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ANCHOR REPORT
Research analysts
Despite the strong longer-term structural story and relatively low market
positioning among foreign investors due to outflows YTD, we retain our Indonesia Strategy
Neutral view on Indonesia, as valuations are now close to peak, at 2SD Elvira Tjandrawinata - PTNSI
above the post-GFC average. This leaves no room for any elvira.tjandrawinata@nomura.com
disappointments in earnings growth or any risks from politics. +62 21 2991 3341
We expect earnings growth next year to decelerate to 13%, from c. 15% And the Indonesia research team
this year, hence we set our JCI target at 6,500 for end-2018F, based on Asia Economics
16x 12-month forward earnings, similar to current levels. Laggards in Euben Paracuelles - NSL
consumers, infrastructure and property offer value, while investors should euben.paracuelles@nomura.com
be more selective in banks and telcos, which we now rate as neutral. +65 6433 6956
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Indonesia strategy
EQUITY STRATEGY
Source: Bloomberg, Nomura estimates. Note: * Ace Hardware upgraded from Neutral to Buy; ↓ downgrading.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Indonesia strategy 8 December 2017
Contents
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Nomura | Indonesia strategy 8 December 2017
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Nomura | Indonesia strategy 8 December 2017
Outlook summary
A higher global growth outlook and a goldilocks scenario (whereby the Fed rate hikes still
allow for an overall weak USD, counterbalanced by risks coming from protectionist US
policies and a sharp China slowdown) provide a more favorable external environment for
2018. This is encouraging for Indonesia, given foreign ownership in both equities and
bonds is still quite significant. Indonesia has seen an outflow of USD2.8bn YTD, in line
with investors’ preference to position in developed vs emerging markets.
-100,000 30
-200,000 28
Feb-12
Jul-12
Feb-17
Jul-17
Jan-15
Nov-10
Sep-11
Dec-12
Aug-14
Jun-15
Nov-15
Sep-16
Apr-11
Oct-13
Mar-14
Apr-16
May-13
Jan-15
Jan-07
Jan-09
Jan-11
Jan-13
Jan-17
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
Sep-17
May-08
May-10
May-12
May-14
May-16
29.0% -1.0%
Jan-10
Jun-10
Jan-15
Jun-15
Feb-12
Feb-17
Sep-11
Aug-14
Sep-16
Mar-14
Jul-12
Jul-17
Sep-11
Jul-12
Jul-17
Nov-10
Dec-12
Aug-14
Apr-16
Sep-16
Jun-10
Apr-11
Oct-13
Nov-15
Mar-14
Jan-10
May-13
Nov-10
Dec-12
Jan-15
Jun-15
Apr-11
Oct-13
Nov-15
Apr-16
Feb-12
May-13
Feb-17
Domestically, demand is also likely to pick up, according to our economist, Euben
Paracuelles, driven by investments, as the government remains committed to developing
infrastructure, while private investment, which had been slow to recover, should finally do
so, benefitting from the more favorable global environment, stable commodity prices and
lower real lending rates. As a result GDP growth next year is expected to accelerate to
5.6%, from this year’s 5.2%.
Meanwhile, private consumption is also expected to remain resilient next year, with our
economist expecting it to grow by 5.1%. This year, even though private consumption
growth remained stable at 5%, the continued depressed retail sales index (RSI) as
reported by Bank Indonesia, and results reported by the consumer companies under our
coverage, raise the question why there is the discrepancy.
4
Nomura | Indonesia strategy 8 December 2017
Our economist argues that the RSI is narrower in its definition than the overall household
spending as it uses information from only 700 retailers in the bigger cities, and hence
only accounts for around 40% of the PCE and therefore may not capture spending in
traditional markets. As a result, RSI does not always provide an accurate picture of PCE
and in certain periods may even show a divergence from it.
Fig. 6: Drivers of private consumption spending Fig. 7: Private consumption spending versus retail sales
40 5.5
6
30 5.0
5
20 4.5
4
10 4.0
3
0 3.5
2
-10 3.0
1 -20 2.5
0 -30 2.0
Mar-11 Feb-12 Jan-13 Dec-13 Nov-14 Oct-15 Sep-16 Mar-02 Oct-04 May-07 Dec-09 Jul-12 Feb-15
Note: Non-durables include food and beverage consumption; semi-durable includes Source: CEIC; Nomura Global Economics
apparel, footwear and maintenance; durables include spending on equipment, and
services include spending on health, education and transportation & communication,
restaurants and hotels. Source: CEIC, Nomura Global Economics.
In our recent consumer report titled “Indonesia Consumer: Selectively more bullish into
2018,” we argued that the primary reason why consumption was weak was due to the
diminished purchasing power of the low-end segment, as the minimum wage hike was
the lowest in the past five years, while the government also removed the electricity
subsidy for some 19mn households. Meanwhile the impact of the tax amnesty (which
ended in March 2018) to the middle / upper classes lingered, as the tax administration
continued to be aggressive in pursuing taxes, keeping consumer confidence low.
Indeed, since President Jokowi’s government come into power in 2014, the
government’s focus has been on developing infrastructure, as it is believed this to be an
engine for economic growth, despite being fully aware the impact will not be immediate
but more in the medium to long terms. This is also part of the reason why consumption
had been relatively weak, as the government diverted funding for the unproductive and
untargeted subsidies in fuel and electricity, towards infrastructure.
While the government had been trying to soften the blow to consumption by raising the
other social spending, such as in education through the Indonesia Smart Card (KIP),
healthcare through the Indonesia Health Card (KIS) and the Hope Family Program
(KJP), the low-end households still generally suffer as the increase in these targeted
subsidies paled in comparison. In 2015, the total loss of subsidies in fuel and electricity
was to the tune of IDR200tn, while the government only increased the social programs
by around IDR10tn.
5
Nomura | Indonesia strategy 8 December 2017
Fig. 8: Fiscal spending mix – capex vs subsidies Fig. 9: Government to increase social spending in 2018
Social spending
Capital spending (IDRtn) Conditional Cash Transfer (PKH)
% of GDP
6.0 Total subsidies 80 Rice for the poor (Rastra)
Social spending for Health (KIS)
5.0 Social spending for Education (KIP)
60
4.0
3.0 40
2.0
20
1.0
0.0 0
2009
2016
2010
2011
2012
2013
2014
2015
2017
2018*
*
Source: Ministry of Finance, CEIC, and Nomura Global Economics Note: * Implied figure. Source: Nomura research
For next year, the higher social spending through the conditional cash transfer program
(PKH) forms the basis for our assumption of a recovery in consumption, in addition to the
regional elections in June and Asian Games in August. As this program is complimentary
to the other social programs, such the Indonesian Smart Card (KIP) for education, the
Indonesian Health Card (KIS) for health and Rastra among others, overall, in 2018 the
government’s budget for social spending is still expected to increase by 10% after an
increase of only 2% this year.
Despite our more bullish view on consumption, we remain skeptical that this could also
spill over to other sectors, especially to the banking sector, which is still struggling from
anaemic loans growth due to perhaps the continued cautiousness among the private
sector leading into the 2019 national elections. The worry is that the continued
sluggishness in loans growth will eventually erode NIMs if banks are forced to invest in
lower-yielding assets, especially if deposits continue to grow. Hence, even though next
year banks are still expected to be the earnings growth driver of the market’s earnings
growth of 13%, if loans growth fails to reach our expected 11-12%, there is risk for
earnings disappointment.
The other big contributor, the telco sector, has seen competition pick up, and hence also
is unlikely to see similarly strong earnings growth for next year. Along the same lines, the
commodities sector, which had supported earnings growth this year, is facing a high
base of comparison.
With current valuation of the Indonesian market now at close to peak, at 2SD above the
average post GFC, as a result of the re-rating we saw post the S&P upgrade in May, this
leaves no room for earnings disappointment. The national elections in 2019 could also
start affecting investors’ behaviours, setting in cautiousness as they prefer to take a wait-
and-see approach, although at this point Jokowi is still the front-runner to become re-
elected. The rising political noise could also become a distraction from reforms, while a
shift to more populist policies could pose some risk to the investment climate and
preclude sovereign rating upgrades.
For these reasons, despite a more favorable backdrop in the external environment, we
retain our Neutral position in the market after downgrading it from a Bullish stance in May
2017. From here, we may turn positive again if: 1) the market corrected to bring market
valuations to more attractive levels, and 2) there were further rating agency upgrades,
leading to sustained reductions in the costs of capital.
Overall, assuming 13% and 10% earnings growth for 2018 and 2019, and valuations
maintained at 16x, we project the JCI to reach 6,500 by the end of 2018.
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Nomura | Indonesia strategy 8 December 2017
Investment-led recovery
We forecast 2018 GDP growth to rise to an above-consensus 5.6%, accelerating from
5.2% in 2017 (Consensus: 5.1% in 2017 and 5.3% in 2018). For 2019, we expect growth
to rise further to 5.8%. Essentially, we envisage a gradual growth trajectory, but
importantly, one that is more sustainable than in the past, driven by higher investment
spending which is already gaining momentum (see Asia Special Report - Indonesia: The
great revival, 19 May 2016).
Specifically, we think private investment, as indicated by our monthly Nomura Private
Investment Index (PII), should continue to recover (Fig. 10). Our previous empirical work
suggests that private investment is pro-cyclical and should improve further as the overall
growth outlook becomes more upbeat. Business climate reforms are also on-going and
are increasingly reflected in Indonesia’s improving ease of doing business rankings (see
Asia Chart Alert - India and Indonesia: Big movers in the ease of doing business
rankings, 1 November 2017).
Moreover, our PII is sensitive to changes in commodity prices, real lending rates, IDR
and the government’s pace of capex disbursements. We expect these drivers to become
more uniformly positive given our higher oil price assumption, rate cuts by BI and the
government’s fiscal stance. Using our model, we expect GFCF growth to double from
6.4% in 2017 to 13.4% in 2018 and 14.2% in 2019.
From the external accounts, FDI inflows surged by 48.3% y-o-y in the first three quarters
of 2017. FDI realisation data from the Investment Coordinating Board (BKPM) show a
72.2% increase in FDI from China over the same period, consistent with our view that
the FDI sources for these striving tiger cubs is shifting to large Asian countries like China
and Japan (see Anchor Report: India and ASEAN: Asia’s next FDI magnets, 31 July
2017). We continue to see great potential for Indonesia to benefit as the government
maintains its reform agenda to steadily improve the investment climate.
7
Nomura | Indonesia strategy 8 December 2017
Fig. 10: Indonesia: Nomura monthly Private Investment Index Fig. 11: Indonesia: Fiscal spending mix – capex vs subsidies
(PII)
30 5.0
20 4.0
10
3.0
0
2.0
-10
1.0
-20
0.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Private Investment Index 3mma Forecasts
Note: The PII is compiled using monthly indicators including commercial car sales, Source: Ministry of Finance, CEIC, and Nomura Global Economics
real private sector investment credit growth, capital goods imports, cement sales. All
series are seasonally adjusted and deflated using headline CPI. Source: CEIC,
Nomura Global Economics.
On the revenue side, we remain optimistic that the tax administration reforms will
continue after the successful tax amnesty program and begin to yield more meaningful
results. For instance, despite relatively stable growth in household consumption
spending, VAT collections are up 13.6% y-o-y over the first three quarters of 2017,
thanks to the implementation of input credits e-invoicing, in our view. The passing of Law
#9 on Accessing Financial Information for Tax Purposes last July and the Automatic
Exchange of Information with the OECD and other signatory countries which comes into
effect in 2018 should support improvements in tax administration.
That said, we think the government’s projection for total revenues to rise by 18.7% in
2018 to 12.7% of GDP, is ambitious. We expect a lower 11.1% of GDP even after taking
1
into account extra revenues as a result of our higher oil price assumption and our
nominal GDP growth forecast.
There are lingering fears that more aggressive tax collection may be curtailing private
sector spending (and therefore growth), with household consumption growth hovering
around 5% over the past few quarters from an average of 5.3% in 2011-14. However, we
view this as household consumption staying resilient, considering the end of the
commodity price boom, the fiscal subsidy reductions over the past few years, and other
reform programs such as the tax amnesty.
We also think these tax reform efforts, as illustrated by the recent experience in the
Philippines, will eventually pay off, having a relatively sizeable impact on revenues which
will likely be used to boost productive spending and hence growth. With the Indonesian
government’s similar focus on implementing infrastructure projects, a strengthening of
this link between higher revenues and infrastructure implementation should help allay
those fears.
1
We use the government’s estimates of the sensitivities of the different budget items. For instance, every
USD1/bbl increase in the Indonesian Crude Oil Price (ICP) will raise revenues by about IDR3-3.33trn and will
improve the fiscal deficit overall by IDR0.7-1.0trn.
8
Nomura | Indonesia strategy 8 December 2017
9
Nomura | Indonesia strategy 8 December 2017
Box 1: Three valuable fiscal lessons Indonesia is learning from its neighbours
Given the importance of fiscal policy, policymakers in Indonesia can draw on the
experience of other countries to be more effective in boosting growth. And they don’t
have to look very far: ASEAN neighbours provide many fiscal lessons on how to
generate fiscal space without necessarily running wider deficits.
