Gearing up for growth

Transcription

1 Gearing up for growth Taye Shim Head of Research / Strategist Mirae Asset Sekuritas Indonesia Research 12/11/217

2 Gearing up for growth We see risks to the upside: Indonesia s economic growth has missed market expectations throughout the year. We ascribe the sluggish economic growth print to the persistently low inflation and weaker-than-expected government spending. However, with firming global growth and a broad-based commodity price recovery, we expect to see gradual recovery of inflation and higher government spending in 218F. We also expect global trade to continue to improve supported by the recovery of the global economic recovery. Global economic growth is firming: The global economic activity is strengthening. From a regional perspective, we are witnessing firming growths in emerging markets, which should buffer potential growth deceleration in the developed markets. The strengthening global growth should trigger a broad-based recovery of the global manufacturing, commodity prices as well as global trade. Indonesia is in the early stage of a cyclical recovery: In Indonesia, we expect to see growth recoveries in consumption, exports and government spending, which should accelerate growth in 218F. In particular, we are encouraged by the recent commodity price recovery, which should stimulate inflation (P), going forward. Furthermore, the upcoming presidential/general election and Asian Games are likely to stimulate consumers spending intentions (Q). Our JCI target for 218F is 6,795: We expect firming global growth to support the commodity price recovery which should fuel Indonesia s economic growth. We also expect to see steady recovery of private consumption in 218F. All in all, we believe consumption-related industries and miners are best positioned to embrace Indonesia s growth recovery.

3 Indonesia at a glance Item Unit/base Details Official name Republic of Indonesia Area Sq km 1,94,569 (World s 15 th largest) Ethnic groups 21 Javanese (4.1%), Sundanese (15.5%), Malay (3.7%), Batak (3.6%) Chinese (1.2%) Religion 21 Muslim (87.2%), Christian (7%), Catholic (2.9%) Population Pax, 216F 258,316,51 (World s 4 th largest) Median age Years, 216F 29.9 (vs. China 37.1, Korea 41.2) Population growth %, 216F.89 (vs. China.43, Korea.53) GDP USDbn, (vs. Korea 1,411) GDP growth %, (vs. China 6.7, Korea 2.8) FX rate (USD/IDR) IDR, Nov ,526 Policy rate %, Nov y gov. bond yield %, Nov JCI Market cap IDRtr, Nov. 17 6,442 (vs. KOSPI KRW1,551tr KOSDAQ KRW273tr) No. of listed stocks Co., Nov (KOSPI 763, KOSDAQ 1,241) Source: CIA World Factbook, Bloomberg, Mirae Asset Securities Research

4 Indonesia economy review

5 A year in review and preview 217 Review: A year mixed with hope and disappointment 218 Preview: Growing is firming across the globe Our key forecasts in hindsight Key events in 217 On December 1, 216, we published our outlook for Indonesia 217 (see In our 217F outlook report, we guided GDP growth of 5.1% YoY, FX rate of IDR13,5 and JCI target of 5,963pt. Item Mirae forecast YTD* Consensus Then** Consensus Now** GDP (217F, %) USD/IDR (Avg. IDR) Inflation (YoY, %) ,5 13,365 13,651 13, JCI (pt) 5,963 6,31 N/A N/A Source: Mirae Asset Sekuritas Research Note: YTD as of December 8, 217, Consensus Then as of November 3, 216, Consensus Now as of December 8, 217 Gearing up for growth 4

6 Indonesia s economy at a glance Mirae Unit F 218F Real GDP growth YoY, % Private consumption YoY, % Government spending YoY, % Investments YoY, % Exports YoY, % Imports YoY, % CPI %, avg Current account balance % of GDP Budget balance % of GDP Policy rate End, % USD/IDR IDR, avg 13,35 13,4 13,55 Source: Mirae Asset Sekuritas Research Note: Consensus and year-to-date figures based on Bloomberg (November 29, 217) Consensus 217F 218F ,35 13,5 YTD 9M N/A N/A ,365 Gearing up for growth 5

7 Heat map of Indonesia s economy (expenditure breakdown) Underlying fundamentals are not as bad as the headline suggests (YoY, %) 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Real GDP growth Private consumption (53.8% of 3Q17 GDP) Government spending (7.6% of 3Q17 GDP) Investments (32.3% of 3Q17 GDP) Exports (21.9% of 3Q17 GDP) Imports (19.5% of 3Q17 GDP) Source: BPS, Mirae Asset Sekuritas Indonesia Research Gearing up for growth 6

8 Consumption: Why do we need inflation? If prices go up tomorrow, you would spend today! Look back at 214 when President Jokowi cut fuel subsidies Gearing up for growth 7

