February 22, Telecommunication IC rate cut impact should be fairly limited

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1 Giovanni Dustin To subscribe to our Daily Focus, please contact us at Market Index Last Trade Chg (%) MoM YoY JCI MSCI Indonesia MSCI EM 1, HANG SENG 31, KOSPI 2, FTSE 7, DJIA 24, NASDAQ 7, Valuation 2018F P/E (x) P/B (x) ROE (%) JCI Key Rates Last Trade Chg (bps) MoM YoY BI 7-Day RR yr yr FX Last Trade Chg (%) MoM YoY USD/IDR 13, USD/KRW 1, USD/JPY USD/CNY Commodities Last Trade Chg (%) MoM YoY WTI Gold 1, Coal Palm Oil 2, Rubber Nickel 13, Copper 7, Tin 21, JCI Index VS MSCI Emerging Markets (pt) 7,000 6,500 6,000 5,500 JCI MSCI EM 5,000 01/17 04/17 07/17 10/17 01/18 (pt) 1,250 1, Telecommunication IC rate cut impact should be fairly limited February data package survey: Telkomsel, the aggressor According to our data package survey for February, all operators Telekomunikasi Indonesia (TLKM), Indosat (ISAT), and XL Axiata (EXCL) maintained their prices from January, but aggressive packages (ISAT s Unlimited and Yellow packages, and EXCL s Xtra Quota) also continued. Additionally, Telkomsel increased the main data quota of its packages (from 3GB to 6GB for Flash 10GB, from 6GB to 12GB for Flash 16GB, from 8GB to 16GB for Flash 20GB, and from 15GB to 25GB for Flash 29GB), which essentially cut the blended average effective data yield of its Flash data packages from IDR29,000 to IDR20,000 (c.-30%). Operators are keeping their aggressive stances to maintain their market shares, as the February 28th deadline for prepaid SIM card registration is fast approaching. (Government officials recently indicated the deadline will not be extended.) As of February 18th, around 230mn subscribers had registered (c.68% of total prepaid subscribers). Interconnection rate cut is on the horizon The Indonesian Telecommunication Regulatory Authority (BRTI) has submitted results of the interconnection rate (IC rate) evaluation (conducted by the Finance and Development Supervisory Agency/BPKP) to the Ministry of Communications and Information Technology (Menkominfo/ICT). Although ICT has yet to announce the results, information circulating in the media suggests BPKP recommended an asymmetric scheme. Under such a scheme, IC rate calculations would be based on operators network investments (with higher investments/better infrastructure translating into a lower IC rate). This bodes well for TLKM, which boasts the most extensive infrastructure network in Indonesia, although the impact on operators and the industry as a whole will be fairly limited, in our view. but impact should be fairly limited The possibility of an IC rate cut surfaced years ago, but the final verdict has been postponed multiple times. We believe that the issue has dragged on for too long. Notably, the impact of an IC rate cut now would not be as significant as it would have been years ago. As the migration to data has already started and will continue to intensify, we expect operators minutes of usage (MoU) to inch lower, which will reduce the contribution of voice and IC revenue. We estimate voice and IC revenue to contribute around 21% and 3%, respectively, to total industry revenue in FY18F, down from 33% and 5% in FY16. It is also worth noting that while the IC rate cut looks imminent, it is still far from a done deal. ICT must review the recommendation, and it must be communicated with all operators. Maintain Overweight; TLKM remains our preferred pick We reiterate our Overweight call on the telco sector, although we acknowledge the looming risk of heightened competition. Moreover, even though we believe an IC rate cut at this stage is not a game changer, it represents a positive wind of change that incentivizes network investments. Telekomunikasi Indonesia (TLKM/Buy/TP: IDR5,000) remains our preferred pick, as we expect the competition landscape to turn more favorable for the incumbent in 2H18 (please see our report titled: FY18 outlook: A changing competitive landscape). The main risks to our call include 1) stronger-than-expected competition that could lead to a disruptive price war; 2) sudden, drastic changes to regulations; and 3) slower-than-expected data monetization.