1. Tax administration reforms are appropriate and can yield significant revenue
increases. The experience of the Philippines suggests that Indonesia’s drive to
improve tax administration and compliance is appropriate, and could have a
relatively sizeable and more permanent impact on revenues. Under President
Aquino, the Philippines raised tax revenue by 1.7pp to 13.8% of GDP with no major
changes in tax policies. It did this via clamping down on tax evasion, improving
fiscal transparency, raising incentives for collection officers and establishing a clear
link between public services provisions and tax payments. These also tie in well
with the anti-corruption agenda, which we believe is a priority in Indonesia, and do
not necessarily affect growth negatively. In the Philippines potential growth has
increased to 6.2% throughout this period of fiscal reforms and anti-corruption drive.
2. Subsidy rationalisation does not necessarily lead to social backlash.
Indonesia and Malaysia removed fuel subsidies at around the same time (i.e. in
2015). However, since the initial fuel price hikes Indonesia been unable to adjust
retail prices consistently, which has resulted in a gap with market prices. In
contrast, Malaysia has stuck to its subsidy rationalisation plans, but this move to
more flexible pricing has not led to social unrest, in part because the public has
grown accustomed to the mechanism given its consistent application. Some of the
fiscal savings were also directed to targeted social assistance programs. Indonesia
is already implementing more of these targeted programs, e.g. the increase in
allocations of conditional cash transfer. But to help fund these, the government
should be more consistent in applying such market-based pricing. As in Malaysia,
we think if done properly this will likely have limited social backlash, especially
because progress is also already made in infrastructure spending in Indonesia.
3. Providing fiscal support to growth is not all about raising budgets. There is a
great deal of focus across ASEAN to build infrastructure. However, there is plenty
of scope for public financial management reforms to increase spending without
adding pressure to the budget. This can be brought about by tightening the link
between planning and budgeting, and improving the efficiency of public investment.
The IMF estimates that, on average, the ‘efficiency gap’ for emerging economies is
2
about 27% (substantially larger in ASEAN countries). Furthermore, we estimate
capex disbursement rates in the past three years have averaged 78% in Indonesia.
We believe increasing the disbursement rate to Malaysia’s levels of around 90%
would give a meaningful boost to growth without leading to wider deficits.
Encouragingly, the fiscal authorities are more focused on improving this,
particularly this year.
2
See http://www.imf.org/external/np/pp/eng/2015/061115.pdf
10
Nomura | Indonesia strategy 8 December 2017
Fig. 13: Indonesia and the Philippines - sovereign credit Fig. 14: Indonesia: Headline inflation vs target
ratings
% y-o-y Nomura forecasts
(Sta) (Sta) 14
Baa2/BBB
(Sta) (Pos) (Pos) (Pos) 12
Baa3/BBB-
Ba1 / BB+ 10
Ba2 / BB 8
Ba3 / BB-
6
B1 / B+
B2 / B 4
B3 / B- 2
S&P Moodys Fitch Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17
Source: Bloomberg, Nomura Global Economics. Source: CEIC, Nomura Global Economics
The fact that large-scale imports are required to improve food supply shows that
improvements have not been driven by productivity gains in the agricultural sector.
Weather-related disruptions of domestic agricultural production also remain a risk,
particularly in the case of rice. ‘Excess margins’ – the difference between actual retail
food prices and reference prices at the consumer level – have narrowed significantly on
a government crackdown on pricing malpractice, but this may have already reached a
floor (see Asia Insights - Indonesia: Weighing the CPI food basket, 11 October 2017).
Finally, we still expect administered fuel prices to be increased by 10-15% in Q2 2018,
when a favourable base effect kicks in (from earlier electricity rate adjustments) given
our higher oil price assumption and a limited fuel subsidy allocation in the budget.
Officials from Pertamina, the national oil company, have already called on the
government to raise prices for premium gasoline from the current IDR6550, which has
3
been fixed since April 2016 when crude oil was just USD37/bbl. Even without these
price hikes, we estimate 2018 inflation to average 4.0%, still up substantially from Q4
2017’s 3.4%.
The inflation outlook underpins our view that BI is done with policy rate cuts and will
remain on hold throughout 2018. If BI wants to continue supporting growth, we believe a
more targeted approach using macroprudential easing would be appropriate. Indeed, BI
has increasingly talked about ‘spatial’ relaxation of loan-to-value ratios across regions or
a possible adjustment to primary reserve requirements. In addition, we believe it would
be more effective for BI to focus on financial sector reforms to improve bank
intermediation and address problems in policy transmission, which resulted in an
incomplete pass-through (i.e. around 80% by our estimates) of policy rate cuts in 2016 to
bank lending rates (see Asia Insights - Indonesia: A double fault, 3 October 2017).
3
“Pertamina says fuel prices need to be increased,” The Jakarta Post, 17 November 2017.
11
Nomura | Indonesia strategy 8 December 2017
Another creeping risk may emanate from BI resuming its easing cycle and cutting its
policy rate too much, which would increase Indonesia’s vulnerability to large capital
outflows, given the still-large share of foreign investor bond holdings. There is also some
uncertainty around the re-appointments of Governor Agus Martowardojo and one deputy
governor, whose terms expire in April 2018. That said, we note that Indonesia’s
resilience has also increased, with larger FX reserve buffers and a rising share of stickier
FDI inflows as mentioned above. BI has also signalled a more cautious tone on the risk
of large capital outflows from more Fed rate hikes and emphasised the need to prioritise
stability in that environment, implying BI is not looking to cut its policy rates again.
Fig. 15: Basic balance Fig. 16: Popularity ratings of President Jokowi
Indikator Politik
SMRC
SMRC
SMRC
Indikator
SMRC
SMRC
Poltracking
Indobarometer
CSIS
CSIS
LSI-Indikator
-6
-8
-10
-12
Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17
Jan- Mar- Jun- Oct- Dec- Jan- Jun- Aug- Mar- May- Aug- Sep-
Net FDI Current Account Basic Balance 15 15 15 15 15 16 16 16 17 17 17 17
Source: CEIC, Nomura Global Economics. Source: Reformasi Weekly, LSI-Indikator, Politracking, SMRC, CSIS, Indikator,
Indobarometer, Nomura Global Economics.
Elections
Domestically, increasing political noise that becomes a distraction from reforms is likely
going to be foremost in investors’ minds in 2018. The next round of simultaneous
regional elections will be held in mid-2018, but on a bigger scale than in 2017. A total of
171 local government units (17 provinces, 115 districts and 39 cities) will hold elections,
up from 101 this year. Moreover, these include key provinces such as West Java,
Central Java, and East Java – home to about 40% of the country’s population.
Given the shock outcome in the Jakarta elections, there are concerns that similar tactics
could be deployed by the opposition to try to replicate the result, which may lead to
increased political risks and reduce the likelihood of President Joko Widodo winning a
second term in 2019. A shift to more populist policies ahead of the general election in
2019 could also pose some risk to the investment climate, and the private sector could
hold back business expansion plans until these elections are over.
However, we do not fully share these concerns for several reasons.
First, 2019 is not the same as 2014 when a new president was to be elected for sure and
there was a lot of uncertainty around the regime change. This time President Jokowi can
run for another term and his popularity remains high even after the Jakarta election (Fig.
16).
Second, his coalition is intact while the opposition party, Gerindra, appears to be in some
disarray at the local level. For example, there appears to be some confusion over
Gerindra’s choice of candidates in the West Java contest, where it has so far refused to
support Deddy Mizwar and his running mate Ahmad Syaikhu – the ticket agreed upon by
4
its coalition partners, the Islamic Justice Party (PKS) and National Democrat Party .
4
“PKS Berharap Gerindra Bergabung dengan Koalisinya di Pilgub Jabar 2018”, Kompas, 27 November 2017.
12
Nomura | Indonesia strategy 8 December 2017
Third, policies such as keeping food prices low and raising budget allocations for
conditional cash transfers to cover a much larger number of low-income families (from
6mn to 10mn) address key voter concerns. While critics argue that this is a shift to
populism, we do not think important reforms to the business climate and the rollout of
infrastructure projects are now less of a priority. If anything, these look likely to receive
increased focus as occurred after the Jakarta elections, likely in a bid by President
Jokowi to win more voter support ahead of 2019.
% y-o-y growth unless otherwise stated 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 2016 2017 2018 2019
Real GDP (sa, % q-o-q, annualized) 3.8 5.5 4.8 8.0 3.7 6.0 4.9 8.5
Real GDP 5.0 5.0 5.1 5.5 5.5 5.6 5.6 5.8 5.0 5.2 5.6 5.8
Private consumption 5.0 5.0 5.0 5.0 5.1 5.1 5.2 5.2 5.0 5.0 5.1 5.3
Government consumption 2.7 -1.9 3.5 4.0 3.5 5.7 5.2 5.2 -0.1 2.2 5.0 6.1
Gross fixed capital formation 4.8 5.3 7.1 8.0 10.7 13.8 13.8 14.9 4.5 6.4 13.4 14.2
Exports (goods & services) 8.7 3.6 17.3 8.0 5.9 9.0 2.4 5.5 -1.7 9.3 5.6 1.6
Imports (goods & services) 5.1 0.2 15.1 8.5 9.3 19.6 11.6 17.6 -2.3 7.2 14.6 14.4
Contributions to GDP (% points)
Domestic final sales 4.5 4.3 5.2 5.9 6.5 7.6 7.7 8.6 4.2 5.0 7.6 8.4
Inventories 0.3 0.0 -1.3 -0.4 -0.5 0.0 0.6 -0.3 0.3 -0.4 0.0 0.0
Net trade (goods & services) 0.9 0.7 0.7 0.0 -0.5 -1.8 -1.7 -2.5 0.1 0.6 -1.6 -2.7
Unemployment rate (% nsa) 5.3 5.3 5.3 5.1 5.1 5.0 5.0 4.9 5.5 5.3 5.0 4.8
Consumer prices 3.6 4.3 3.8 3.6 3.7 4.2 4.4 4.6 3.5 3.8 4.2 4.0
Exports (BOP basis) 23.4 8.0 24.4 12.9 10.8 15.9 10.3 13.4 -3.1 16.8 12.5 10.3
Imports (BOP basis) 15.5 5.5 23.0 13.6 14.4 22.7 14.7 20.7 -4.5 14.3 18.1 16.7
Trade balance (US$bn, BOP basis) 5.6 4.8 5.3 5.5 5.0 3.2 4.2 3.3 15.4 21.3 15.7 6.1
Current account balance (US$bn) -2.3 -4.8 -4.3 -3.2 -3.6 -6.8 -5.3 -6.2 -16.8 -14.7 -21.7 -31.8
Current account balance (% of GDP) -1.0 -1.9 -1.7 -1.3 -1.4 -2.5 -1.8 -2.2 -1.8 -1.5 -2.0 -2.6
Fiscal Balance (% of GDP) -2.5 -2.5 -2.6 -2.8
Policy rate, 7 day reverse repo rate (%) 4.75 4.75 4.25 4.25 4.25 4.25 4.25 4.25 4.75 4.25 4.25 4.25
Exchange rate (USD/IDR) 13,321 13,319 13,492 13,500 13,400 13,450 13,650 13,600 13,436 13,500 13,600 13,200
Notes: Numbers in bold are actual values; others forecast. “Inventories” component contribution to GDP also includes statistical discrepancy. Interest rate and currency forecasts
are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 7 December
2017. Source: CEIC, Nomura Global Economics.
13
Nomura | Indonesia strategy 8 December 2017
14
Nomura | Indonesia strategy 8 December 2017
While in the beginning Jokowi’s government struggled to pursue both economic and
bureaucratic reforms, as he was only able to form a minority coalition, and a cabinet with
many political appointments, he subsequently was able to consolidate his power base to
get things done. His bold move to reallocate the funds for fuel subsidies for infrastructure
has resulted in plenty of evidence that new projects are being built. A case in point is the
start of construction and the financial closure of the poster-child PPP Batang power plant
project in mid-2016. Since then progress on the trans-Sumatra and trans-Kalimantan toll
roads are enjoying rapid progress, while even the trans-Java toll road is progressing
despite the initial problems with land clearing.
Admittedly there is still a lot to be done in infrastructure development and what has been
achieved so far takes time for the benefits to filter through to the economy. This is quite
similar to the tax amnesty, which is deemed successful, but still failed to substantially
increase tax revenue, as growth has not yet picked up. It may take a while for the benefits
to be fully realised, as currently the impact to consumption still lingers, as the middle /
upper classes remained hesitant to spend, especially on big-ticket items, for fear of
attracting the attention of the tax authorities. Still, we see this as only a temporary
phenomenon. As mentioned above, with the strong focus of the government to implement
infrastructure projects, strengthening of the link between the drive to raise fiscal revenues
and infrastructure implementation should bode well for private sector spending.
Jokowi’s detractors are using the lack of progress in consumption recovery to question
his leadership, especially closer to the national elections in 2019. However, we believe
he is playing a long game to ensure that Indonesia is achieving its full potential. It is
therefore imperative that he gets re-elected to continue his reforms, we think.
