Market outlook OVERWEIGHT. The mitigation strategy of the government. Thursday, 21 May 2015

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1 Thursday, OVERWEIGHT YE15 Target 5,900 JCI Index 5,292 Market Cap. (Rp tn) 5,341 US$ (bn) 408 1Y Avg. daily T/O. (Rp bn) 6,641 US$ (mn) 506 Market outlook The mitigation strategy of the government Against the backdrop of the current economic weakness, we had an opportunity to host Mr. Purbaya Yudhi Sadewa, the Deputy III for Strategic Issues Management at the Presidential Staff Office, as the key speaker in our Danareksa Distinguished Speaker Series to share his insight on the current problems that the government is facing as well as what would be the mitigation plan to propel economic growth. Post the meeting, we were encouraged on government s more aggressive stance on budget disbursement, which would include better monitoring and coordination in ministries. Nonetheless, the 2Q15 economic activity is unlikely to show much improvement, in our view. We continue to believe that stronger budget disbursement in 2H will play a major role in restoring investors confidence, something that has been missing as seen in consistent foreign outflow on equity market recently. The key points on the discussion Some of the key points: the current economic slowdown was driven by tight monetary policy initially initiated by previous government; however, the government has now fully aware of the current slow economy situation, and aggressively looking ways to address the problem. There will be more effort to boost budget absorption, as well as more stringent monitoring on ministries. Government spending will be the key to propel economic acceleration, and aside from infra spending, the government would also accelerate the disbursement direct support to poor family to enhance purchasing power. All in all, despite our believe that the economic situation will remain challenging in 2Q15, government more aggressive spending will further emphasize economy acceleration in 2H. In the end, higher economic growth will improve confidence to equity market, which recently has saw consistent foreign outflow given faltering economic growth, which jettisoned Indonesia s attractiveness as an emerging market. Fear of CAD has cost Indonesia a considerable economic slow down Current account deficit (CAD) has become the specter of the economy over the past couple years, which considered to be the culprit of weak IDR. In contrast, however, the CAD situation was essentially driven by an increased in capital inflow (FDI and portfolio) since 2010, which ultimately supported economic growth. Higher capital inflow would consequently increase import activity on raw materials which would led to CAD expansion. The monetary policy response was to tightened monetary policy through rising BI benchmark rate and reduced the growth rate of money supply. Arguably, the policy was effective to bring down CAD, as seen in the recent 1.8% CAD to GDP, but it came at considerable cost of slower economic growth. In contrast to its initial target, weak economic growth has driven outflow from equity market, which in the end would further pressured down IDR, despite an improved CAD figures. With ample forex reserve, Bank Indonesia has given a sign of its intention to support rupiah at this current level, something that, in our view, should be done much earlier. Government more active role is needed to control food prices Imperfect coordination during the initial stage of the new government had appeared to cause major inflation spike post government decision to raised fuel price in Nov Fuel price increase always created major cost push inflation which consequently eroded purchasing power. To make it worse, the rice price increase was excessive, mainly given the unavailability of subsidized-rice, something that has been effective in controlling rice price during SBY era. The government took swift action and strike to have better coordination between Bulog and various ministries to ensure better rice available in the market and conducting market operation to stabilizing the price. Rice price has been gradually decline since then, and the government plan to widen the market operation from the usual wet market to include modern retail channel such as Alfa, to distribute subsidized-rice, a new innovation which we believe will enhance the effectiveness to stabilized rice price. In the following months, food prices will likely to have upward pressure on pre Lebaran demand, which will become the real test for the government.