9 Consumption: Purchasing intention remains weak Prolonged low inflation is decentivizing consumers to spend With inflation low, consumers seem to be sidelined (YoY, %) (YoY, %) Retail sales growth (avg. for the year, L) Inflation (avg. for the year, R) M17 Source: Bloomberg, Mirae Asset Sekuritas Research and banks are the key beneficiaries (YoY, %) Deposit growth -2 1/12 1/13 1/14 1/15 1/16 1/17 despite deposit yields grinding lower Source: Bank Indonesia, Mirae Asset Sekuritas Research Loan growth (% p.a.) /12 1/13 1/14 1/15 1/16 1/17 Gearing up for growth 8

10 Government spending: Can government spend? Structural bottlenecks to spending From unproductive to productive spending (IDRtr) Oil and non-oil subsidies 5 Capital expenditure and goods/services expenses Source: Government, Mirae Asset Sekuritas Research Budget deficit widening 2, 1,5 1, 5-5 (IDRtr) ,864 1,556 Source: Government, Mirae Asset Sekuritas Research State revenue composition FY14 vs. FY16 (IDRtr) FY16 FY Source: Government, Mirae Asset Sekuritas Research , 1,5 2, Budget balance Revenue Spending Income tax Production taxes (VAT) International trade tax Natural resources and environment Gearing up for growth 9

11 Government spending: Commodity price rebound is a blessing Improvement in government spending to accelerate government spending Due to the commodity price rebound (pt) Commodities Index (L) Dollar index (R) /6 1/7 1/8 1/9 1/1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 (USD) ?? Non-tax revenue is improving Revenue item (IDRtr) 9M16 9M17 Change Domestic tax revenue % Income tax % VAT % Property tax % Excise % Others % Non tax revenue % Natural resources % Share of SOEs Profit % Other non-tax revenue % Public Service Board % Source: Bloomberg, Mirae Asset Sekuritas Research Source: Government, Mirae Asset Sekuritas Research Gearing up for growth 1

12 Investments: Showing signs of confidence Jokowi s business friendly policies to stimulate appetite for investments Investment cycle reach the peak since 1Q13 (%) (%) GDP (L) 5.7 Investments (R) Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: BPS, Mirae Asset Sekuritas Research FDI investments by sector (YoY, %) 35 Primary sector 3 Secondary sector 25 Tertiary sector Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: BKPM, Mirae Asset Sekuritas Research Gearing up for growth 11

13 Investments: Which sectors are foreigners interested in? Foreigners seem to be interested in the services sector FDI investments in detail NO. S E K T O R / S e c t o r (USDmn) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 YoY I SEKTOR PRIMER / Primary Sector 1, , , , , , , ,52.3 1, % 1 Tanaman Pangan & Perkebunan / Food Crops & Plantation % 2 Peternakan / Livestock % 3 Kehutanan / Forestry % 4 Perikanan / Fishery % 5 Pertambangan / Mining 1, , ,74.4 1, ,6.3 1, % - - II SEKTOR SEKUNDER / Secondary Sector 2, ,58.9 3, , , , ,772. 3, , ,83.6 3, % Industri Makanan / Food Industry % 7 Industri Tekstil / Textile Industry % 8 Ind. Barang Dari Kulit & Alas Kaki / Leather Goods & Footwear Industry % 9 Industri Kayu / Wood Industry % 1 Ind. Kertas dan Percetakan/Paper and Printing Industry , % 11 Ind. Kimia dan Farmasi / Chemical and Pharmaceutical Industry % 12 Ind. Karet dan Plastik / Rubber and Plastic Industry % 13 Ind. Mineral Non Logam / Non Metallic Mineral Industry % 14 Ind. Logam, Mesin & Elektronik / Metal, Machinery & Electronic Industry , , , , % 15 Ind. Instru. Kedokteran, Presisi & Optik & Jam/Medical Preci. & Optical Instru, Watches & Clock Industry NM 16 Ind. Kendaraan Bermotor & Alat Transportasi Lain/Motor Vehicles & Other Transport Equip. Industry % 17 Industri Lainnya / Other Industry % III SEKTOR TERSIER / Tertiary Sector 1, ,532. 2, ,52.8 1,64.7 2, ,8.8 2, ,41.3 2, , % - 18 Listrik, Gas dan Air / Electricity, Gas & Water Supply ,64.9 1, % 19 Konstruksi / Construction % 2 Perdagangan & Reparasi / Trade & Repair % 21 Hotel & Restoran / Hotel & Restaurant % 22 Transportasi, Gudang & Komunikasi/Transport, Storage & Communication , % 23 Perumahan, Kawasan Ind & Perkantoran/Real Estate, Ind. Estate & Business Activities % 24 Jasa Lainnya / Other Services % JUMLAH / Total 6, , ,41.1 7, , ,155. 7, ,52.8 7, , , % Source: BKPM, Mirae Asset Sekuritas Research Gearing up for growth 12