Encouragingly, the efforts of the government has yielded the desired results, with World
nd st
Bank Ease of Doing Business rankings in 2018 improving significantly to 72 from 91
as a result of improvement in reducing the cost of starting a business, access to
electricity and credit, ease of tax payments and importation, investor protection and
property registration (see India and Indonesia: Big movers in the ease of doing business
rankings). While 72 is still relatively low and there is room for improvement, climbing
nearly 25 notches in these rankings over a short period of time (i.e. since 2015) is a
remarkable achievement not to be underestimated, given that the survey is a zero-sum
game where all countries are also likely trying to push their way up.
In the area of subsidy and social spending, a more targeted approach is an area of focus
for the government in 2018. For example, the government plans to change the
distribution of the subsidized 3 kg LPG from an open system where anybody can buy, to
a closed system whereby only those which are deemed deserving (poor) will be able to
buy by providing proof of the Prosperous Family Card (KKS) next year. The government
is also re-directing part of the food subsidy in the form of the “Rastra” program, or “rice
for the poor” in which the poor households can buy 15 kg of rice per month at a
subsidised price, into a so called non-cash food subsidy whereby the recipient will be
given a ‘nominal cash’ amounting to IDR110,000 per month which could be used to buy
rice of the desired quality and quantity, as well as other essential food items.
Looking ahead, an area where Jokowi’s government is seen as lagging behind is on
governance reforms, intuitional reforms in the legal system and the labor market, which
remains very restrictive.
15
Nomura | Indonesia strategy 8 December 2017
16
Nomura | Indonesia strategy 8 December 2017
Project
No List of projects Location
status
1 Trans Sumatera toll road (15 sections) Sumatra Construction
2 MRT Jakarta South-North section DKI Jakarta Construction
3 Makassar-Pare Pare train South Sulawesi Construction
4 Light Rail Transit in South Sumatera South Sumatra Construction
5 National Capital Integrated Coastal Development (NCICD) fase A DKI Jakarta Construction
6 Batang power plant Central Java Construction
7 Palapa Ring Broadband Indonesia Construction
8 LRT in Jakarta, Bogor, Depok, and Bekasi Greater Jakarta Construction
9 Panimbang, Serang toll road Banten Construction
10 500KV transmission in Sumatera South Sumatra Construction
11 500KV transmission line in Central-West Java Central Java Construction
12 Balikpapan-Samarinda toll road East Kalimantan Construction
13 Manado-Bitung toll road North Sulawesi Construction
14 Jambaran - Tiung Biru Gas Field Utilization East Java Construction
15 Indonesia Deepwater Development East Kalimantan Construction
16 LNG Train 3 Development West Papua Construction
17 LRT DKI Jakarta DKI Jakarta Construction
18 Inland Waterway/Cikarang-Bekasi-Laut (CBL) Greater Jakarta Preparation
19 East Kalimantan train East Kalimantan Preparation
20 Soekarno-Hatta Airport Train Express DKI Jakarta Preparation
21 Kuala Tanjung seaport development South Sumatra Preparation
22 Bitung International Port Hub North Sulawesi Preparation
23 Jakarta sewage system DKI Jakarta Preparation
24 Drinking water treatment in West Semarang Central Java Preparation
25 Patimban Port West Java Preparation
26 Lapangan Abadi WK Masela Maluku Preparation
27 Drinking water supply system Jatiluhur West Java Preparation
28 Probolinggo - Banyuwangi Toll Road East Java Transaction
29 Yogyakarta - Bawean Toll Road East Java Transaction
30 Bontang refinery East Kalimantan Transaction
31 Revitalisation of existing refinery (Balikpapan, Cilacap, Balongan, Dumai, Plaju) East Kalimantan Transaction
32 Tuban refinery East Java Transaction
33 Indramayu gas-fired power plant West Java Transaction
34 Mulut Tambang Power plant (5 Provinces) Sumatra and Kalimantan Transaction
35 Gas Based Power plant (18 provinces) Java, Sumatra, Kalimantan, Sulawesi, Papua Transaction
36 Drinking water supply system Lampung Bandar Lampung Transaction
37 Waste to energy program (8 cities) Java and Sulawesi Transaction
Source: State Ministry for Development Planning /National Development Planning Agency, Nomura research
We believe the main challenges will remain around company capacity, noting state
contractors’ leverage ability and equity size has doubled in the past two years. However,
we see clearer financing strategies through better government execution on PINA and
clearer strategy on PPP, which lead to faster infra project execution as well as funding
support. More details are discussed below:
17
Nomura | Indonesia strategy 8 December 2017
Source: State Ministry for Development Planning /National Development Planning Agency, Nomura research
18
Nomura | Indonesia strategy 8 December 2017
Fig. 23: PINA: Next project pipeline Fig. 24: Progress on PPP projects
Source: State Ministry for Development Planning /National Development Planning Source: State Ministry for Development Planning /National Development Planning
Agency, Nomura research Agency, Nomura research
19
Nomura | Indonesia strategy 8 December 2017
Fig. 25: GMV per capita vs. household expenditure Fig. 26: Retail space in ASEAN is lacking
GSEA
Thailand
Taiwan
Vietnam
China
US
Malaysia
Philippines
Source: Euromonitor, Akamai, Wearesocial, Nomura estimates Source: Frost and Sullivan
20
Nomura | Indonesia strategy 8 December 2017
Fig. 27: A USD7.2bn market growing at 25% pa Fig. 28: Media and consumer electronics most popular online
Indonesia's e-commerce market (B2C & C2C) Internet retailing by categories (2012-2019F)
(USDmn) B2C ecommerce C2C ecommerce (USDmn Fixed 2016 ex rates)
70,000 5,000
Apparel and Footwear
60,000 Consumer Electronics
4,000 Media Products
50,000
Food and Drink
40,000 Home Care
3,000
Beauty and Personal Care
30,000 Others
2,000
20,000
10,000
1,000
0
2012
2013
2014
2015
2016E
2017F
2018F
2019F
2020F
2021F
2022F
2023F
2024F
2025F
0
2012 2013 2014 2015 2016F 2017F 2018F 2019F
Source: Euromonitor, World Bank, IMF, Nomura estimates Source: Euromonitor, Nomura research
The challenges facing e-commerce such as low penetration of credit cards and other
online payments, relatively low internet penetration and smartphone penetration (40%),
patchy and relatively poor quality of internet access and poor infrastructure and last-mile
delivery options, are well known. As such, these are also what the government is trying
th
to address in issuing the 14 policy package focusing on the e-commerce road map to
facilitate e-commerce businesses and provide strategic directions.
Fig. 29: Estimated size of the e-commerce market (both B2C Fig. 30: Estimated size of the e-commerce market (both B2C
and C2C) in 2016 and C2C) in 2026
Seeing an opportunity in solving the problem with logistics and payment systems, the
private sector, both domestic and foreign investors, have been developing solutions.
Companies such as Go-jek offer logistics solutions with their fleet of motorbikes, while it
is also developing its e-wallet/payment system through Go-Pay having received a USD1
bn investment from Tencent. The likes of Bank Mandiri are developing Mandiri E-Cash
and Telkomsel Tcash, hot on Go-jek’s heels. Earlier, Alibaba also acquired Lazada, with
the aim of obtaining Lazada’s e-logistics, one of the largest e-commerce logistics arms in
ASEAN. Similarities between China and ASEAN in terms of the roadblocks faced have
led the Chinese companies to expand their business into the region.
It therefore not a surprise that ASEAN has been gaining prominence as a technology
hub and is fast emerging as a potential destination for tech investors. Investment in the
tech sector YTD is already seen a two-fold increase from FY2016 to USD6.5bn has.
However, much of this has been poured into non-ecommerce sectors. This year, 57% of
the USD6.5bn funds raised have been allocated to one of Grab, Go-Jek and Traveloka.
21
Nomura | Indonesia strategy 8 December 2017
While there is still funding being channeled into the e-commerce industry, Andrew thinks
that most of the new capital provided has been concentrated within the major e-
commerce portals. Smaller e-commerce startups are struggling to raise new equity
unless they have an especially differentiated value proposition.
Even though the funding environment for e-commerce may not be as bullish as it was
before, it is obvious that the development of e-commerce in Indonesia could not only
disrupt or change the competitive landscape of several industries such as the brick-and-
mortar retailers, but also to a certain extent the telcos and the banks, which seem to be
competing with one another in the e-wallet space at this point.
In the grocery sector, as argued above, the presence of e-commerce remains limited
while the minimarket operators such as Alfamart and Indomaret have introduced their
online businesses, as has hypermarket operator Matahari Putra Prima.
The non-grocery area is probably more at risk, with department stores which had high
content of apparel and footwear to bear the brunt of the rapid growth of e-commerce. In
fact – this was the question already being asked by investors given the poor
performance YTD. While on the one hand low penetration of department stores in
Indonesia, accounting for only 2% of the total retail sales in Indonesia, seems to provide
some buffer, on the other hand, e-commerce are looking at this as an opportunity.
Perhaps amongst the Indonesian retailers, Mitra Adi Perkasa may be least at risk from e-
commerce, as the company is the brand owner of 150 brands, many of which are on an
exclusive basis, for both online and offline, hence even if it is also threatened by e-
commerce players, the company has more flexibility to formulate its e-commerce
strategy. The company operates its own online business, but it also has the option to go
with the leading general merchandiser e-commerce players such as Lazada or
Tokopedia to save on marketing / customer acquisition costs. In a recent management
conference call, Matahari Dept Store’s management also did not rule out this option.
In the telco space, the big three players all have position in the space by directly
investing and forming strategic partnerships leveraging off their networks. But this year,
both XL and Indosat had decided to exit their e-commerce businesses. Indosat plans to
halt all its digital business such as Cipika and Dompetku and just focus on data
telecommunications. Meanwhile, XL Axiata and SK Planet recently sold their stake in
Elevenia (Indonesian site for 11 Street) to the Salim Group. We foresee Elevenia being
gradually merged with iLotte, the JV between Lotte Group and Salim Group, which could
mark the beginning of consolidation after Rakuten’s exit in ASEAN. This leaves
Telkomsel still trying to develop the e-wallet space under T-cash.
In the banking space, with cash remaining the dominant method of transaction, this
creates an opportunity to develop digital wallets which has attracted entrants into the
industry from financial companies, e-commerce portals and ride-sharing firms, all vying
for the leadership in this space, as this industry is currently still in its nascent stage. Bank
Mandiri decided to enter this space with its Mandiri E-Cash, allowing customers to
establish e-money through smartphones without having to open an account.
However, as fin-tech companies move into the traditional banking services, regulators
have to reconsider the guidelines for digital players. For example, e-wallet operators who
plan for more than 300,000 active users must have minimum paid-up capital of IDR3bn.
Meanwhile, e-wallet balances must be capped at IDR10mn (about USD750), although
there are no transaction size limits. Bank of Indonesia (BI) had restricted issuance of
new open-loop licenses for 18 months after January 2015, but since July 2016 five new
e-money licenses have been granted.
BI has recently suspended top-ups of wallets owned by companies that have not
received full licenses, such as Tokopedia, Bukalapak and Sea. Nonetheless, it would
give momentum to incumbents with licenses, such as Go-Jek. Go-Pay is one of five
independent non-bank/non-telco companies in Indonesia that hold a central bank
electronic money operator license, which allows payments and money transfers. Go-Jek
now allows credit to be sent at no cost to any phone number linked to its app, and users
can eventually withdraw cash from their digital wallets via their own bank accounts.
22
Nomura | Indonesia strategy 8 December 2017
Earnings outlook
How has 2017 fared?
We started 2017 with high hopes that earnings will finally recover, after a very
disappointing year in 2016, in which earnings grew only by 3%, expecting earnings to
grow by c.16%, driven by the low base in auto (Astra’s performance was dragged down
by high NPLs at Bank Permata), banks (deteriorating asset quality) and to a certain
extent also property (revenue recognition issues). During the early part of the year, this
seemed to be achievable, especially since 1Q17 showed promising trends, delivering
earnings growth of c.17%. As such we saw consensus bumping up earnings estimates
post the 1Q17 results expecting stronger 2Q17 results, as this included the hari raya
period which for some industries such as the auto and consumers will be bumper
periods.
However, the 2Q17 results revealed that this was not to be the case. Even though
earnings still grew by c.15% in 1H17, the expected acceleration in consumption did not
materialise, while the media, cement and utilities sectors’ earnings continued to be under
pressure, offset by the earnings upgrades in the energy sector.
This resulted in consensus cutting back earnings growth expectations to c.16%, similar
to where we started. In 9M17, earnings growth remained unchanged at c.15%, so
overall, we are expecting FY2017 to deliver earnings growth of 15%.
Despite this, it is encouraging to see that earnings revision breadth for MSCI Indonesia
(the spread between the number of companies seeing earnings upgrades to the number
of seeing downgrades) appears to be picking up again.
