21263478 Anchor Report Indonesia Outlook 2013 - Coming Out From The

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Equity Research

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Indonesia outlook 2013: Coming out from the bunker

More focus on infrastructure and moving out from consumer to cyclical

As cost pressures and competition intensify, we foresee many parts of the Indonesian market facing peak margins: consumer and banking in the near term, and auto, cement, and infrastructure projects in the longer term.

However, despite perceptions that “nothing happened” on infrastructure, we see many projects (eg, rail, air and seaport) are moving forward well and believe the land acquisition law should further aid future projects.

We expect a 16% gain in JCI in 2013 to 5000, driven mainly by earnings growth. JCI currently trades near its three-year P/E average of 13.7x and its three-year P/B average of 4.1x, supported by ROE of 28% in FY13F.

We overweight infrastructure and automotive, underweight consumers, and are neutral elsewhere. Our top picks focus on firms with strong market leadership, market share winners and stocks with solid earnings growth.

Key analysis in this anchor report includes:

Why we see margins peaking in many areas; which firms are affected

Acceleration of infrastructure projects – key timetables in the new law

5 stocks that should benefit most from the infrastructure acceleration

5 other top picks in Indonesia

January 8, 2013

Research analysts

Indonesia Strategy

Wilianto Ie - PTNI [email protected] +62 21 2991 3341

And the Indonesian Research Team

Indonesia outlook 2013

EQUITY STRATEGY

EQUITY RESEARCH

Coming out from the bunker

More focus on infrastructure and moving out from consumer to cyclical

January 8, 2013

Peak margins likely due to cost pressure and competition We foresee peak margins in many sectors or subsectors in Indonesia as competition intensifies, thereby limiting companies’ ability to pass on rising cost pressures to consumers. In our view, the consumer and banking sectors are the most exposed to peak margins in the near term, while automotive, cement, and new infrastructure projects are likely to face margin pressure or lower IRR in the long term.

Infrastructure projects are happening In contrast to investors' perception of "nothing happened" and doubt, many infrastructure projects (eg, railways, airports, and seaports) are progressing well and future projects should be further aided by the land acquisition law. Underinvestment in infrastructure in the last decade represents a significant future opportunity to infrastructure companies such as toll road operators, cement producers and contractors.

Slower reform ahead of 2014 election We expect unpopular reform to slow significantly ahead of the 2014 election. The much-needed removal of fuel subsidies appears unlikely or will be marginal at best. The policy focus remains on acceleration of GDP growth, reducing systemic risk to external shocks, retaining value added processing of commodities and improving administration and control.

Top picks and sector weightings We expect a 16% gain in JCI in 2013F to 5000, mainly on earnings growth. JCI currently trades near its 3-year P/E average of 13.7x and its 3-year P/B average of 4.1x, supported by ROE of 28% in FY13F. We overweight infrastructure and automotive sectors, underweight consumers, and are neutral on the rest. Our top picks list focuses on firms with strong market leadership, market share winners and firms with solid earnings growth. Fig. 1: Indonesia top picks*

Source: Bloomberg, Nomura estimates. *Note: Our top picks are reviewed quarterly. Pricing as of 2 January 2013

Anchor themes

Indonesia will benefit from the return of inflation, in our view. Cost pressure and competition are likely to intensify; thus, not all stocks will be winners despite strong top-line growth. Macroeconomic fundamentals, prudent monetary policy, and fiscal discipline should remain in place to sustain long-term growth.

Research analysts

Indonesia Strategy

Wilianto Ie - PTNI [email protected] +62 21 2991 3341 And the Indonesian Research Team

No Company Price Rec

PER

13F (x)

PER 14F

(x)

Net profit growth

13F (%)

Net profit growth

14F (%)

PB 13F

(x)

ROE

13F (%)

DVD yield

13F (%) Ticker

1 Astra Int'l 7,500 Buy 13.7 11.6 16.4 17.5 3.7 29.4 3.7 ASII IJ

2 Bank Mandiri 8,250 Buy 11.0 8.9 25.3 23.3 2.2 21.6 1.8 BMRI IJ

3 BNI 3,725 Buy 9.1 7.8 17.4 16.2 1.4 16.7 2.2 BBNI IJ

4 Indocement 21,900 Buy 16.4 14.6 10.7 12.2 3.6 23.6 1.8 INTP IJ

5 Indomobil 5,300 Buy 11.0 8.4 38.3 31.0 2.3 22.2 1.8 IMAS IJ

6 Jasa Marga 5,550 Buy 21.9 15.7 10.1 39.1 3.9 18.9 1.8 JSMR IJ

7 Kalbe Farma 1,040 Buy 25.1 21.6 20.0 16.3 6.1 27.8 3.0 KLBF IJ

8 Semen Gresik 14,800 Buy 15.4 12.3 30.9 24.5 4.4 31.8 2.6 SMGR IJ

9 United Tractors 20,950 Buy 11.5 9.7 12.0 17.9 2.3 21.5 3.5 UNTR IJ

10 Wijaya Karya 1,530 Buy 15.7 12.2 34.5 32.4 3.2 21.3 1.4 WIKA IJ

Market - Simple Average 17.4 11.6 26.7 48.5 3.7 22.9 2.3

Market - Aggregate (Weighted) 13.9 11.7 16.4 19.0 2.9 20.7 2.8


Nomura | Indonesia outlook 2013 January 8, 2013

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Contents

4 Focus charts

6 Margins are peaking

6 Costs pressure is returning

10 Sustaining profitability amid rising competition

12 Sectors with rising competition risk: consumer, banks, and automotive

15 Stocks that are affected

16 Acceleration of infrastructure projects

17 Impact on new projects

17 Impact on existing projects

18 Stock implications

19 Reform likely to slow ahead of 2014 election

19 Looking back

20 Going forward

21 Wish list of what needs to be done…

22 Politics ahead

24 Our top picks and market view

25 Key recent trends

27 Indonesia top picks

31 Indonesia economic outlook

31 Indonesia: Watch policies and politics


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35 Sector outlooks

36 Banks

42 Coal

44 Consumer

51 Infrastructure

58 Plantations

63 Property

66 Telecoms / Towers

75 Company profiles

77 Astra International

83 Bank Mandiri

89 Bank Negara Indonesia

95 Indocement Tunggal Perkasa

99 Indomobil Sukses International

103 Jasa Marga

107 Kalbe Farma

111 Semen Indonesia

115 United Tractors

121 Wijaya Karya

126 Appendix A-1


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Focus charts The charts below show that domestic consumption remains strong, the banking system remains healthy and investment continues to rise. The current account deficit in 2012 was largely driven by capital goods imports and can still be fully funded by the capital account. FX reserves have ticked up again in the past months and the rupiah has been relatively stable compared to its historical volatility.

Fig. 2: Car sales hit record high Monthly domestic car sales (units)

Source: Gaikindo (The Association of Indonesia Automotive Industries)

Fig. 3: Motorcycle sales are showing signs of recovery Monthly domestic motorcycle sales (units)

Source: AISI (Indonesian Motorcycles Industry Association)

Fig. 4: Cement sales still grow at double digit rates Monthly domestic cement sales (tons)

Source: Indonesian Cement Association (ASI)

Fig. 5: FDI trend continues to rise FDI trend by sector (USDmn)

Source: Indonesian Investment Coordinating Board, Nomura research

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Fig. 6: Trade balance

Source: Bloomberg, Statistics Indonesia

Fig. 7: FX reserves

Source: Bank Indonesia, Bloomberg

Fig. 8: Indonesia’s nominal GDP vs. CRB index

Source: CEIC, Bloomberg, Statistics Indonesia, Nomura research

Fig. 9: Farmers’ terms of trade

Source: Statistics Indonesia

Fig. 10: Indonesia Terms of Trade


Fig. 11: Lending growth by type of loan (% y-y)

Source: Bank Indonesia, CEIC, Nomura research

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Margins are peaking The high margins and profitability enjoyed by many Indonesian companies are facing a credible threat from rising costs and intensifying competition. Companies’ ability and willingness to increase prices will be dwindled by competition and the already very high margins. The rising competition is increasingly visible in retailing, personal care, automotive, and banking. We also see signs of upcoming competition in cement and expect rising investor interest (post the land acquisition law) to reduce required IRRs in future infrastructure projects.

Costs pressure is returning

We expect cost pressure to return due to an expected pickup in global inflation and domestic-driven factors such as the large (22%) increase in minimum wages, 15% increase in electricity tariff, and weak currency.

General inflation was low in 2012 at 4.3% despite the weak currency as falling commodity prices and good harvests helped to ease cost pressure. Commodity prices are unlikely to fall further in 2013, if not rise, as our economics team expects a modest recovery in the China and US economies Asia Special Report:2013 outlook: Asia's overheating risks.

Some companies are likely to be more exposed to cost pressures than others. Although in general, Indonesian listed companies’ direct exposure to labour cost is not that high (10% of revenues; 63% of pretax profit in aggregate), the impact to profit could be large for those companies with low margins and those who have a significant part of their costs coming from labour and electricity, such as the retailers. In the three retailers under our coverage (aggregate), payroll accounted for 103% of pretax profit (9% of revenues) and electricity accounted for 25% of pretax profit (2% of revenues) in 9M12. Other sectors that have meaningful direct exposure to labour and/or electricity costs are contractors and cement.

Further cost pressure should come from any recovery in raw material prices (commodity) as the rupiah depreciation in 2012 made input costs more expensive. Although many raw materials are sourced locally, most are priced at international prices times the prevailing exchange rate. Therefore, any recovery in international commodity price should directly impact raw material costs in Indonesia, whether sourced locally or imported.

The large increase in minimum wages On 20 November 2012, Jakarta’s governor, Joko Widodo, signed a significant 44% increase to minimum wages in DKI Jakarta province to IDR2.2m per month in 2013 (vs. 15% in 2012 which was considered high). This was unexpected and sent a shock to employers and quickly set a benchmark in industrial areas of Greater Jakarta that demanded and received a similar hike in minimum wages (see figure on next page).

Even if other provinces implement a lower minimum wage hike, the overall picture remains for a very high increase in labour costs in 2013 (the minimum wage increase is set every year in the fourth quarter and takes effect in January the following year). Although the high increase in minimum wages in 2013 is arguably a one-off adjustment to match the minimum required living standard (it was below the living standard in the past), there is no guarantee that a minimum wage hike in the future will normalise at a much lower level. This is especially true after President Susilo Bambang Yudhoyono (SBY) stated that the era of cheap labour in Indonesia is over.

“It is our moral obligation to fight for it. The era of cheap labour and injustice is now over,” said Yudhoyono in a speech before governors, regents, mayors, police chiefs and regional military commanders.” (Source: Jakarta Post, 1 December 2012). http://www2.thejakartapost.com/news/2012/12/01/no-more-cheap-labor-ri-sby.html

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The minimum wage variance in various provinces would ideally lead to reallocation of labour-intensive industry to the areas where minimum wages are still relatively low as minimum wages in some provinces are still half of those in greater Jakarta. However, the poor infrastructure and lack of skilled labour in some of those areas will make this unlikely to happen anytime soon, in our view.

Fig. 12: Provincial minimum wage increase in 2013

Province 2012 2013 Increase

1 East Kalimantan 1,177,000 1,752,073 49%

2 Banten (Tangerang) 1,529,150 2,203,000 44%

3 Jakarta 1,529,150 2,200,000 44%

4 Gorontalo 837,500 1,175,000 40%

5 East Java (Surabaya) 1,257,000 1,740,000 38%

6 Riau Islands 1,015,000 1,365,087 34%

7 Mollucas 975,000 1,275,000 31%

8 Bengkulu 930,000 1,200,000 29%

9 West Java (Bandung) 1,243,023 1,583,703 27%

10 Central Sulawesi 885,000 1,125,207 27%

11 North Sulawesi 1,250,000 1,550,000 24%

12 Bali 967,500 1,190,000 23%

13 Lampung 975,000 1,195,000 23%

14 Central Java (Semarang) 991,472 1,209,100 22%

15 North Mollucas 960,498 1,152,598 20%

16 South Sulawesi 1,200,000 1,440,000 20%

17 Jogjakarta 892,660 1,065,247 19%

18 West Papua 1,450,000 1,720,000 19%

19 West Kalimantan 900,000 1,060,000 18%

20 West Sumatra 1,150,000 1,350,000 17%

21 Central Kalimantan 1,327,459 1,553,127 17%

22 Bangka Belitung 1,110,000 1,265,000 14%

23 Jambi 1,142,500 1,300,000 14%

24 Riau 1,238,000 1,400,000 13%

25 South Sumatra 1,195,220 1,350,000 13%

26 Papua 1,515,000 1,710,000 13%

27 Aceh 1,400,000 1,550,000 11%

28 West Nusa Tenggara 1,000,000 1,100,000 10%

29 East Nusa Tenggara 925,000 1,010,000 9%

30 South Kalimantan 1,225,000 1,337,500 9%

31 South East Sulawesi 1,032,300 1,125,207 9%

32 North Sumatra 1,200,000 1,305,000 9%

33 West Sulawesi 1,127,000 1,200,000 6%

Source: Ministry of Manpower and Transmigration

Based on the data from Statistics Indonesia from August 2012, unemployment is 6.14% (7.24m people) and another 5.59% (6.6m people) are working less than 15 hours per week. The total work force in Indonesia is 118m, of which around 40% are working in the formal sector and 60% are working in the informal sector. (According to Statistics Indonesia, the formal sector comprises those with employment status as labor/employees and employers with permanent labor, and the informal sector comprises entrepreneurs, temporary employees, freelance workers, and those who work for their families.)