2 Exhibit 1. Rice price trends Source: CEIC The economic growth momentum is still soft The current economic condition has been signaling a slowdown as seen in various demand data such as retail sales (especially outside Java), consumer products, automotive sales, cement sales as well as lower credit growth in the 1Q15. If the situation persists, the potential recession will become the major risk that will unfold, eventually. The Leading Economic Indicator is still showing slower growth momentum, which would need more active and stronger effort from government to propel economic activity. In our recent market outlook report, we also highlighted that April data was not showing any pick up. Our economist expects that GDP growth will likely to remain soft in 2Q15, before improve in 2H15. Exhibit 2. April 2015 data remains soft 4M14 4M15 YoY, % Apr-14 Mar-15 Apr-15 MoM, % YoY, % Constrution -Contracts (IDR bn) WIKA 5,355 5,120 (4) 643 1, (17) 35 PTPP 5,501 7, ,580 1,100 (80) 15 WSKT 3,520 3, ,830 1,100 (40) 115 ADHI 2,000 3, , (41) 48 TOTAL 16,376 19, ,612 9,724 3,810 (61) 46 Auto - Sales (Unit) ASII 4 Wheelers 230, ,604 (20) 57,553 49,951 46,395 (7) (19) 2 Wheelers 1,699,237 1,464,395 (14) 445, , ,001 (1) (17) Other 4 Wheelers 203, ,341 (12) 48,571 49,459 35,205 (29) (28) 2 Wheelers 1,012, ,423 (34) 282, , ,774 (9) (46) Total 4 Wheelers 434, ,945 (16) 106,124 99,410 81,600 (18) (23) 2 Wheelers 2,711,866 2,129,818 (21) 727, , ,775 (4) (28) Cement-Sales ('000 tonnes) SMGR 8,182 6,301 (23) (7) (5) INTP 5,627 5,262 (6) (2) SMCB 2,661 2,506 (6) (2) (0) SMBR (4) 93 TOTAL DOMESTIC 18,598 18,096 (3) (3) (1) Retail - Sales (IDR bn) ACES 1,388 1, (10) 6 RALS 2,059 1,981 (4) (4) (5) Retail - SSG (%) ACES 5.00 (2.10) RALS 7.10 (3.90) Source: Companies and Association; Danareksa Sekuritas 2

3 What s has been done, and what would be next Not standing still to the current soft economic situation, the government is now on all cylinders to push through some mitigation plan as: 1) sustaining people s purchasing power, 2) maintaining price stability, 3) expediting budget absorption and 4) attracting more investment to Indonesia. To maintain purchasing power, the government has launched Family Welfare Deposit Program (PSKS) for poor families in April 2015, of which IDR6.6tn had been distributed. To boost investments, the government has been aggressively inviting foreign investments, accelerating infrastructure projects, reorganizing bureaucracy, and developing Jakarta s Mass Rapid Transit (MRT). In regards to MRT, the development of East-West corridor will be started later in this year in conjunction with North-South Corridor that currently under construction. In addition to this, the government also has started to accelerate the development of several projects, including: groundbreaking power plant projects, started the toll road projects (trans Sumatera, Solo-Ngawi and Ngawi-Kertosono), and started the construction of rusunawa. Exhibit 3. Progress of Government Infrastructure Program I Power Plant Project 35,000 MW Project Progress Location Capacity 1 Signing of PPA PLTB (wind power plant) Samas Yogyakarta 50 MW 2 Signing of PPA PLTU (steam power plant) Kendari-3 South East Sulawesi 2x50 MW 3 Signing of PPA PLTU (steam power plant) Jeneponto Expansion South Sulawesi 2x125 MW 4 Signing of PPA PLTA (hydro power plant) Malea South Sulawesi 2x45 MW 5 Signing of LOI of EPC PLTU (steam power plant) Grati East Java 450 MW 6 Groundbreaking PLTA (hydro power plant) Jati Gede West Java 2X55 MW 7 Groundbreaking PLTU (steam power plant) Takalar South Sulawesi 2x100 MW 8 Groundbreaking PLTU (steam power plant) Pangkalan Susu unit 3 and 4 North Sumatera 2x220 MW II Trans Sumatera Toll Road (Ground Breaking) a. Four Main Corridor Development Plan Length 1 Bandar Lampung - Palembang (South Sumatera) 358 km 2 Palembang - Pekanbaru (Riau) 610 km 3 Pekanbaru - Medan (North Sumatera) 548 km 4 Medan - Banda Aceh 460 km b. Three Priority Corridor Development Plan Length 1 Palembang Bengkulu 303 km 2 Pekanbaru - Padang (West Sumatera) 242 km 3 Medan Sibolga 175 km III Solo - Kertosono Toll Road (Accelerating program) Length 1 Solo - Ngawi acceleration program (91.62% completion) 90.1 km 2 Ngawi - Kertosono toll road ground breaking (48.5% land acquisition, expect to complete by end of 2016) km IV One Million Housing Programs (Ground Breaking) Total Budget Allocation Rp13tn: -60 percent allocation for low income people, selling price breakdown: 1 Greater Jakarta Rp120mn per unit 2 Java (exclude greater Jakarta) Rp105mn per unit 3 Sumatera (exclude Bangka Belitung) Rp105mn per unit 4 Kalimantan Rp118mn per unit 5 Sulawesi Rp110mn per unit 6 Papua and Papua Barat Rp165mn per unit -40 percent allocation for middle income people IV Inauguration of Way Leman Dam in Maluku *Project value of Rp25.8bn IV Pledge Rp3tn budget for infrastructure project in North Maluku Source: Cabinet Secretary of Republic of Indonesia; Danareksa Sekuritas 3

