MORNING HIGHLIGHT. Equity Research Tuesday, April 05, 2016 FROM EQUITY RESEARCH FROM DANAREKSA RESEARCH INSTITUTE MARKET NEWS

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1 Equity Research Tuesday, April 05, 2016 MORNING HIGHLIGHT FROM EQUITY RESEARCH UNVR: Cautiously optimistic (UNVR IJ. Rp43,500. HOLD. TP Rp46,650) Unilever Indonesia posted revenues of Rp 36.5tn (+5.7% yoy) in FY15, with net profits of Rp5.9tn (-1.3% yoy), the first contraction in the company s earnings since More encouragingly, we foresee better performance in FY16F-17F with estimated net profits of Rp6.5 tn (+10.6% yoy) and Rp7.7 tn (+19.1% yoy), respectively. Any rerating in the stock would take place gradually, we believe. We set a higher TP of Rp 46,650, reflecting PE16F of 55x, or at +2SD its 5-year average PE. HOLD. FROM DANAREKSA RESEARCH INSTITUTE BSI: Recovery gathers pace CEO optimism strengthened further in our latest survey. In the reporting period of December 2015 January 2016, the Business Sentiment Index (BSI) climbed 5.4 percent to after rebounding 10.9 percent in the previous survey. CSI: Consumer Confidence Climbs to an Eighteen-month High Consumer confidence reached an eighteen-month high in March. After posting a small decline in the previous survey, the Consumer Confidence Index (CCI) resumed its upward trend by rising 2.9% to in March. MARKET NEWS *Analysts comment inside BBRI targets managed DPLK fund of Rp7tn (ID) Govt, House to discuss State Budget revision in May (TJP) Jakarta Elevated Toll Road: JSMR prepares an investment of Rp 11 tn (BI) JPFA aims revenue increase of 15% (ID) KRAS prepares capital of USD105.6mn to finance HSM (ID) MDLN aims residential sales of Rp3tn (ID) TBIG probes bond emission worth USD500mn (ID) Previous Reports: GGRM: Beneficiary of improved purchasing power-snapshot FY15 Result on mining, property, retail-snapshot FY15 Result on consumer, healthcare, property, and retail- Snapshot FY15 Result on consumer and property-snapshot Indofood CBP FY15 Result, Indofood FY15 Result- Snapshot IDX ANNOUNCEMENT Corp Action Code Action Date Time (WIB) KAEF AGM 6-Apr INAF AGM 6-Apr PPRO AGM-EGM 20-Apr-16 Source: KSEI Key Index Close Chg Ytd Vol (%) (%) (US$ m) Asean - 5 Indonesia 4, Thailand 1,400 (0.0) 8.7 1,021 Philippines 7, Malaysia 1, Singapore 2, (1.6) 541 Regional China 3, (15.0) 68,798 Hong Kong 20,499 (1.3) (6.5) 8,497 Japan 16,123 (0.3) (15.3) 11,522 Korea 1,972 (0.3) 0.6 4,465 Taiwan 8,658 (1.0) 3.8 2,235 India 25, (2.7) 311 NASDAQ 4,892 (0.5) (2.3) 64,233 Dow Jones 17,737 (0.3) 1.8 7,080 Currency and Interest Rate Rate w-w m-m ytd (%) (%) (%) Rupiah Rp/1US$ 13, (0.7) 5.1 SBI rate % (0.1) (0.6) 10y Gov Indo bond 7.62 (0.2) (0.3) (1.1) Unit Hard Commodities Price d-d m-m ytd (%) (%) (%) Coal US$/ton 50 (0.9) (1.9) (1.1) Gold US$/toz 1,215 (0.0) (3.5) 14.5 Nickel US$/mt.ton 8, (10.7) (5.2) Tin US$/mt.ton 16,705 (0.6) (1.4) 14.4 Unit Soft Commodities Price d-d m-m ytd (%) (%) (%) Cocoa US$/mt.ton 2,960 (2.1) (0.9) (9.4) Corn US$/mt.ton 132 (1.6) (2.2) (1.3) Oil (WTI) US$/barrel 35 (0.8) (1.4) (4.4) Oil (Brent) US$/barrel 38 (2.5) (2.7) 1.1 Palm oil MYR/mt.ton 2, Rubber US$/mt ton Pulp US$/tonne 789 N/A (0.2) (1.7) Coffee US$/60kgbag (0.8) Sugar US$/MT 423 (3.1) (0.1) 0.2 Wheat US$/ton 129 (0.2) 3.0 (0.4) Source: Bloomberg Danareksa Sekuritas Equity Research

2 Equity Research Tuesday, April 05, 2016 PT Danareksa Sekuritas Jl. Medan Merdeka Selatan No. 14 Jakarta Indonesia Tel (62 21) Fax (62 21) Equity Research Team Anindya Saraswati (62-21) Property, Retail Natalia Sutanto (62-21) ext.3508 Consumer, Tobacco Stefanus Darmagiri (62-21) Auto, Coal, Heavy Equip., Metal, Cement Puti Adani (62-21) Consumer Antonia Febe Hartono (62-21) ext.3504 Cement Lucky Bayu Purnomo (62-21) ext.3512 Technical Analyst Sales team Ermawati A. Erman (62 21) ext Novrita E. Putrianti (62 21) ext Ehrliech Suhartono (62 21) ext Yunita L. Nababan (62 21) ext Laksmita Armandani (62 21) ext Muhammad Hardiansyah (62 21) ext Tuty Sutopo (62 21) ext Upik Yuzarni (62 21) ext Kevin Giarto (62 21) ext Danareksa Sekuritas Equity Research