14 Investments: The three supportive agenda Investment growth driven by policy settings, credit rating upgrade, and low yields President maintains favorable policies S&P raised Indonesia s credit rating Attractive rates for leverage Rating Now is time to attract investments: Jokowi Prime High grade Aaa Aa1 Aa2 AAA AA+ AA Jakarta Post, August 29, 217 Ease of doing business (217) MY CN Asia IN PH Rank Score Ease of doing business (218) MY IN CN Asia PH Rank Score Upper medium grade Lower medium grade Non-investable grade speculative Highly speculative grade Aa3 AA- A1 A+ A2 A A3 A- Baa1 BBB+ Baa2 BBB Baa3 BBB- Ba1 BB+ Ba2 BB Ba3 BB- B1 B+ B2 B B3 B- (YoY, %) Policy rate (R) CPI (YoY, L) (%) /14 7/14 1/15 7/15 1/16 7/16 1/17 7/ Source: World Bank, Mirae Asset Sekuritas Research Source: BI, Mirae Asset Sekuritas Research Source: BI, Mirae Asset Sekuritas Research Gearing up for growth 13

15 Trade: Structural virtuous cycle ahead Global trade is showing signs of recovery Trade balance is improving (USDmn) Trade balance (L) (YoY, %) 2, Export growth (R) Import growth (R) 6 1,5 5 1, , -1,5-1 -2, -2-2,5-3 -3, -4 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 Source: BPS, Mirae Asset Sekuritas Research Although fragile, global trade is marching upwards (25=1) (YoY, %) 125 Global trade index (L) Growth (YoY, R) /11 1/12 1/13 1/14 1/15 1/16 1/17 (25=1) (SA, Index) 125 Global trade index (L) Morgan Stanley Global Trade Leading Indicator (R) /11 1/12 1/13 1/14 1/15 1/16 1/17 Source: CBP Netherlands Bureau for Economic Policy Analysis, Morgan Stanley, Mirae Asset Sekuritas Research Gearing up for growth 14

16 Trade: Higher trade activities to narrow the current account deficit We see limited downside to the local currency Improving trade balance to stabilize CAD and improve the value of the rupiah (USDmn) 15, Trade balance Services balance ( %) 3 (21=1) 15 1, 5, Income balance Balance of transfer C.A. balance % of GDP (R) yr average Normalized target , , , 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Source: BPS, Mirae Asset Sekuritas Research /8 1/9 1/1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 Source: BPS, Mirae Asset Sekuritas Research Gearing up for growth 15

17 GDP breakdown by industry Services industries continue to drive Indonesia s economy (Constant Prices 21; IDRtr) 3Q16 4Q16 1Q17 2Q17 3Q17 QoQ (%) YoY (%) Gross Domestic Product 2, , , , , Agriculture Mining Manufacturing Electricity and gas Construction Wholesale and retail trade Transportation and storage Accommodation and F&B Information and communications Financial and insurance Real estate Business services Education services Other services Source: BPS, Mirae Asset Sekuritas Research Gearing up for growth 16

18 F&B Coal and Refined Petroleum Fabricated Metal and Elec Equip Transport Equipment Chemicals and Pharmaceuticals Textiles Wearing Apparel Tobacco Basic Metals Paper Products; Printing and Media Other Non-Metallic Mineral Rubber and Plastics Products Wood, straw and plaiting materials Machinery and Equipment Manufacture of Furniture Leather and Footware Other Manufacturing Manufacturing industry growth by sub-sectors Growth opportunities: F&B, Chemicals, Basic Metals, Machinery, Fab. Metal, Furniture Manufacturing sub-sector economic output vs. growth (9M17) (IDRtr) Economic output (L) Growth (YoY, R) (%) Source: BPS, Mirae Asset Sekuritas Research Gearing up for growth 17

19 Discussions on key themes in 218

20 Theme #1. Improving sentiment to stimulate Q

21 Global activity is showing signs of improvement Global economic recovery is firming global domestic demand Global manufacturing PMI is marching north (Index) JPMorgan Global Manufacturing PMI (L) Commodity price index (R) 48 1/16 5/16 9/16 1/17 5/17 9/17 Source: Markit, Bloomberg, Mirae Asset Sekuritas Research (USD) Global leading economic indicator is set to improve (%) Source: OECD, Mirae Asset Sekuritas Research OECD Total leading indicators CLI Trend Restored YoY SA Gearing up for growth 2