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Fig. 13: Employment by sector (Aug 2012)


Fig. 14: Unemployment rate (last = Aug 2012)


Implication of higher minimum wages Firms that operate in a labour-intensive industry, command lower margins, or have weak pricing power will be hurt by the high minimum wage increase in 2013. Sectors and subsectors under our coverage that have high exposure to rising minimum wages are retail, plantations, hand-rolled cigarettes, motorcycle financing, and building contractors.

Implication to listed companies will vary depending on the labour intensity, profit margin, and their ability to pass on the costs increase. It will be negative for some companies with high labour costs, low margins, and/or limited pricing power, such as Mitra Adiperkasa (MAPI IJ, Neutral), Ace Hardware (ACES IJ, Neutral), and plantation companies.

Contractors such as Wijaya Karya (WIKA IJ, Buy) might escape the negative impact of higher wages given cost escalation clause normally include labour cost. This will allow WIKA to pass on the labour cost increase to the property/projects owner which will be much less sensitive to the wage increases as their profit margin is relatively high.

Companies that are likely to benefit include Ramayana (RALS IJ, Buy), a low-end retailer that should benefit from the increased purchasing power of workers (higher same-store growth) which is more than likely to offset the increase in labour costs, in our view. Other potential beneficiaries include cigarette producer Gudang Garam (GGRM IJ, Buy), which has a high proportion of machine-made cigarettes in its product mix and should benefit from higher spending power of industrial workers.

The follow-through implications include higher inflation and slower FDI in 2H13. Foreign investors may postpone some projects in Indonesia until there is further clarity on future labour costs, especially those with meaningful exposure to labour costs.

The figure below shows the exposure of company profitability to labour costs. The column “Labour/Pretax profit” shows the ratio of labour costs to pretax profit assuming all other factors remain unchanged. This table is intended to gauge companies’ exposure to higher wages instead of calculating the actual outcome, as we did not factor in other factors such as volume and pricing power, etc.

Agriculture, 36%

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Construction, 6%

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Fig. 15: List of selected companies with direct exposure to rising labour costs (IDRbn)

Company Total Labour

costs Revenues Pretax

profit

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Labour/ Pretax

profit (x)

Bumi Resources* 173 4,222 28 0.04 6.20

Wijaya Karya 1,096 6,370 501 0.17 2.19

Mitra Adiperkasa 671 5,441 394 0.12 1.70

Salim Ivomas Pratama 2,854 10,521 1,683 0.27 1.70

Semen Gresik 1,420 6,515 1,277 0.22 1.11

Ace Hardware 332 2,296 348 0.14 0.96

Indofood Sukses Makmur 4,649 37,255 5,011 0.12 0.93

Bank Danamon 3,732 13,389 4,093 0.28 0.91

Ramayana 375 5,921 483 0.06 0.78

Astra Agro Lestari 1,217 8,575 1,672 0.14 0.73

Mayora 406 7,684 667 0.05 0.61

Bank Negara Indonesia 3,800 14,996 6,277 0.25 0.61

Kalbe Farma 1,000 9,694 1,657 0.10 0.60

Indomobil 514 14,597 865 0.04 0.59

Indosat 1,053 16,509 1,791 0.06 0.59

Indofood CBP 1,190 16,228 2,321 0.07 0.51

PP London Sumatra 573 3,372 1,164 0.17 0.49

AKR Corporindo 286 16,305 589 0.02 0.49

United Tractors 2,781 44,137 5,792 0.06 0.48

Lippo Karawaci 481 3,641 1,011 0.13 0.48

Bank Rakyat Indonesia 7,702 30,604 16,466 0.25 0.47

Bank Central Asia 4,844 19,806 10,401 0.24 0.47

Jasa Marga 755 5,593 1,622 0.13 0.47

Holcim Indonesia 541 6,515 1,277 0.08 0.42

Gozco Plantations 37 295 91 0.13 0.41

Summarecon 234 2,199 583 0.11 0.40

Astra Intl 8,277 143,138 21,098 0.06 0.39

Bank Mandiri 5,674 28,697 14,603 0.20 0.39

TB Bukit Asam 1,418 12,026 3,924 0.12 0.36

Indika Energy 517 5,316 1,447 0.10 0.36

BW Plantation 106 764 302 0.14 0.35

Telkom 6,299 56,864 18,820 0.11 0.33

Gudang Garam 1,355 15,989 4,057 0.08 0.33

Ciputra Development 204 2,237 661 0.09 0.31

Bumi Resources Minerals 41 212 177 0.19 0.23

XL Axiata 688 15,772 2,965 0.04 0.23

SMN 70 1,619 331 0.04 0.21

Agung Podomoro 187 3,516 906 0.05 0.21

Unilever 964 20,344 4,902 0.05 0.20

Bumi Serpong Damai 222 2,631 1,195 0.08 0.19

Tower Bersama 64 1,138 537 0.06 0.12

Indocement 508 12,536 4,359 0.04 0.12

Perusahaan Gas Negara* 78 1,828 808 0.04 0.10

Indo Tambangraya Megah* 57 2,503 609 0.02 0.09

Adaro Energy* 66 3,930 784 0.02 0.08

Alam Sutera 61 1,719 838 0.04 0.07

Harum Energy 71 9,135 1,922 0.01 0.04

Krakatau Steel 1,039 15,878 -9 0.07 n.m.

*In USD mn

Note: Excludes indirect exposure to labour costs.

Source: Company data, Nomura research


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Sustaining profitability amid rising competition

The ability of companies to sustain the current high margin and high ROE will be put to test over the next few years as competition rises, in our view. The enlarged market size due to rising purchasing power, a young demographic, and urbanization (both from those moving from rural to urban areas as well as rural areas growing into urban areas due to economic development) have attracted new entrants to many sectors.

Rising consumption and fast-rising demand for many discretionary products in Indonesia is a well-known story and has been ongoing for nearly a decade, excluding the 2008-09 global crisis period. This has attracted new investments, both foreign direct investment as well as domestic investments, which should lead to rising competition and dilution of pricing power.

Rising competition is seen across sectors, from retailers, media, personal care and packaged food to automotive. Rising competition is often accompanied by large investments to convince customers and distributors alike about the strong commitment to be successful in Indonesia. As a result, competition for market share is likely to be on the rise, pricing power may weaken, and profitability should gradually adjust lower, in line with the falling cost of funds in the last three years.

Fig. 16: Investment - FDI and domestic investments

Source: Indonesia Investment Coordinating Board, Bank Indonesia, Nomura research

Rising competition will eventually dilute the pricing power of companies, especially those with weaker brand equity and distribution network, in our view. Therefore, profit growth in certain sectors is likely to slow if demand growth does not outpace competition growth or if entry barriers are too low. In addition, the expected rise in input cost, especially those of agricultural commodities (owing to the drought in the US, the upcoming El Nino weather phenomenon, global monetary easing, etc.) is likely to put pressure on the margins of companies with weak pricing power. Asia Special Report: Asia's inflation wildcard - 07 Aug 2012

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Fig. 17: EBIT margins of select consumer companies


Note: GGRM EBIT excludes excise tax and VAT

Fig. 18: EBIT margins of select retailers


Fig. 19: Profit per unit sales of motorcycles (AHM)


Fig. 20: Astra: distribution EBIT margin


Fig. 21: EBIT margins of cement companies


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Select examples of rising competition in various sectors South Korean retail giant Lotte Shopping through its subsidiary in Indonesia, has signed an agreement with Ciputra Adigraha for a 20-year lease of the entire shopping mall in Ciputra World, Jakarta. Lotte Shopping Avenue in Ciputra World will be Lotte’s first shopping mall in Indonesia. Through this deal, Lotte Group has expanded its presence in the retail industry of Indonesia following its successful hyper-mart business, Lotte Mart, which has been well received by Indonesian customers.

Nissan Motor Company Limited has announced that it will increase its production capacity from 100,000 units/year to 250,000 units/year by investing US$400mn in a production facility located in Karawang Industrial Estate, West Java. Apart from the new production facility, Nissan also plans to increase the number of its dealers to 100-150, from 71 operating dealers currently.

Kompas TV, the subsidiary of Indonesian media giant Kompas Gramedia, has been expanding its broadcast across Indonesia through local TV networks’ channels, pay television networks and satellite broadcast. With this, Kompas TV is likely to be the pioneer of Indonesian TV broadcasting in high definition (HD) quality through Kompas HD, which is available through the pay television network. Currently, Kompas TV is proposing digital TV broadcasting, which is still under review by the government.

Lippo Group, through its pay TV provider subsidiary First Media, will launch direct-to-home satellite TV and compete head-on with MNC Sky Vision of Global.

L ‘Oreal has increased its penetration in Indonesia by investing €100mn to build its biggest production facility globally in Cikarang, West Java. This plant will support the target of L ‘Oreal to sustain net sales growth of 30% in the future. The facility will also produce to export in other ASEAN countries.

South Korean tire maker Hankook, the seventh largest tire producer in the world, has opened its Indonesian tire production facility in November 2012, which will be its third-largest plant globally with total investment of US$1.1bn until 2018. The plant will have a production capacity of 16mn tires/year in 2018, according to management (as per media reports, see sources below).

(Sources [for all information in this box]: company data, various local media including Bisnis Indonesia, Kompas, Investor Daily, Jakarta Post)

Sectors with rising competition risk: consumer, banks, and automotive

Consumer The consumer sector is facing the largest wave of rising competition in the past decade and compared to other sectors, attracting new entrants as well as inducing existing companies to try and grab more market share of the growing pie. This has yet to dampen investors’ appetite for consumer stocks, which have outperformed the market significantly since 2H11, pushing up the valuation to a 25% premium to the market based on the multiples of companies under our coverage.

The consumer sector’s strong performance was driven by a few factors, such as rising consumption and investors’ flight to defensive stocks and those perceived as safe haven stocks. Going forward, we foresee a risk of the consumer sector to underperform the Jakarta Composite index given the already-high market expectations. The modest recovery in China and the US is also likely to increase investors’ risk appetite and the wide valuation premium in consumer should induce bargain-hunting in other sectors, in our view. We recommend that investors underweight the consumer sector in 2013F.


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Fig. 22: Relative performance of consumer sector vs market Relative performance of Jakarta Consumer Index vs. Jakarta Composite Index

Source: Bloomberg, Nomura research

Retail subsector Retail companies are probably facing the most intensive competition in decades. While the last decade has seen an orderly structure – with Ramayana at the low end, Matahari in the middle, Mitra Adiperkasa at the high end, and Ace Hardware in the home improvement segment – the future is likely to be very different with Lotte Shopping, Central Group and Parkson aggressively acquiring locations, in our view. Thus, competition is bound to heat up and, indeed, bargaining power in rental rates has started to shift from retailers back to property owners, as noted by Janni Asman in her report Indonesia retail - Space fight!.

Similarly, in the home improvement segment, Ace Hardware is facing new competition from Pong, IKEA and Courts Asia, and we have also learned that Zara Home is looking to open in Indonesia.

In addition, electricity costs (25% of pretax profit) will rise (as the tariff increase was passed by the government and implemented in Jan-13, and will be followed by a step-up increase every three months to a total of 15% increase for the year) and many of the staff at the stores are working at or near minimum wages pay, thus the cost pressure from payroll (0.8x - 1.7x of pretax profit) is high.

Automotive The automotive sector is also seeing competition intensifying. Although most brands have had some presence in Indonesia for years, the market share is still concentrated in the Big Six that control 88% of the car market (source: Gaikindo), and even more so in the motorcycle market, which is almost a duopoly, with Honda and Yamaha together controlling 92% market share in 9M12 (source: AISI). Aside from good product line-up and strong distribution network, we believe the concentration of market share is partly due to the fact that until recently, many producers did not seriously focus on the Indonesia market.

The rising competition in the automotive sector can be seen in the announcement of new investments in car production facilities, which we believe reflects both the need to satisfy growing demand as well as rising competition. In aggregate, automotive producers have announced total investments in excess of USD1bn either to expand production capacity or to deepen manufacturing capability. We have also witnessed an increasing number of new models being launched, especially in the higher end segment.

However, despite the aggressive expansion, new entrants are still likely to find it difficult to win market share, in our view, as the automotive sector has a relatively high entry barrier. Producers are required to have high local content to benefit from lower tax. Under the Asean Free Trade Agreement, only products with 40% or more Asean content are allowed to be shipped to Indonesia with no import duty.

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(1 Jan 2011 = 100)



14

To further benefit from potential luxury tax exemption in the low-cost green car program, producers need to have 80% local contents. The requirements of high local content serve as the key barrier to entry for new players that do not have investments, or have not committed to invest in Indonesia or Asean.

Cement Competition in the cement sector is looming on the horizon, but is unlikely to intensify in the next three years given the high entry barriers, in our view. The market continues to be dominated by the big three producers, which together controlled 88% market share in the domestic market in 9M12 (see below figure).

Fig. 23: Market share in the domestic market (9M12)

Source: Indonesian Cement Association (ASI)

Over the past year, there have been a number of media reports (including in Kompas) quoting interest from foreign players, mainly Chinese cement companies planning to set up new cement capacity in the country. Anhui Conch was reported as having plans to build 15mn tons of new capacity mainly in Kalimantan and Papua. China National Building Materials (CNBM) was reported to have expressed interest in building 2.5mn tons of new capacity in Central Java, and Siam Cement (Thailand-based company) was also reported to have expressed interest in building 2mn tons of new capacity in West Java (Source: Kompas, 6 March 2012).