2 Local flash TOWR: Sarana Menara posts 2,300 tower leases by PT Sarana Menara Nusantara Tbk (TOWR) has received over 2,300 tower lease requests or tenancy leases last year. Of this total order, nearly 1,600 tenancy leases have reached the ready-toinstall status (RFI) and are beginning to generate rental income. The Group also acquired 3,700 additional equipment leases in 2017, which came from tenant users of more leased space on the tower site. (Kontan) BNBR: Bakrie & Brothers will restructure its IDR 2.5 trillion debt. The Bakrie & Brothers Tbk (PTBN) debt clean-up program continues. There will be some more corporate debt that will be restructured this year. "At least IDR 2.5 trillion," said Finance Director Amri Aswono Putro to Kontan.co.id, not long ago. (Kontan) CSAP: Catur Sentosa targets 2018 revenue to increase by 14%. PT Catur Sentosa Adiprana Tbk (CSAP) this year aims to double digit revenue growth. This will be achieved by optimizing all business lines from distribution and retail of building materials, chemicals and FMCG. Idrus H Widjajakusuma, Corporate Secretary CSAP said, products in the category of flooring or ceramics and granite will still be a growth driver. The sales portion of the two products is still relatively high compared to other products. "The growth target is around 14% for 2018," he told Kontan.co.id by , Tuesday (20/2). (Kontan) BBRI: Tomorrow, BRI will record IDR 2.44 trillion bond in IDX. PT Bank Rakyat Indonesia Tbk (BBRI) obtained approval from the Indonesia Stock Exchange (BEI) to register bonds in IDX. The bonds have AAA rating from PT Rating Rating Indonesia (Pefindo). "The sustainable bond II of BRI Stage IV of 2018 amounting to IDR 2.44 trillion will be guaranteed with full capability," said I GEde Nyoman Yetna, Head of Corporate Valuation Division I of Indonesia Stock Exchange (IDX) in the information disclosure, Wednesday (21/2). The bond listing of the two series will be held on Thursday,. (Kontan) ARNA: Arwana Citramulia prepares IDR 30 billion for share buyback. PT Arwana Citramulia Tbk (ARNA) immediately executed a buyback of shares. Therefore, the company will immediately request shareholder approval in the Annual General Meeting of Shareholders on March 28, ARNA management said it will conduct share buyback within 12 months after the date of shareholder approval. "The Company provides as much as IDR 30 billion for the repurchase of the company's shares up to the maximum price according to the prevailing regulations," said ARNA management in the information disclosure on the BEI website on Wednesday (21/2). (Kontan) MYOH: Samindo Resources will be working on a new project in East Kalimantan. PT Samindo Resources Tbk targets to sign a new project by This target is a key performance performance indicators (KPI) of the major shareholders to be met by the company. Unfortunately, Ahmad Zaki, Investor Relations of PT Samindo Resources Tbk admitted that he can not mention which companies will cooperate with MYOH. Zaki just mentioned, currently the director of PT Samindo Resources Tbk is conducting field visits for its location survey. The target, the signing of cooperation can be done in mid Project in East Kalimantan has a contract period over 5 years. "About seven years if not mistaken, but that is obviously long enough, over 5 years," added Zaki. (Kontan) 2

3 Technical analysis Tasrul Jakarta Composite Index (JCI) Consolidation Summary Item Data Item Data Close (Feb 21, 2018) (-0.29%)Trading range 6,612-6,671 Average index performance (%) 3.82 Target Period 58 - Daily 6,671 r-squared Weekly 6,719 Volatility (+/-, %) / Monthly 6,756 Volatility (+/-, point) / Stop loss 6,595 Source: Research Figure 1. Daily trend Uptrend ^JKSE [ ^JKSE ] - Daily - 2/21/2018 Open: 6,649 High: 6,666 Low: 6,614 Close: 6,643 Vol. 17,985,058,816 Prev. Av g. Price: 6,641.2 R-Squared: Period: 58 Std.Dev : 1.64 Volatility (+) : Volatility (-) : V-Ratio : 1.04 Chg.: -0.29% 6, , , , , , , , , Optimization Trading System ^JKSE - Volume = 17,985,058,816.00, EMA(Volume,27) = 10,536,550, ,985,058,816 10,536,550, Dec Feb

4 Figure 2. Daily MFI optimized,w%r optimized, Stochastic %D & MACD optimized ^JKSE - MFI Smoothed = ^JKSE - Will%R Smoothed = ^JKSE - Stochastic %D = 61.66, MA = ^JKSE - MACD = , Trigger = , Histogram = ^JKSE [ ^JKSE ] - Daily - 2/21/2018 Open: 6,649 High: 6,666 Low: 6,614 Close: 6,643 Vol. 17,985,058,816 Prev. Av g. Price: 6,641.2 R-Squared: Period: 58 Std.Dev : 1.64 Volatility (+) : Volatility (-) : V-Ratio : , ,612.4 Chg.: -0.29% ^JKSE - Volume = 17,985,058,816.00, EMA(Volume,27) = 10,536,550, ,985,058,816 10,536,550,400 Nov Dec 2018 Feb Source: Research 4