22 When will Indonesian consumers open up their wallets? Key drivers are: 1) Higher commodity prices and 2) Growth expectations Spending to improve on higher commodity prices and expectations for growth (e.g., election) (mn units) Car sales (L) Oil price (WTI, R) (USD/b) Source: Gaikindo, Bloomberg, Mirae Asset Sekuritas Research Presidential election is a key spending driver (YoY, %) (YoY, %) (YoY, %) Presidential Election year Retail sales growth (avg. for the year, L) Inflation (avg. for the year, R) M1 Retail sales growth (avg. for the year, L) Crude oil price (WTI, R) M1 Source: Mirae Asset Sekuritas Research (USD) Gearing up for growth 21

23 Presidential election and Asian Games Fiscal support and reinforced growth outlook to stimulate spending More money means more spending Seoul Olympics (1988) and Beijing Olympics (28) (IDRtr) Subsidies Oil price (WTI) (USD/b) (USD) 3, 25, 2, Indonesia Korea China , 1, GDP per capita 1 5 Subsidies remained high despite falling oil prices Source: Government, Bloomberg, Mirae Asset Sekuritas Research 2 5, Source: Bloomberg, Mirae Asset Sekuritas Research Gearing up for growth 22

24 Should we be concerned about the health of Indonesia s economy? Over investment, high-gearing of leverage, and surging prices are key drivers of economic collapse however, we see no imminent risks that could derail Indonesia's growth path Economic cycle is on track to a recovery Debt to GDP ratio remains low within the region (YoY, %) 12 1 OECD Leading index for Indoensia (L) JCI (R) (pt) 6,5 6, 5,5 (%) , /1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 Source: OECD, Mirae Asset Sekuritas Research 4,5 4, 3,5 3, 2,5 2, Source: CIA, Mirae Asset Sekuritas Research Prudent management of production utilization rate (%) Total 85 Manufacturing Q8 4Q9 4Q1 4Q11 4Q12 4Q13 4Q14 4Q15 4Q16 Source: BI, Mirae Asset Sekuritas Research Gearing up for growth 23

25 Theme #2. The rise of P (Price)

26 Government intervention has kept inflation on a tight leash The administration needs to keep Indonesia happy Prices are being controlled by the government Central Bank is downplaying inflation expectations (YoY, %) October 216 October Sementara secara tahunan (year on year) inflasi Oktober akan berada pada level 3,61%. Secara yoy 3,61%. Kami melihat inflasi sesuai target, bahkan 218 dan 219 mengarah pada titik tengah rata-rata, ujarnya. October 6, 217 Source: Kontan (Click), Mirae Asset Sekuritas Research We see further pressures building in 218 Cost plus margin? Year Gov. BI Consensus Mirae CPI (YTD) 217F 4.% 3.7~ 3.8% 3.9% 3.9% 3.9% 218F 3.5% 3.5% +/- 1% 3.8% 4.% N/A Source: BI, Press reports, Mirae Asset Sekuritas Research Source: Government, BI, Bloomberg, Mirae Asset Sekuritas Indonesia Note 1: Consensus based on Bloomberg consensus Note 2: Government s 217F inflation target (Click), 218F inflation target (Click) Note 3: BI s inflation target is based on a recent press report. Also, in a recent interview with the press, BI Deputy Senior Governor stated that "inflation (in 217) is very likely to come close to 3.5 percent" (Click) Gearing up for growth 25

27 A fragile environment for prices A sudden spike in oil price could push inflation faster-than-expected Inflation Gap btwn ASEAN and Indonesia has narrowed What would happen if oil price picked up? (YoY, %) Indonesia - ASEAN 5 Gap ASEAN 5 Indonesia (YoY, %) (USD/b) ? /13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 Source: Bloomberg, BPS, Mirae Asset Sekuritas Research 2 Indonesia CPI (L) 1 WTI (R) 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 Source: Bloomberg, BPS, Mirae Asset Sekuritas Research 2 Gearing up for growth 26

28 Higher customs/tax will be passed onto end users Higher import duties and newly introduced tax on e-commerce outlets to stimulate prices Indonesia s tax collection is the lowest in SEA Customs officers at work Tax revenue as a % of GDP (215) (%) OECD Philippines Malaysia Singapore Indonesia Source: OECD, Bloomberg, Mirae Asset Sekuritas Research Indonesia is aiming to boost tax to GDP ratio to 14% Source: Biro KLI, Mirae Asset Sekuritas Research Potential taxation on e-commerce to be passed on Tax-to-GDP ratio Source: OECD, Bloomberg, Mirae Asset Sekuritas Research Source: Internet, Mirae Asset Sekuritas Research Gearing up for growth 27