Our view is that the entry of new foreign players is not an imminent risk in the near term and presents only a risk to the sentiment on the sector in the equity market. We believe that it will take time for other new players to set their operation to the scale of existing players and fully compete with them. Even Siam Cement, which gains capacity through brownfield acquisition, will only add 2m tons of new capacity or less than 4% of the industry’s capacity.

We also believe that new competition will have a relatively minimal impact on existing companies, given the significant demand potential. Assuming industry production to increase from 55mn tons currently to 95mn tons by 2016F, this represents cement consumption of only 395kg per capita, which is still less than the current per capita consumption of Thailand and Vietnam, and much less than that of Malaysia, Singapore or China.

Competition in the banking sector will intensify among existing banks (instead of from new entrants), both on funding as well as on the lending side of the business, in our view.

The rising loan to deposit ratio, which reached 86% in August 2012, and the strong loan growth that continues to outpace deposit growth, are increasingly leading to tighter liquidity in the banking sector. This benefits larger banks and puts pressure on smaller banks, which need to pay higher rates to attract depositors and have limited access to low-cost CASA funds.

SGG, 40.4%

Indocement, 32.3%

Holcim, 15.7%

Others, 11.6%


15

The lower cost of funds and margin pressure in mortgage and corporate lending have encouraged banks to look to lend more to higher-margin segments such as SME and consumer financing. The competition has managed to push net interest margin down in each of the segments, but overall margin compression remains absent in some of the banks due to change of product mix. Only banks with high concentration in high-margin businesses, such as Danamon and Bank Rakyat Indonesia, are experiencing a decline in their consolidated net interest margin.

We note that two segments in lending – motorcycle loans and rural micro financing – will likely be the last segments to face rising competition due to higher entry barriers (being labour-intensive and involving a high degree of manual process).

The property sector faces very little competition from the demand side, in our view. According to our estimates, marketing sales of listed property companies under our research coverage continued to grow strongly (30-40% y-y) in 9M12 and the biggest challenge has been competition to secure new land banks, in our view. Indonesian property companies generally own large undeveloped land banks but they have been conservative and reluctant to quickly sell them due to difficulties in securing new land banks and the expectation of further capital gains (Indonesian property companies do not mark-to-market the value of their landbanks due to capital gain tax on asset revaluation).

Competition in the natural resources sector, as always, is focused more on licensing and availability of land or resources. Land availability is increasingly rare as the government is now very reluctant to release forestry land to be converted into plantations or for other commercial use.

Stocks that are affected

In our view, three stocks that are best positioned to navigate through the rising competition are Kalbe Farma, Astra International, and Ramayana.

Kalbe Farma has been highly innovative in introducing new products and commands a strong distribution network. Astra International commands strong brand equity, offers top quality after-sales services, and has strong market leadership. Low-end retailer Ramayana operates in a segment with high entry barriers given the complexity in merchandising at the right price and securing location in low-income populated areas.

In our view, three stocks that will face the strongest headwinds amid competition are Mitra Adiperkasa, Ace Hardware, and Bank Danamon.

Mitra Adiperkasa and Ace Hardware operate in main cities and main shopping malls, where there are lower entry barriers for new competing entrants, and they are also facing rising cost pressure as bargaining power is shifting from retailers to property owners. Bank Danamon also faces intensifying competition as heavyweights such as Mandiri and BCA aim to grow their consumer financing and SME loans aggressively, which are the core business areas for Bank Danamon. Fig. 24: Select stocks impacted by rising competition

No Company Price (IDR) Rec

PER 13F (x)

PER 14F (x)

Net profit

growth 13F (%)

Net profit

growth 14F (%)

PB 13F (x)

ROE 13F (%)

DVD yield

13F (%)

1 Kalbe Farma 1,040 Buy 25.1 21.6 20.0 16.3 6.1 27.8 3.0

2 Astra Int'l 7,500 Buy 13.7 11.6 16.4 17.5 3.7 29.4 3.7

3 Ramayana 1,170 Buy 16.6 13.1 14.8 26.7 2.5 15.6 3.3

4 Mitra Adiperkasa 6,550 Neutral 21.5 18.2 21.6 18.3 4.2 21.3 0.7

5 Ace Hardware 820 Neutral 3.2 2.7 24.6 20.8 0.7 25.5 4.6

6 Bank Danamon 5,550 Neutral 12.4 11.5 6.6 7.4 1.7 14.3 2.4

Source: Bloomberg, Nomura estimates

Note: Pricing as of 2 January 2013


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Acceleration of infrastructure projects Infrastructure projects are progressing, especially in areas that required a less complicated land acquisition process (such as railways, seaports, airports, and toll roads in Bali built on top of mangrove and sea). This was before the Land Acquisition Law was in effect and investors’ perception was that nothing was built. A better coordination among the state-owned enterprises and the government’s strong push to accelerate the infrastructure sector is key to this new development. The land acquisition will further accelerate this process in the coming years, we believe.

One key decision being made by the government is that if a project is deemed critically important, the government will fast-track it by appointing one or more state-owned companies to develop the infrastructure (as opposed to tendering it out, which takes time to execute). This should eventually force potential investors to jump in and take a strong view in participating in the Indonesian infrastructure programme or risk being left out.

The Land Acquisition Law for Infrastructure Development should further accelerate the process as soon as the government proves that it can be effectively implemented on the ground. We continue to believe that the law will do more good than harm and will help to accelerate infrastructure projects, both existing as well as new projects.

Under the legal umbrella of the Land Acquisition Law, the government will be able to complete the land acquisition without the risk of being held back by owners who refuse to sell. The law also provides certainty in the timing of the whole land acquisition process, from socialization of the project to the actual land acquisition. Pricing will also be relatively fair as valuation will be done by accredited appraisal.

Key time tables as outlined in the Land Acquisition Law: • Stage 1 – Preparation (104-242 working days): The government should carry out

socialization of the infrastructure projects in advance (transparency). This will happen in the first phase of the project. The process can be sped up if land owners have no objection, otherwise the provincial governors will decide either to use the proposed location or move the project to an alternate location. If people continue to refuse, they can challenge the governor’s decision in the administrative court with only one chance to appeal to the Supreme Court. The entire court process will take no more than 14+74 working days. The whole stage 1 process, if exhausted, will take a maximum of 242 days.

• Stage 2 – Implementation (134-250 working days): Fair price of the land is determined through independent appraisal, followed by negotiation in the form of compensation (cash or re-settlement). Re-settlement is also an option to be offered to the landowner. Land owners who disagree with the compensation can take the case to court with only one chance to appeal to the Supreme Court. The entire court process will take a maximum of 30+74 working days. The entire stage 2 process, which includes revocation of land rights, will take no more than 250 working days.

• Stage 3 – Handover (7 working days): After the implementation of land acquisition and stage 2 is completed, the land acquired will be handed over for the project development.

• The project will be tendered out after preparation (stage 1) is completed.

Parliament passed The Land Acquisition Law in December 2011, allowing the government to force landowners to sell their land at market price if needed for public infrastructure projects (eminent domain). This was followed by the implementation of the regulation of the law that was issued in August 2012. The implementation of the regulation is a crucial part of the law as it regulates the detail procedure of the land acquisition process and sets the maximum time frame and structure (see box above).

The law has appointed BPN (National Land Agency) as the only body responsible for land acquisition that is in the public interest. This differs from the past where the Ministry of Public Works was the champion for land acquisition (and the Ministry of Public Works still has to go through the National Land Agency to verify and change ownership title of the land). Thus, the process has been simplified from two steps into one.


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The law is effective immediately for new projects. Existing projects must still resort to normal negotiation processes until 31 December 2014, wherein if the negotiation stalled, the land acquisition law can be used to enforce compulsory purchase for the remaining land yet to be acquired.

Impact on new projects

The implication for new projects is clear. The new law allows for a speedy land acquisition process for new public infrastructure projects. Despite many lingering doubts from sceptics over the effectiveness of the Land Acquisition Law, we have given the Land Acquisition Law the benefit of doubt and expect it to accelerate new project developments. The maximum period of 583 days (from socialization to execution of the land purchase) mandated by the law is a very strong foundation for authorities (both in the technical department as well as the local governments) to execute the land acquisition and thus development of the infrastructure projects.

It is worth noting that local government officials are generally keen to develop infrastructure in their areas, as that often has a positive multiplier impact on the local economy. The process has been slow in the past as authorities could not legally force landowners to sell their land (in the past, there were cases where landowners refused to sell, even if the offer price was near or above market price, due to various reasons).

We also expect the Land Acquisition Law to attract more investors into infrastructure projects as it provides more certainty on the timing and, thus, return visibility of a project compared to the past decade.

Impact on existing projects

The key concern and push-back on the effectiveness of the law is that it does not allow existing projects to jump in and use the law until the end of 2014. However, even for the existing projects that cannot use the Land Acquisition Law immediately, it is just a matter of time (with maximum delay to 2015) when the law can be used for compulsory land purchase. As such, many existing projects will also be accelerated because developers and project winners will have much better certainty on the timing and process of land acquisition.

For example, prior to the passing of the Land Acquisition Law, contractors/toll road operators tended to wait until land acquisition was ~90% completed before they would start the physical development of the project. This is part of the risk management in order to avoid working capital being locked in case some owners of the lands refuse to sell (the funds that are invested into project development will not generate any cash flow if the project cannot be completed and the toll road cannot be opened).

Post land acquisition, contractors/toll road operators will be able to start the physical development of the toll road at a much lower threshold of land acquisition completion because there is certainty that they will get the remaining land in 2015 at the latest. The ability of the law to force the owner to sell the land will also help to speed up the land acquisition process as the landowner knows that he has to reach an agreement or the land acquisition law will take effect in 2015.

The new land acquisition law itself helps provide process and timing certainty for land acquisition that will benefit infrastructure development. The new regulation provides that the entire process from socialization to the land rights transfer will be a maximum of 583 days or slightly more than 1.5 years (as compared to some land acquisition processes in the past that took up to 10 years).


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Fig. 25: Government’s projection of infrastructure spending needed in Indonesia

Source: Office of Coordinating Ministry for Economy

Fig. 26: Infrastructure spending (capex) in government budget

Source: Office of Coordinating Ministry for Economy, Nomura estimates

Stock implications

In our view, the five stocks that will benefit the most from the acceleration of infrastructure development are toll operator Jasa Marga, contractor Wijaya Karya, and cement companies Semen Gresik, Indocement, and Holcim Indonesia.

Aside from the five main beneficiaries, some companies that we think will indirectly benefit from the acceleration of infrastructure development are banks that provide funding to those projects, property developers that potentially gain better access and thus higher land price, and some consumer companies such as cigarette producer Gudang Garam, and Kalbe Farma which produce energy drinks.

Fig. 27: Five stocks that stand to benefit most from the acceleration of infrastructure

development

No Company Price (IDR) Rec

PER 13F (x)

PER 14F (x)

Net profit

growth 13F (%)

Net profit

growth 14F (%)

PB 13F (x)

ROE 13F (%)

DVD yield

13F (%)

1 Jasa Marga 5,550 Buy 21.9 15.7 10.1 39.1 3.9 18.9 1.8

2 Wijaya Karya 1,530 Buy 15.7 12.2 34.5 32.4 3.2 21.3 1.4

3 Semen Gresik 15,950 Buy 15.4 12.3 30.9 24.5 4.4 31.8 2.6

4 Indocement 21,900 Buy 16.4 14.6 10.7 12.2 3.6 23.6 1.8

5 Holcim Indonesia 2,725 Buy 14.1 12.7 16.4 11.1 2.3 16.9 3.3


Note: Pricing as of 2 January 2013

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19

Reform likely to slow ahead of 2014 election We expect the government’s reforms movement to slow in 2013, especially the unpopular reforms. The government’s focus is on the implementation of policies to accelerate/sustain GDP growth, ring fencing financial sector from external shock, retain value-added processing of commodities, and improve administration/internal control. Our hope of a big step to remove fuel subsidies is increasingly unlikely based on our read into 2013 budget and latest political development.

The budget of IDR194tn in fuel subsidies with the assumption of 46m kiloliter volume of subsidised fuel implied that government did not expect a demand shock from a large increase in subsidised domestic fuel price. Therefore, we do not expect the government to remove fuel subsidies and even if there is any effort to increase domestic subsidised fuel price, it will be a small increment. That being said, if there is one factor that will force the government’s hand, we believe it will be a spike in oil prices that will threaten a budget deficit and thus put heavy pressure on the currency and investors’ confidence.

In addition, there have been concerns that Indonesia’s policies will swing into more nationalistic and populist territory as the elections draw near. The stream of recently issued regulations certainly attracts attention and concern from equity investors. However, we see that the direct impact on equities has been limited and equity price movements have been driven primarily by company fundamentals and global economic conditions/market sentiment.

We expect no significant major nationalistic economic policies to be issued in 2013. Instead, the government is likely to focus on a renegotiating royalty payment of mining companies and ensuring that the regulations that have been issued, such as a ban on the export of metal ore which can be implemented in 2014.

Looking back

The recent announcement of several policies is unsurprising, in our view, given that communication was done early during the process. Investors were made well aware by the government with regards to the regulations, given the government communicated those potential regulations early during the process. Indeed, some regulations, eg, the ban on the export of metal ore, were passed into law in 2009, and, thus, investors should already be well aware of them.