Fig. 31: MSCI Indonesia earnings growth forecasts: Fig. 32: MSCI Indonesia: earnings revision breath
12-mo forward, 2016, 2017, 2018, 2019
Forward 2016 2017 2018 MSCI Indonesia: earnings revision breadth
20
1.5
18 12 per. Mov. Avg. (MSCI Indonesia: earnings revision
breadth)
16 1.0
14
12 0.5
10 0.0
8
6 -0.5
4
-1.0
2
0 -1.5
Jul-16
Jul-17
May-16
May-17
Jun-16
Dec-16
Jan-17
Jun-17
Nov-17
Apr-16
Aug-16
Sep-16
Oct-16
Nov-16
Apr-17
Aug-17
Sep-17
Oct-17
Mar-16
Feb-17
Mar-17
Jan-15
Jan-10
Jun-10
Jun-15
Feb-12
Feb-17
Jul-12
Jul-17
Nov-10
Sep-11
Dec-12
Aug-14
Sep-16
Dec-17
Apr-11
Oct-13
Nov-15
Mar-14
Apr-16
May-13
23
Nomura | Indonesia strategy 8 December 2017
up. Gopa has since turned Neutral on the company and expects the telco sector to grow
by only 11% next year, vs. 20% this year.
On the flip-side, we expect an improvement in consumers (staples and discretionary),
boosted by rising social spending by the government and the regional elections in the all-
important Java areas. This should help lift the earnings growth of these sectors to double
digits once again, after suffering from negative economies of scale this year as top-line
growth was extremely challenged.
The cement companies are also expected to perform better next year, after having
suffered severe margin contraction due to more intense competition. However, with
demand starting to improve and the pace of ASP decline decelerating, our analyst
Anthony Yunus expects improving margins to deliver c.13% growth. The property sector
should also see strong earnings growth due to backlog sales recognition on residential
properties and better availability and more attractive mortgages, after delivering decent
earnings growth of close to 40% in the 9M17.
Fig. 33: 12M forward earnings forecasts by sector Fig. 34: 12M forward earnings forecasts by sector
Energy, Materials, Industrial, Discretionary, Utilities Staples, Health Care, Financials, Telcos
160 120
140 115
120 110
100 105
80 100
60 95
Benchmark Energy Benchmark Staples
40 Materials Industrials 90 Health Care Financials
20 Discretionary Utilities 85 Telcos
0 80
Feb-17
Jul-17
Jan-17
Jan-17
Jun-17
Jun-17
Aug-17
Aug-17
Sep-17
Oct-17
Nov-17
Mar-17
Mar-17
Apr-17
Oct-17
May-17
Jul-17
Jun-17
Jan-17
Jan-17
Jun-17
Mar-17
Apr-17
Aug-17
Aug-17
Oct-17
Nov-17
Sep-17
Oct-17
Feb-17
Mar-17
May-17
Meanwhile, the construction sector has underperformed the market massively this year,
even though earnings more than doubled in the 9M17, as investors are currently worried
about the financing capabilities of these companies, as cash flow remains rather poor.
Next year, as these companies plan to either monetize their assets or list some of their
subsidiaries, our analyst Anthony Yunus is hoping that these efforts will help alleviate
investors’ concerns, and he sticks to his Bullish call on the sector.
In the CPO sector we remain Neutral, as we expect FFB production growth to taper off in
2018 following strong production growth this year due to the end of the El Nino.
However, our analyst June Ng warns that there could be potential upside to CPO prices
in case of La Nina developing in early 2018.
Finally in the gas sector, June highlights the lack of clarity in the future direction, while
she also warns of declining gas usage due to competition from the likes of coal and
hydro/renewable sources.
24
Nomura | Indonesia strategy 8 December 2017
50%
40%
30%
20%
10%
0%
-10%
India
Thailand
Japan
China
Korea
Taiwan
HK
Singapore
Malaysia
Philippines
Indonesia
25
Nomura | Indonesia strategy 8 December 2017
Fig. 36: MSCI Indonesia Forward P/E Fig. 37: MSCI Indonesia 12m Forward PER relative to MXASJ
15
14 1.2
13
12 1.0
11
10 0.8
Feb-12
Feb-17
Jan-10
Jun-10
Feb-12
Jan-15
Jun-15
Feb-17
Jul-12
Jul-17
Jul-12
Jul-17
Aug-14
Jan-10
Jun-10
Jan-15
Jun-15
Aug-14
Nov-10
Sep-11
Dec-12
Apr-11
Oct-13
Nov-15
Sep-16
Dec-17
Mar-14
Apr-16
Nov-10
Sep-11
Dec-12
May-13
Apr-11
Oct-13
Nov-15
Sep-16
Dec-17
Mar-14
Apr-16
May-13
Source: MSCI, Nomura research Source: MSCI, Nomura research
Fig. 38: MSCI Indonesia 12m Forward P/E by sector Fig. 39: MSCI Indonesia 12m Forward P/E by sector
Healthcare, Staples, Discretionary, Telcos, Benchmark Energy, Industrials, Financials, Materials, Utilities
Benchmark Energy Materials
40 Discretionary 25 Industrials Financials
Staples Utilities
35 Health Care
Telcos 20
30
25 15
20
15 10
10
5
5
0 0
Jul-12
Jul-17
Jan-10
Jun-10
Nov-10
Sep-11
Dec-12
Oct-13
Aug-14
Jan-15
Jun-15
Nov-15
Sep-16
Dec-17
Apr-11
Mar-14
Apr-16
Feb-12
May-13
Feb-17
Jul-12
Jul-17
Jan-15
Jun-15
Jan-10
Jun-10
Nov-10
Dec-12
Dec-17
Apr-11
Sep-11
Oct-13
Nov-15
Mar-14
Aug-14
Apr-16
Sep-16
Feb-12
May-13
Feb-17
Source: MSCI, Nomura research Source: MSCI, Nomura research
For these reasons, despite a more favorable backdrop in the external environment, we
retain our Neutral position in the market after downgrading it from a Bullish stance in May
2017. From here, we may turn positive again if: 1) the market corrected to bring market
valuations to more attractive levels, and 2) there were further rating agency upgrades,
leading to sustained reductions in the costs of capital.
Overall, assuming 13% and 10% earnings growth for 2018 and 2019, and valuations
maintained at 16x, we project the JCI to reach 6,500 by the end of 2018. Given the
extended valuations, we believe investors should be more discerning in their stock picks
for 2018. We suggest a positioning in stocks that offer solid fundamentals and
reasonable valuation. Our favoured exposure by sector and top picks are discussed in
the next pages.
26
Nomura | Indonesia strategy 8 December 2017
Top picks
Despite a more favourable outlook in 2018, with acceleration in GDP expected, driven by
both public and private spending, while the reforms are gaining traction, helping unleash
Indonesia’s large growth potential, we warned that the market valuation is now close to
its peak, basically allowing for no disappointments in either earnings or politics. We
therefore suggest a selective positioning in stocks that offer solid fundamentals and
reasonable valuation.
Bank Central Asia (BBCA IJ, BUY, TP IDR24,440): We continue to expect BBCA to
lead the Indonesian banking sector in terms of ROE with its solid asset quality and its
focus towards the consumer segment, while maintaining its strong corporate profile.
Valuation is not cheap, but its structurally lower ROE is mainly due to a strong capital
position rather than lower profitability.
Bank Mandiri (BMRI IJ, BUY, TP IDR8,450): The bank boasts the strongest earnings
growth in 2018, as it is still benefitting from asset quality improvements. It has also been
successful in expanding its presence in the consumer loan segment, particularly in
mortgages.
Indofood Sukses Makmur (INDF IJ, BUY, TP IDR10,450): We like INDF as a cheaper
alternative to Indofood CBP (ICBP IJ, Neutral)), as the recent concern on the exit of
Asahi Group Holdings interestingly affected INDF more than ICBP, leading to a widening
of the discount to its NAV to 33% from 23% in September. We also expect INDF to
register better earnings growth in 2018 as its other businesses pick up. We think
Bogasari and the agribusiness should post healthy earning growth as Bogasari pass on
the cost increases from higher wheat prices while CPO prices should remain relatively
stable supporting volume growth which we expect to be around 10%.
Mitra Adi Perkasa (MAPI IJ, BUY, TP IDR8,525): Within the retail sector, we like
companies that are less susceptible to the onslaught of e-commerce. Our top pick in this
space is Mitra Adi Perkasa (MAPI IJ, Buy). MAPI is the brand owner of 150 brands
(many with strong brand equity), most of which are on an exclusive basis, for both online
and offline, hence even if it is also affected by e-commerce players, it has more flexibility
to formulate its e-commerce strategy. We are also now more comfortable with MAPI, as
it has sustainably improved its cash flow and is now focused on expanding its profitable
growth engines.
Ace Hardware (ACES IJ, BUY, TP IDR1,410): We also like Ace Hardware Indonesia
(ACES IJ, Buy) within the retail space, for its increasing dominance in the home
improvement and lifestyle segment. We expect ACES to gradually gain market share
from the traditional channel, given tighter import regulations and consumers’ increasing
preference for convenience.
PT Pembangunan Perumahan (PTPP IJ, BUY, TP IDR4,000): The construction sector
has massively underperformed this year on funding concerns, despite very strong
earnings growth. However, we believe this issue is well priced in by the market, while we
expect clearer financing strategies such as asset divestment, securitization etc, to bear
fruits. We like PTPP in this sector as it has the most solid balance sheet and cashflow
generation compared to peers, potentially better new orders growth, and attractive
valuations.
Summarecon (SMRA IJ, BUY, TP IDR1,400): SMRA’s share price is down by 33%
YTD, and we believe downside is pretty much limited at this point given that presales
and earnings are bottoming, and recovery should start next year amidst the potential
robust backlog recognition and debt refinancing lowering interest costs. Valuations are
attractive too – the stock trades at a 70% disc to RNAV, or at its trough valuation.
Siloam (SILO IJ, BUY, TP IDR12,225): We expect a turnaround in its profitability, as we
are seeing some positive signs post the entrance of CVC in September 2016. Salary
expenses have been successfully reduced by reducing redundancies in overhead
staffing while SILO is also optimising its drug procurement process.