29 Impact of one-off spending (tax amnesty) to fade out Revenue growth remains sluggish driven by 1) weak economic activity (VAT) and 2) soft commodity prices (IDRbn) YoY Income and expenditure 981,69 848, ,272 1,21,6 1,338,11 1,438,891 1,55,491 1,58,2 1,555, % 1 Domestic revenue 979,35 847,97 992,249 1,25,346 1,332,323 1,432,59 1,545,456 1,496,47 1,546, % A Tax revenue gross 658,71 619, ,37 873,874 98,518 1,77,37 1,146,866 1,24,419 1,284,97 3.6% a Domestic tax 622,359 61, , ,753 93,862 1,29,85 1,13,218 1,25,479 1,249, % i Income tax 327, , ,46 431, ,7 56, ,181 62,38 666, % ii Production taxes (VAT) 29, ,68 23,65 277,8 337, ,714 49, , , % iii Land and building tax 25,354 24,27 28,581 29,893 28,969 25,35 23,476 29,25 19, % iv Duties on property transfers 5,573 6,465 8,26-1 N/A v Excise duties 51,252 56,719 66,166 77,1 95,28 18, ,86 144, , % vi Other taxes 3,34 3,116 3,969 3,928 4,211 4,937 6,293 5,568 8, % b International trade tax 36,342 18,67 28,915 54,122 49,656 47,457 43,648 34,94 35, % B Non-tax revenue 32,65 227, , , ,85 354, , , , % a Natural resources and environment 224, , , , , ,46 24,848 1,972 64, % e Profit transfers from SOEs 29,88 26,5 3,97 28,184 3,798 34,26 4,314 37,644 37, % f Other non-tax revenue 63,319 53,796 59,429 69,361 73,459 69,672 87,747 81, , % 2 Grants 2,34 1,667 3,23 5,254 5,787 6,833 5,35 11,973 8, % As we have continuously argued, general income level of Indonesian corporates/ households have improved Indeed, private consumption remains weak evident by the weak VAT revenue Given prolonged weakness in commodity prices, government revenue is likely to remain squeezed Tax amnesty redemption fees? limiting government spending ability (subsidies cut were unable to fully compensate for the infra and natural spending growths) YoY Central government expenditure 693, , ,46 883,722 1,1,558 1,137,163 1,23,577 1,183,34 1,154,18-2.5% Personnel expenditure 112,83 127,67 148,78 175, , , ,72 281,143 35, % Goods & Service Expenditure 55,963 8,668 97, ,639 14, , , , , % Capital Expenditure 72,772 75,871 8, , ,14 18, , , , % Interest payment (D.2.6. or F.2.6.) 88,43 93,782 88,383 93,262 1, ,35 133, ,1 182, % Subsidies (D.2.7. or F.2.7.) 275, ,75 177, , ,42 355,45 391, , , % - Oil Subsidies 139,17 45,39 82, , ,896 21, 239,994 6,759 43, % - Non-oil Subsidies 133,515 9,626 93, ,84 131, , ,123 12,68 121, % - Others 2,668 2,49 2,197 3,357 3,42 2,646 4,845 5,144 8, % Grants , ,262 7, % Social Benefits 57,741 73,814 68,611 71,14 75,621 92,136 97,925 97,151 49, % Other Expenditure 3,328 38,926 21,673 5,465 4,73 3,367 11,651 1,52 6,24-4.1% Regional transfers 292,433 38, , ,325 48, ,26 573,73 623,14 71, % Suspended state budget % Total 985,73 937,381 1,42,117 1,294,999 1,491,41 1,65,564 1,777,183 1,86,515 1,864, % Source: Government, Mirae Asset Sekuritas Research Government spending exhibited negative growth due to revenue constraints Public goods spending showed solid growth which was offset by the sharp cut in capex spending We remain concerned that the sharp reduction on social benefits may continue to hinder private consumers appetite for spending Gearing up for growth 28

30 Theme #3. Foreign investors to come back to Indonesia

31 Foreigners are focused on inflation Stubbornly low inflation has pushed foreigners out of Indonesian market Foreign net selling vs. inflation Foreigners tend to turn to net buyers after a sell-off (YoY, %) Cumulative foreign net purchase (R) Inflation (L) (IDRtr) 2 1 (USDmn) 5, 4, 3, , , 2, 1, -1, -2, -1, , , , , /16 12/16 2/17 4/17 6/17 8/17 1/17 Source: BI, Mirae Asset Sekuritas Research -7-3, Source: Mirae Asset Sekuritas Research Gearing up for growth 3