3 Tuesday, 05 April 2016 HOLD Target Price, Rp 46,650 Upside 7.0% GGRM IJ/GGMR.JK Last Price, Rp 43,500 No. of shares (mn) 7,630 Market Cap, Rpbn 331,905 (US$ mn) 25,133 3M T/O, US$mn 7.3 Last Recommendation 03-Feb-16 BUY Rp 42,000 Market Recommendation Buy Hold Sell UNVR relative to JCI Index Consensus Our Cons % Diff Target Price, IDR 46,650 41, EPS 2016F, IDR PE 2016F, x (1.2) Puti Adani (62-21) ext 3511 putia@danareksa.com Natalia Sutanto (62-21) ext 3508 natalia.sutanto@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg (Rp) (%) 50, ,000 46,000 44,000 42,000 40,000 38,000 36,000 34,000 32,000 30,000 Jun-15 Jul-15 UNVR (LHS) Aug-15 Sep-15 Oct-15 Nov-15 8 Relative to JCI (RHS) Dec-15 Jan-16 Feb-16 Mar CONSUMER STAPLES/COMPANY UPDATES Unilever Indonesia Cautiously optimistic Unilever Indonesia posted revenues of Rp 36.5tn (+5.7% yoy) in FY15, with net profits of Rp5.9tn (-1.3% yoy), the first contraction in the company s earnings since More encouragingly, we foresee better performance in FY16F-17F with estimated net profits of Rp6.5 tn (+10.6% yoy) and Rp7.7 tn (+19.1% yoy), respectively. Any rerating in the stock would take place gradually, we believe. We set a higher TP of Rp 46,650, reflecting PE16F of 54x, or near its +2SD of its 5-year average PE. HOLD. Macro slowdown hurts performance The FY15 revenues of Rp 36.5tn (+5.7% yoy) and net profits of Rp5.9tn (-1.3% yoy) were 98.5% and 98.0% of our respective forecasts i.e. inline. At the topline, stronger domestic performance (+6.6% yoy) was partly offset by weaker exports (-8.5%). Hence, overall revenues only grew 5.7% yoy compared to the usual double-digit growth in the last four years. Margins wise, the gross margin remained firm at 51.1%. However, higher operating expenses (+16.5% yoy) dragged down the operating profits to Rp7.9tn (-0.9% yoy). This increase in operating expenses owed to implementation of the new PSAK which affected the accounting treatment of employee benefits in addition to the increase in UNVR s royalty fee to 7.0% of total sales in 2015 from 5.6% in At the bottom line, the 1.3% yoy decline in net profits was the first contraction in the company s earnings since On a quarterly basis, margins improved across the board in 4Q15. On a yearly comparison, while revenues still grew 6.1% yoy in 4Q15 the operating profits were still lower due to the jump in operating expenses (+23.1% yoy), reflecting the hike in royalty fees. The home and personal care (HPC) segment still contributed the bulk of sales (69.7%) compared to Food and Refreshments (FNR) at 30.3%. Yet despite FNR s smaller contribution to total sales, this segment grew more briskly at 12% yoy compared to 3.2% yoy for HPC. Better days ahead We foresee better performance in 2016 from improving macroeconomic conditions and stronger consumer confidence. In FY16F-17F, we expect revenues to reach Rp40.9 tn (+12% yoy) and Rp46.4tn (+13% yoy), respectively, supported by yearly average selling price increases (prices adjusted for inflation) and stronger consumer purchasing power to boost sales volumes. Operating expenses should stabilize in 2016, translating into stable profit margins of 21-22%. However, UNVR s plans to launch/revamp 40 new products will keep advertising and promotional costs at 8-9% of total sales. The royalty fee is expected to remain at 7.0% in 2016 although it is likely to be eventually raised to a maximum 8.0% of total sales. In FY16F-17F, we estimate net profits of Rp6.6 tn (+12.1% yoy) and Rp7.6 tn (+15.1% yoy), respectively. Year End 31 Dec F 2017F 2018F Revenue, Rp bn 34,512 36,484 40,945 46,383 52,845 EBITDA, Rp bn 8,368 8,423 9,297 10,734 12,271 EBITDA growth, % Net profit, Rp bn 5,927 5,852 6,563 7,555 8,658 Core profit, Rp bn 5,927 5,854 6,563 7,555 8,658 Core EPS, Rp ,135 Core EPS growth, % 10.7 (1.3) Net gearing, x Core PER, x PBV, x EV/EBITDA, x Yield, %

4 5 April 2016 Unilever Indonesia Exhibit 1. 4Q15 result Cautiously optimistic: Hold UNVR We are cautiously optimistic on the stock s outlook given soft commodity prices, the stabilization of operating expenses as the largest adjustment to royalty fees was done in 2015 supported by the company s deep penetration of the Indonesian market. However, it is worth noting that UNVR shares tend to underperform when the Indonesian equity market is performing strongly, as discussed in our previous report. As such, any rerating of the stock would take place gradually, we believe. We set a higher TP of Rp 46,650, reflecting PE16F of 54x, or near +2SD its 5-year average PE. HOLD. FY14* FY15 YoY, % 4Q14 3Q15 4Q15 QoQ, % YoY, % FY15F A/F, % (in Rp bn) Net sales 34,512 36, ,422 8,745 8, , COGS 17,305 17, ,945 4,311 4,252 (1.4) , Gross profit 17,207 18, ,476 4,435 4, , Opex 9,194 10, ,947 2,732 2,397 (12.2) , Operating profit 8,013 7,939 (0.9) 2,529 1,703 2, (9.5) 8, EBITDA 8,368 8, ,884 1,820 2, (16.1) 8, Other income (expenses) (86) (110) 28.4 (22) (25) (57) (44) Pretax profit 7,928 7,829 (1.2) 2,507 1,678 2, (11.0) 8, Tax expense (2,001) (1,978) (1.2) (629) (425) (562) 32.2 (10.6) (2,105) 94.0 Net profit 5,927 5,852 (1.3) 1,878 1,253 1, (11.1) 5, (in %) Gross margin Operating margin EBITDA margin Net margin Source: Danareksa Sekuritas Exhibit 2. Earnings revision New Old Changes F 2017F F 2017F F 2017F Revenue 36,484 40,945 46,383 37,035 41,126 46, % -0.4% 0.8% Gross profit 18,649 20,293 23,226 18,987 21,012 23, % -3.4% -1.7% Operating profit 7,940 8,902 10,290 8,118 8,921 10, % -0.2% 2.2% Net profit 5,852 6,563 7,555 6,036 6,624 7, % -0.9% 1.4% Gross margin 51% 56% 64% 52% 58% 65% Operating margin 22% 24% 28% 22% 24% 28% Ner margin 16% 18% 21% 17% 18% 20% 2

