BNIS INVESTMENT STRATEGY

INDONESIA

Equity Jul23,2013

InvestmentOpportunitiesWhenItIs DeepMarketCorrection
Analyst:NoricoGaman
norico@bnisecurities.co.id

ImpactonBIsPolicy

After BI increased its key interest rate by 50 basis points to 6.5% and deposit facility rate (FASBI) by 50 basis points to 4.75%, market participants are react ing in different view. BIs move on rising its key interest rate and FASBI in or der to restrain an increasinghigher inflation rate expectation and a depreciat ing IDR which has weakened above psychological level of IDR 10,000/USD. Inflationrateispredictedtoincreasetothelevelof7.0%8.0%duringfasting period of Ramadan and Idul Fitri (feast celebrating the end of fasting period) since consumers consumptions are relatively higher during this period. How ever, BIs policy on the increasing key interest rate has sent a negative senti ment to the market which it is reflecting a tight money policy which it may harm the potential of Indonesia economic growth. The rising key interest rate by 50 basis points could be translated as higher loan interest rate in banking sector with may move up by 100 200 basis points. This condition will be tough for corporations with high interest rate environment which it could in crease their interest payments or financial expenses. At the end, the soaring interest payment will impact on slowing down of corporate earnings. BIs pol icyontherisinginterestrateisalsotostabilizeIDRcurrencyfornotdepreciat ingtoomuchandexpecttokeepforeigncapitalfornothavingamassivecapi tal outflow. In contrast, IDR has been depreciating to reach more than IDR 10,000/USD in responding Indonesia trade balance deficit for more US$ 2 bil lion since January to June 2013 and declining foreign reserve to US$ 98.0 bil lion as of June 2013 compared to foreign reserve of US$ 105.1 billion as of May2013.Therefore,mostforeigninvestorsseeanegativeviewonIndonesia macroeconomycondition. After China experienced a slowing down economic growth in previous quarters, some multilateral organizations (IMF, World Bank, ADB) have been revising down some Asian countries economic growth included Indonesia. Those institutions reduced Indonesia economic growth forecast for this year from 6.1% to be 5.9% in responding higher inflation and interest rate conditions and also weak fiscal policy. Indonesias exports are depending on AsiaeconomywhereChinaisaveryimportanttradingpartnerforIndonesia.It may affect Indonesias export value if there are slowing global demand on Indonesia products especially from natural resources. Many investors become worry when they see Indonesia macro economy figures and reacting spontaneouslyinsellingofftheirportfolioinvestmentincapitalmarketbeside the Fed statement on the plan for reducing its economic stimulus (quantitative easing) by the end of this year and may stop the asset buying programbymiddleofyear2014.

Revision on Indonesia EconomicGrowth

1 PTBNISecuritiesResearchDepartment

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Revision...

Market participants especially global investors see lower liquidity in the US when quantitative easing may end by mid next year. Therefore, global investors try to get their investment from emerging market and take their fundbacktobereinvestedinUScapitalmarketinanticipatinganypotentialof lowerliquidity.

Figure2.BIRatevs.InflationRate

Source:Bloomberg

Indonesia 5 years Credit Default Swap (CDS) Increase But Relatively Better Compared to CDS in 2008

If we look at Indonesia 5 years CDS has surged more than 200 basis points (2.0%) level which it is showing a higher risk in bond market due to Indonesia Governments fiscal health. However, the weakening CDS in recent months is relativelybettercomparedtoIndonesiaCDSin2008whichhadexperiencedto increase up to more 1,100 basis points (11.0%) level when it was a global financial crisis because of the market failure of subprime mortgage in US at thattime. 2

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Indonesia5yearsCDS...

Figure3.Indonesia5yearsCDS

Source:Bloomberg

Rising Risk Premium and CostofEquity

We see that foreign investors look on Indonesias higher risk premium which Indonesia 10 years Government bond yield has been surging to 8.18% in July 2013 from a month ago with yield of 6.45% due to higher inflation rate expectationanddepreciatingIDRtoUSD.Itisreflectinganincreasingriskfree ratetobearound8.2%andrisingriskpremiumtoreach3.8%whichitimpacts on higher cost of equity to become 12.0% from previously cost of equity of 11.1%. The increasing cost of equity may also reduce the valuation of companies share value in stock market. As of 19 July 2013 Jakarta Composite Index (JCI) has valuation in term of forward price earnings ratio (PER) 2013 of 15.43x and price book value (PBV) of 2.89x which those valuations are relatively higher compared to average forward PER 2013 in Asia region of 14.62xandPBV2013of2.56x.Therefore,weseeJCIindexhasalimitedupside potential due to weaker Indonesia macro economy and slow down of corporateearningsgrowth.
Figure4.JCIvs.IDRCurrency

Source:Bloomberg

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SelectiveBUYAccumulation on Selective Sectors Amid DeepMarketCorrection

WeestimatethatJCIattheendofthisyearcouldbeclosedmoderatelyatthe level of 4,800 and optimistically at the level of 5,000. However, JCI may fall downpessimisticallytothelevelof4,200iftheGovernmentcouldnotcontrol inflation and interest rate at measurable level and also affect the downside growthofIndonesiaeconomytobelessthan5.9%.WestillbelievethatBIand the Government of Indonesia could overcome the economy situation and implementing effective monetary and fiscal policies in order to maintain Indonesia economic growth at least at the level of 6.0%. We calculate the probabilityof80%(moderatelyoptimistically)forJCItobeclosedatthelevel of 4,800 5,000 and probability of 20% (moderately to pessimistically) to be closedlessthanlevelof4,800bytheendofthisyear.
Figure5.JCIEstimateattheEndofYear2013