32 We expect a cyclical weakness of the greenback US is not the growth driver of the world economy The relative strength of US growth has peaked out (21=1) USD Real Effective Value (%p) GDP gap (US-EM) F Source: IMF, Bloomberg, Mirae Asset Sekuritas Research +1 std Avg. -1 std EM is likely to be the growth driver of the world (%) Emerging and developing Asia Major advanced economies (G7) United States F Source: IMF/World Bank, Mirae Asset Sekuritas Research Note: Nominal GDP in current USD (not adjusted for inflation) Gearing up for growth 31

33 Fed to maintain its accommodative policy throughout 218 Stubbornly low inflation has pushed foreigners out of Indonesian market Stripping away the home prices, where is the inflation? (% YoY) US Core CPI US Core CPI ex. Shelter. 2/12 11/12 8/13 5/14 2/15 11/15 8/16 5/17 Source: Bloomberg, Mirae Asset Sekuritas Research 1.7% Inflation contribution from home prices.6% E-commerce continues to erode consumer prices Segment Weight in e- commerce Computer/ Electronics 21.5% Apparel 17.% Item Sept. 17 YoY (%) Mobile phones PC and gadgets Software Men Women Source: E-Marketer, Mirae Asset Sekuritas Research Sept. 16 YoY (%) Automobile 1.3% Used car/ Trucks Home appliance 9.1% Media 6.5% Washing machine Clocks/Interior Books Video TV Audio Healthcare 5.5% Healthcare Toys/ Hobbies 3.9% Toys Sports Gearing up for growth 32

34 YOU RE HIRED! New Fed chief on board Mr. Jerome Powell to continue Yellen s legacy Federal Reserve Governor Jerome Powell (212~ ) Market views Biography: - Born Feb. 4, Education:: Princeton, George town - Politics: Republican - Career: US Dept. Treasury (9~ 93), Under Secretary of the Treasury (92-93), Bankers Trust (93), Dilon, Read % Co. (95), Carlyle Group (97~ 5), Global Environment Fund (8), Visiting Scholar at Bipartisan Policy Center (1~ 12), Member of the Federal Reserve Board of Governors (12~ ) We suspect that a Powell-led Fed would not be a large step away from a Yellen-led Fed and would thus represent policy continuity for markets DB Powell and Yellen would be competent continuity UBS "Powell would likely guide the board in a similar direction to the current and former Chair focusing on a commitment to a symmetric inflation goal", "Powell would also favor a strong risk management approach and clear separation between monetary policy and macro prudential tools", "With respect to the political economy and fiscal policy, he would likely have a slightly higher tolerance than the current chair, but would not sacrifice price stability for short-term growth objectives BBVA Fed s rate normalization means good news for EM (%) Upper bound (pt) 6 Lower bound 1,4 MSCI EM Index (R) 1,3 5 1,2 4 1,1 1, /4 1/6 1/8 1/1 1/12 1/14 1/16 Source: Bloomberg, Mirae Asset Sekuritas Research Gearing up for growth 33

35 Appendix. Rupiah vs. US Dollar

36 We expect marginal weakness of the rupiah in 218F Our average forecast for the rupiah is IDR13,55 per USD GDP gap is flattening (%, %p) Source: Bloomberg, Mirae Asset Sekuritas Research Note: We use consensus estimates for our gap analysis Indonesia-US Difference Indonesia US F and yield (1yr) gap should moderately narrow (%, %p) Indonesia-US Difference Indonesia US F Source: Bloomberg, Mirae Asset Sekuritas Research Note: We use consensus estimates for our gap analysis Gearing up for growth 35

37 Investment strategy: Back in the spotlight

38 Global index performance Indonesia's lackluster performance YTD chiefly due to lackluster economic growth Index performance as of December 8 (local currency) (%) Source: Bloomberg, Mirae Asset Sekuritas Research Gearing up for growth 37

39 LQ45 Revenue growth Valuation scatter plot (218F P/E) Over-valued HMSP EXCL KLBF SMRA INTP ICBP BBCA AKRA BBRI SCMA SMGR GGRM ASII BRPT TLKM Average INDF UNTR AALI PGAS PWON BJBR BMRI BSDE LPKR LSIP BBNI MNCN ADRO PTBA Opportunities when coupled with growth SRIL INCO Source: Bloomberg, Mirae Asset Sekuritas Research Note: Excluding UNVR, BUMI, ANTM, BMTR, and MYRX WSKT PPRO PTPP WIKA Fairly valued ADHI Under-valued (218F Revenue growth, %) Ticker Rev. growth 18F P/E (18F, %) (x) BBCA HMSP TLKM BBRI BMRI ASII BBNI GGRM UNTR ICBP KLBF INTP INDF SMGR ADRO JSMR PGAS SCMA BSDE EXCL BRPT PWON WSKT INCO AALI AKRA PTBA BJBR MNCN PTPP WIKA LPKR SSMS SMRA PPRO LSIP ADHI SRIL BBTN LPPF Avg * Avg. excludes JSMR and SSMS Gearing up for growth 38