Further, the regulations are still within our expectation over the frameworks targeted by the government:

1. To ring fence and manage risks in Indonesia’s banking sector.

2. To move up the value chain in the resources sector, from exporting raw materials to exporting processed or refined products.

3. To improve administrative and internal control such as export-imports reporting, tax reporting, centralised electronic ID system, etc.

4. To accelerate economic growth and promote investment.

Regulations that fall under (1) are:

• The loan to value regulation (preventing a bubble in certain sectors)

• The export repatriation regulation (to increase the transaction volume of FX in the domestic market and better reporting/tax control)

• The regulation on the single shareholder limit in the banking sector

• The law and formation of the Financial Services Authority

• The move to the electronic ID (e-KTP) programme, which will integrate the population database of each Indonesian (see page 15 of Indonesia outlook 2012 - ANCHOR REPORT: Leaping to bigger things. )




20

Regulations that fall under (2) are: • The lowering of export tax on refined palm oil vs. crude palm oil (which should give cost

benefits and incentives to build refinery and oleochemical plants in Indonesia).

• The ban on mineral ore export in 2014 (to force mining companies relocate their smelter/refinery plant in Indonesia), and potentially reduce exports of natural gas and divert it for domestic use to lower the cost of energy (and thus reduce the import of oil/fuel) which arguably is part of (3) as well.

• Note that Indonesia has no intention of defaulting on its natural gas contract obligation as the government is in discussions about not extending the expired export contract and not initiating a new export contract for natural gas until the domestic demand is fulfilled.

Key regulations that fall under (3) are: • The regulation that only a certain number of ports can be used to import or export a

particular category of goods.

• General importer can only imports one category of goods per import license.

• Some of the regulation in #1 such as the electronic ID project and export repatriation regulation.

Key regulations that fall under (4) are: • The passing of the Land Acquisition Law for public infrastructure.

• Tax holiday for certain industry.

• The acceleration of infrastructure development.

Going forward

We still expect more regulations within the policy frameworks above to be issued in 2013, albeit at slower pace. Most of the key regulations have been issued in the last 18 months and the government is likely to focus more on the implementation and closing down any loophole. The efforts to accelerate economic growth, retain the value-added process, and to safeguard Indonesia’s systemic risk from internal and external shock will continue.

Some new regulations might create a lot of noise and raise investors’ concern along the way, but we believe the essence and spirit of the upcoming laws and regulations will remain that of good intentions.

In our view, the Indonesian regulatory environment has swung too far into the free market and open market mechanism following the Asia Financial Crisis in 1997; the government is now trying to get it back into the middle and to be more in line with global practices. This process is often seen as a negative by investors despite the fact that, after the swing, Indonesian regulations and government policies remain relatively pro-growth and pro-market.

One example is the regulation on single ownership limit in banks in which financial institutions can only own a maximum of 40% stake in an Indonesian bank. The limits for individuals and non-financial institutions are lower. Initially, investors feared that this regulation could be construed as being anti-foreigner, but it is not, as the regulation applies to both foreign and local shareholders. The single shareholder limit indeed aims to consolidate smaller banks and promote good corporate governance in the banking sector.

Foreign shareholders can still own 99% of Indonesian banks so long as none of the shareholders breach the single shareholding limit. Any foreign investor who would like to own 99% of an Indonesian bank needs to obtain Bank Indonesia’s approval and meet the requirements as a healthy bank with good corporate governance based on Bank Indonesia’s assessment.


21

Wish list of what needs to be done…

Indonesian and foreign investors have a long wish list of what needs to be done in order for Indonesia to be deemed as a better place to live, to invest and move forward. We believe this is not unique to Indonesia.

In our view, the top three wishes in the list are: Removal of fuel subsidies: Indonesia spent IDR89tn in fuel subsidies in 1H12 (14% of budget expenditure; 2.2% of GDP), which is a poor allocation of resources, in our view. It is not about affordability (the budget can afford it), but more about allocating the money for greater importance such as infrastructure development, education and healthcare.

Legal reform to improve legal certainty is at the top of the wish list of many foreign investors in Indonesia. This reform, however, will be the toughest and the slowest, in our view. Note that Indonesia’s judicial system is separated from executive power (government) and is at an equal position with executive power. However, it has made a good start with the anti-corruption body, which has gained widespread public support and has started to show some results (see articles in the link below).

Demonstration Begin as KPK-Police Standoff Takes a Fresh Turn - Tempointeractive

Photo News - Media Indonesia

"Where Are You Mr. President? ask Indonesian Twitter Users - Tempointeractive

Nationwide protests in support of KPK

Indonesian House Agrees to Terminate KPK Law Deliberations

Debottlenecking infrastructure is one of the urgent tasks and is being addressed. The poor infrastructure has led to high logistic and operating costs, causing a rise in cost of doing business in Indonesia. Therefore, any improvement in infrastructure will benefit companies and consumers alike, bringing down operating costs (higher profit) and helping to reduce inflation.

Fig. 28: Ranking of infrastructure competitiveness by the World Economic Forum Rank /144

Country

Quality of Overall

Infrastructure Quality

of roads

Quality of railroad

infrastructure

Quality of port

Infrastructure

Quality of air transport

infrastructure

Available airline seat kms/week,

millions

Quality of electricity

supply

Mobile telephone

subscriptions/ 100 pop

Fixed telephone lines/ 100

pop

US 25 20 18 19 30 1 33 72 15

Brazil 107 123 100 135 134 7 68 41 55

China 69 54 22 59 70 2 59 114 58

India 87 86 27 80 68 13 110 116 118

Russia 101 136 30 93 104 12 84 5 41

Singapore 2 3 5 2 1 16 6 14 30

Malaysia 29 27 17 21 24 23 35 33 85

Thailand 49 39 65 56 33 17 44 57 95

Vietnam 119 120 68 113 94 33 113 18 86

Indonesia 92 90 51 104 89 20 93 90 78

Source: World Economic Forum: Global Competitiveness Report 2012-2013, Nomura Global Economics

http://www.tempointeractive.com/hg/nasional/2012/10/07/brk,20121007-434209,uk.html�

http://www.mediaindonesia.com/foto/20045/Save-KPK�

http://www.tempointeractive.com/hg/nasional/2012/10/08/brk,20121008-434465,uk.html�

http://www.thejakartapost.com/news/2012/10/09/nationwide-protests-support-kpk.html�

http://www.thejakartaglobe.com/politics/indonesian-house-agrees-to-terminate-kpk-law-deliberations/550684�


22

Politics ahead

Indonesia will hold its next elections on 9 April 2014 (parliament) and 9 July 2014 (presidential). President Susilo Bambang Yudhoyono, who has served two terms (2x five years), is no longer allowed to run based on the Indonesian election law that limits an individual to hold a maximum of two terms as president.

Given the potentially tight race among the top five political parties and the falling popularity of the ruling Partai Demokrat, we expect the government to be reluctant to take any decisions on “risky and unpopular policies” that could cause them to lose even more votes and popularity.

In the meantime, political parties will also try to undermine other parties’ popularity and one of the easiest ways is to find, prove, and unveil corruption cases done by other parties’ officials or financial supporters. Therefore, big cases such as investigation into corruption charges of certain political party officials will intensify and are likely to peak in 2013-early 2014, in our view.

A positive aspect about the upcoming elections is that we are likely to see a further consolidation of political parties in parliament from 16 parties in 2004-09 and 9 parties in 2009-14. The consolidation will be aided by the election law (UU No.8/2012) that increases the election threshold to be represented in parliament to 3.5% in 2014 vs. 2.5% in 2009. This means that political parties that gain less than 3.5% of total votes at nationwide count will have to forfeit parliament seats won at regional as well as national levels.

If the 2014 elections indeed lead to more consolidation in political parties represented in parliament, future negotiation and the ability to efficiently pass important laws will hopefully improve.

The elections in 2014 The Indonesian elections are direct, where people can opt to directly vote for not only the political party, but also to choose a particular party representative. As such, an unpopular candidate might lose to his colleague in winning the parliament seat even if he is the top candidate of his party. This will force party candidates to realign their interests with the people as well as their political party.

None of the political parties currently seem very confident about winning a complete majority in the parliament on its own; potential implications of this situation include:

1. The 2014-19 elections could again result in a coalition government but the number of political parties in coalition members might be less than the current coalition of seven political parties, in our view. Although the president is directly elected by the people, he/she will still need support in parliament to be able to govern effectively.

2. The next president should be a relatively good and well-accepted figure. None of the political parties are strong enough to push a presidential candidate that is not popular among the people (low electability).

3. Parliament and government are likely to be slower in proposing and passing new laws/bills that are not urgent. We expect more status quo till the elections rather than major new reform initiatives.

It is worth noting that election for parliament members (DPR) is separate from the presidential election. Often the results of the two elections are completely different: the presidential candidate from the party that wins the most seats in parliament might not win the presidential election. When current President Susilo Bambang Yudhoyono won the presidential election in 2004, his Partai Demokrat only won 55 (10%) parliament (DPR) seats, standing fourth after Golkar, PDIP, and PPP.


23

Fig. 29: Election results in 2004 and 2009

No Parties 2009 % of seat 2004 % of seat

1 Partai Demokrat 148 26.43% 55 10.00%

2 Partai Golongan Karya 106 18.93% 128 23.27%

3 Partai Demokrasi Indonesia Perjuangan 94 16.79% 109 19.82%

4 Partai Keadilan Sejahtera 57 10.18% 45 8.18%

5 Partai Amanat Nasional 46 8.21% 53 9.64%

6 Partai Persatuan Pembangunan 38 6.79% 58 10.55%

7 Partai Kebangkitan Bangsa 28 5.00% 52 9.45%

8 Partai Gerakan Indonesia Raya 26 4.64% - 0.00%

9 Partai Hati Nurani Rakyat 17 3.04% - 0.00%

10 Partai Bintang Reformasi - 0.00% 14 2.55%

11 Partai Damai Sejahtera - 0.00% 13 2.36%

12 Partai Bulan Bintang - 0.00% 11 2.00%

13 Partai Persatuan Demokrasi Kebangsaan - 0.00% 4 0.73%

14 Partai Pelopor - 0.00% 3 0.55%

15 Partai Karya Peduli Bangsa - 0.00% 2 0.36%

16 Partai Keadilan dan Persatuan Indonesia - 0.00% 1 0.18%

17 Partai Nasional Indonesia Marhaenisme - 0.00% 1 0.18%

18 Partai Penegak Demokrasi Indonesia - 0.00% 1 0.18%

Total 560 100% 550 100%

Source: General Election Commission, House Representative


24

Our top picks and market view We expect a 16% gain in JCI in 2013 to 5000, driven mainly by earnings growth instead of valuation multiple expansion. JCI currently trades near its three-year P/E average of 13.7x and its three-year P/B average of 4.1x, which we believe are justified by the strong balance sheet, resilient earnings growth, high ROE of 28% in FY13F, and falling interest rate/inflation environment. This, however, could face technical headwinds going forward as Indonesia is still a consensus Overweight market based on EPFR data.

Resilient domestic consumption, manageable inflation and recovery in earnings growth should continue to support a higher JCI in coming years. Stabilisation, if not recovery, in commodity prices, should help to prevent a sharp deterioration in the trade balance in 2013F. Our economics team expects the trade balance to be only slightly negative (-USD0.8bn) in 2013 and the current account deficit to remain manageable at -1.9% of GDP.

Fig. 30: P/E ratio of JCI Index and MSCI Asia

Source: Thompson Reuters Datastream, Nomura International (Hong Kong) – Quantitative Strategies

Fig. 31: P/B ratio of JCI Index and MSCI Asia

Source: Thompson Reuters Datastream, Nomura International (Hong Kong) – Quantitative Strategies

Fig. 32: Indonesia: Consensus Weighting Relative to MSCI Asia ex-Japan Benchmark

Note: Methodology: EPFR’s AxJ Funds consensus Indonesia allocation % minus MSCI AxJ Index Indonesia country weight %

Source: EPFR Global, MSCI

Fig. 33: Foreign net buy/sell in IDX (daily) from Jan 2010 – Dec 2012

Source: CEIC, Bloomberg, Nomura research

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We have shifted our top pick portfolio to be even more overweight on infrastructure to capture the acceleration of infrastructure projects. We reduce our weighting on the consumer sector to underweight due to high market expectation (valuation) and upcoming margin pressure on the back of rising costs and competition. The commodity sector, which underperformed in 2012, remains the wildcard, but increasingly looks interesting as the global economy is moving into a modest recovery mode. It will be still a stock-picking market in general in 2013, in our view.

Our target valuation multiple is maintained at 15x forward P/E, which means most of the future upside potential will likely come from earnings growth. Our aggregate earnings growth estimate for Indonesian stocks under our coverage is 16.4% for 2013F and 19.0% for 2014F.

Fig. 34: Financials vs JCI

Source: Bloomberg

Fig. 35: Consumer vs JCI

Source: Bloomberg

Fig. 36: Mining vs JCI

Source: Bloomberg

Fig. 37: Automotive vs JCI

Source: Bloomberg

Fig. 38: Telecom vs JCI

Source: Bloomberg

Fig. 39: Property vs JCI

Source: Bloomberg

Key recent trends

1. The trade balance remains volatile and is turning back and forth between positive and negative territories. FX reserves ticked back up since September 2012 despite the weak currency which implies that Bank Indonesia intentionally allows the rupiah to weaken to help exports and curb imports. Thus, although the trade deficit is unlikely to reverse given the strong FDI and domestic consumption, the market’s concern over a deteriorating trade balance and volatile rupiah should have somewhat reduced, in our view.

