10.8 8.8 53.0 47.9 44.0 8.1 7.4 6.7 15.5 15.8 15.7 Kalbe Farma BUY 1,600 1,850 5.4 5.3% 6.9 8.9 10.2 28.5 26.2 23.7 4.7 4.3 3.9 17.2 17.1 17.2
Plantations 3.1 5.3% (67.3) 439.8 33.8 105.2 20.1 15.9 1.4 1.3 1.2 1.3 6.7 8.6 Astra Agro Lestari BUY 13,425 16,160 1.9 13.5% (83.5) 530.0 45.6 108.5 17.2 11.8 1.3 1.2 1.1 1.2 7.1 9.8 London Sumatera BUY 1,420 1,585 0.7 13.6% (62.0) 243.1 (11.7) 76.9 22.4 25.4 1.2 1.1 1.1 1.5 5.1 4.3 Sawit Sumbermas NEUTRAL 880 1,000 0.6 -29.6% (23.6) 389.1 49.9 127.3 26.0 17.4 2.0 1.8 1.6 1.6 7.2 9.7
Misc 0.2 6.7% 28.7 16.2 16.9 16.3 14.0 12.0 2.8 2.5 2.3 17.8 18.8 20.0 Arwana Citramulia BUY 448 590 0.2 6.7% 28.7 16.2 16.9 16.3 14.0 12.0 2.8 2.5 2.3 17.8 18.8 20.0 Source: RHB
See important disclosures at the end of this report 48
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