5 5 April 2016 Unilever Indonesia Exhibit 3. Income Statement (Rp bn) F 2017F 2018F Sales 34,512 36,484 40,945 46,383 52,845 COGS 17,305 17,835 20,652 23,157 26,343 Gross profit 17,207 18,649 20,293 23,226 26,502 Operating Expense 9,193 10,709 11,391 12,936 14,717 Depreciation EBITDA 8,368 8,423 9,297 10,734 12,271 Operating income 8,014 7,940 8,902 10,290 11,785 Interest income Interest expense (96) (121) (151) (207) (226) Forex gain (loss) Other income (exp) Pre-tax income 7,928 7,830 8,778 10,106 11,581 Income tax (2,001) (1,978) (2,216) (2,551) (2,923) Net income 5,927 5,852 6,563 7,555 8,658 Source: Unilever Indonesia, Danareksa Sekuritas Exhibit 4. Balance Sheet (Rp bn) F 2017F 2018F Cash and cash equivalent , ,046 Account receivables 3,052 3,602 3,734 4,230 4,819 Inventories 2,326 2,298 2,677 3,002 3,415 Other current assets Total current assets 6,337 6,623 7,699 8,304 9,418 PPE 7,348 8,321 9,430 10,689 12,144 Others Total assets 14,281 15,730 17,950 19,859 22,479 Account payable 4,632 4,842 5,213 5,666 6,590 Bank Loan 1,250 1,700 2,692 3,050 3,475 Other current liabilities 2,983 3,585 4,025 4,457 4,990 Total current liabilities 8,864 10,128 11,930 13,173 15,054 Benefit obligation Other non current liabilities Total non-current liabilities ,043 Total liabilities 9,534 10,903 12,729 14,088 16,097 Minority Interest Capital stock Additional paid in Retained earnings 4,574 4,655 5,049 5,599 6,210 Total liabilities and equity 14,281 15,730 17,950 19,859 22,479 Source: Unilever Indonesia, Danareksa Sekuritas 3

6 5 April 2016 Unilever Indonesia Exhibit 5. Statement of Cash Flow (Rp bn) F 2017F 2018F Net Income 5,927 5,852 6,563 7,555 8,658 Depreciation and amortisation Change in working capital Operating cash flow 6,575 6,632 7,245 8,049 9,581 Capex (828) (1,456) (1,504) (1,703) (1,941) Others 16 (190) (36) (44) (52) Investing cash flow (813) (1,647) (1,540) (1,747) (1,993) Dividends (5,066) (5,738) (5,852) (6,563) (7,555) Net change in debt , Other (182) (33) (317) (443) (492) Financing cash flow (5,164) (5,216) (5,152) (6,533) (7,494) Net change in cash 598 (231) 553 (230) 95 Net cash (debt) at beg , Net cash (debt) at end , ,046 Source: Unilever Indonesia, Danareksa Sekuritas Exhibit 6. Ratios (Rp bn) F 2017F 2018F Profitability, % Gross margin Operating margin Pretax margin Net margin ROA ROE Leverage, x Net debt/equity Per share data (Rp) EPS ,135 BVPS DPS ,135 Multiples (x) P/E, current P/BV EV/EBITDA, current Source: Unilever Indonesia, Danareksa Sekuritas 4

7 B I - M O N T H L Y R E P O R T Ri/1238/bs/2016 April 2016 D A N A R E K S A R E S E A R C H I N S T I T U T E B U S I N E S S S E N T I M E N T Recovery gathers pace CEO optimism strengthened further in our latest survey. In the reporting period of December 2015 January 2016, the Business Sentiment Index (BSI) climbed 5.4 percent to after rebounding 10.9 percent in the previous survey. Most notably, sentiment was much stronger in the agricultural and construction sectors, helped by higher commodity prices and government infrastructure spending, respectively. Along with the bright outlook for the economy, CEOs also foresee stronger business conditions over the next six months. Indeed, of the CEOs polled, a clear majority (60.5 percent) expect business conditions to be good over the next six months. Corporate health is also expected to improve as economic conditions recover. At the top line, sales are expected to grow at a faster pace (this index added 3.5 percent to 145.1). And profits are also expected to grow at a brisker pace: this index climbed another 2.0 percent to its highest reading since the April-May 2015 survey. A key finding of our latest survey is that CEOs expect further cuts in interest rates - this index has now fallen in five straight surveys to stand at This assessment looks increasingly realistic given the government s desire to see bank lending rates reduced in a bid to promote economic growth. Business confidence toward the government continued to improve as economic conditions picked up. In our survey, the Business Confidence in the Government Index (BCGI) rose another 5.6 percent to after climbing 4.1 percent in the previous survey. MARTIN JENKINS Economist (62-21) / 88 ext 3609 martin@danareksa.com DAMHURI NASUTION Head of Economic Research (62-21) / 88 ext 3600 damhuri@danareksa.com