27
Nomura | Indonesia strategy 8 December 2017
Company Bloomberg Rating Market Cap (USD bn) Price (IDR) Target Price (IDR) Upside Price Performance (%) 3M ADTV Forward P/E Forward P/BV
Name Ticker 4-Dec-17 4-Dec-17 (%) YTD (USD mn) 2017 2018 2017 2018
AUTO
Astra International ASII IJ Reduce 24.3 8,100 7,650 -6% -2.1 17.7 17.3 16.0 2.7 2.5
Indomobil IMAS IJ Reduce 0.2 940 930 -1% -28.2 0.0 (4.5) (7.0) 0.5 0.6
Total 24.5 17.9 16.4 2.6 2.5
CONSUMER STAPLES
Indofood INDF IJ Buy 4.7 7,300 10,450 43% -7.9 4.2 14.1 12.7 2.0 1.8
Indofood CBP ICBP IJ Neutral 7.6 8,750 9,160 5% 2.0 2.7 26.5 24.8 5.1 4.6
Unilever UNVR IJ Neutral 27.8 49,300 50,325 2% 27.1 6.8 51.9 47.0 56.0 50.4
Kalbe Farma KLBF IJ Neutral 5.6 1,610 1,720 7% 6.3 3.1 31.2 28.1 5.9 5.4
Tiga Pilar Sejahtera Food AISA IJ Reduce 0.1 540 600 11% -72.2 0.6 7.7 9.0 0.4 0.4
Gudang Garam GGRM IJ Buy 11.3 79,150 81,400 3% 23.9 7.0 19.7 17.5 3.6 3.3
Hanjaya Mandala Sampoerna HMSP IJ Buy 37.2 4,320 4,430 3% 12.8 5.0 37.1 33.1 14.3 13.7
Mayora Indah MYOR IJ Neutral 3.5 2,100 2,090 0% 27.7 0.3 32.7 27.1 6.6 5.6
Nippon Indosari Corpindo ROTI IJ Neutral 0.6 1,245 1,360 9% -22.2 0.3 40.9 23.0 5.3 5.1
Total 98.3 32.3 28.9 8.2 7.5
PLANTATIONS
PP London Sumatra LSIP IJ Buy 0.7 1,375 1,710 24% -21.0 1.4 12.5 10.7 1.1 1.1
Astra Agro Lestari AALI IJ Buy 2.0 13,875 20,100 45% -17.3 0.8 13.5 12.2 1.8 1.6
Total 2.7 13.2 11.8 1.6 1.4
CONSUMER DISCRETIONARY
Mitra Adiperkasa MAPI IJ Buy 0.8 6,625 8,525 29% 22.7 1.0 29.3 20.5 3.1 2.7
Matahari Department Store LPPF IJ Neutral 2.3 10,500 11,100 6% -30.6 4.1 15.9 14.2 12.9 9.6
Ramayana Lestari Sentosa RALS IJ Neutral 0.5 970 1,000 3% -18.8 0.7 16.8 15.4 2.0 1.9
Ace Hardware ACES IJ Buy 1.5 1,160 1,410 22% 38.9 1.1 24.5 21.4 5.5 4.7
Sumber Alfaria Trijaya AMRT IJ Buy 2.0 660 800 21% 5.6 0.1 42.2 34.6 4.9 4.4
Total 7.2 24.3 20.2 4.7 4.2
PROPERTY
Summarecon Agung SMRA IJ Buy 0.9 885 1,400 58% -33.2 2.5 38.8 26.4 2.1 2.0
Puradelta Lestari Tbk Pt DMAS IJ Buy 0.6 169 270 60% -26.5 0.3 13.4 10.6 1.1 1.0
Lippo Karawaci LPKR IJ Neutral 0.9 540 830 54% -25.0 4.2 11.4 9.8 0.6 0.6
Bumi Serpong Damai BSDE IJ Buy 2.3 1,630 2,500 53% -7.1 1.9 11.9 10.7 1.4 1.2
Ciputra Development CTRA IJ Buy 1.6 1,200 1,580 32% -10.1 1.7 19.3 16.5 1.9 1.8
Total 6.4 14.9 12.8 1.3 1.2
CEMENT
Semen Indonesia Persero SMGR IJ Buy 4.2 9,600 12,000 25% 4.6 3.6 26.7 22.8 2.0 1.9
Indocement Tunggal Prakarsa INTP IJ Neutral 5.1 18,800 19,000 1% 22.1 2.2 31.9 29.4 2.7 2.6
Total 9.3 29.4 26.0 2.3 2.2
INFRASTRUCTURE
Jasa Marga (Persero) JSMR IJ Buy 3.5 6,425 7,800 21% 48.7 3.4 17.5 19.4 3.0 2.7
Wijaya Karya Persero WIKA IJ Buy 1.1 1,730 3,500 102% -26.7 2.5 9.5 8.6 1.2 1.1
Waskita Karya Persero WSKT IJ Buy 2.1 2,080 2,550 23% -18.4 3.7 8.7 8.2 2.0 1.6
Pembangunan Perumahan PTPP IJ Buy 1.2 2,580 4,000 55% -32.3 3.4 11.5 8.9 1.5 1.3
Total 7.9 11.9 11.3 2.0 1.7
TELECOM
Telekomunikasi Indonesia TLKM IJ Neutral 31.3 4,200 4,400 5% 6.0 33.3 18.4 17.3 3.7 3.4
Indosat ISAT IJ Buy 2.2 5,350 7,500 40% -17.1 0.3 16.3 11.2 2.0 1.8
Xl Axiata EXCL IJ Buy 2.3 2,960 4,000 35% 28.1 1.7 126.0 44.1 1.5 1.4
Total 35.8 19.4 17.4 3.2 3.0
BANKS
Bank Rakyat Indonesia BBRI IJ Buy 30.1 3,300 3,600 9% 41.3 22.4 14.5 12.4 2.5 2.2
Bank Mandiri Persero BMRI IJ Buy 25.7 7,450 8,450 13% 28.7 20.1 16.1 12.1 2.1 2.0
Bank Danamon Indonesia BDMN IJ Neutral 3.7 5,150 5,900 15% 38.8 1.0 11.7 10.0 1.3 1.2
Bank Negara Indonesia BBNI IJ Neutral 11.4 8,225 7,800 -5% 48.9 8.8 11.5 9.5 1.6 1.4
Bank Central Asia BBCA IJ Buy 37.9 20,800 24,440 18% 34.2 21.5 21.6 19.4 4.0 3.6
Bank Pan Indonesia PNBN IJ Buy 2.1 1,190 1,180 -1% 58.7 0.3 10.1 8.9 0.8 0.8
Total 110.9 16.0 13.4 2.4 2.2
UTLITIES
Perusahaan Gas Negara Perser PGAS IJ Buy 3.0 1,650 3,350 103% -38.9 8.2 5.8 5.6 0.9 0.8
Total 3.0 5.8 5.6 0.9 0.8
TOWERS
Solusi Tunas Pratama SUPR IJ Neutral 0.6 6,500 7,300 12% - - 19.3 15.8 1.3 1.2
Total 0.6 19.3 15.8 1.3 1.2
AIRLINE SERVICES
Garuda Indonesia Pasero GIAA IJ Reduce 0.6 310 295 -5% -8.3 0.2 (9.9) (6.6) 0.8 0.8
Total 0.6 (9.9) (6.6) 0.8 0.8
HEALTHCARE
Siloam International Hospitals SILO IJ Buy 1.3 10,600 12,225 15% -2.2 0.2 135.7 97.6 2.3 2.7
Mitra Keluarga Karyasehat MIKA IJ Neutral 1.9 1,810 2,070 14% -29.6 1.3 36.9 35.5 7.0 6.7
Total 3.2 54.2 48.9 4.5 4.8
PETROCHEMICALS
Barito Pacific BRPT IJ Neutral 2.3 2,270 1,860 -18% 209.9 5.2 16.3 15.5 2.1 1.5
Chandra Asri Petrochemical TPIA IJ Neutral 7.3 5,500 4,640 -16% 35.7 4.2 19.1 20.4 4.4 3.9
Total 9.6 18.3 19.0 3.5 2.9
SANITARY WARE
Surya Toto Indonesia TOTO IJ Buy 0.3 416 550 32% -16.5 0.0 16.0 14.1 2.5 2.3
Total 0.3 16.0 14.1 2.5 2.3
MEDIA
Surya Citra Media SCMA IJ Neutral 2.4 2,200 2,300 5% -21.4 2.7 22.2 21.0 8.4 7.5
Media Nusantara Citra MNCN IJ Neutral 1.4 1,300 1,650 27% -25.9 2.3 13.3 12.6 2.0 1.9
Total 3.8 17.8 16.9 3.9 3.6
GRAND TOTAL 19.8 17.3 3.1 2.8
28
Nomura | Indonesia strategy 8 December 2017
Sector outlooks
Banks: Downgrade to Neutral – fundamental improvements
largely priced in
Downgrade banking sector to Neutral after rally; continue to prefer BBCA and
upgrade Mandiri to 2nd in pecking order
In May-17 we resumed coverage of the Indonesian banking sector with a Bullish view as
we saw that asset quality improvements have yet to be fully priced in. Nonetheless, our
covered banks on average are up ~20% since May-17. Our current valuations take into
account average EPS growth of ~20%, and for valuations to expand further from now
(most banks are at about our target price already) would require the banks’ EPS to grow
at an even faster pace than our estimates. We think that is unlikely as the major delta in
earnings improvement should be achieved in 2017F due to significant decline in credit
cost, and improvements will be gradual going forward. In our view, current valuations
have already accounted for the ~20% growth in average EPS. Therefore, we bring our
stance on the banking sector down to Neutral from Bullish.
Rally in 2017 supported by idiosyncratic banking sector improvements
YTD Indonesia financials’ performance is at 33%, beating Indonesia’s index by ~20pp.
The run-up in valuations is largely due to the significant improvements in asset quality as
the banking sector enters into an asset quality recovery cycle. The resilient NIM also
helped support valuation uplift for most of the large banks. Nonetheless, system loans
growth remained weak throughout the year. Business loans were the main drag, while
consumer loans growth remained relatively robust. Although consumer loans growth
remained robust at 7.2% year-to-September, it is largely supported by subsidized
mortgages and micro-loans, which are both supported by the government.
Fig. 41: Stability in system NPL ratio since end-16 Fig. 42: NIM remained resilient throughout the year
1.0% 5.0
Sep-16
Sep-15
Sep-17
Jul-16
Jul-17
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Nov-15
Jan-16
Mar-16
Nov-16
Jan-17
Aug-12
Apr-13
Aug-13
Apr-14
Aug-14
Apr-15
Aug-15
Apr-16
Aug-16
Apr-17
Aug-17
May-16
Mar-17
May-17
Source: OJK, BI, Nomura research Source: OJK, BI, Nomura research
29
Nomura | Indonesia strategy 8 December 2017
Fig. 43: System loans growth – By economic sector & loan type
30
Nomura | Indonesia strategy 8 December 2017
3-Yr
FY15 FY16 FY17F FY18F FY19F Change Our view
(bps)
Net Interest Income Yield
NII yield to decline faster than rest of ASEAN due to: 1) government’s initiative to bring interest rate down; 2) margin
6.02% 6.18% 5.95% 5.80% 5.66% -0.52%
squeeze from rising competition; 3) weaker loans demand.
+
Non-Interest Income Yield
Non-NII for Indonesian banks relates to loan growth. With the trend in credit growth likely to be on a downward trend,
1.77% 1.80% 1.75% 1.77% 1.79% -0.01%
there could be pressure on non-NII. Other fees and other non-NII should also remain relatively flat.
=
Total Income Yield
7.79% 7.98% 7.70% 7.56% 7.45% -0.53% ID banks could see some pressure on revenue from both NII and non-NII..
-
Opex / Avg. Assets
Being the largest in ASEAN by population size and an archipelagic island country, cost has been a structural issue for
Indonesian banks. But the shift towards a digital economy, with banking transaction volume via mobile and/or internet
3.63% 3.64% 3.51% 3.42% 3.34% -0.30%
ballooning in the last few years, has improved cost efficiency. We expect Indonesia banks to be most aggressive amongst
ASEAN peers in terms of cost-saving from banking digitalization.
=
PPOP / Avg. Assets
ID banks banks could see some pressure on PPOP growth until cost efficiency improves in a more meaningful way given
4.16% 4.35% 4.20% 4.15% 4.11% -0.24%
the need to invest heavily in IT and digital platforms amid relatively a weak revenue growth phase.
Normalized ROAA
The key improvement in the Indonesian banking sector’s earnings profile is mainly derived from the significant decline in
2.49% 2.27% 2.41% 2.62% 2.71% 0.44% credit cost. Nonetheless, we need further catalysts, especially for the loans growth segment to improve in order for
profitability face.
x
Leverage
We expect our rated Indonesian banks to increase their dividend payout ratio as capital levels are amongst the highest
7.7x 7.4x 6.6x 6.5x 6.5x -0.9x globally, while credit growth remains weak. Nonetheless, unless the state-owned banks initiate to reduce their capital
ratios, we reckon that leverage will remain around the 6.5x range.
=
Normalized ROAE
The accelerated ROE reversion for Indonesian banks amongst ASEAN peers will largely be from the reduction in credit
18.5% 15.1% 15.8% 17.1% 17.7% 2.67%
cost, focusing towards the consumer segment and stability in leverage profile (from a declining one).
31
Nomura | Indonesia strategy 8 December 2017
Fig. 45: Recovery to pick up in 2018 Fig. 46: LCGC popularity diminishing
Annual 4W volumes vs growth LCGC monthly volumes as a % of total 4W monthly volumes
Annual 4W volume sales (RHS) 27% LCGC cumulative volumes as a % of
(000s) total 4W cumulative volumes
Growth y-o-y (LHS) 25%
1,400 1,275 30%
25%
1,230 1,209 1,159 25% 23%
1,200 1,062 1,083
17% 1,116 1,013 20% 21%
1,000 894 15% 19%
765 10%
800 5% 17%
10% 10% 5%
600 7% 15%
0%
2% 13%
400 -2% -5%
-10% 11%
200 9%
-16% -15%
0 -20% 7%
Jul-14
Jul-15
Jul-16
Jul-17
Jan-14
Jan-15
Jan-16
Jan-17
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
FY13
FY10
FY11
FY12
FY14
FY15
FY16
FY17F
FY18F
FY19F
• Overcapacity persists in the industry, with total annual installed capacity now estimated
at 2.0 to 2.2mn units by Astra’s management, following new capacity additions by
Mitsubishi Motors and Wuling over the last two years. Thus, competition continues to
remain very intense. So far this has been reflected in Astra’s slim dealership operating
margins, which for the first time turned negative in 2Q17, leading to consolidated
automotive operating profit (2W & 4W dealership plus auto-parts) falling 68% y-y in
9M17. This was offset by 51% y-y growth in 9M17 net profits at Astra Daihatsu Motor
(ADM), as a result of the company’s continued high capacity utilization. Overall,
however, Astra’s four-wheeler net profit was flat y-y in 9M17.
32
Nomura | Indonesia strategy 8 December 2017
• Going forward, while we expect sequential GDP growth in 2018 as a result of private
investment kicking in and higher consumption propelled by tailwinds from a regional
election, we are not comfortable assuming double-digit growth in four-wheeler volume
sales and hence only expect a 7% increase. Competition in the space is likely to tighten
further due to new product launches, such as that of the Mitsubishi Xpander (which has
already attracted over 40K new orders so far). However, it still remains to be seen
whether any new launches will sustain their popularity. We continue to expect Astra
International brands such as Toyota and Daihatsu to maintain control of the majority of
the market share, but expect their share to decline from 55% this year to 54% in 2018.
Two wheelers: Normalising, but unlikely to growth at double-digit levels
• Although year-to-October total volume sales growth in the two-wheeler space is flat (-
0.1%), it is a notable improvement over the segment’s underperformance over the last
three years. Growth started picking-up after Hari Raya, which Astra’s management
attributed to higher commodity prices finally translating into higher demand. However, it
remains to be seen whether this improvement is sustainable. While we are cautious, we
are comfortable expecting flat growth for this year, compared to -5% y-y previously.
• For 2018, we expect two-wheeler volume sales to improve by 5% y-y after three years
of decline from 7.87 million units in 2014 to an estimated 5.93 million units in 2017, a
fall of 25%. Higher social spending by the government should boost incomes for the
lower-middle class buyers, ultimately driving sales. A sustained recovery in commodity
prices would help demand growth further to the mid-single digit level. However, we
believe that acceleration beyond that level is unlikely given our belief that the two-
wheeler market is facing saturation, especially in the large urban centers.