40 Scatter plot by sectors Undervalued sectors are financials and commodities Financials 4 (218F P/E) BBCA 2 BBRI Average 15 BJBR 1 BMRI BBNI 5 Sector (218F Revenue growth, %) Consumers 4 (218F P/E) 35 HMSP 3 KLBF Sector 25 ICBP 2 GGRM 15 ASII Average LPPF 1 INDF 5 (218F Revenue growth, %) Source: Bloomberg, Mirae Asset Sekuritas Research Property and industrial 4 (218F P/E) 35 3 SMRA INTP PPRO 25 2 SMGR AKRA BRPT Sector 15 BSDE Average WIKA UNTR 1 PTPP PWON LPKR ADHI 5 WSKT (218F Revenue growth, %) Commodities 4 (218F P/E) 35 INCO AALI Sector Average 1 LSIP 5 ADRO PTBA (218F Revenue growth, %) Source: Bloomberg, Mirae Asset Sekuritas Research Gearing up for growth 39

41 Market and sector outlook Our preferred sectors are: Consumers, Mining, and Misc. Industry JCI (R / NP ) Financials (R / NP ) Consumer (R / NP ) Utilities (R / NP ) Property (R / NP ) 3 (PE, x) F F 1 (Sales Growth %) (PE, x) 35 (PE, x) F F F F 1 (Sales Growth %) 28 (Sales Growth %) (PE, x) F F 1 11 (Sales Growth %) Basic Industries (R / NP ) Trade (N/A) Mining (R / NP ) Agriculture (R / NP ) Misc Industries (R / NP ) (PE, x) (PE, x) (PE, x) 218F (PE, x) F F 217F F (Sales Growth %) 218F (Sales Growth %) (Sales Growth %) 215 (Sales Growth %) Source: Based on Bloomberg consensus, Mirae Asset Sekuritas Research (PE, x) F 218F (Sales Growth %) (PE, x) F 218F 15 (Sales Growth %) Gearing up for growth 4

42 Financials: Classic bottom line recovery The unfolding of a benign credit cycle Banks credit cycle vs. commodity prices (%) (USD) NPL ratio (L) Bloomberg Comomdity Index (R) /9 1/1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 Source: BI, Bloomberg, Mirae Asset Sekuritas Research Troubled loans are legacy assets (and provided for) (IDtr) (%) Aggregated credit cost of big 4 banks NPL Ratio Source: Bloomberg, Mirae Asset Sekuritas Research M17 (ann.) Gearing up for growth 41

43 Commodities: When growth meets low dollar Fundamentally driven economic growth to boost commodity prices higher Commodity prices are fundamentally driven (Index) JPMorgan Global Manufacturing PMI (L) 49 Commodity price index (R) 48 1/16 5/16 9/16 1/17 5/17 9/17 Source: Bloomberg, Mirae Asset Sekuritas Research (USD) Commodity prices show inverse relationship to USD (%) (USD) 15 Dollar Index (L) Bloomberg Comomdity Index (R) /9 1/1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 Source: Bloomberg, Mirae Asset Sekuritas Research Gearing up for growth 42

44 Consumers: Welcome back, Q and P Strong pocket situation offset low household s willingness to spend in % of households will earn USD7,5+ in 18F Consumer revenue to bounce off from the bottom (%) >USD25, >USD15, >USD7,5 >USD5, <USD5, Source: Bloomberg, Mirae Asset Sekuritas Research % (IDRtr) (YoY, %) 9 Revenue (L) Growth (YoY, R) 9M12 9M13 9M14 9M15 9M16 9M17 9M18 Inflation is expected to rebound F 218F Source: Bloomberg, Mirae Asset Sekuritas Research Note: 9M revenue of HMSP, GGRM, ICBP, KLBF and UNVR 4. 25% 2% 15% 1% 5% % 4.5 Gearing up for growth 43

45 Property: Brace for rising interest rates Construction: Robust headline earnings mean little economic value as they are only accrual figures Developers: A fool to use leverage in stock investment vs. A fool not to use leverage in buying a house Builders accrual ratio stand at.53x Inflation outlook Policy rate outlook (x) 1.2 WSKT WIKA PTPP ADHI Industry (%) 4.6 (%) Source: Company data, Mirae Asset Sekuritas Research Note: indicates 1% cash basis and 1 is 1% accrual basis F F Mirae Consensus F F Source: Bloomberg, Mirae Asset Sekuritas Research Mirae Consensus 218F 4.3 Gearing up for growth 44