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Fig. 40: Trade balance (last Nov12)

Source: Bloomberg, Statistics Indonesia

Fig. 41: FX reserves (last Nov12)

Source: Bank Indonesia, Bloomberg

2. Domestic consumption remains solid. Despite the lower commodity prices vs last year, the slowdown in domestic consumption is not evident yet. Car sales remain strong and motorcycle sales have recovered from the impact of LTV regulation faster than expected. Cement sales were still growing at 17% y-y in 11M12, reflecting a strong demand in property and infrastructure sectors.

The muted impact from LTV regulation is partly due to the loophole in the LTV regulations that exclude sharia bank and sharia financing. Bank Indonesia has issued regulations that will include sharia banks in the LTV regulation and MoF will follow soon with regulations to include sharia financing companies into LTV regulations.

We believe that the purchasing power has still held up relatively well despite falling commodity prices because GDP growth remained strong at 6.2% in 3Q12. Rural disposable incomes remain good as farmers should have paid off their motorcycle credit, bought their mobile phone and many have renovated their houses. Thus, the initial spending cycle is completed and farmers should have entered the investment or increased-savings up-cycle. In urban areas, workers are seeing more job creation from rising FDI and domestic investment plus will enjoy the benefit of the large increase in minimum wages. Fig. 42: FDI trend (update 9M12)

Source: CEIC

Fig. 43: Cement sales trend (last Nov 12)

Source: Indonesia Cement Association (ASI)

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Fig. 44: Car sales trend (last = Nov12)

Source: Gaikindo (The Association of Indonesia Automotive Industries)

Fig. 45: Motorcycle sales trend (last = Nov12)

Source: AISI (Indonesian Motorcycles Industry Association)

3. Since Bank Indonesia (BI) stated in early August 2012 that it might allow the rupiah to depreciate in an effort to curb imports/boost exports, the rupiah has weakened from 9,468/USD at 1 August 2012 to 9,793/USD at end-2012 based on data from Bank Indonesia. Despite the recent weakness in the rupiah, volatility is much muted than historical levels, which allows businesses to manage their production costs and price adjustments much better.

Our FX team expects the rupiah to weaken slightly to 9800/USD at end-2013 before strengthening back to 9600/USD in 2014. If the capital inflows are strong and trade balance improves, BI will have room to abandon its weak rupiah policy once inflation starts to tick up.

In 2011, BI adopted a strong rupiah policy to stem inflation (which hit a high of 7.02% in January 2011) and the rupiah strengthened from IDR8,988/USD at the start of 2011 to IDR8,579/USD at the end of 1H11. Inflation declined to 5.05% in Jun11 and to 3.79% in Dec11.

4. Risk of inflation is rising on the back of global monetary easing and global modest economic recovery. However, the key important factor for the mass population, food inflation, remain subdued as the feared El Nino weather phenomenon (often associated with drought) turned out to be much milder than initially feared.

Prices of agricultural products might move up if the harvest fails. However, the good rice harvest earlier this year and last year plus ample rice inventories globally should provide some cushion to the price of rice, the most important agricultural product in the inflation basket. Rice is the main source of carbohydrates and palm oil is the main source of fats for many Indonesians.

Indonesia top picks

We position our top picks to benefit from a higher Jakarta Composite Index (JCI), which we believe will be driven by the infrastructure-related sector. Our top picks in Indonesia include Indocement, Semen Indonesia, Jasa Marga, and Wijaya Karya, which make the infrastructure-related stocks account for four of our 10 top picks. The progress in infrastructure development, the implementation of the land acquisition law, and the government’s effort to accelerate infrastructure projects should continue to support financial performance of those stocks and draw investors’ interest to the sector, in our view.

Our top picks also include two automotive stocks, Astra International and Indomobil, as we believe the automotive sector remain in early stages of growth and we expect car sales to double to 2m units in 2017F. Astra is a strong market leader with 54% market share that should continue to capture the largest pie of the strong growth and Indomobil is a market share gainer that will grow faster than the industry, in our view. Both are not

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directly exposed to the threat of margin pressure as they are largely auto distributors and only have minority stakes in the manufacturing.

We also include Kalbe Farma, which has proven to excel in a highly fragmented and competitive pharmaceutical, consumer health, and nutritional products. The launch of the national healthcare program and the rising income will boost healthcare spending which is still very low at the moment.

The banking sector is represented by Bank Mandiri and Bank Negara Indonesia, as we believe large banks will continue to be better positioned vis-à-vis smaller banks.

We view Mandiri as having the strongest earnings growth prospects in the banking sector in the next two years, underpinned by its strong deposit franchise and ROAE upside from its potential productivity and cost efficiency improvements.

Bank Negara Indonesia has shown early signs of accelerating core earnings growth. This represents an improvement in its earnings growth quality, which was driven by NPL writeback in the past few years. The recent court ruling that allow state banks to grant debt principals reduction to debtors will allow BNI to resolve its legacy NPL and near term sentiment will be aided by its effort to sell stakes in BNI Life to foreign strategic partner.

The coal mining sector is only represented by United Tractors, which we believe to have lower earnings volatility as it is related to coal mining volume rather than coal price. We think that coal prices will be range-bound around the current levels and it may need a strong demand recovery to reach a level higher than USD100/ton (from current USD85-90/ton). (Indonesia coal - The sum of all fears)

Even if coal prices remain range-bound at USD80-100/ton, we believe United Tractors should see heavy equipment sales volume recovering as the confidence returns. The sharp fall in equipment sales in the past three months is not solely due to economic factors, in our view, as many of Indonesian coal mines remain profitable. As well, the contract mining business is still growing with volume up 7.9% in coal delivered and 7.0% in overburden removal. (United Tractors (UNTR IJ, Buy) - Earnings less volatile than price suggests) Fig. 46: Indonesia top picks

No Company Price Rec

PER 13F (x)

PER 14F (x)

Net profit

growth 13F (%)

Net profit

growth 14F (%)

PB 13F (x)

ROE 13F (%)

DVD yield

13F (%) Ticker

1 Astra Int'l 7,500 Buy 13.7 11.6 16.4 17.5 3.7 29.4 3.7 ASII IJ

2 Bank Mandiri 8,250 Buy 11.0 8.9 25.3 23.3 2.2 21.6 1.8 BMRI IJ

3 BNI 3,725 Buy 9.1 7.8 17.4 16.2 1.4 16.7 2.2 BBNI IJ

4 Indocement 21,900 Buy 16.4 14.6 10.7 12.2 3.6 23.6 1.8 INTP IJ

5 Indomobil 5,300 Buy 11.0 8.4 38.3 31.0 2.3 22.2 1.8 IMAS IJ

6 Jasa Marga 5,550 Buy 21.9 15.7 10.1 39.1 3.9 18.9 1.8 JSMR IJ

7 Kalbe Farma 1,040 Buy 25.1 21.6 20.0 16.3 6.1 27.8 3.0 KLBF IJ

8 Semen Gresik 14,800 Buy 15.4 12.3 30.9 24.5 4.4 31.8 2.6 SMGR IJ

9 United Tractors 20,950 Buy 11.5 9.7 12.0 17.9 2.3 21.5 3.5 UNTR IJ

10 Wijaya Karya 1,530 Buy 15.7 12.2 34.5 32.4 3.2 21.3 1.4 WIKA IJ

Market - Simple Average 22.9 2.3

Market - Aggregate (Weighted) 1 1 1 20.7 2.

Source: Bloomberg, Nomura estimates. Note: Pricing as of 2 January 2013

Note: Our top picks portfolio is reviewed on a quarterly basis. Performance measure is based on equal weighting for each stocks and reset to 100 at the beginning of the quarter. Members of our top picks portfolio are stocks under our coverage with reasonable liquidity.

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Fig. 47: Valuation matrix of companies under our coverage

Company Price TP Mkt Cap

(USDmn) Rec PER

13F (x)

PER 14F (x)

Net profit growth 13F (%)


PB 13F (x)

ROE 13F (%)

DVD yield 13F (%) Ticker

Banking/Financial Services 11.5 9.6 18.8 19.5 2.3 20.1 1.7

Bank Central Asia 9,100 7,700 23,074 Reduce 16.4 13.4 21.0 22.2 3.7 24.2 1.2 BBCA IJ

Bank Negara Indonesia 3,725 5,000 7,202 Buy 9.1 7.8 17.4 16.2 1.4 16.7 2.2 BBNI IJ

Bank Rakyat Indonesia 7,050 9,600 18,032 Buy 9.2 7.8 15.3 18.1 2.2 26.6 2.2 BBRI IJ

Bank Danamon Indonesia 5,550 6,000 5,515 Neutral 12.4 11.5 6.6 7.4 1.7 14.3 2.4 BDMN IJ

Bank Mandiri 8,250 10,200 19,959 Buy 11.0 8.9 25.3 23.3 2.2 21.6 1.8 BMRI IJ

Metal & Mining 15.1 8.5 -10.3 77.9 2.3 15.2 3.2

Adaro Energy 1,740 1,900 5,770 Buy 16.0 10.1 -9.8 58.0 2.2 14.2 2.1 ADRO IJ

Bumi Resources 620 840 1,335 Neutral 49.3 3.7 88.5 1226.5 1.6 3.3 0.1 BUMI IJ

Bumi Resources Minerals 245 810 650 Buy 86.8 21.8 31.2 298.7 0.4 0.5 0.0 BRMS IJ

Harum Energy 6,600 6,400 1,848 Neutral 11.4 8.6 6.3 33.3 4.5 33.8 2.2 HRUM IJ

Indika Energy 1,570 2,000 848 Neutral 7.1 4.4 -5.0 62.0 0.9 13.8 3.7 INDY IJ

Indo Tambangraya Megah 42,150 40,000 4,938 Neutral 14.7 8.9 -21.4 66.0 4.8 32.9 6.5 ITMG IJ

Tambang Batubara Bukit Asam 16,550 18,000 3,954 Neutral 14.6 11.1 -11.2 31.9 3.6 26.0 3.9 PTBA IJ

Plantation 8.4 7.7 75.1 9.9 1.9 22.7 3.0

Astra Agro Lestari 20,050 29,000 3,274 Buy 9.0 9.1 70.4 -1.7 2.8 35.0 4.0 AALI IJ

BW Plantation 1,390 2,100 582 Buy 9.0 6.2 88.9 45.4 2.5 31.6 1.1 BWPT IJ

Gozco Plantations 205 230 128 Neutral 6.4 4.7 88.1 34.8 0.7 11.5 1.7 GZCO IJ

PP London Sumatra 2,425 3,300 1,715 Buy 9.0 8.0 39.2 12.0 2.1 25.8 3.2 LSIP IJ

Salim Ivomas Pratama 1,230 1,900 2,017 Buy 7.4 6.5 117.6 13.6 1.2 17.9 2.5 SIMP IJ

Consumer, Automotive 16.9 14.7 18.6 15.3 4.3 25.5 2.9

Astra International 7,500 9,500 31,480 Buy 13.7 11.6 16.4 17.5 3.7 29.4 3.7 ASII IJ

Indomobil Sukses International 5,300 8,500 3,039 Buy 11.0 8.4 38.3 31.0 2.3 22.2 1.8 IMAS IJ

Gudang Garam 55,500 67,500 11,072 Buy 16.8 15.3 45.8 9.8 3.5 22.0 2.4 GGRM IJ

Indofood CBP 8,000 9,500 4,836 Buy 19.3 17.0 6.1 13.7 3.5 19.4 2.1 ICBP IJ

Indofood Sukses Makmur 5,800 6,050 5,280 Neutral 13.6 12.5 9.6 8.3 2.1 16.5 2.9 INDF IJ

Mayora 19,750 27,000 1,570 Buy 17.8 13.7 22.7 29.5 4.1 25.7 1.1 MYOR IJ

Unilever 21,850 17,200 17,285 Reduce 31.3 28.6 9.9 9.6 36.3 119.0 3.2 UNVR IJ

Kalbe Farma 1,040 1,200 5,476 Buy 25.1 21.6 20.0 16.3 6.1 27.8 3.0 KLBF IJ

Ace Hardware 820 620 146 Neutral 3.2 2.7 24.6 20.8 0.7 25.5 4.6 ACES IJ

Mitra Adiperkasa 6,550 7,000 1,127 Neutral 21.5 18.2 21.6 18.3 4.2 21.3 0.7 MAPI IJ

Ramayana 1,170 1,800 861 Buy 16.6 13.1 14.8 26.7 2.5 15.6 3.3 RALS IJ

Note: Pricing as of 2 January 2013. JCI Market Cap: USD387,778mn Nomura coverage: 70%.

Source: Nomura research.