Fig. 47: 2W to return to growth in 2018F after a flat 2017 Fig. 48: Honda to remain the dominant player in 2W
Annual 2W volumes vs growth 2W market share trends
(000s) Annual 2W volume sales (RHS) Astra (Honda) Yamaha Suzuki Kawasaki Others
Growth y-o-y (LHS) 100%
9,000 15%
8,013 90%
7,744 7,867
8,000 7,373 10%
7,064 80%
9.6%
7,000 6,480 6,539
6,228 70%
8.7% 5,931 5,931 5%
6,000 1.6% 5.0%5.0% 60%
5,000 0.0% 0%
50%
4,000 -5% 40%
3,000 -8.5% 30%
-10%
2,000 -11.8% 20%
1,000 -15% 10%
-17.6%
0 -20% 0%
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jan-17
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17F
FY19F
FY18F
Source: Gaikindo, Nomura estimates Source: Gaikindo Company data, Nomura research
• Despite the 2W market facing slower volume growth compared to 4W, the 2W business
remains a significant contributor to Astra’s net profit, representing around 20% of its
total net profit in 9M17. The 2W manufacturing operation, Astra Honda Motor (AHM),
saw a revival in margins due to lower low material costs. This led to Astra’s share in
AHM’s net income growing by 29% y-y in 9M17. We also believe that Honda will
continue to dominate the 2W market in Indonesia, with a market share of 75%.
33
Nomura | Indonesia strategy 8 December 2017
Fig. 49: 2W ownership rate by region Fig. 50: Jakarta: 2W ownership rate vs GDP per capita
For the period 2010 to 2015
160% Jakarta Java Non-Java National (IDRmn) Jakarta GDP/capita (LHS)
250 Jakarta Penetration Rate (RHS) 150%
140%
140%
120% 200
130%
100%
150 120%
80%
110%
60% 100 100%
40% 90%
50
20% 80%
0% 0 70%
2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015
Source: National statistics, Nomura research Source: National statistics, IMF, Nomura research
34
Nomura | Indonesia strategy 8 December 2017
wage), translating into 3.7% additional spending on staples (Nielsen assumes the
Indonesian grocery market to be worth IDR450tn).
As the government has now moved to a formula-based method in determining yearly
increases in minimum wage, we are unlikely to see a sharp hike in minimum wage; for
2018 the minimum wage increase has been set at ~8.7%. However, the government
has stated that it will keep electricity prices unchanged for next year, so we don’t expect
further cost pressure in the form of utility bill increases for the low-end.
2009
2010
2011
2012
2013
2014
2015
2016
2017F
2018F
Source: Nomura research
Consumer behavioral changes: While the above could explain the weakness among
the low-end, many are struggling to explain what has been the source of weakness
among the middle and upper segments. Various surveys and data points indicate that
there has been a clear change in consumers’ behaviour, with the younger generation
now spending more on travel, F&B and cell-phone vouchers. Also, consumers are
shifting from physical stores to online channels, which could partially explain some of the
weaknesses seen in some of the retailers. We think 2018 could be a determining year for
companies such as Matahari Department Store (LPPF IJ, Neutral), especially if the
overall consumption does pick up. This year, due to the overall weakness in
consumption, one could not conclude if the weakness in LPPF’s SSSG was primarily due
to the shift to online channel, or merely due to consumers’ weak purchasing power.
How to position for 2018?
To play the low-end recovery theme, we prefer the FMCG names. Our top pick in this
space is Indofood Sukses Makmur (INDF IJ, Buy). We still like INDF as a cheaper
alternative to Indofood CBP (ICBP IJ, Neutral)), as the recent concern on the exit of
Asahi Group Holdings interestingly affected INDF more than ICBP, leading to a widening
of the discount to its NAV to 33% from 23% in Sept. and also we expect INDF to register
better earnings growth in 2018 as its other businesses pick up. We think Bogasari and
the agribusiness have potential to surprise on the upside as Bogasari pass on the costs
increases from higher wheat prices while CPO prices are expected to remain relatively
stable and volume should grow by ~10%. We also like the cigarette names as a proxy to
recovery among the low-end. However, we believe that current valuations are not as
compelling compared to 1-2 months ago, and so we would prefer to further accumulate
the cigarette names on any weakness.
Within the retail sector, we like companies that are less susceptible to the onslaught of e-
commerce. Our top pick in this space is Mitra Adi Perkasa (MAPI IJ, Buy). MAPI is the
brand owner of 150 brands (many with strong brand equity), most of which are on an
exclusive basis, for both online and offline, hence even if it is also affected by e-
commerce players, it has more flexibility to formulate its e-commerce strategy. We are
also now more comfortable with MAPI, as it has sustainably improved its cash flow and
is now focused on expanding its profitable growth engines. We also like Ace Hardware
Indonesia (ACES IJ, Buy) within the retail space for its increasing dominance in the
35
Nomura | Indonesia strategy 8 December 2017
home improvement and lifestyle segment. We expect ACES to gradually gain market
share from the traditional channel, given tighter import regulations and consumers’
increasing preference for convenience.
36
Nomura | Indonesia strategy 8 December 2017
Fig. 52: Key outperformers and underperformers in 9M17 Fig. 53: Key outperformers and underperformers in 9M17
TOP 10 CATEGORY TV & PRINT 9M17 vs 9M16 TOP 10 PRODUCT TV & PRINT 9M17 vs 9M16
GOVERNMENT, POLITIC ORGANIZATION -9% MEIKARTA CIKARANG 0%
HAIR CARE PRODUCTS 16% TRAVELOKA.COM 82%
COMMUNICATION EQUIPMENT & SERVICES 33% INDOMIE 17%
FACIAL CARE PRODUCTS 21% VIVO GSM MULTICARDS HANDPHONE 6735%
ONLINE SERVICES 49% SAMSUNG GSM MULTICARDS HANDPHONE 121%
CLOVE CIGARETTES -24% SGM EKSPLOR 1 PLUS - GROWING UP MILK 22%
COFFEE, TEA -7% CLEAR ANTI KETOMBE - SHAMPOO 24%
SNACKS, BISCUITS, COOKIES, CAKES 22% KEMENTERIAN KESEHATAN RI -13%
INSTANT FOOD, INSTANT NOODLES 3% MARJAN BOUDOIN 18%
CORPORATE ADS, SOCIAL SERVICES -8% PANTENE ANTI KETOMBE - SHAMPOO 114%
Fig. 54: Product split of in-program ads vs commercial break (Based on the month of May – October 2017)
Fig. 55: Commercial break ads – top-10 categories Fig. 56: In-program ads – top-10 categories
TOP 10 CATEGORY TV & PRINT # of spots # of HH:MM TOP 10 CATEGORY TV & PRINT # of spots # of HH:MM
HAIR CARE 135,760 713:20:00 COFFEE, TEA 74,727 156:33:00
ONLINE SERVICES 122,983 777:45:00 HEATLH DRINK 53,020 117:01:00
FACIAL CARE 103,695 521:19:00 ONLINE SERVICES 33,757 103:48:00
COMMUNICATION EQPTMENT & SERVICES 97,257 517:33:00 COMMUNICATION EQPTMENT & SERVICES 31,316 86:16:00
COFFEE, TEA 83,316 405:43:00 VITAMIN, ESSENCES, SUPPLEMENTS 25,118 89:38:00
SNACKS, BISCUITS, COOKIES, CAKES 80,265 353:57:00 COSMETICS, MAKE UP 24,478 32:22:00
CLOVE CIGARETTES 79,769 406:24:00 CORPORATE ADS, SOCIAL SERVICES 19,889 121:43:00
VITAMIN, ESSENCES, SUPPLEMENTS 64,456 313:39:00 CEREALS, BREAKFAST FOOD 18,772 49:29:00
INSTANT FOOD, INSTANT NOODLES 62,781 300:36:00 INSTANT FOOD, INSTANT NOODLES 18,097 40:02:00
TOILET SOAP, LIQUID SOAP 57,681 333:15:00 TRADITIONAL MEDICINE 18,014 38:25:00
37
Nomura | Indonesia strategy 8 December 2017
38
Nomura | Indonesia strategy 8 December 2017
Fig. 59: SILO’s employee breakdown by function Fig. 60: SILO’s opex breakdown
% of overhead staff has declined in 9M17 Salary expenses growth has slowed down in 9M17
Office and administration Others
(IDRbn) Water and electricity
Other medical staff
12,000 40% Depreciation
Nurses 1,400 Rental 40%
Doctors Other office expenses
Non-medical staff/total employee (RHS) 1,200 Salaries and employee benefits 39%
10,000
Salaries as % of opex (RHS)
35%
1,000 38%
8,000
800 37%
6,000 30%
600 36%
4,000
25% 400 35%
2,000 200 34%
0 20% 0 33%
2011A 2012A 2013A 2014A 2015A 2016A 9M17 2011A 2012A 2013A 2014A 2015A 2016A 9M17
Source: Company data, Nomura research Source: Company data, Nomura research
Fig. 61: SILO’s revenue vs. opex Fig. 62: SILO’s margins trends
We like MIKA for its excellent track record in managing hospitals, but in the near term,
we think its minimum exposure to BPJS (<3% as of 9M17) and high profitability (~35%
EBITDA margin as of 9M17) will work against it. MIKA’s conservative approach will likely
result in further market share losses to BPJS hospitals. On the other hand, aggressively
tapping into the BPJS segment could quickly erode its healthy margins.
39
Nomura | Indonesia strategy 8 December 2017
Fig. 63: MIKA’s hospital performance (Greater Jakarta) Fig. 64: MIKA’s hospital performance (Surabaya and Tegal)
Occupancy rate fell since the launch of UHC Waru suffered from low occupancy rate this year
Inpatient admission (LHS) Inpatient days (LHS) Inpatient admission (LHS) Inpatient days (LHS)
Outpatient visits (LHS) Occupancy rate (RHS) Outpatient visits (LHS) Occupancy rate (RHS)
1,500,000 72.2% 80% 500,000 80%
68.5% 73.2%
66.4%
60.1% 58.8% 400,000 57.5%
60% 52.8% 51.7% 60%
50.2%
1,000,000
300,000
1,293,586 1,338,476 40% 40%
1,256,886 1,262,237
200,000 396,521
1,003,786
500,000 349,363 294,681
304,484 326,116 314,858 326,861
301,103 280,659 20% 87,924 85,927 98,564 20%
215,407 100,000 81,025
66,050
82,991 79,226 91,495 64,063 23,782 23,290 25,482 28,775 20,630
81,822
0 0% 0 0%
2013A 2014A 2015A 2016A 9M17 2013A 2014A 2015A 2016A 9M17
Source: Company data, Nomura research Source: Company data, Nomura research
We rate KLBF as one of the best companies to own over the longer term, but we are
unexcited by its near-term outlook. Of all of its business lines, only Nutritional has shown
consistent growth in the past few quarters, while other business segments are facing
headwinds. The Pharma business is still digesting the impact of universal healthcare, as
shown by the shift towards more unbranded generics, while Energy Drinks under
Consumer Health has already matured. Distribution is still looking for more principals,
while Medical Devices, which supposedly boasts higher margins than the regular
distribution business, is still relatively small. As such, for next year we continue to expect
sub-double-digit growth at the top line, while the bottom line we expect to return to
double-digit growth, supported mainly by rising efficiencies at the operating line.
Fig. 65: KLBF’s revenue breakdown by segment Fig. 66: KLBF’s revenue growth by segment
0 -10%
FY13A FY14A FY15A FY16A FY17F FY18F FY19F FY14A FY15A FY16A FY17F FY18F FY19F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
40
Nomura | Indonesia strategy 8 December 2017
• Regulatory developments around SIM card registration should remain a key driver for
competition. We expect Telkomsel to remain aggressive on acquisition packs during
this window. However, we do expect the telco to continue to price its reloads at a
premium to peers.
• Revenue exposure to starter packs is at around 15% of telcos’ revenues, we think. The
growth here should slow down as registration progresses. The subsequent subscriber
clean-up would also remove dormant / inactive subscribers. Within the three telcos, we
expect ISAT to be the most exposed to these risks – given its strong net add
momentum in the recent quarters.
• Data should remain a key growth driver. This should be driven by higher adoption vs
any increase in data pricing. The revenue exposure here is 39% for TSel, 60% for ISAT
and 67% for XL.
• We expect further traffic shift in ex Java region from voice to data. With their selective
focus, we think XL is well-positioned to tap into this opportunity. While we may see
slightly higher capex, we do not expect a significant spike in overall capex.
• Fixed segment would be a focus and an opportunity for PT Telkom. Given the
underpenetrated market, there is a strong growth potential for the incumbent. TLKM
indicated interest in inorganic growth to improve its skillsets. At the same time, the telco
remains focussed on profitability in such acquisitions.