8 B U S I N E S S S E N T I M E N T Business sentiment rose further in the latest survey ,5 Present Situation Expectations 143,1 129,5 116,0 90 Jan-11 Feb-11 M ar-11 Apr-11 Mei-11 Jun-11 Jul-11 Agust-11 Sep-11 Okt-11 Nop-11 Des-11 Jan-12 Feb-12 M ar-12 Apr-12 Mei-12 Jun-12 Jul-12 Agust-12 Sep-12 Okt-12 Nop-12 Des-12 Jan-13 Feb-13 M ar-13 Apr-13 Mei-13 Jun-13 Jul-13 Agust-13 Sep-13 Okt-13 Nop-13 Des-13 Jan-14 Feb-14 M ar-14 Apr-14 Mei-14 Jun-14 Jul-14 Agust-14 Sep-14 Okt-14 Nop-14 Des-14 Jan-15 Feb-15 M ar-15 Apr-15 Mei-15 Jun-15 Jul-15 Agust-15 Sep-15 Okt-15 Nop-15 Des-15 Jan-16 Source: Danareksa Research Institute Table 1. Appraisal of Present Situations Sep-15 Nov-15 Jan-16 %Change Business Sentiment Index Present Situation Expectations Source: Danareksa Research Institute THE DECEMBER JANUARY 2016 RESULTS: CEO optimism strengthened further in our latest survey. In the reporting period of December 2015 January 2016, the Business Sentiment Index (BSI) climbed 5.4 percent to after rebounding 10.9 percent in the previous survey. While it is too early to say that the economy is performing strongly, our latest survey findings do encouragingly suggest that a broad-based recovery is nonetheless taking place across many sectors of the Indonesian economy. Most notably, sentiment was much stronger in the agricultural sector, a significant finding given that this sector remains a mainstay of the Indonesian economy, accounting for 14 percent of national economic output and nearly 50 percent of the workforce. CPO prices are showing nascent signs of recovery this year (+14 percent ytd) a boon to the nation s CPO producers. In our survey, sentiment also showed a marked improvement in the construction sector, perhaps unsurprisingly, given that this sector has the most to gain from the government s ambitious infrastructure development plans for which Rp313.5 trillion was allocated from the state budget in 2016, or up from Rp290.3 trillion in While concerns over the strength of global economic recovery do remain, the rising prices of some commodities this year such as CPO are good news for Indonesia, especially since the national economy is also gaining traction from improving fundamentals which include well-controlled inflation, interest rate cuts and increasing momentum from the government s drive to upgrade the nation s infrastructure. Against this backdrop, the two main components which make up the BSI both improved. Most impressively, the Present Situations Index (or PSI) rose another 9.2 percent after surging 13.7 percent in the previous survey, an indication that economic recovery is taking hold. The other main component of the BSI, the Expectations Index (or EI), posted a smaller gain: up 2.5 percent to 143.1, as improving economic indicators point toward a brighter future. DANAREKSA RESEARCH INSTITUTE 2

9 B U S I N E S S S E N T I M E N T CEO ASSESSMENTS OF CURRENT BUSINESS CONDITIONS Like in the previous survey, CEOs gave less negative assessments on the health of the economy (this index rose a further 30.7 percent to 85.1). This compares to a low of just 35.3 two surveys previously, providing compelling evidence to believe that the performance of the Indonesian economy has picked up dramatically. Overall, some 34.3 percent of CEOs gave negative assessments on the state of the economy. While this may seem a high figure, it is nonetheless significantly down from the previous survey s figure of 46.2 percent. Furthermore, nearly half of CEOs now believe that the economy is performing normally and another 19.5 percent say it is performing well. With economic recovery taking hold, CEOs also claimed better business conditions (this index added another 2.3 percent to 133.0). Companies continued to benefit from the more supportive business environment and, as a result, CEOs claimed not only higher sales growth (the index climbed a solid 9.1 percent) but also easing cost pressures - most notably from lower forex losses as the rupiah recovered its composure. Hence, corporate profitability also improved. According to the CEOs surveyed, corporate profits are now expected to start growing again this index rose 7.7 percent to from 94.1 in the previous survey. Table 2. Appraisal of Present Situations Sep-15 Nov-15 Jan-16 %Change Economic Conditions Business Conditions Company s Conditions Source: Danareksa Research Institute Table 3. Current Company Financial and Utilization Performance All Sectors Sep-15 Nov-15 Jan-16 %Change Capital Expenditure Sales Profits Liquidity Capacity/Equipment Utilization Employment Cost of Goods Sold (1.1) Operating cost (0.0) Interest expenses/cost (0.4) Foreign Exchange Loss (3.0) Average Price of Product/Service (1.9) Source: Danareksa Research Institute CEO APPRAISALS OF NEAR-TERM BUSINESS CONDITIONS CEOs remain hopeful of a brighter future. External risks have eased and the rupiah has recovered accordingly, rebounding around 7 percent off its low of circa 14,700/USD at end-september Meanwhile, positive improvements on the domestic economic front pave the way for further progress, especially if lending rates can be trimmed more aggressively to levels which stimulate more borrowing a goal the government recently said it was keen to achieve. Against this backdrop, some 46.5 percent of CEOs expect a brighter economic future (a figure which is little changed from the previous survey s 47.2 percent). DANAREKSA RESEARCH INSTITUTE 3