4 Finally, as the mitigation plan to the current economic slowdown, the recommendation from chief of staff house to the government includes: 1. Improve the implementation of control of food price. The weekly coordination meeting on food price between various ministries and Bulog will be enacted. 2. Accelerate budget spending, especially for infra related projects such as toll road, which will help to improve business sentiment and business confidence. 3. Hasten the organization restructuring to speed up budget spending, especially for ministry that has large allocation of infrastructure budget. 4. Postpone the implementation of policies which could put some pressure to the living costs such as the abolishment of RON 88 petrol to a higher octane fuel at higher price. 5. Better coordination within ministries to avoid conflicting message on government target and policy from government s officials 6. Promote the positive investment climate. Relieve investment regulation and bureaucracy. 7. Coordinates with BI as well as other stakeholder to find the solution in order to prevent further economic deterioration. Exhibit 4. Leading economic indicators Source: Danareksa Research Institute Exhibit 5. Business sentiment index Source: Danareksa Research Institute 4

5 Weak 1Q15 GDP will give government stronger reason to push ahead We continue to believe that with a clear sign on weak economic activity, there would be more palpable effort from government to push ahead on growth acceleration. In our view, the soft GDP figures would further enhance the likelihood of any cabinet reshuffling. Also, BI s relaxation policies are increasingly needed to help further weakening on the economy. On the latter, the recent plans to relax LTV and LDR regulation would signals that BI will take a more responsive and pro-growth stance. Nonetheless, a cut on interest rate is still remote at this juncture, especially with higher inflation figures ahead of Lebaran in July. Foreign outflow continues; we continue to pitch our 9 top picks in the market We belief that investors will continue to take a cautious stance on the market. Foreign outflows have still dominated in the past 5 trading weeks, although index continue to slightly strengthen mostly supported by domestic investors. We continue to have faith in the government s ability to realize its ambitious infrastructure development plans a key part of Indonesia s investment story going forward. More pronounce realization will be seen in 2H15. We continue to pitch our 9 top picks in the market: BMRI, BBRI, PTPP, WSKT, SMGR, INDF, BSDE, ACES and INCO. In our view, these names would provide some of the defensive quality given their firm standing within their respective sector, while also good play for alpha when market were to rebound. 5