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Revenue share
Telkomsel 64.3% 64.7% 65.4% 65.1% 65.9% 66.8% 67.5% 68.1% 67.7% 67.2% 67.3%
Indosat 18.4% 18.9% 18.6% 18.8% 18.5% 18.9% 18.9% 18.3% 18.4% 18.5% 17.6%
XL Axiata 17.3% 16.4% 16.0% 16.0% 15.6% 14.3% 13.6% 13.5% 14.0% 14.3% 15.1%
EBITDA chg%y-y
Telkomsel 9% 12% 27% 9% 27% 21% 11% 11% 13% 15% 3%
Indosat 0% 14% 25% 19% 14% 12% 7% 17% 5% 16% -6%
XL Axiata -15% -3% 7% 1% 17% 3% -10% -22% -16% 0% 15%
EBITDA margin
Telkomsel 54% 55% 59% 56% 58% 58% 59% 55% 59% 59% 58%
Indosat 43% 42% 46% 40% 43% 43% 45% 44% 43% 46% 43%
XL Axiata 41% 43% 45% 46% 46% 46% 44% 40% 40% 41% 43%
Total margin 51% 52% 56% 53% 55% 55% 56% 53% 55% 56% 55%
41
Nomura | Indonesia strategy 8 December 2017
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Data revenue contribution
Telkomsel 25% 25% 27% 29% 31% 32% 32% 33% 34% 37% 39%
Indosat 31% 30% 32% 35% 39% 45% 42% 44% 52% 57% 60%
XL Axiata 31% 32% 31% 35% 37% 40% 47% 53% 58% 63% 67%
42
Nomura | Indonesia strategy 8 December 2017
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
BTS
Telkomsel 90,552 96,915 100,382 103,289 110,512 118,673 124,097 129,033 136,093 146,571 152,191
Indosat 40,831 43,075 46,361 50,687 52,326 53,333 54,212 56,483 58,175 59,023 60,247
XL Axiata 52,942 54,550 56,300 58,879 59,040 66,353 78,725 84,484 87,648 93,507 98,005
Total BTS 184,325 194,540 203,043 212,855 221,878 238,359 257,034 270,000 281,916 299,101 310,443
BTS additions
Telkomsel 5,132 6,363 3,467 2,907 7,223 8,161 5,424 4,936 7,060 10,478 5,620
Indosat 602 2,244 3,286 4,326 1,639 1,007 879 2,271 1,692 848 1,224
XL Axiata 930 1,608 1,750 2,579 161 7,313 12,372 5,759 3,164 5,859 4,498
Total BTS additions 6,664 10,215 8,503 9,812 9,023 16,481 18,675 12,966 11,916 17,185 11,342
BTS share
Telkomsel 49% 50% 49% 49% 50% 50% 48% 48% 48% 49% 49%
Indosat 22% 22% 23% 24% 24% 22% 21% 21% 21% 20% 19%
XL Axiata 29% 28% 28% 28% 27% 28% 31% 31% 31% 31% 32%
Total BTS 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
3G BTS
Telkomsel 43,556 48,183 51,666 53,134 57,205 63,891 68,651 72,327 75,190 78,408 80,418
Indosat 18,544 20,067 22,671 23,730 25,068 25,816 26,273 27,724 28,510 29,255 29,912
XL Axiata 16,431 17,246 17,918 18,239 18,324 23,474 33,939 38,731 39,743 42,167 44,462
Total BTS 78,531 85,496 92,255 95,103 100,597 113,181 128,863 138,782 143,443 149,830 154,792
3G BTS additions
Telkomsel 5,117 4,627 3,483 1,468 4,071 6,686 4,760 3,676 2,863 3,218 2,010
Indosat 481 1,523 2,604 1,059 1,338 748 457 1,451 786 745 657
XL Axiata 425 815 672 321 85 5,150 10,465 4,792 1,012 2,424 2,295
Total BTS additions 6,023 6,965 6,759 2,848 5,494 12,584 15,682 9,919 4,661 6,387 4,962
4G BTS
Telkomsel 1,761 4,210 4,932 5,015 6,362 11,130 17,837 21,447
Indosat 75 106 165 3,361 3,544 3,724 4,080 4,717 5,446 5,533 6,110
XL Axiata 180 232 1,018 3,134 3,286 5,250 7,204 8,204 10,330 13,591 15,711
Total BTS 255 338 1,183 8,256 11,040 13,906 16,299 19,283 26,906 36,961 43,268
4G BTS additions
Telkomsel 2,449 722 83 1,347 4,768 6,707 3,610
Indosat 31 59 3,196 183 180 356 637 729 87 577
XL Axiata 52 786 2,116 152 1,964 1,954 1,000 2,126 3,261 2,120
43
Nomura | Indonesia strategy 8 December 2017
1,600
1,400
1,200
1,000
800
600
400
200
0
2011 2012 2013 2014 2015 2016 2017F 2018F
Source: Ministry of Finance, The Directorate-General for Taxation, Nomura research
44
Nomura | Indonesia strategy 8 December 2017
Fig. 72: Progress on priority project completion Fig. 73: Cement demand & supply
45
Nomura | Indonesia strategy 8 December 2017
Fig. 74: Infra revenue & earnings & growth Fig. 75: JSMR financing strategy
Revenue (LHS) Net income (LHS) Financing strategies Launch year Potential proceeds (IDR tn)
250 35%
y-o-y% revenue y-o-y% net income 1) Asset securitization
30% -Jagorawi 3Q17 2
200 25% -Others FY18- 19 15-20
20% 2) Bonds
-JORR - W2N 4Q17 1.5-2.0
150 15%
-Others FY18- 19 10
10% 3) Trans Jawa Holding FY17- 19 N.A
100 5% 4) CPF (7 toll roads) FY18- 19 ~40
0%
50 -5%
Source: Company data, Nomura Research
-10%
0 -15%
2015 2016 2017F 2018F 2019F
Source: Company data, Nomura estimates
(x)
PE Average STD +1
24 STD +2 STD -1 STD -2
22
20
18
16
14
12
10
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Dec-13
Dec-14
Dec-12
Jun-13
Aug-13
Jun-14
Aug-14
Jun-15
Apr-15
Aug-15
Aug-16
Jun-17
Aug-17
Apr-13
Oct-13
Apr-14
Oct-14
Oct-15
Dec-15
Jun-16
Apr-16
Oct-16
Dec-16
Apr-17
Oct-17
46
Nomura | Indonesia strategy 8 December 2017
Fig. 77: Consolidated presales & growth Fig. 78: Apartment/condo supply trend
5% 64%
150,000 62%
15,000 0%
60%
-5%
100,000 58%
10,000 -10%
56%
-15%
50,000 54%
5,000 -20%
52%
-25% 0 50%
3Q17
2009
2010
2011
2012
2013
2014
2015
2016
0 -30%
2015 2016 2017F 2018F 2019F
Source: Company data, Nomura estimates Source: Cushman and Wakefield, Nomura research
Fig. 79: Home prices in primary market Fig. 80: Banks’ mortgage loans as a % of total loans
8.9%
2,000
60 8.7%
1,500 8.5%
Jul-14
Dec-14
Mar-11
Jan-12
Jun-12
Nov-12
Jan-17
Jun-17
Aug-11
Apr-13
Sep-13
Oct-15
Aug-16
Feb-14
May-15
Mar-16
1,000 10
2006 2007 2008 2009 2010 2011 2012 2013
Source: Bank Indonesia, Nomura Research Source: Indonesia Banking Statistics, Nomura Research
47
Nomura | Indonesia strategy 8 December 2017
Fig. 81: Mortgage takers Fig. 82: Consolidated earnings & growth
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Sep-13
Sep-14
Mar-15
Sep-15
Sep-16
Sep-17
Mar-13
Mar-14
Mar-16
Mar-17
48
Nomura | Indonesia strategy 8 December 2017
• CPO price is likely to peak in early 2018 and gradually taper off in 2Q18 due to still-high
inventory and continued production growth from new maturities. CPO is expected to
pick up again in 4Q18 with lower inventory after the festive season and seasonally low
production period.
• Recent observations by Australia’s Bureau of Meteorology indicate the chance of a
La Niña forming in late 2017 of 70%; around 3x the normal likelihood. La Niña events
typically bring above-average rainfall and affect CPO production. We estimate the
development of a La Niña event would drive 2018 average CPO prices higher by 7%
due to weak production.
• We note that CPO prices and CPO stock share prices tend to be higher in the Nov-Feb
period compared with the preceding Mar-Oct period, with a positive trend of 60% over
the past 15 years. We expect a similar trend in 2018 with positive catalyst coming from
stronger 3Q17 results, higher CPO prices due to an increase rainfall that affects
productions and oil price recovery (correlation of 0.7x).
• Higher CPO prices should benefit stock prices, with high CPO price correlation such as
LSIP IJ and AALI IJ (all rated Buy).
• In our view, sector winners will be those with strong production growth and efficient cost
control. We maintain our Neutral sector view with 2017-2018 CPO price forecast of
MYR2,850/MT.
Fig. 84: Share price correlation with CPO price Fig. 85: Palm oil companies’ ROE (CY1H17, annualised)
0 0%
FR SP SIME MK IOI MK GENP AALI IJ LSIP IJ FR SP SIME MK IOI MK GENP AALI IJ LSIP IJ
MK MK
Source: Bloomberg, Nomura research Source: Company data, Nomura research
Fig. 86: Palm oil companies’ margins (FY18F) Fig. 87: FFB production growth in CY1H17 for key players
0%
FR SP SIME MK IOI MK GENP AALI IJ LSIP IJ
MK
Source: Company data, Nomura research
49
Nomura | Indonesia strategy 8 December 2017
Fig. 88: CPO and crude oil price trend and correlation in last 15 years
In last Correlation
1,200
1 year 0.43
3 year 0.30
1,000
5 year 0.76
800 10 year 0.73
600
400
200
0
Mar-04
Mar-11
Jul-06
Jul-13
Aug-10
Jun-02
Jan-03
Aug-03
Oct-04
Dec-05
Sep-07
Nov-08
Jun-09
Jan-10
Apr-08
Oct-11
Dec-12
Sep-14
Nov-15
Jun-16
Jan-17
Aug-17
Apr-15
May-05
Feb-07
May-12
Feb-14
Source: Bloomberg, Nomura research
50
Nomura | Indonesia strategy 8 December 2017
Fig. 89: PGAS’s average natural gas selling price in 9M17 Fig. 90: Indonesia natural gas consumption
compared to other alternatives
In USD/MM BTU In cubic ft/day bn
25 4.3 4.2
20.0 20.1
20 18.1 18.6 18.8 4.2
17.1 4.07 4.08
4.1
15 12.4 3.95 3.95
4.0 3.91
10 8.6 3.9
7.1
3.8
5
3.7 3.64
0 3.6
LPG - 12kg
HSD
IDO/MDF/MDO
MFO 180
Gasoline 88
LPG - 50 kg
(subsidized)
Kerosene
Natural Gas
- ang PGN
LPG - 3kg
3.5
3.4
3.3
2010 2011 2012 2013 2014 2015 2016
Source: Company data, Nomura research Source: CEIC, Nomura research
Fig. 91: Key regulatory steps taken by the government in last two years
Fig. 92: PGAS’ distribution volumes Fig. 93: PGAS’ transmission volumes
780 767
750 736
760
740 700
720
700 650
2012 2013 2014 2015 2016 9M16 9M17 2012 2013 2014 2015 2016 9M16 9M17
Source: Company data, Nomura research Source: Company data, Nomura research
51
Bank Central Asia BBCA.JK BBCA IJ
EQUITY: BANKS
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Bank Central Asia 8 December 2017
53
Bank Mandiri BMRI.JK BMRI IJ
EQUITY: BANKS
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Bank Mandiri 8 December 2017
55
Indofood Sukses Makmur
INDF.JK INDF IJ
EQUITY: AGRI-RELATED
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Indofood Sukses Makmur 8 December 2017
57
Nomura | Indofood Sukses Makmur 8 December 2017
Fig. 94: Revenue breakdown by segment Fig. 95: Agribusiness EBIT contribution improving
EBIT breakdown by segment
(IDRbn) ICBP Bogasari Agribusiness Distribution (IDRbn) ICBP Bogasari Agribusiness Distribution
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
FY14 FY15 FY16 1H17 FY17F FY18F FY19F FY14 FY15 FY16 1H17 FY17F FY18F FY19F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Fig. 96: INDF has provided higher returns since 2016 Fig. 97: Sum-of-the-parts valuation
ICBP vs. INDF price returns
180% INDF ICBP % of
Value to %
Indofood contribution
ownership
170% (IDRbn) to total
Jun-16
Jan-17
Jun-17
Jul-16
Nov-16
Dec-16
Jul-17
Nov-17
Dec-17
Feb-16
Mar-16
Apr-16
May-16
Aug-16
Sep-16
Oct-16
Feb-17
Mar-17
Apr-17
May-17
Aug-17
Sep-17
Oct-17
NAV/Share 10,445
Source: Bloomberg, Nomura research Source: Company data, Bloomberg consensus, Nomura estimates
Fig. 98: Still trading at a 33% discount to its NAV Fig. 99: Trading close below long-term mean
INDF - discount to NAV Forward P/E
Forward P/E Average +1SD
40% 19
-1SD +2SD -2SD
30%
20% 17
10%
15
0%
-10% 13
-20%
-30% 11
-40%
9
-50%
-60% 7
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Dec-12
Jun-13
Sep-13
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Dec-16
Jun-17
Sep-17
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Source: Bloomberg consensus, Nomura research Source: Bloomberg consensus, Nomura research
58
Mitra Adiperkasa MAPI.JK MAPI IJ
EQUITY: RETAIL
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Mitra Adiperkasa 8 December 2017
60
Nomura | Mitra Adiperkasa 8 December 2017
9M12
9M13
9M14
9M15
9M16
9M17