10 B U S I N E S S S E N T I M E N T Along with the bright outlook for the economy, CEOs also foresee stronger business conditions over the next six months. Indeed, of the CEOs polled, a clear majority (60.5 percent) expect business conditions to be good over the next six months up from 56.3 percent in the previous survey. Corporate health is also expected to improve as economic conditions recover. At the top line, sales are expected to grow at a faster pace (this index added 3.5 percent to 145.1). Costs wise, the picture is mixed but while COGS are expected to grow at a faster pace (+2.2 percent), operating costs (-0.6 percent) as well as forex losses (-2.7 percent) and, most notably interest expenses (-6.6 percent) are expected to ease. Hence, with a growing domestic marketplace and relatively subdued cost pressures, profits are expected to grow at a brisker pace over the next six months: this index climbed another 2.0 percent to its highest reading since the April-May 2015 survey. Table 4. Expectations for the Six Months Ahead Sep-15 Nov-15 Jan-16 %Change Economic Prospects (0.3) Business Prospects Company s Prospects Source: Danareksa Research Institute Table 5. Prospects for Company Financial and Utilization Performance All Sectors Sep-15 Nov-15 Jan-16 %Change Capital Expenditure Sales Profits Liquidity (0.2) Capacity/Equipment Utilization Employment Cost of Goods Sold Operating cost (0.6) Interest expenses/cost (6.6) Foreign Exchange Loss (2.7) Average Price of Product/Service (1.3) Source: Danareksa Research Institute DANAREKSA RESEARCH INSTITUTE 4

11 B U S I N E S S S E N T I M E N T Table 6. Expectation Index on Key Economic Indicators Indicators Sep-15 Nov-15 Jan-16 %Change General Prices Expectation Loan Rate Expectation (3.0) Exchange Rate Expectation (3.5) Stock Price Expectation (2.6) Source: Danareksa Research Institute EXPECTATIONS ON KEY ECONOMIC INDICATORS A key finding of our latest survey is that CEOs expect further cuts in interest rates - this index has now fallen in five straight surveys to stand at 107.3, thus mirroring the central bank s easing monetary policy. The government itself has specifically stated that it would like to see lower lending rates in the country to boost the economy. At the present time, there is growing belief that banks profitability margins are excessive and the government - along with the financial services oversight body (OJK) and the central bank have signaled their intent to address this issue in an effort to promote growth. In regard to prices, CEOs still believe that inflationary pressures will be relatively well contained even though the index measuring sentiment toward prices edged up 0.7 percent to in the latest survey. Note that while inflationary pressures have eased considerably (headline yoy inflation was subdued at 3.35 percent yoy in December 2015), prices do tend to head higher at the end of the year due to seasonal factors. Nonetheless, the impact is not long-lasting. Similarly, CEOs also remained upbeat toward the outlook for the rupiah over the next six months. Despite posting a small 3.5 percent decline in the latest survey, this index remains comfortably above the 100 level, depicting general optimism toward the local currency as Indonesia s economic fundamentals continue to improve. Lastly, CEOs were slightly less upbeat on the outlook for stock prices this index corrected 2.6 percent after rebounding a healthy 11.9 percent in the previous survey. Yet at a level of 110.8, this index is still well ensconced in positive territory, suggesting a bright outlook for stock prices going forward, especially amid improving corporate fundamentals. Stock price movements this year appear to support this view with the Indonesian stock market one of the best performing markets globally, up more than 5 percent ytd. Table 7. Business Confidence in the Government Index Indicators Sep-15 Nov-15 Jan-16 %Change Expand the Market Size Create a Safe Environment Stabilize prices Provide Public Utilities Enforce Law of Contracts BCGI Source: Danareksa Research Institute DANAREKSA RESEARCH INSTITUTE 5

12 B U S I N E S S S E N T I M E N T SENTIMENT TOWARD THE GOVERNMENT Business confidence toward the government continued to improve as economic conditions picked up. In our survey, the Business Confidence in the Government Index (BCGI) rose another 5.6 percent to after climbing 4.1 percent in the previous survey. On the economic front, CEOs are much more confident in the government s ability to expand the domestic marketplace (this index jumped another 7.5 percent to 150.5). With regard to inflation, more CEOs believe that the government is doing a good job at stabilizing prices: this index rose 3.2 percent. Optimism toward the ability of the government to improve public infrastructure also strengthened: this index climbed 5.9 percent to a very high level of an endorsement of the government s commitment to improve the nation s creaky infrastructure. Finally, CEOs were more confident in the government s ability to enforce the law of contracts (this index jumped 11.5 percent to 98.9) while the component measuring sentiment toward the government s ability to create a safe and orderly environment rose 1.7 percent to DANAREKSA RESEARCH INSTITUTE 6

13 M O N T H L Y R E P O R T D A N A R E K S A R E S E A R C H I N S T I T U T E /1239/cc/2016 C O N S U M E R C O N F I D E N C E April 2016 Consumer Confidence Climbs to an Eighteen-month High Consumer confidence reached an eighteen-month high in March. After posting a small decline in the previous survey, the Consumer Confidence Index (CCI) resumed its upward trend by rising 2.9% to in March. Most notably, consumer concerns over expensive fuel eased significantly - only 3.0% of the consumers polled cited this issue as a major concern (down from 5.7% in February reflecting subdued global prices of crude oil. At the same time, consumer concerns over drought also eased in our latest survey (down from 6.4% to 3.4%). Consumer concerns toward the sensitive issue of high foodstuff prices remained high at 73.4% yet still stable. Both components that make up the CCI increased. The component measuring consumer sentiment toward current conditions, the Present Situations Index (PSI), rose 2.6 percent to 82.6, as sentiment toward both the current state of the economy and the current state of the job market improved. The other main component of the CCI - the one measuring consumer sentiment toward the future (the Expectations Index or EI) climbed 3.0 percent to in March. The increase in the EI reflects stronger consumer optimism toward the prospects for the national economy over the next six months. ASTI SUWARNI Analyst (62-21) / 888 ext 3608 asti@danareksa.com MARTIN JENKINS Analyst (62-21) / 888 ext 3609 martin@danareksa.com Although consumers are more upbeat on the country s overall economic outlook, buying intentions for durable goods actually declined in March. In our latest survey, 28.3 percent of consumers expressed plans to purchase a durable good over the next six months, down from 30.9 percent in the previous month. Furthermore, on a yearly comparison, buying intentions for durable goods are also lower, since 32.7 percent of consumers expressed plans to purchase a durable good back in March Consumer confidence in the government s ability to carry out its duties strengthened in the March survey. After increasing 6.4 percent in the previous survey, the Consumer Confidence in the Government Index (CCGI) climbed 0.2 percent to Furthermore, this index is also higher than its level one year ago (93.6 in March 2015). Two components that make up the CCGI increased, while three components declined.