5 Figure 3. Weekly Trend Uptrend, MFI optimized,w%r optimized, Stochastic %D & Bollinger Band optimized ^JKSE - MFI Smoothed = ^JKSE - Will%R Smoothed = ^JKSE - Stochastic %D = 82.84, MA = ^JKSE - Weekly 2/21/2018 Open , Hi , Lo , Close (0.8%) BBTop(Av erage,14,1.81) = 6,754.67, BBBot(Av erage,14,1.81) = 5,925.04, 6, ^JKSE [ ^JKSE ] - Weekly - 2/21/2018 Open: 6,611 High: 6,693 Low: 6,608 Close: 6,643 Vol. 40,633,720,832 Prev. Av g. Price: 6,648.3 R-Squared: Period: 67 Std.Dev : 1.82 Volatility (+) : Volatility Optimization (-) : Trading System V-Ratio : 1.27 ^JKSE - Volume = 40,633,720,832.00, EMA(Volume,14) = 38,071,652, Chg.: 0.79% 6, , , , , Oct 2017 Apr Jul Oct 2018 Source: Research 40,633,720,832 38,071,652,352 Figure 4. Daily : 6,612 6,671 Figure 5. Weekly : 6,592-6,719 Figure 6. Monthly : 6,422 6,756 ^JKSE [ ^JKSE ] - Daily - 2/21/2018 Open: 6,649 Prev. Av g. Price: 6,641.2 R-Squared: Period: 58 Std.Dev : 1.64 Volatility (+) : Volatility (-) : V-Ratio : 1.04 Chg.: -0.29% 6,671.1 ^JKSE [ ^JKSE ] - Weekly - 2/21/2018 Open: Prev. Av g. Price: 6,648.3 R-Squared: Period: 67 Std.Dev : 1.82 Volatility (+) : Volatility (-) : V-Ratio : ,719.4 Chg.: 0.79% x ^JKSE [ ^JKSE ] - Monthly - 2/21/2018 Open: Prev. Av g. Price: 6,587.9 R-Squared: Period: 30 Std.Dev : Volatility (+) : ,756.4 Volatility (-) : V-Ratio : ,587.9 x 6, , , , ,612.4 ^JKSE - Volume = 17,985,058, ,985,058,816 ^JKSE - Volume = 40,633,720, ^JKSE - Volume = 148,435,894, ,633,720, ,435,894, Feb Source: Research Source: Research Source: Research 5

6 Chart 7. JCI Vs. USD/IDR (pt) JCI (L) USD/IDR (R) 6,800 6,600 6,400 6,200 6,000 5,800 5,600 5,400 11/22 12/20 1/17 2/14 Source: Bloomberg, (IDR) 13,800 13,700 13,600 13,500 13,400 13,300 13,200 13,100 Chart 8. JCI performance (absolute vs. relative) (%, %p) Note: Relative to MSCI EM Index Source: Bloomberg, 2.2 Absolute D 1W 1M 1Y Relative -3.2 Chart 9. Foreigner s net purchase (EM) Chart 10. Energy price (USDmn) ,000-1,500-2, , Note: The latest figure for India are February 20 th, 2018 Source: Bloomberg, 1 Day 5 Days Korea Taiwan Indonesia ThailandPhilippines India (D-3M=100) 120 CPO WTI Coal /22 12/20 1/17 2/14 Source: Bloomberg, Chart 11. Non-ferrous metal price (D-3M=100) Copper Nickel Tin /17 12/17 01/18 02/18 Source: Bloomberg, Chart 12. Precious metal price (D-3M=100) Silver Gold Platinum /17 12/17 01/18 02/18 Source: Bloomberg, 6