6 Equity Valuation Rating Price (Rp) Price Mkt Cap Net profit, Rp bn EPS (Rp) EPS Growth PER (x) EV / EBITDA (x) PBV (x) Target Rp Bn Danareksa Universe 3,112, , , % 14% Auto 331,210 24,660 29, % 18% Astra International HOLD 7,850 8, ,796 23,976 28, % 17% Gajah Tunggal BUY 1,055 1,500 3, % 139% Selamat Sempurna BUY 4,850 5,300 6, % 4% net cash 32.3 Banks 1,074,511 84,332 96, % 14% BCA HOLD 13,875 14, ,088 19,127 21, % 15% NA NA NA 22.4 BNI BUY 6,775 7, ,345 12,142 13, % 15% NA NA NA 19.1 BRI BUY 12,475 13, ,748 27,391 31,497 1,110 1,277 13% 15% NA NA NA 25.2 Bank Tabungan Negara BUY 1,180 1,400 12,470 1,357 1, % 19% NA NA NA 10.6 Bank Mandiri BUY 11,275 13, ,083 22,087 24, ,069 11% 13% NA NA NA 19.8 Bank Tabungan Pensiunan BUY 3,900 5,450 22,777 2,228 2, % 14% NA NA NA 17.2 Cement 175,511 12,525 15, % 23% Holcim HOLD 1,640 2,300 12, , % 31% Indocement BUY 23,075 28,300 84,944 5,741 6,595 1,559 1,792 8% 15% net cash 21.2 Semen Indonesia BUY 13,150 18,800 77,999 5,861 7, ,276 5% 29% Construction 115,533 4,577 5, % 21% Jasa Marga BUY 6,300 8,200 42,840 1,600 1, % 30% Wijaya Karya BUY 3,335 4,000 20, , % 19% Pembangunan Perumahan BUY 4,085 4,600 19, % 23% Adhi Karya BUY 2,825 3,700 5, % 33% Waskita Karya BUY 1,745 2,100 17, % 23% Wika Beton HOLD 1,150 1,350 10, % 24% net cash 17.1 Consumer 483,224 13,686 15, % 13% Indofood CBP HOLD 14,000 13,800 81,633 3,033 3, % 9% net cash 20.3 Indofood BUY 6,925 8,050 60,804 3,811 4, % 12% Unilever SELL 43,350 30, ,761 6,365 7, % 15% net cash Nippon Indosari Corpindo HOLD 1,210 1,200 6, % 42% Mandom BUY 19,400 19,300 3, ,045 1,126 8% 8% Heavy Equipment 87,796 5,764 6,341 1,261 1,387 4% 10% Hexindo Adiperkasa HOLD 3,050 3,650 2, % 18% net cash 8.0 United Tractors HOLD 22,850 22,200 85,234 5,544 6,081 1,486 1,630 3% 10% net cash 14.5 Healthcare 108,764 2,633 3, % 15% Kalbe Farma HOLD 1,800 1,900 84,375 2,273 2, % 15% net cash 22.7 Kimia Farma BUY 1,170 1,500 6, % 19% Siloam Hospital BUY 15,475 15,750 17, % 30% Mining 122,118 8,963 10, % 12% Adaro Energy BUY 890 1,150 28,468 2,095 2, % 5% Timah BUY 925 1,400 6, % 18% Vale Indonesia BUY 3,435 4,200 34,131 2,375 2, % 8% Aneka Tambang HOLD 805 1,100 7, % 106% Bukit Asam BUY 10,800 13,500 24,885 1,746 1, % 11% net cash 19.7 Indo Tambangraya Megah HOLD 14,900 16,000 16,836 1,782 1,982 1,577 1,755-15% 11% net cash 18.0 Harum Energy HOLD 1,195 1,750 3, % 69% net cash 3.1 Plantation 68,660 5,510 5, % 8% Astra Agro Lestari BUY 27,400 27,100 43,148 2,770 2,832 1,759 1,798 4% 2% net cash 24.5 Sampoerna Agro BUY 1,845 2,600 3, % 19% PP London Sumatra HOLD 1,675 2,090 11,428 1,055 1, % 7% net cash 13.9 Salim Ivomas Pratama BUY ,597 1,221 1, % 17% Property 89,922 5,943 6, % 12% Alam Sutera BUY ,870 1,254 1, % 21% Bumi Serpong Damai BUY 1,980 2,100 38,108 2,369 2, % 10% net cash 16.6 Metropolitan Land BUY , % 11% Surya Semesta Internusa HOLD 1,160 1,040 5, % -11% net cash 16.9 Lippo Karawaci BUY 1,315 1,200 30,347 1,565 1, % 13% Telco & Infrastructure 435,141 19,860 22, % 15% XL Axiata BUY 3,920 4,710 33, % 91% Indosat HOLD 3,805 3,820 20, % 89% Telkom HOLD 2,835 3, ,768 15,554 16, % 6% net cash 22.1 Sarana Menara Nusantara BUY 3,860 4,525 39,383 1,702 2, % 25% Tower Bersama HOLD 9,350 9,625 44,848 1,933 2, % 22% MNC Sky Vision HOLD 1,555 1,410 10, % 19638% 5, Tranportation 21,143 1,253 1, % 24% Blue Bird BUY 8,450 12,200 21,143 1,253 1, % 24% Utility 102,057 11,088 10, % -7% PGN BUY 4,210 6, ,057 11,088 10, % -7% net cash 28.7 Retail 26,741 1,210 1, % 25% Mitra Adi Perkasa BUY 5,625 6,250 9, % 54% Ramayana SELL , % 5% net cash 7.2 Ace Hardware BUY , % 14% net cash 23.8 Net Gearing ROE

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