Source:BloombergandBNISEstimate

Investment Focus on Domestic Market Oriented and Less Interest Rate SensitiveSectors

We suggest our investors for selective buying on domestic market oriented and less interest rate sensitive sectors such as consumer goods, poultry, pharmacy, infrastructure, telecommunication, retail, cement, and construction. Year to date (YTD) return (as of 18 July 2013) of those sectors had outperformed JCI index of 15.43% (see figure 5). In contrast, export market oriented (mostly natural resources) and strong interest rate sensitive sectors were most likely underperforming JCI index. However, we still see investment opportunities for those sectors which have positive correlation with Indonesia economic growth in the long run. Indonesia economic growth is supported by increasing domestic consumption and rising middle class income with improving purchasing power. Indonesia GDP per capita has been growing for almost five (5) fold in last ten (10) years to reach USD 4,653 per capita which supporting a strong domestic demand for goods and services.Therefore, there are investment opportunities for strong fundamental stocks as our criteria if there is a deep market correction during JulyAugust2013.Ourrecommendationoninvestmentstrategyforinvestors is to accumulate buyingposition (cost averaging) when JCIhas declined below the level of 4,500 and we consider any possibility for the index to fall down reachingourpessimisticlevelof4,200. 4

InvestmentStrategy
Figure6.SectorsPerformancevs.JCIPerformance

Figure7.JCIPerformancevs.GlobalIndices

Source:Bloomberg

Investment Recommendation

We recommend investors to invest in prospective sectors like consumer goods, poultry, pharmacy, infrastructure, telecommunication, and construction with their strong fundamental business and financial performance. Our top stocks pick with BUY recommendation and their target price per share (TP) are following: PT Indofood CBP Sukses Makmur (ICBP | TP: IDR 12,000), PT Unilever Indonesia (UNVR | TP: IDR 36,000), PT Mayora Indah (MYOR | TP: IDR 42,000), PT Kalbe Farma (KLBF | TP: IDR 2,000), PT Kimia Farma (KAEF | TP: IDR 1,200), PT Mitra Adiperkasa (MAPI | TP: IDR 11,000), PT Ace Hardware Indonesia (ACES | TP: IDR 1,350), PT Charoen Phokpand(CPIN|TP:IDR6,000),PTJapfaComfeedIndonesia(JPFA|TP:IDR 3,000), PT Malindo Feed Mill (MAIN | TP: IDR 3,500), PT Telekomunikasi Indonesia (TLKM | TP:IDR 15,000), PT Sarana Menara Nusantara (TOWR | TP: IDR 31,000), PT Tower Bersama Infrastructure (TBIG | TP: IDR 7,500), PT Waskita Karya (WSKT | TP: IDR 1,000), PT Wijaya Karya (WIKA | TP: IDR 2,500), PT Total Bangun Persada (TOTL | TP: IDR 1,270), PT Semen Indonesia (SMGR|TP:IDR25,000). 5

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JAKARTAManggaDua
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MALANG
Jl.BuringNo.58Malang Phone:(62341)321214,321213,341430 Fax:(62341)356876 email:malang@bnisecurities.co.id

DENPASAR
PertokoanDiponegoroMegahBlok.A5A6,Lt.2 Jl.DiponegoroNo.100DenpasarBali Phone:(62361)264376 Fax:(62361)229170 email:denpasar@bnisecurities.co.id

MEDAN
Jl.PemudaNo.12 Phone:(6261)4579616 Fax:(6261)4579656 email:medan@bnisecurities.co.id

PALEMBANG
Jl.Jend.SudirmanNo.132,KotakPos165PLG Phone:(62711)3619662 Fax:(62711)3619663 email:plb@bnisecurities.co.id

BANDUNG
Jl.PerintisKemerdekaanNo.3 Phone:(6222)4213375 Fax:(6222)4213376 email:bdg_pk@bnisecurities.co.id

YOGYAKARTA
GedungBNI,Jl.LaksdaAdiSuciptoNo.137 Phone:(62274)581001 Fax:(62274)584023 email:yogya@bnisecurities.co.id

SOLO
Jl.SlametRiyadiNo.348 Phone:(62271)729667 Fax:(62271)729668 email:solo@bnisecurities.co.id

SURABAYA
Jl.PemudaNo.36 Phone:(6231)5320912 Fax:(6231)5318425

PEKANBARU BNICabangPasarPusat Jl.JendSudirmanNo.365Pekanbaru28282 Phone:(62761)46757,839698 Fax:(62761)856279 email:pekanbaru@bnisecurities.co.id SEMARANG ThamrinSquareBlokB5 Jl.MHThamrinNo.5Semarang Phone:(6224)35664145,641264137 Fax:(6224)3581713 email:bnissmg@bnisecurities.co.id ACEH Jl.KHAkhmadDahlanNo.111Lt.2 BandaAceh

DISCLAIMER
This document is not intended to be an offer, or a satisfaction of an offer, to buy or sell relevant securities (i.e. securities mentioned herein or of the same issuer and options, warrants or rights to or interest in any such securities). The information and opinions contained in this document havebeencompiledfromorarrivedatingoodfaithfromsourcesbelievedtobereliable.Norepresentationorwarranty,expressedorimplied,is made by BNI SECURITIES or any other member of the BNI Group, including any other member of the BNI Group from whom this document may bereceived,astotheaccuracyorcompletenessoftheinformationcontainedherein.Allopinionsandestimatesinthisreportconstituteourjudg 6 mentasofthisdateandaresubjecttochangewithoutnotice.