14 C O N S U M E R C O N F I D E N C E THE MARCH 2015 RESULTS Consumer confidence reached an eighteen-month high in March. After posting a small decline in the previous survey, the Consumer Confidence Index (CCI) resumed its upward trend by rising 2.9% to in March. Most notably, consumer concerns over expensive fuel eased significantly - only 3.0% of the consumers polled cited this issue as a major concern (down from 5.7% in February reflecting subdued global prices of crude oil. At the same time, consumer concerns over drought also eased in our latest survey (down from 6.4% to 3.4%). Consumer concerns toward the sensitive issue of high foodstuff prices remained high at 73.4% yet still stable. Both components that make up the CCI increased. The component measuring consumer sentiment toward current conditions, the Present Situations Index (PSI), rose 2.6 percent to 82.6, as sentiment toward both the current state of the economy and the current state of the job market improved. The other main component of the CCI - the one measuring consumer sentiment toward the future (the Expectations Index or EI) climbed 3.0 percent to in March. The increase in the EI reflects stronger consumer optimism toward the prospects for the national economy over the next six months. By region, consumer confidence strengthened in four of the six regions covered by the survey. Sentiment improved the most in West Java (where the index jumped 14.6 percent to in March), followed by East Java (where the index added 5.6 percent to 101.1), South Sulawesi (where the index edged up 3.5 percent to 99.8), and Jakarta (where the index climbed 2.5 percent to 118.3). By contrast, confidence still deteriorated in Central Java (where the index slumped 4.1% to in March), and North Sumatra (where the index retreated 3.1 percent to 90.9). Overall, consumers with income levels above Rp2,000,000 per month were more upbeat than consumers with low incomes (incomes below Rp1,000,000/month). The survey shows that the CCI for high income consumers rose 2.5 percent to in March, while the CCI for low income consumers actually decreased 1.8 percent to Changes in confidence were also varied between rural and urban areas. While the CCI for urban consumers rose 5.1 percent to in March, the CCI for rural consumers fell 2.8 percent to Chart 1. Consumer Confidence Strengthened in March 110 Consumer Confidence Index Fuel Prices Hike 100 Fuel Prices Hike Fuel Prices Hike 70 Fuel Prices Hike Basic Food Price Hike Fuel Prices Hike Basic Food Price Hike 60 J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 J-16 DANAREKSA RESEARCH INSTITUTE 2

15 C O N S U M E R C O N F I D E N C E Chart 2. Urban Consumers were More Upbeat in March Urban Areas Rural Areas 60 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Table 1. The Consumer Confidence Index Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 MoM % Change Consumer Confidence Present Situation Expectation Appraisal of Current Situations: More Positive on the Economy Consumers were more positive on the current state of the national economy in our latest survey (this index added 0.2 percent to 76.2). In our survey, the proportion of consumers who claimed that national economic conditions were bad decreased from 39.1 percent to 38.0 percent, while the proportion of consumers claiming that national economic conditions were good stayed around 14.2 percent. Nevertheless, a significant proportion of consumers (47.9 percent) still said that national economic conditions were normal. In regard to the current state of the local economy, consumers also gave more positive assessments (this index jumped 4.2 percent from 99.4 to in March). However, several issues continued to worry consumers in March. Most notably, 73.4 percent of them still cited high foodstuff prices as a major factor weighing on the local economy in the last three months (down from 73.8 percent in February). Besides this, 32.9 percent of consumers mentioned job scarcity as a main concern (up from 25.3 percent in February), while 3.4 percent are worried by drought (down from 6.4 percent in February). In the March survey, consumers gave more upbeat assessments on the job market (the index measuring sentiment toward job market conditions rose 3.1 percent to 68.0). Furthermore, our survey also reveals that more consumers claimed that jobs were easy to get (23.3% in March vs percent in February), while 21.3% of consumers still claimed that the job market was unchanged. Nevertheless, it should be noted that the index measuring sentiment toward job market conditions is still way below 100, an indication that the job market remains tough and that greater efforts are still needed to tackle the perennial problem of unemployment. DANAREKSA RESEARCH INSTITUTE 3

16 C O N S U M E R C O N F I D E N C E Table 2. Appraisal of Current Situations Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 MoM %Change Economic Conditions Local Area Economic Conditions Employment Conditions Chart 3. Key Concerns February 2016 Important factors that worsen local economic conditions in the past three months March 2016 Important factors that worsen local economic conditions in the past three months 5.7% 1.9% 6.4% 73.8% 2.0% 3.4% 3.0% 25.3% 32.9% 73.4% Increase in basic foodstuff prices Expensive of fuel Drought Job scarcity Scarcity of fuel Increase in basic foodstuff prices Expensive of fuel Drought Job scarcity Scarcity of fuel Assessments on Near-Term Conditions: More Upbeat on the Economy Looking ahead over the next six months, consumers are more optimistic on the country s economic outlook: the Expectations Index (EI) rose 3.0 percent to in March. This is its highest level since March Moreover, all components of the EI posted increases and they are above the 100 level. This suggests that consumers are more upbeat on the outlook for the economy and the job market. In the March survey, consumers are more optimistic on the national economic outlook. This component of the EI added 1.7 percent to Indeed, our survey reveals that 28.4 percent of consumers were upbeat on the national economic outlook in March compared to 25.3 percent in February. Only 9.3 percent of consumers were downbeat. Nevertheless, 62.2 percent of consumers still foresee no change in national economic conditions over the next six months. As for the local economy, consumers are also more upbeat on its prospects: this index added 2.4 percent to in March. In regard to the job market outlook, consumers are also more upbeat. This index added 5.5% to in March. Indeed, our survey shows that more consumers expect jobs to be easier to get (18.0% in March vs. 14.7% in February), while fewer consumers expect jobs to be hard to get (5.3% in March vs. 7.9% in February). With greater confidence in the job market outlook, more consumers foresee better prospects for family incomes (24.1% in March vs. 21.3% in February) and fewer consumers foresee lower family incomes in the future (13.2% in March vs. 13.4% in February). As such, overall, the index measuring sentiment toward future family incomes edged up 2.7% to DANAREKSA RESEARCH INSTITUTE 4