30

Fig. 48: Valuation matrix of companies under our coverage (continued)

Company Price TP Mkt Cap

(USDmn) Rec

PER 13F (x)

PER 14F (x)



PB 13F (x)

ROE 13F (%)

DVD yield

13F (%) Ticker

Telecom 14.9 14.0 7.9 7.0 2.6 17.4 3.5

XL Axiata 5,700 6,750 5,028 Neutral 13.7 12.7 6.1 8.3 2.7 21.1 3.6 EXCL IJ

Indosat 6,450 7,500 3,634 Buy 26.2 23.4 -10.8 12.2 1.9 -0.3 1.9 ISAT IJ

Telkom Indonesia 8,950 8,600 18,326 Neutral 12.5 12.0 6.9 4.7 2.3 19.4 5.2 TLKM IJ

Tower Bersama Infrastructure 5,450 4,300 2,639 Neutral 29.1 25.0 47.2 16.1 6.5 25.2 0.3 TBIG IJ

Sarana Menara Nusantara 23,000 35,000 2,433 Buy 27.3 22.2 47.3 23.0 8.3 35.9 0.0 TOWR IJ

Property 14.9 20.5 34.1 -27.7 2.2 15.0 1.0

Agung Podomoro 380 330 808 Neutral 9.4 0.0 11.8 -100.0 1.4 15.7 2.9 APLN IJ

Alam Sutera 610 490 1,130 Buy 11.4 0.0 20.4 -100.0 2.5 24.6 0.0 ASRI IJ

Bumi Serpong Damai 1,110 1,620 2,014 Buy 15.0 11.8 27.2 27.4 2.2 15.8 1.3 BSDE IJ

Ciputra Development 800 1,025 1,258 Buy 13.4 11.1 96.3 20.5 2.0 15.5 1.3 CTRA IJ

Lippo Karawaci 1,000 1,070 2,242 Buy 18.4 15.9 36.6 15.4 2.2 12.4 0.8 LPKR IJ

Summarecon Agung 1,860 1,320 1,325 Buy 23.0 0.0 42.6 -100.0 4.1 19.1 0.9 SMRA IJ

Infrastructure, Cement, Logistics 14.6 12.2 14.5 19.5 3.3 22.7 2.8

Indocement Tunggal Perkasa 21,900 26,900 8,359 Buy 16.4 14.6 10.7 12.2 3.6 23.6 1.8 INTP IJ

Holcim Indonesia 2,725 4,275 2,165 Buy 14.1 12.7 16.4 11.1 2.3 16.9 3.3 SMCB IJ

Semen Gresik 15,950 17,900 9,809 Buy 15.4 12.3 30.9 24.5 4.4 31.8 2.6 SMGR IJ

Wijaya Karya 1,530 1,800 984 Buy 15.7 12.2 34.5 32.4 3.2 21.3 1.4 WIKA IJ

Krakatau Steel 640 870 1,047 Neutral 9.0 0.0 -18.4 72.3 0.9 10.1 4.1 KRAS IJ

Jasa Marga 5,550 6,875 3,913 Buy 21.9 15.7 10.1 39.1 3.9 18.9 1.8 JSMR IJ

AKR Corporindo 4,125 4,250 1,634 Buy 17.4 13.4 30.1 31.4 3.6 21.8 2.0 AKRA IJ

United Tractors 20,950 33,000 8,102 Buy 11.5 9.7 12.0 17.9 2.3 21.5 3.5 UNTR IJ

Perusahaan Gas Negara 4,600 5,000 11,562 Neutral 14.3 13.1 12.1 9.0 4.9 37.6 4.2 PGAS IJ

Simple average 17.4 11.6 26.7 48.5 3.7 22.9 2.3

Aggregate 271,423 13.9 11.7 16.4 19.0 2.9 20.7 2.8

Note: Pricing as of 2 January 2013. JCI Market Cap: USD387,778mn Nomura coverage: 70%.

Source: Nomura research


31

Indonesia economic outlook Paracuelles, Euben

[email protected] / +65 6433 6956

Venkateswaran, Lavanya [email protected] / +91 22 305 33053

Indonesia: Watch policies and politics

The policy environment is likely to be more uncertain ahead of the 2014 elections.

Activity and external accounts: We expect GDP growth to remain stable at 6.1% in 2013, driven mainly by resilient domestic demand as was the case in 2012. We think growth in investment spending will likely moderate but that of private consumption should remain stable. Government expenditures should also contribute more positively ahead of the 2014 elections, as implementation of the budget improves, particularly on infrastructure (as opposed to this year’s under-spending). In terms of external demand, however, our assumptions remain subdued as our economics teams expect weak GDP growth in the US and Euro Area in H1 and in China in H2, which will be especially important for Indonesia.

On the external front, we believe the current account deficit will likely narrow in 2013 but only marginally, supported by higher export growth to China in H1 and improving US and Euro Area growth in H2. That said, Indonesia’s import demand for oil is inelastic due to heavily subsidized local fuel prices, and so we expect large oil & gas imports to remain. This combined with still resilient domestic demand, which is further supported by policy announcements such as large minimum wage increases and an increase in the non-taxable income bracket, should continue to bolster strong import growth.

Fig. 49: GDP growth by expenditure

Source: CEIC; Nomura Global Economics

Fig. 50: Current account deficit


In addition, we expect the political environment to heat up ahead of the 2014 elections, and we see a risk of a policy impasse, or worse, more nationalist/populist regulations that could damp the investment climate (see Asia Special Report: Indonesia: Policy swings). Evidence supporting this is a string of recent policy announcements including large minimum wage increases and the implementation of more import substitution policies. This is likely to add pressure to Indonesia’s already weakening external position – the current account deficit has remained substantial, causing a noticeable decline in its basic balance, which could deteriorate further if FDI inflows start to slow.

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Fig. 51: Basic balance


Inflation and monetary policy: Last year, the inflation picture was remarkably benign, with headline inflation closing the year at a stable 4.3% y-o-y in December, well within Bank Indonesia’s target. This is unlikely to be the case in 2013, in our opinion. We expect both supply- and demand-side inflation pressures to build, and forecast headline inflation to approach the upper end of the 3.5-5.5% target range. In fact, we see the risks to the inflation forecast as significantly tilted to the upside given the upward adjustment of electricity tariffs this year (by 15% in total) and possibly, a reduction in fuel subsidies. Given the strength in domestic demand, the ability of firms to pass on the associated increase in production costs is likely to be strong. We see this being exacerbated by sharp increases in minimum wages and higher disposable incomes (see Asia Insights: Thoughts from Bank Indonesia's post-meeting call, 12 December 2012).

We continue to forecast policy rates to remain at 5.75% through H1 2013, before a total of 50bp of hikes in H2 to address inflation risks and rein in excess domestic demand, which should otherwise keep current account deficits substantial. The main risk to our view is the prospect of fuel subsidy cuts which we have not factored into our baseline forecasts given the uncertainty of the timing and the political obstacles. But clearly, policy rate hikes would come sooner, and likely be much larger, if the government decides to cut fuel subsidies in H1.

Fiscal policy: We expect the 2013 fiscal deficit to overshoot the budgeted 1.65% of GDP. While the approved 2013 budget allows the government to raise fuel prices if deviations from macroeconomic assumptions occur, this does not guarantee an actual decision to change fuel subsidy policy. Political considerations will be important, and we believe the window for this to happen will close as we get into the second half of the year. More positively, we expect the government to improve execution of capital expenditures, particularly on infrastructure, this year given the strong focus. All told, we expect increased operating costs and subsidies to cause fiscal slippage of close to 0.3pp, resulting in a 2013 deficit of 2% of GDP.

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Fig. 52: CPI inflation versus target

Source: Nomura Global Economics

Fig. 53: Key components of the budget

Source: CEIC, Nomura Global Economics

Risks: Downside risks stem from external shocks: a deeper recession in the euro area, a hard landing in China and large capital outflows. In addition, more protectionist policy announcements could further generate negative sentiment on investment.

Fig. 54: Details of the forecast

% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 6.3 6.4 6.2 5.7 6.1 6.2 6.0 6.0 6.1 6.1 6.2

Private consumption 4.9 5.2 5.7 5.6 5.5 5.5 5.6 5.5 5.4 5.5 5.6

Government consumption 5.9 7.4 -3.2 5.0 7.0 8.0 10.0 10.0 3.6 9.0 7.0

Gross fixed capital formation 10.0 12.3 10.0 9.9 9.8 8.9 8.8 7.1 10.5 8.4 9.0

Exports (goods & services) 7.9 2.2 -2.8 5.5 6.0 6.0 7.0 8.0 3.1 6.8 10.0

Imports (goods & services) 8.0 10.9 -0.5 6.0 6.5 7.0 5.5 14.0 6.0 8.4 11.9

Contributions to GDP:

Domestic final sales 5.5 6.4 5.3 6.3 5.7 5.8 6.0 6.1 6.2 6.0 6.0

Inventories 2.0 2.3 -0.1 -1.0 0.0 0.0 0.0 0.2 0.8 0.0 -0.3

Net trade (goods & services) 0.7 -3.1 -1.2 0.4 0.4 0.0 1.3 -1.5 -0.8 0.1 0.2

Consumer prices index 3.7 4.5 4.5 4.4 4.6 5.1 5.4 5.5 4.3 5.2 5.1

Exports 5.3 -8.2 -13.0 2.8 6.0 9.0 8.0 9.0 -3.6 8.0 8.0

Imports 21.6 9.7 -0.3 6.2 7.0 7.0 8.0 10.5 8.8 8.1 14.4

Merchandise trade balance (US$bn) 1.7 -2.1 0.6 -1.1 1.6 -1.1 2.7 -3.5 -0.8 -0.3 -0.9

Current account balance (% of GDP) -1.4 -3.5 -2.4 -1.7 -1.3 -2.2 -1.8 -2.4 -2.2 -1.9 -1.6

Fiscal Balance (% of GDP) -2.4 -2.0 -2.2

Bank Indonesia rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.25 6.25 5.75 6.25 6.75

Exchange rate (IDR/USD) 9146 9433 9591 9793 9660 9680 9730 9800 9620 9800 9600

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 3 January 2012.

Source: CEIC and Nomura Global Economics

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35

Sector outlooks

Banks

BANKS

EQUITY RESEARCH

Outlook 2013

Still bullish on sector; earnings growth likely to accelerate on stable NIMs and lower costs

January 8, 2013

Action: Buy Bank Mandiri - our top sector pick We are bullish on Indonesia banks - we forecast earnings growth for the five banks in our coverage to accelerate to 17-20% in FY13-14F, from 11.7% in FY12F on robust loan growth, stable NIMs, better cost ratios and low credit costs. Mandiri remains our top pick for the sector, but we also like BNI for its NPL recovery upside potential.

Catalysts: Improving macro outlook; NPL recovery upside potential Macro uncertainties, due to Indonesia’s worsening current account (CA) balance, have been a key overhang on the sector. However, we believe CA deficit is under control and unlikely to lead to significant monetary tightening. We also see potential earnings upside for Mandiri and BNI from rising NPL recoveries on the back of recent constitutional court ruling.

Stable NIMs, better cost ratios While NIMs have been on a downtrend in the past two years, due to a steep fall in interest rates and rising competition, we see scope for a slight uptick in coming years due to rising LDRs, better loan mix, and an uptrend in rates. We expect growth of operating cost to slow, after growing strongly in 2010-11, as the pace of network expansions slows.

Sustained low credit costs Improving credit underwriting standards and sustained economic growth in Indonesia should underpin a stable asset quality, in our view. We expect current low credit costs to be sustained, even before taking into account NPL recovery upside at Mandiri and BNI.

Valuation: Still inexpensive; below six-year mean Based on Bloomberg consensus, the five banks in our coverage traded at an average 12-month forward P/E of 11.3x – this is still below historical average P/E of 13x over 2006-2012 despite declining cost of capital.

Fig. 55: Stock ratings and valuation

Source: Bloomberg, Nomura research; Note: Pricing as of 2 January 2013

Anchor themes

We believe Indonesian banks can sustain their strong earnings outlook in the face of headwinds from global economic uncertainties in light of the pro-growth fiscal and monetary policies and prudent macroeconomic management in the country.

Nomura vs consensus

Nomura's FY13F forecasts for aggregate sector earnings are on average in line with consensus.

Research analysts

Indonesia Banks

Stephan Hasjim - PTNI [email protected] +62 21 2991 3347

Company Price Rec

PER 13F (x)

PER 14F (x)

Net profit

growth 13F (%)

Net profit

growth 14F (%)

PB 12F (x)

ROE 12F (%)

DVD yield 12F (%)

Banking/Financial Services 11.5 9.6 18.8 19.5 2.3 20.1 1.7

Bank Central Asia 9,100 Reduce 16.4 13.4 21.0 22.2 3.7 24.2 1.2

Bank Negara Indonesia 3,725 Buy 9.1 7.8 17.4 16.2 1.4 16.7 2.2

Bank Rakyat Indonesia 7,050 Buy 9.2 7.8 15.3 18.1 2.2 26.6 2.2

Bank Danamon Indonesia 5,550 Neutral 12.4 11.5 6.6 7.4 1.7 14.3 2.4

Bank Mandiri 8,250 Buy 11.0 8.9 25.3 23.3 2.2 21.6 1.8 See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Banks January 8, 2013

37

Banks: Still bullish; earnings growth to accelerate on stable NIMs, lower cost ratios and sustained low credit costs

Earnings growth likely to accelerate in next two years

We expect stronger earnings growth for the five major banks in our coverage (Mandiri, BCA, BRI, BNI and Danamon) in the next two years. We forecast aggregate earnings of the five banks to grow by 17.1% in FY13F and 19.5% in FY14F vs. 11.7% in FY12F. Earnings growth for the five banks was unusually strong in FY11 (+31% y-y) and FY10 (+43% y-y) – this can be attributed to the impacts of accounting change on revenue recognition and loan provisioning and corporate tax rate cuts to 20% (from 30%). We forecast underlying earnings of the five banks to grow at 18.5% in FY13F and 19.7% in FY14F, stronger than in the prior years (FY12F: 13.4%; FY11: 15.0%; FY10: 13.0%). This is due to our expectations of stable NIMs and slowing operating expense growth in the next two years vs. declining NIMs and strong cost growth in the past three years.