7 Table. Key valuation metrics Company Name Ticker Price Market Cap Price Performance (%) P/E(X)* P/B(X)* ROE(%)* (IDR) (IDRbn) 1D 1W 1M 1Y FY18 FY19 FY18 FY19 FY18 FY19 Jakarta Composite Index JCI 6,643 7,416, FINANCIALS Bank Central Asia BBCA 24, , Bank Mandiri Persero BMRI 8, , Bank Rakyat Indonesia Persero BBRI 3, , Bank Negara Indonesia Persero BBNI 10, , Bank Tabungan Negara Persero BBTN 3,800 40, CONSUMER HM Sampoerna HMSP 4, , Gudang Garam GGRM 80, , Indofood CBP Sukses Makmur ICBP 8, , Indofood Sukses Makmur INDF 7,625 66, Kalbe Farma KLBF 1,635 76, Unilever Indonesia UNVR 54, , AGRICULTURAL Astra Agro Lestari AALI 14,000 26, PP London Sumatera Indonesia LSIP 1,390 9, Sawit Sumbermas Sarana SSMS 1,445 13, INFRASTRUCTURE XL Axiata EXCL 2,930 31, Jasa Marga JSMR 5,550 40, Perusahaan Gas Negara PGAS 2,720 65, Tower Bersama Infrastructure TBIG 5,900 26, Telekomunikasi Indonesia TLKM 4, , Soechi Lines SOCI 286 2, N/A N/A Garuda Indonesia GIAA 322 8, BASIC-INDUSTRIES Semen Indonesia SMGR 11,575 68, Charoen Pokphand Indonesia CPIN 3,620 59, Indocement Tunggal Prakarsa INTP 21,800 80, Japfa Comfeed Indonesia JPFA 1,530 17, MINING Indo Tambangraya Megah ITMG 29,600 33, Adaro Energy ADRO 2,470 79, Aneka Tambang ANTM , N/A Vale Indonesia INCO 3,520 34, N/A Tambang Batubara Bukit Asam PTBA 3,380 38, TRADE United Tractors UNTR 37, , AKR Corporindo AKRA 6,000 24, Global Mediacom BMTR 655 9, N/A N/A N/A N/A N/A N/A Matahari Department Store LPPF 10,575 30, Media Nusantara Citra MNCN 1,585 22, Matahari Putra Prima MPPA 460 2, N/A Surya Citra Media SCMA 2,660 38, Siloam International Hospital SILO 8,550 13, PROPERTY Bumi Serpong Damai BSDE 1,790 34, Adhi Karya ADHI 2,400 8, Alam Sutera Realty ASRI 388 7, Ciputra Development CTRA 1,270 23, Lippo Karawaci LPKR , Pembangunan Perumahan PTPP 3,200 19, Pakuwon Jati PWON , Summarecon Agung SMRA 1,120 16, Wijaya Karya WIKA 1,930 17, Waskita Karya WSKT 2,940 39, MISCELLANEOUS Astra International ASII 8, , Source: Bloomberg, *Note: Valuation metrics based on Bloomberg consensus estimates 7

8 Sector performance Top 10 market cap performance Name Index Chg (%) Ticker Price Market Cap (IDRbn) Chg (%) Agricultural 1, BTPN IJ , Mining 2, BSSR IJ , Basic-Industry MEDC IJ , Miscellaneous Industry 1, BRMS IJ 90 5, Consumer Goods 2, SDRA IJ 890 5, Property & Construction KRAS IJ , Infrastructure 1, BUMI IJ , Finance 1, PGAS IJ , Trade LSIP IJ , Composite -0.3 AALI IJ , Source: Bloomberg Top 5 leading movers Top 5 lagging movers Name Chg (%) Close Name Chg (%) Close BBNI IJ ,175 BMRI IJ ,800 PGAS IJ 3.4 2,720 HMSP IJ ,780 SMGR IJ ,575 ASII IJ ,175 MEDC IJ 7.1 1,365 GGRM IJ ,100 BTPN IJ 7.9 3,690 WSKT IJ ,940 Source: Bloomberg Economic Calendar Time Currency Detail Forecast Previous 2:00am USD FOMC Meeting Minutes 9:00am NZD Credit Card Spending y/y 6.3% 12:15pm USD FOMC Member Quarles Speaks 2:45pm EUR French Final CPI m/m -0.1% -0.1% 4:00pm EUR German Ifo Business Climate :30pm GBP Second Estimate GDP q/q 0.5% 0.5% 4:30pm GBP Prelim Business Investment q/q 0.5% 0.5% 4:30pm GBP Index of Services 3m/3m 0.4% 0.4% 6:00pm GBP CBI Realized Sales :30pm EUR ECB Monetary Policy Meeting Accounts 8:30pm CAD Core Retail Sales m/m 0.1% 1.6% 8:30pm CAD Retail Sales m/m 0.0% 0.2% 8:30pm CAD Corporate Profits q/q 8.5% 8:30pm USD Unemployment Claims 230K 230K 9:00pm EUR Belgian NBB Business Climate :00pm USD CB Leading Index m/m 0.7% 0.6% 10:00pm USD FOMC Member Dudley Speaks 10:30pm USD Natural Gas Storage -121B -194B 11:00pm USD Crude Oil Inventories 2.2M 1.8M 10:00pm EUR Consumer Confidence 1 1 Note: Time is based on Indonesian local time Source: Forex Factory 8

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