17 C O N S U M E R C O N F I D E N C E Table 3. Expectations in the Six Months Ahead Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 MoM % Change Economic Prospects Local Area Economic Prospects Employment Prospects Family Income Prospects Purchasing Intentions for Durable Goods: Declined Although consumers are more upbeat on the country s overall economic outlook, buying intentions for durable goods actually declined in March. In our latest survey, 28.3 percent of consumers expressed plans to purchase a durable good over the next six months, down from 30.9 percent in the previous month. Furthermore, on a yearly comparison, buying intentions for durable goods are also lower, since 32.7 percent of consumers expressed plans to purchase a durable good back in March Of the ten categories tracked by our survey, buying intentions declined in six of them. Most notably, buying intentions for home aplliances, land, audio-visual equipment and houses dropped significantly in March. At the same time, the proportion of consumers who expressed an interest in wanting to renovate their homes also declined (down from 3.02 percent to 2.96 percent in March). Meanwhile, the proportion of consumers who want to buy livestock sank from 0.75 percent to 0.23 percent in March. By contrast, buying intentions for some items still increased. For example, buying intentions for bicycles rose fourfold from 0.06 percent to 0.23 percent in March. Meanwhile, buying intentions for automobiles doubled from 0.23 percent to 0.46 percent in March. Finally, the proportion of consumers who expressed an interest in buying either a motorcycle or gold & jewelry rose moderately in March. Table 4. Buying intensions Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Automobile Motorcycle Bicycle House House Renovation Land Audio-visual Home appliance Gold & jewelry Livestock DANAREKSA RESEARCH INSTITUTE 5

18 C O N S U M E R C O N F I D E N C E Expectations on Key Economic Variables: Inflationary Pressure is Expected to Decrease In our latest survey, consumers said they expected inflationary pressures to decrease over the next six months. Overall, the index measuring consumer sentiment toward general prices retreated 1.7 percent to in March. Furthermore, this index is also lower than its level one year ago, when the index reached in March In part, at least, the decline in this index might be attributable to expectations that foodstuff prices will fall due to greater supply of foodstuffs in relation to the harvesting season in March. In regard to interest rates, more consumers foresee higher interest rates over the next six months (34.4 percent in March vs percent in February), while fewer consumers foresee lower interest rates (8.9 percent in March vs percent in February). At the same time, a significant portion of consumers (21.0 percent) still expect interest rates to remain unchanged. As such, overall, the index measuring sentiment toward interest rates added 4.6 percent to As for the rupiah, consumers in the main cities are more pessimistic on the outlook for the local currency. In our survey, the index measuring sentiment toward the rupiah retreated 9.3 percent to a nine-month low of 67.6 in March. In regard to the outlook for stock prices, however, consumers are more confident that Indonesian stocks will record gains over the next six months (this index added 8.8 percent to 121.3). Table 5. Expectations on Prices Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 MoM % Change General Prices Expectation Interest Rates Expectation Exchange Rates Expectation Stock Prices Expectation DANAREKSA RESEARCH INSTITUTE 6

19 C O N S U M E R C O N F I D E N C E Confidence in the Government: Strengthened Consumer confidence in the government s ability to carry out its duties strengthened in the March survey. After increasing 6.4 percent in the previous survey, the Consumer Confidence in the Government Index (CCGI) climbed 0.2 percent to Furthermore, this index is also higher than its level one year ago (93.6 in March 2015). Two components that make up the CCGI increased, while three components declined. The component of the CCGI to increase the most was the one measuring sentiment toward the government s ability to enforce the rule of law (it climbed 6.6 percent to 98.3 in March). This component is now at its highest level in the last 14 months. This is very encouraging since perceptions of weak law enforcement have been the main drag on consumer sentiment toward the government since the end of At the same time, the component of the CCGI measuring sentiment toward the government s ability to ensure a safe and orderly environment was also higher: it added 4.0 percent to in March. By contrast, the component of the CCGI measuring sentiment toward the government s ability to stabilize prices declined in March. The relevant index retreated 4.6 percent to Indeed, in our survey, most consumers still said that this particular issue was a major factor affecting local economic conditions over the last three months. The component of the CCGI measuring sentiment toward the government s ability to provide and maintain public infrastructure was also down: it dipped 2.9 percent to in March. Finally, the component of the CCGI measuring sentiment toward the government s ability to spur economic growth edged down 2.5 percent from its eleven-month high of to 99.2 in March. Table 6. Confidence Toward The Current Government Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 MoM %Change Recovery National Economy Stabilize the Price of Goods Maintain Public Infrastructure Provide A Sense of Safety Provide A Sense of Certainty CCGI * Note: Starting in April 2007, the Consumer Confidence in the Government Index (CCGI) has been adjusted to the year of 2003 = 100 DANAREKSA RESEARCH INSTITUTE 7