Fig. 56: Top-5 banks: Aggregate earnings growth (% y-y)


Fig. 57: Top-5 banks: Growth of underlying earnings (% y-y)


The following table shows ROAE decomposition (DuPont) analysis for the aggregate five banks in our coverage as implied by our earnings forecasts and assumptions. In the next two years, we assume a slight uptick in NIMs, improving cost income ratio as operating expense growth slows and sustained low credit costs.

Fig. 58: Top-5 banks: DuPont Analysis (% of average assets)


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Year end Dec 2006 2007 2008 2009 2010 2011 2012F 2013F 2014FNet Interest Income 5.97 5.86 6.29 6.24 6.24 6.05 5.77 5.81 5.82Other Income (% gross income) 20 22 21 22 23 25 24 24 24Gross Income 7.48 7.50 7.97 7.98 8.08 8.01 7.57 7.66 7.68Cost Income Ratio 52 52 49 47 48 49 49 48 47Pre-Provision Profit 3.62 3.60 4.09 4.26 4.24 4.11 3.83 3.95 4.09Provisions -1.07 -0.86 -1.30 -1.42 -0.87 -0.48 -0.44 -0.52 -0.56Profit Before Tax 2.55 2.79 2.85 2.97 3.39 3.71 3.44 3.49 3.58Tax Rate (% pre-tax profit) 28 33 31 28 26 21 20 20 19Normalised ROAA 1.83 1.84 1.93 2.12 2.50 2.88 2.70 2.76 2.85Equity/Assets (%) 10 10 9 10 10 12 12 13 13Normalised ROAE 18.28 18.06 20.36 22.11 24.37 24.12 22.22 21.76 21.78

Reported ROAA 1.83 1.89 1.93 2.12 2.67 2.95 2.70 2.76 2.85Reported ROAE 18.28 18.54 20.36 22.11 26.03 24.67 22.22 21.76 21.78

We expect stronger underlying earnings growth in the next two years due to stable NIMs and slower operating cost growth

We assume stable NIMs and asset quality and lower cost ratios in next two years


38

Steady asset growth

We expect aggregate loans of the five major banks in Indonesia to grow by 20% p.a. in FY13-14F (same as in FY12F) or slightly slower vs. 22.5% CAGR achieved in 2001-11. Although banking system loans grew by 22.8% y-y as of October 2012, we expect loan growth to moderate towards year-end given the high base in 2H11 and slowing growth of consumer auto loans. The October loan growth has decelerated in comparison to 26.1% y-y in May. Corporate loans, particularly investment loans, and home mortgage loans, remain the fastest growing loan segments this year with growth of 30% y-y and 22% y-y, respectively, as of October 2012. In comparison, micro-credit and SME loans grew by only 11% y-y and 14% y-y, respectively.

We assume aggregate deposits of the five banks to grow by 14% p.a. in FY12-14F – this is more or less in line with Indonesia’s expected nominal GDP growth. We believe this is a conservative assumption given that deposits in the banking system grew at 20% y-y during most of the past two years (October 2012: +18.9% y-y), hence potential upside to our earnings forecasts should deposit growth remain strong in the next two years. Fig. 59: Top-5 banks: Loan growth and LDR (% y-y)


Fig. 60: Top-5 banks: Deposit vs. nominal GDP growth (% y-y)


Potential NIMs recovery

We forecast a slight recovery in aggregate NIMs of the five major banks in FY13-14F on the back of higher interest rates, rising LDRs and improving loan mix as banks strive to grow retail loans at a faster pace than corporate loans. In the past three years, NIMs in the sector has been trending down due to declining interest rates and sovereign yields and rising competition in SME and micro lending, which has pressured NIMs of high margin mass-market lenders such as BRI and Danamon.

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We assume loan growth of 20% p.a. for the five major banks in FY13-14F vs. 21% in FY12F

Our deposit growth assumption of 14% appears conservative given 20% growth sustained in the past two years


39

Fig. 61: Top-5 banks: Trend of quarterly NIMs (% pa)


Fig. 62: Top-5 banks: Trend of quarterly ROAA and ROAE (% pa)


We expect a trend reversal in interest rates, due to monetary policy tightening, as evident in rising interbank rates in recent months, to benefit corporate lenders with strong deposit franchise such as BCA, Mandiri and BNI. This, coupled with their loan mix shift towards more retail loans, should give scope for these banks to slightly improve NIMs in the next two years. Meanwhile, we expect NIMs for mass-market lenders such as BRI and Danamon, which has been under pressure due to rising competition, to be relatively more stable in the coming years.

Slowing operating expense growth

We forecast operating expense growth for the five banks to slow in the next two years, following strong growth in FY11 (+20.1%) and FY10 (+17.7%) on the back of rising investments in network infrastructure and human resources by some banks in recent years, most notably Mandiri, BNI and BRI. While we expect these banks to continue making significant investments in the coming years, we expect the pace of growth to be decelerating.

For example, Mandiri expanded its branch network and micro outlets to 1,537 and 1,941 units, respectively, as of December 2011, from 1,095 and 800 units, respectively, at the end of 2009. Although the bank plans to add 200 new micro outlets p.a. in 2012-14, we believe its network growth will be slower vs. the previous two years. BRI expanded its micro outlets from 4,755 to 6,153 units during the same period and have plans to maintain the pace of expansions in the next few years.

Our earnings forecasts imply aggregate cost/asset ratios of the five banks to improve to 3.6% in FY14F, from 3.9% in FY11, and cost/income ratios to 46.7%, from 48.7%, during the same period. The improved cost ratios are expected on the back of higher economies of scale and a slight uptick in NIMs for the five banks in our coverage.

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Scope for corporate lenders to improve NIMs given rising rates and stronger growth of retail loans

We forecast slower growth of operating expenses in next two years after strong growth in prior years


40

Fig. 63: Top-5 banks: Operating expense growth (% y-y)


Fig. 64: Top-5 banks: Operating cost ratios (% of average assets)


Sustained strong asset quality

We expect the five major banks to maintain asset quality in the coming years, following significant improvement seen in recent years. We forecast aggregate overall provisions, net of recoveries, to increase marginally to 52bps in FY13F and 56bps in FY14F, from 44-48bps in FY11-12F, on the back of improvements in credit underwriting standards and still robust economic growth in the country and still significant loan recovery potential. Asset quality improvements and adoption of IFRS international accounting standards had led to a steep decline in aggregate provisions for the five banks by 30% and 35% in FY10 and FY11, respectively. This, coupled with lower corporate tax rates, has been the key drivers for the sector’s strong earnings growth of 43% and 31%, respectively, during this period.

As shown in the chart below, aggregate net provisions (after recoveries) for the five banks declined to 70bps (annualized) in 3Q12, from over 200bps in the years prior to 2010. We believe this is a normalized provisioning level for the aggregate five banks in our coverage under the new IFRS accounting standards, which we expect to be largely sustained in the coming years assuming stable asset quality, which is reflected in the decelerating pace of new NPL formation in the past two years.

NPL recovery upside potential due to recent constitutional court ruling Aggregate loan recoveries for the five major banks was 67bps (annualized) in 3Q12 and averaged 82bps in the past four quarters, as shown in the following chart. However, we expect there is scope for increased loan recoveries in the coming years in light of recent constitutional court ruling, which supported loan recovery efforts at state-owned banks by allowing debt principal reductions (which are normal practice at private banks).

We believe Mandiri and BNI are the two key beneficiaries of this ruling given their significant exposures to written-off NPLs, which amounted to IDR32tn and IDR24tn, respectively, as of September 2012 or equivalent to 46% and 58%, respectively, of reported equity capital of these two banks as of September 2012. Not all of these written-off NPLs are backed by significant collateral. We estimate Mandiri and BNI may be able to get some recoveries from only IDR22tn and IDR15tn of their total written-off NPLs, respectively, with a recovery rate of perhaps around 20-30%.

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We expect stable asset quality and credit costs to remain low in coming years

Net provisions declined to 70bps in 3Q12, from >200bps prior to 2010

NPL recovery upside potential due to recent constitutional court ruling

Mandiri and BNI are the two key beneficiaries from recoveries of legacy NPLs, in our view


41

Fig. 65: Top-5 banks: Trend of provisions, net of recoveries (% of average loans)


Fig. 66: Top-5 banks: New NPLs vs. loan recoveries (% of average loans)


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Coal

COAL

EQUITY RESEARCH

Outlook 2013

Our sector focus on quality remains

January 8, 2013

Some light at the end of the tunnel Two major indicators, in our view, suggest that the worst in the coal market is already over: 1) coal inventory in China’s power sector is now 22 days, down from the highest level of 31 days in October 2012; and 2) the coal price is now back to USD90-95/ton after falling to as low as below USD80/ton in October 2012. We think that the pickup in some economic activities in China and supply cuts by small mines have helped the coal market recovery.

Supply disciplines remain the central theme in 1H13 We are of the view that supply disciplines remain the main driver for stabilizing coal prices at USD90-95/ton in 1H13 given no expected strong global economic activity. We forecast coal prices to start moving up to ~USD100/ton in 2H13 on better demand.

Declining earnings in 2013F: priced in We think the sector (ex-BUMI) average EPS growth of -7.9% in 2013F is priced in. The focus should be on: 1) potential cost reductions, which we have not fully factored in; and 2) potential coal price recovery.

Focus on quality remains ADRO remains our top pick in the sector due to its operational track record, growth and management. ITMG potentially offers high dividend yield and good corporate governance, despite production growth limitation. Meanwhile, PTBA’s mid-to-long term production growth looks attractive.

Fig. 67: Valuations and recommendations of Indonesian coal stocks

* closing prices as of Jan 2; ** normalized PER for HRUM. Note: our TP for ADRO is under review; # TP under review

Source: Bloomberg and Nomura research

Anchor themes

We expect coal prices to stabilize at USD90-95/ton in 1H12, and start picking up in 2H13

Nomura vs consensus

Nomura 2013F earnings forecasts are ~22% lower than consensus

Research analysts

Indonesia Metals & Mining

Isnaputra Iskandar, CFA - PTNI [email protected] +62 21 2991 3346

Price* TP

Stock Rating (IDR) (IDR) PER (x) EV/EBITDA (x) PBV (x) Yield ROE

ADRO Buy 1,740 1,900# 16.0 7.0 2.2 2.1% 14.2%

BUMI Neutral 620 840# 49.3 6.9 1.6 0.1% 3.3%

HRUM** Neutral 6,600 6,400 11.4 7.3 4.5 2.2% 33.8%

INDY Neutral 1,570 2,000# 7.1 2.9 0.9 0.9% 13.8%

ITMG Neutral 42,150 40,000 14.7 8.7 4.8 6.5% 32.9%

PTBA Neutral 16,550 18,000 14.6 9.9 3.6 3.9% 26.0%

Average (ex-BUMI) 12.8 7.2 3.2 3.1% 24.1%

2013F


Nomura | Coal January 8, 2013

43

Fig. 68: China inventory days in declining trend

Source: SXCOAL and Nomura research

Fig. 69: Coal price stabilizing at USD90-95/ton

Source: Platts, Nomura research

Fig. 70: Flat export from Indonesia should support coal price

Source: Ministry of Energy and Mineral Resources, Indonesia Coal Mining Association and Nomura research

Fig. 71: Loss-making operations to support coal price

Source: WoodMackenzie and Nomura research

Fig. 72: Nomura coal price assumptions


Fig. 73: Net gearing as of 30 September 2012

Source: Company data and Nomura research

1012141618202224262830

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ITMG PTBA HRUM INDY ADRO BUMI

Consumer

CONSUMER RELATED

EQUITY RESEARCH

Outlook 2013

Signs of rising competition are increasingly visible; prefer strong brands

January 8, 2013

Action: Still prefer the double “B” – Branding and Barriers to entry While we expect the overall Indonesia consumer sector to continue to grow strongly, we anticipate rising competition to cap margins, especially in discretionary. Hence, we like companies with strong branding/ positioning for better pricing power and those in industries that have high barriers to entry, which could help cushion the impacts of intensifying competition.

Competition in Indonesia’s consumer sector is emerging Competition in Indonesia’s consumer sector is heating up as, we believe, many players lured by market size (we expect 150mn people to enter the middle class by 2014F) and growth (GDP growth of 6.3% in 1H12) are poised to enter the sector in the next 1-2 years. Existing players are also aggressively expanding to capture growth and strengthen their foothold.

Catalyst: Demand for higher living standards by the middle class Considering Indonesia’s rising middle class and increased focus on improving living standards, we expect education and healthcare to continue to improve in Indonesia. We believe demand for convenience in everyday consumption and purchasing will also increase.

Top Picks: Astra Int’l, Indomobil, Gudang Garam and Kalbe Our top picks are Astra Int’l (TP based on 17x FY13F P/E), Indomobil (18x FY13F P/E), G. Garam (20x FY13F P/E), and Kalbe (27x FY13F PE).

Fig. 74: Stocks for action

Source: Nomura research. Note: As per closing of 2 Jan 2012

Anchor themes

We remain positive on Indonesia's long-term consumption growth, but are wary that rising competition may affect earnings performance. We note, however, the intensity of competition varies across sub-sectors and prefer companies with strong branding or effective product placements.

Nomura vs consensus

We are more bullish than consensus on our Top Picks, while more cautious on the impact from competition.