9M12
9M13
9M14
9M15
9M16
9M17
1Q12
1Q13
1Q14
1Q15
1Q16
1Q17
1Q12
1H12
FY12
1Q13
1H13
FY13
1Q14
1H14
FY14
1Q15
1H15
FY15
1Q16
1H16
FY16
1Q17
1H17
Source: Company data, Nomura research Source: Company data, Nomura research
Fig. 102: Specialty Stores remains in good shape… Fig. 103: … benefitting from operating leverage
Specialty Stores quarterly revenues vs. quarterly SSSG Specialty Stores operating margins vs. quarterly SSSG
(IDRbn) Specialty stores revenues (LHS) 25% Specialty stores operating margins
3,500 25%
Specialty stores SSSG (RHS) Specialty stores SSSG
3,000 20%
20%
2,500
15%
2,000 15%
1,500 10%
10%
1,000
5% 5%
500
0 0% 0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
Source: Company data, Nomura research Source: Company data, Nomura research
Fig. 104: Struggling department store segment… Fig. 105: … has led to restructuring
Department Store quarterly revenues vs. quarterly SSSG Department Store operating margins vs. quarterly SSSG
(IDRbn) Department stores revenues (LHS) Department stores operating margins
20%
800 Department stores SSSG (RHS) 20% Department stores SSSG
700 15%
15%
600 10%
10%
500
5%
400 5%
300 0%
0%
200
-5% -5%
100
0 -10% -10%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
Source: Company data, Nomura research Source: Company data, Nomura research
61
Nomura | Mitra Adiperkasa 8 December 2017
Fig. 106: F&B is likely to grow despite low SSSG… Fig. 107: … as new outlets are opened
F&B quarterly revenues vs. quarterly SSSG F&B operating margin vs. quarterly SSSG
(IDRbn) F&B revenues (LHS) F&B operating margins
30%
600 F&B SSSG (RHS) 25% F&B SSSG
25%
500 20% 20%
15% 15%
400
10% 10%
300 5%
5%
200 0%
0%
-5%
100 -5% -10%
0 -10% -15%
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
Source: Company data, Nomura research Source: Company data, Nomura research
30
25
20
15
10
0
Dec-12
Jun-13
Sep-13
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Dec-16
Jun-17
Sep-17
Dec-17
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
62
Ace Hardware Indonesia
ACES.JK ACES IJ
EQUITY: CONSUMER RELATED
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Ace Hardware Indonesia 8 December 2017
64
Nomura | Ace Hardware Indonesia 8 December 2017
Fig. 109: ACES: store count, total area and average store size Fig. 110: ACES: new store openings by region
Average store size has been declining as ACES shifts to smaller stores Fewer new stores opened in the last 3 years (especially outside Java)
500,000 3,100 25
450,000
3,000
400,000 20
2,900 9
350,000
5
2,800 15
300,000
1
250,000 2,700 2
5
174
200,000 158 10 9 8
143 2,600
129 1 7 10
150,000 110 117
95 2,500 3 1 4
100,000 76 5 9
53
50,000
2,400 4 5 5 3 4 3
0 1
0 2,300
2011A 2012A 2013A 2014A 2015F 2016A 2017F 2018F 2019F
2011 2012 2013 2014 2015 2016 YTD2017
Total area (in sqm) Average store size (in sqm) (RHS) Jakarta Java ex Jakarta Outside Java
Source: Company data, Nomura estimates Source: Company data, Nomura research
Fig. 111: Sales breakdown by type and GPM per segment Fig. 112: GPM vs. operating margin trend
Gross margin has been very strong this year We don't expect much operating margin expansion from here on
100.0% 3.4% 4.0% 51.0% 50.0% 16.5%
4.6% 4.5% 4.5% 4.6%
90.0% 49.5%
49.0%
16.0%
80.0%
38.8% 38.5% 36.9% 47.0%
49.0%
70.0% 40.0% 15.5%
48.5%
38.6% 38.7% 45.0%
60.0%
48.0%
15.0%
50.0% 43.0%
47.5%
40.0% 14.5%
41.0% 47.0%
30.0% 57.8% 57.5% 58.5% 56.9% 56.8% 55.4%
39.0% 46.5% 14.0%
20.0%
37.0% 46.0%
10.0% 13.5%
45.5%
0.0% 35.0%
2012A 2013A 2014A 2015 2016 9M17 45.0% 13.0%
2011A 2012A 2013A 2014A 2015A 2016A 2017F 2018F 2019F
Home improvement Lifestyle
Toys Home improvement's GPM (RHS)
Lifestyle's GPM (RHS) Toys' GPM (RHS)
GPM Operating margin (RHS)
Source: Company data, Nomura research Source: Company data, Nomura estimates
Fig. 113: ACES: employee count vs. space/employee Fig. 114: Opex breakdown vs. salaries as % of GP
Space/employee seems to have peaked in 2016 Salaries remain the largest opex driver
14,000 32 100% 34.0%
90%
33.0%
12,000 30
80%
32.0%
10,000 28 70%
31.0%
60%
8,000 26
50% 30.0%
6,000 24 40%
29.0%
30%
4,000 22 28.0%
20%
2,000 20 27.0%
10%
0% 26.0%
0 18 2012A 2013A 2014A 2015A 2016A 2017F 2018F 2019F
2011 2012 2013 2014 2015 2016 9M17
Salaries and bonuses Rental Maintenance
Total employees Space/employee (sqm) (RHS) Utilities Depreciation and amort Others
Salaries as % of GP (RHS)
Source: Company data, Nomura research Source: Company data, Nomura estimates
65
PT Pembangunan Perumahan
PTPP.JK PTPP IJ
EQUITY: ENGINEERING & CONSTRUCTION
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | PT Pembangunan Perumahan 8 December 2017
67
Nomura | PT Pembangunan Perumahan 8 December 2017
Fig. 115: Cash conversion cycle comparison (days) Fig. 116: Net gearing trend (%)
140 60.0%
120 50.0%
100 40.0%
80 30.0%
60 20.0%
40 10.0%
20 0.0%
- -10.0%
2015 2016 2017F 2018F 2019F
-20.0%
PTPP WIKA WSKT 2015 2016 2017F 2018F 2019F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Fig. 117: New contracts (IDRtn) & growth (%) Fig. 118: EPS growth comparison (%)
60 30.0% 100%
50 25.0% 80%
40 20.0%
60%
30 15.0%
40%
20 10.0%
20%
10 5.0%
0%
- 0.0% 2015 2016 2017F 2018F 2019F
2015 2016 2017F 2018F 2019F
-20%
New contract (IDRtn) Y-Y%
PTPP WIKA WSKT
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
25
20
15
10
0
Dec-12
Jun-13
Jun-15
Jun-16
Jun-17
Feb-13
Apr-13
Aug-13
Oct-13
Dec-13
Jun-14
Feb-14
Apr-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Aug-17
Oct-17
68
Summarecon Agung SMRA.JK SMRA IJ
EQUITY: PROPERTY
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Summarecon Agung 8 December 2017
70
Nomura | Summarecon Agung 8 December 2017
Fig. 120: SMRA – 10M17 presales breakdown by product type Fig. 121: SMRA – quarterly presales trend (IDRbn)
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
2017F
Shoplots
29%
Source: Company data, Nomura research Source: Company data, Nomura estimates
Debt Maturity
Year Total (IDRbn) Remarks
2017 1,402
2018 1,499 including continuous bond I 1st & 3rd tranche
2019 1,962 including continous bond I 2nd tranche
2020 1,683 including continuous bond II 1st tranche
2021 635
2022 174
2023 72
Total 7,427
Source: Company data, Nomura research
Fig. 123: SMRA – Earnings (IDRbn) & growth (%) Fig. 124: SMRA – Discount to RNAV band (%)
800 40%
40%
45%
700
20% 50%
600
55%
500 0%
60%
400 -20% 65%
300 70%
-40% 75%
200
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
-60%
100
0 -80% % Disc to RNAV Mean +1 STD
2015 2016 2017F 2018F 2019F +2 STD -1 STD -2 STD
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
71
Siloam International Hospitals
SILO.JK SILO IJ
EQUITY: HEALTH CARE & PHARMACEUTICALS
Key company data: See next page for company data and detailed price/index chart.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Siloam International Hospitals 8 December 2017
73
Nomura | Siloam International Hospitals 8 December 2017
Fig. 125: SILO’s employee breakdown by function Fig. 126: SILO’s opex breakdown
8,000 32.0%
1,000.0 38.0%
30.0%
6,000 800.0 37.0%
28.0%
600.0 36.0%
4,000 26.0%
0 20.0% - 33.0%
2011A 2012A 2013A 2014A 2015A 2016A 9M17 2011A 2012A 2013A 2014A 2015A 2016A 9M17
Salaries and employee benefits Other office expenses
Office and administration Other medical stafff Rental Depreciation
Nurses Doctors Water and electricity Others
Non-medical staff/total employee (RHS) Salaries as % of opex
Source: Company data, Nomura research Source: Company data, Nomura research
Fig. 127: SILO’s revenue vs opex Fig. 128: SILO’s margins trend
35.0%
in IDR bn
29.5% 29.0% 28.8% 28.7%
12,000 40.0% 28.5% 28.4% 28.4% 28.7%
30.0%
35.0%
10,000 25.0%
30.0%
8,000 20.0%
25.0%
15.0% 14.4% 14.7% 15.0%
6,000 20.0% 15.0% 13.2% 12.6%
13.4%
12.1%
15.0%
4,000 10.0%
6.8% 7.4%
10.0% 6.5%
5.4% 5.1% 5.6% 4.9% 5.7%
2,000 5.0% 2.8% 3.0% 3.3%
5.0% 2.2% 1.7% 1.7% 1.5% 2.1%
- 0.0% 0.0%
2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F
Revenue Opex Revenue y-y growth Opex y-y growth Gross margin Operating margin EBITDA margin Net margin
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
Fig. 129: SILO’s FCF breakdown Fig. 130: Cash and debt position of SILO
We forecast positive FCF starting in FY20 SILO should have sufficient cash for expansion due to right issue
in IDR bn in IDR bn
Right issue of
1,500.0
3,000.0 ~IDR3.1tn
1,000.0
2,500.0
500.0
2,000.0
-
2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F 1,500.0 Right issue of
(500.0) ~IDR1.3tn
1,000.0
(1,000.0)
500.0
(1,500.0)
0.0
(2,000.0) 2014A 2015A 2016A 2017F 2018F 2019F 2020F 2021F
Source: Company data, Nomura estimates Source: Company data, Nomura estimates
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Nomura | Indonesia strategy 8 December 2017
Appendix A-1
Analyst Certification
I, Elvira Tjandrawinata, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views
about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or
will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of
my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
Issuer Ticker Price Price date Stock rating Previous rating Date of change Sector rating
Ace Hardware Indonesia ACES IJ IDR 1,125 07-Dec-2017 Buy Neutral 08-Dec-2017 N/A
Bank Central Asia BBCA IJ IDR 20,975 07-Dec-2017 Buy Neutral 26-May-2017 N/A
Bank Mandiri BMRI IJ IDR 7,350 07-Dec-2017 Buy Not Rated 04-Mar-2015 N/A
Indofood Sukses Makmur INDF IJ IDR 7,325 07-Dec-2017 Buy Not Rated 27-Oct-2014 N/A
Mitra Adiperkasa MAPI IJ IDR 6,775 07-Dec-2017 Buy Neutral 05-Sep-2017 N/A
PT Pembangunan Perumahan PTPP IJ IDR 2,450 07-Dec-2017 Buy Not Rated 03-Feb-2015 N/A
Siloam International Hospitals SILO IJ IDR 10,800 07-Dec-2017 Buy Reduce 22-Nov-2017 N/A
Summarecon Agung SMRA IJ IDR 850 07-Dec-2017 Buy Not Rated 07-Oct-2014 N/A
Ace Hardware Indonesia: Valuation Methodology We peg ACES at 26.0x FY18 P/E(one standard deviation above the five-
year mean) to derive our TP of IDR1,410. The benchmark index for this stock is the MSCI Indonesia.
Ace Hardware Indonesia: Risks that may impede the achievement of the target price 1) sharp rise in minimum wages; 2)
foreign currency risk; 3) economic slowdown; and 4) persistently high inventory days.
PT Pembangunan Perumahan: Valuation Methodology We derive our target price of IDR4,000/share based on a 15x FY18F
P/E multiple or the five-year stock historical mean. The benchmark for the stock is the MSCI Indonesia.
PT Pembangunan Perumahan: Risks that may impede the achievement of the target price 1) any delay in infrastructure
projects, particularly Jokowi's maritime project, could have a negative impact on the company's orderbook, which would in turn
lower earnings; and 2) a turnaround in commodity prices.
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