46 Utilities/Infrastructure: It s a seller s market Utility operators have strong bargaining power (Inflation is not the key pricing factor) Utility operators have higher margins (%) TLKM UNVR ICBP Expansion drives revenue higher (monopoly) (YoY, %) Telekomunikasi Indonesia (TLKM) Revenue growth (L) Capex (R) (IDRtr) F Source: Bloomberg, Mirae Asset Sekuritas Research Source: Bloomberg, Mirae Asset Sekuritas Research Gearing up for growth 45

47 Valuations We also disagree with valuations being stretched Valuations are trending higher Three methods of utilizing free cash (x) Price-to-book ratio (L) Price-to-earnings ratio (R) (x) Bonus payout Investment (Capex) Dividend payout Current and Indonesia is one of the most expensive market Trailing MSCI EM China Korea Taiwan Malaysia Thailand Indonesia P/E (x) P/B (X) Source: Bloomberg, Mirae Asset Sekuritas Research Note: Price as of December 8, Objective: Share profit and retain talent Objective: Foundation for future cash flow Dividend payout ratio for 3 large-cap companies (%) TLKM UNVR HMSP Source: Company data, Mirae Asset Sekuritas Research Objective: Share value w/ stakeholders Looking beyond 46

48 Mirae Asset Sekuritas Indonesia model portfolio OW: Consumers, Misc. industry, Mining / MW: Infrastructure, Trade UW: Financials, Basic industry, property, agriculture Weight recommendation by sectors Industry Mirae (A) Market (B) (A) (B) Financials Consumers Infrastructure Trade/Services Basic industry Property Misc. industry Mining Agriculture Total Expansion drives revenue higher (monopoly) Overweight Consumers, Misc. industry, Mining Market weight Infrastructure, Trade Financials, Basic industry, Property, Agriculture Underweight Source: Mirae Asset Sekuritas Indonesia Research Gearing up for growth 47

49 Mirae Asset Sekuritas Indonesia model portfolio Remove/ Reduce: BBCA, BSDE, ISAT, PTBA, LSIP New/ Add: BMRI, BBNI, GGRM, KLBF, RALS, SCMA, ANTM Industry Name Ticker Weight (%) Acquisition (IDR) Last price (IDR) Return (%) 18F P/E (x) 18F ROE (x) Financials Bank Central Asia BBCA ,3 21, Financials Bank Mandiri BMRI 1. 6,821 7, Financials Bank Negara Indonesia BBNI 5. 8,85 8, Consumer Indofood CBP ICBP 8.5 8,65 8, Consumer Gudang Garam GGRM 5. 7,447 8, Consumer Kalbe Farma KLBF 1.5 1,539 1, Property Wijaya Karya WIKA 2. 2,26 1, Property Bumi Serpong Damai BSDE 2. 1,83 1, Infrastructure Telekomunikasi Indonesia TLKM 3. 4,11 4, Infrastructure Jasa Marga JSMR 9. 4,74 6, Trade Ramayana Lestari Sentosa RALS 5. 1,15 1, Trade Surya Citra Media SCMA 5. 2,45 2, Basic Industry Barito Pacific BRPT 4.5 1,29 2, Basic Industry Indah Kiat Pulp & Paper INKP 2. 3,2 4, N/A N/A Mining Tambang Batubara Bukit PTBA 4. 11,275 11, Mining Aneka Tambang ANTM Misc. Industry Astra International ASII 5.5 8,125 8, Misc. Industry Sri Rejeki Isman SRIL Source: Bloomberg estimates, Mirae Asset Sekuritas Indonesia Research Note 1: Last price as of December 8, 217 / Note 2: P/E and RoE based on Bloomberg consensus Gearing up for growth 48

50 JCI Target: 6,795pt by 218F Our target of 6,795pt is derived by applying a P/B multiple of 2.8x Trailing P/B trend (Trailing P/B, x) LT target 3.5x Post GFC to taper tantrum avg. 2.9x 1yr average: 2.7x 2. Trough cycle 2.x /5 1/6 1/7 1/8 1/9 1/1 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18 Gearing up for growth 49

51 Important Disclosures & Disclaimers Disclosures As of the publication date, PT Mirae Asset Sekuritas Indonesia, and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Indonesian jurisdiction and are subject to Indonesian securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of, PT Mirae Asset Sekuritas Indonesia, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or, PT Mirae Asset Sekuritas Indonesia except as otherwise stated herein. Disclaimers This report is published by PT Mirae Asset Sekuritas Indonesia ( Mirae ), a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Mirae makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Bahasa Indonesia. If this report is an English translation of a report prepared in the Indonesian language, the original Indonesian language report may have been made available to investors in advance of this report. Mirae, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae. Mirae, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.