20 C O N S U M E R C O N F I D E N C E TABLE 7. CCI - COMPOSITE SERIES CCI by Regions Feb-16 Mar-16 MoM %Change National Consumer Confidence Index Present Situation Expectations Jakarta Consumer Confidence Index Present Situation Expectations West Java Consumer Confidence Index Present Situation Expectations Central Java Consumer Confidence Index Present Situation Expectations East Java Consumer Confidence Index Present Situation Expectations North Sumatera Consumer Confidence Index Present Situation Expectations South Sulawesi Consumer Confidence Index Present Situation Expectations TABLE 8: NATIONAL FIGURES CCI by Classification Respondent Feb-16 Mar-16 MoM Profile (%) %Change Age of Respondents and over Educational Level Primary School or less High School Academy/University Households Income under RP , Rp , Rp , Rp ,- and over Type Area Urban Rural Gender Male Female Occupation Worker Self employed Unemployed * An index reading above 100 indicates that positives responses outnumber negative responses DANAREKSA RESEARCH INSTITUTE 8

21 RESEARCH TEAM Damhuri Nasution Kahlil Rowter Head of Economic Research Chief Economist Asti Suwarni Analyst Darwin Sitorus Economist / Database Officer darwin@danareksa.com Natalia Daisyana Research Assistant natalia@danareksa.com Pramayanti Meitisari Analyst pramayanti@danareksa.com Handri Thiono Junior Economist handrit@danareksa.com Martin Jenkins Editor martin@danareksa.com Rika Pantjawati Executive Secretary rikap@danareksa.com Danareksa Research Institute Danareksa Building Jl. Medan Merdeka Selatan 14 Jakarta, INDONESIA Tel : (62-21) / 888 (hunting) Fax : (62 21) All rights reserved. No part of this publication may be reproduced, stored in retrieval systems, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Danareksa Research Institute. DISCLAIMER The information contained in this report has been taken from sources which we deem reliable. However, none of Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue hereof.we have no responsibility to update this report in respect of events and circumstances occurring after the date of this report.we expressly disclaim any responsibility or liability (express or implied) of Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/or agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, actions, suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a result of acting in reliance upon the whole or any part of the contents of this report and neither Danareksa Research Institute and/or its affiliated companies and/ or their respective employees and/or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in this report and any liability in respect of this report or any inaccuracy herein or omission herefrom which might otherwise arise is hereby expressly disclaimed. Accordingly, none of Danareksa Research Institute and/or its affiliated companies and/or their respective employees and/or agents shall be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement or omission in any information contained in this report. This report is prepared for general circulation. It does not have regard to the specific person who may receive this report.

22 Equity Research Tuesday, April 05, 2016 MARKET NEWS BBRI targets managed DPLK fund of Rp7tn (ID) Bank Rakyat Indonesia (BBRI) targets a managed Financial Institutions Pension Fund (DPLK) to reach Rp7tn. DPLK is one of the BBRI investment products that provide pension benefit payments periodically. Generally, more than 50% of assets under management of the DPLK is placed in money market instruments with returns above the average benchmark. Govt, House to discuss State Budget revision in May (TJP) As State Revenue is expected to fall well below expectations, the government said that it would submit revision in early May and expected to secure latters approval within the same month. Finance Minister and Coordinating Economic Minister said President Jokowi would gather its ministers on Thursday to discuss several key economic issues and review their budget revision proposal. Finance Minister said that government expected to see house begin deliberation of the tax amnesty bill in April and State budget revision on the following month. Jakarta Elevated Toll Road: JSMR prepares an investment of Rp 11 tn (BI) Jasa Marga (JSMR) set aside up to funds up to Rp11tn for the development of 37km s Jakarta elevated toll road. JMSR also plans to work with other investors but still can t ensure which business entities to work together, as it depends on the strategy of SOE ministry. The cost of construction is estimated to reach Rp300 bn per km, excluding the cost to widen the road that must be done to develop the elevated toll road. This toll road will stretch from West Karawang to Cikunir and will be built above the existing Jakarta-Cikampek toll road. JSMR targeting the addition of 400km new sections in JPFA aims revenue increase of 15% (ID) Japfa Comfeed Indonesia (JPFA) aiming for revenue growth of 10-15% this year. The growth target is in line with average growth in corporate earnings since Financial Director JPFA declare this income projections can be achieved if the exchange rate remained stable this year. To minimize the impact of exchange rate fluctuations, JPFA will hedge 70% of the needs of US dollars for the purchase of raw materials this year. This number increased compared hedging last year by 50%. KRAS prepares capital of USD105.6mn to finance HSM (ID) Krakatau Steel (KRAS) prepared a capital expenditure for construction USD105.6mn Hot Strip Mill (HSM) II factory up to The portion of this equity loan will complement loan provided by Commerzebank AG worth USD million in funding the construction of the plant with a capacity of 1.5 million tons per year. HSM will be constructed on an area of 48ha in Krakatau Industrial Estate Cilegon. The development will increase the production capacity hot strip mill into 3.9 million tonnes at the beginning of For the sale of steel, KRAS optimistic for an improving on the volume growth this year following Chinese government's decision to cut its steel production capacity ranging between million tonnes in the next 5 years. MDLN aims residential sales of Rp3tn (ID) Modernland Realty (MDLN) targeting residential sales worth Rp3tn this year which will be supported by the launch of the new four clusters site houses on 2Q16. Corporate Secretary MDLN declare this new project located in Jakarta Garden City. With regard to the price of the unit, MDLN can not release it. To attract customers in Jakarta Garden City, MDLN plans to build facilities food and beverage and AEON Mall. MDLN targets pre-sales of Rp4.2tn in 2016, up 32.5% from 2015 realization. TBIG probes bond emission worth USD500mn (ID) Tower Bersama Infrastructure (TBIG) through TBG Global Pte Ltd back exploring the issuance of up to USD500 million bonds or equivalent Rp6.6tn this year. Previously, TBIG had canceled plans following not conducive market conditions. Finance Director TBIG said the company will ask for approval on bond issuance on Annual General Meeting (AGM) on May 11, Bonds with total worth of USD500 million will due on 2025 with maximum interest rate charged of 8% pa. Danareksa Sekuritas Equity Research