Research analysts

Indonesia Consumer Related

Janni Asman - PTNI [email protected] +62 21 2991 3345


Stock Price Rec

PER 13F (x)

PER 14F (x)



PB 13F (x)

ROE 13F (%)

EV/EBITDA 13F

DVD yield

13F (%) TP Ticker

Astra Int'l 7,500 Buy 13.7 11.6 16.4 17.5 3.7 29.4 9.7 3.7 9,500 ASII IJ

Indomobil 5,300 Buy 11.0 8.4 38.3 31.0 2.3 22.2 11.1 1.8 8,500 IMAS IJ

G.Garam 55,500 Buy 16.8 15.3 45.8 9.8 3.5 22.0 11.3 2.4 67,500 GGRM IJ

ICBP 8,000 Buy 19.3 17.0 6.1 13.7 3.5 19.4 11.3 2.1 9,500 ICBP IJ

Indofood 5,800 Neutral 13.6 12.5 9.6 8.3 2.1 16.5 4.6 2.9 6,050 INDF IJ

Mayora 19,750 Buy 17.8 13.7 22.7 29.5 4.1 25.7 11.0 1.1 27,000 MYOR IJ

Unilever 21,850 Reduce 31.3 28.6 9.9 9.6 36.3 119.0 22.0 3.2 17,200 UNVR IJ

Kalbe 1,040 Buy 25.1 21.6 20.0 16.3 6.1 27.8 2.8 3.0 1,200 KLBF IJ

Ace 820 Neutral 3.2 2.7 24.6 20.8 0.7 25.5 1.3 4.6 620 ACES IJ

MAP 6,550 Neutral 21.5 18.2 21.6 18.3 4.2 21.3 7.4 0.7 7,000 MAPI IJ

Ramayana 1,170 Buy 16.6 13.1 14.8 26.7 2.5 15.6 8.8 3.3 1,800 RALS IJ


Nomura | Consumer January 8, 2013

45

It’s getting hot here We expect rising competition to put a cap on companies’ margins; hence, we prefer companies with good branding and those in segments that have high entry barriers for better margin resilience.

Competition shows early signs of intensifying

Recent robust economic growth (GDP growth of 6.4% in 1H12 as per Indonesia Statistics data) in Indonesia, the fourth most populous country in the world (~237mn as per the 2010 National Census) has lured many new players to the consumer sector and, we understand, many new players have taken early steps to prepare for an entry in the next one to two years, while existing players are expanding to capture growth and strengthen their foothold.

In the retail segment, we believe rising competition has also led to a shift in pricing power to landlords. Thus, we expect some pressure on middle- to upper-middle retailers, given their high dependence on malls and growing demand for locations suitable for their targeted customers.

Although we expect strong growth in consumption to continue, we note that increased competition may put a cap on companies’ margins. Hence, we prefer companies with a strong branding/ good positioning for pricing power as well as those in segments that have high entry barriers.

Fig. 75: Consumer companies competitive edge in facing rising competition

Company Pricing power Cost pressure Competition Demand escalation Regulatory risk Ticker

Astra Int'l High Low High High Low ASII IJ

Indomobil Medium Low High High Low IMAS IJ

G. Garam High Medium Low Low High GGRM IJ

ICBP High High Low Low Low ICBP IJ

Indofood Medium Medium Medium Medium Low INDF IJ

Mayora Low High High High Low MYOR IJ

Unilever High High High Medium Low UNVR IJ

Kalbe High Medium Medium High High KLBF IJ

Ace High Medium Medium High Low ACES IJ

MAP High High Medium High Low MAPI IJ

Ramayana Medium Low Low Medium Low RALS IJ



46

Fig. 76: Jabodebek* leased retail supply and occupancy

Source: Bank Indonesia, Nomura research

* Jabodebek covers Jakarta, Bogor, Depok, and Bekasi (parts of Greater Jakarta).

Fig. 77: Banten* leased retail supply and occupancy

Source: Bank Indonesia, Nomura research

* Banten covers Tangerang, Serang, and Cilegon.

Still upgrading

We expect Indonesia’s booming economy to continue to raise the number of middle class households, and estimate Indonesia’s middle class population to reach 150mn by 2014F. Growing disposable incomes and improvement in education should also lead to further growth in discretionary consumption, including healthcare, in our view.

The launch of National Social Security in 2014 is aimed to widen the access to healthcare services and products to a larger population, as currently some have no access to healthcare. According to data from the Ministry of Health, Indonesia’s bed-to-population ratio is 51 beds for every 100,000 people, which is relatively low, compared with the world average of 294 beds, as per World Bank data.

We expect stronger demand for convenience in everyday consumption and purchasing to lead to further growth in modern trade. In fact, the trend is already visible, with the share of modern trade in the past decade having increased from 25% in 2002 to 42% in 2011. We expect more rapid growth in mini-market formats, as they are located closer to customers. The share of mini-market formats in modern trade has grown from 27% in 2004 to 51% in 2010 (as shown in the chart overleaf).

Fig. 78: Indonesia – HDI growth vs. other emerging countries

Source: United Nations Development Programme, Nomura research

Notes: HDI is a composite index measuring the average achievement in three basic dimensions of human development—a long and healthy life, knowledge and a decent standard of living. The countries are all in the medium human development category except for Mexico, Malaysia and Brazil.

Fig. 79: Indonesia – Revenue of top-five consumer companies


Note: The figures reflect aggregated revenue from Top-5 consumer companies. Companies are Unilever, Gudang Garam, ICBP, Kalbe Farma, and Mayora. For ICBP financials prior to 2007, CBP segment revenues from Indofood were used instead.

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Fig. 80: Indonesia – modern trade contribution trend

Source: Nielsen Retail and Shoppers Trend AsiaPac, Company data, Nomura research

Fig. 81: Indonesia – modern markets’ market share (by type)

Source: Nielsen Retail and Shoppers Trend AsiaPac, company data, Nomura research

Note: *Preliminary number for 2010

Our Top Picks

We like Astra Int’l and Indomobil in the Indonesia consumer space, and expect both to continue to benefit from the continued increase in discretionary consumption, including automotive. We also have Gudang Garam as a top pick. Gudang Garam’s possible margin improvement on likely easing cost pressure in 2H12F and 2013F are potential positive catalysts. Fig. 82: Indonesia consumer companies valuation

Company Price Rec PER 13F (x)

PER 14F (x)

Net profit

growth 13F (%)

Net profit

growth 14F (%)

PB 13F (x)

ROE 13F (%)

EV/EBITDA

13F

DVD yield

13F (%) TP

Net DTE 13F (%)

Ticker

Consumer 16.9 14.7 18.6 15.3 4.3 25.5 2.9

Astra International 7,500 Buy 13.7 11.6 16.4 17.5 3.7 29.4 9.7 3.7 9,500 43 ASII IJ

Indomobil 5,300 Buy 11.0 8.4 38.3 31.0 2.3 22.2 11.1 1.8 8,500 64 IMAS IJ

Gudang Garam 55,500 Buy 16.8 15.3 45.8 9.8 3.5 22.0 11.3 2.4 67,500 12 GGRM IJ

Indofood CBP 8,000 Buy 19.3 17.0 6.1 13.7 3.5 19.4 11.3 2.1 9,500 net cash ICBP IJ

Indofood 5,800 Neutral 13.6 12.5 9.6 8.3 2.1 16.5 4.6 2.9 6,050 net cash INDF IJ

Mayora 19,750 Buy 17.8 13.7 22.7 29.5 4.1 25.7 11.0 1.1 27,000 98 MYOR IJ

Unilever 21,850 Reduce 31.3 28.6 9.9 9.6 36.3 119.0 22.0 3.2 17,200 9 UNVR IJ

Kalbe Farma 1,040 Buy 25.1 21.6 20.0 16.3 6.1 27.8 2.8 3.0 1,200 net cash KLBF IJ

Ace Hardware 820 Neutral 3.2 2.7 24.6 20.8 0.7 25.5 1.3 4.6 620 net cash ACES IJ

Mitra Adiperkasa 6,550 Neutral 21.5 18.2 21.6 18.3 4.2 21.3 7.4 0.7 7,000 70 MAPI IJ

Ramayana 1,170 Buy 16.6 13.1 14.8 26.7 2.5 15.6 8.8 3.3 1,800 net cash RALS IJ


Note: As per 2 Jan 2012 closing

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48

Automotive While competition is likely to intensify on expanded market size, we remain bullish on the sector and prefer names with market-leading positions and those that are able to gain market share.

Wilianto Ie - PTNI [email protected]

+62 21 2991 3341

Low penetration likely to set base for long-term growth

Car sales in Indonesia continue to hit new highs, despite the government’s efforts to tighten underwriting standards for car loans through higher down-payment requirements (ie, loan-to-value [LTV] regulation). We believe car sales in Indonesia are poised for sustainable strong growth in the long term, driven by the country’s low car ownership rate, rising affordability and a young population. In our view, the best-positioned players in this market are those companies with a strong commitment to invest and develop products that suit Indonesian consumer lifestyles.

Despite strong car sales growth in the last few years (2006-11 CAGR: 23%), car ownership in Indonesia is still low at 3.5% (35 cars/1,000 people), thus implying potential for continuous growth ahead. Rising incomes, strong economic growth (GDP growth of 6.4% in 1H12), a relatively low interest rate environment (the current Bank Indonesia rate of 5.75% is near a 10-year low), and high availability of consumer financing facilities have been the key demand drivers.

Fig. 83: Indonesia – domestic car sales (monthly)

Source: The Association of Indonesia Automotive Industries, Nomura research

Competition to intensify as market size expands

The fast-growing Indonesia automotive market is attracting competition. While many brands are trying to increase their presence in Indonesia and have launched new products, opened new dealerships and are investing to ramp-up production capacity, competition in the automotive sector continues to intensify as market size expands. With intensifying marketing campaigns and the introduction of new products to complete product line-ups, especially in the high-volume segment, we believe automakers’ commitment to this market is also on the rise with several car producers announcing new investments to either expand production capacity or increase local content.

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49

The upcoming Low-Cost Green Car (LCGC)

LCGC refers to small-engine cars (700-1,200cc) that will be priced at less than IDR100mn per unit (USD10,000). For comparison, the price of Indonesia’s current best-selling car is around USD16,000 per unit. The LCGC is required to have high fuel efficiency of 20-22km/litre, while the current average of best-selling cars is around 12km/litre.

Four automakers – Nissan, Toyota/Daihatsu, Suzuki and Honda – have obtained the required licenses/approvals to produce LCGCs, but the actual launch of LCGCs is still pending the issuance of government regulations that will waive or reduce the luxury tax imposed on LCGCs to bring selling prices down.

To participate in the LCGC business, automakers need to have a strong investment commitment in Indonesia. We believe the high local-content requirement should serve as a barrier to entry for new competitors that do not have a strong manufacturing base in Indonesia.

The introduction of LCGCs in Indonesia should change the market share outlook, in our view, as we estimate Toyota/Daihatsu is likely to lose some market share [38% (Toyota) and 15% (Daihatsu) in 1H12]. We believe it is unlikely for Toyota/Daihatsu to be able to maintain their strong dominance in the LCGC market, given that the four producers are slated to launch their products within 12 months in the new market segment. We note that Toyota/Daihatsu required very long (ie, more than five years) lead times when they launched their two best-selling products (Toyota Kijang and Toyota Avanza/Daihatsu Xenia) that have allowed them to dominate the Indonesian automotive market.

Motorcycles – dominated by Honda and Yamaha

Motorcycles remain one of the cheapest and most efficient modes of transportation in Indonesia. Poor public transportation infrastructure has led to continued robust demand for motorcycles as it pushes commuters to buy motorcycles as soon as one can afford a down payment (monthly installments are less of a concern, since the cost of taking a bus/taxi to work would make up for it, in our view).

However, the recently implemented LTV regulation has had a negative impact on motorcycle sales, which declined ~22% y-y (+7% m-m) in Jul12, a step down from the already weakening motorcycle sales trend of the past few months.

The impact of the LTV regulation is fully reflected in the motorcycle market because of the weaker purchasing/saving power of customers in this segment, in our view. We estimate sales volumes to have bottomed in Aug/Sep 2012 before bouncing back to 10-15% below the original trend line. This shift to lower potential volume is structural, in our view.

Competition is tight in the motorcycles business but remains relatively consolidated, with Honda and Yamaha comprising ~90% of the market. Going forward, we expect limited change in market share distribution, with the two names likely to remain major players in Indonesia’s motorcycle market.


50

Fig. 84: Indonesia – domestic motorcycle sales (monthly)

Source: Indonesian Motorcycle Industry Association; Nomura research

We like Astra International and Indomobil Astra International is the best proxy for the Indonesia automotive market, in our view, with a 56% market share in 1H12, based on The Association of Indonesia Automotive Industries data. Astra is the sole distributor of Toyota, Daihatsu, Isuzu, UD Trucks and Peugeot brands. It is also an authorised dealer for BMW in the country. Indonesia’s other listed automotive company, Indomobil, distributes Nissans in the country. Our target price of IDR9,500 is based on a P/E of 15x our FY14F EPS of IDR644, which implies 4.1x P/B in 2014F and is in line with our forward NAV per share estimate of IDR9,400. Risks that may impede the achievement of our target price include a negative impact from competition, government regulatory intervention and a major slowdown in Indonesia’s GDP growth (includes any potential impact from global macro economic shocks).

In our view, Indomobil is an attractive stock for investors looking for a high growth profile and a challenger to the dominance of Astra Intl. Nissan’s market share in Indonesia has risen from 1.3% in 2006 to 6.4% in 1H12; it is investing USD400mn in Indonesia to expand its production capacity and increase local content, as per the company. Our TP of IDR8,500 is based on a P/E multiple of 17.7x FY13F, a slight premium to peer Astra International (15x FY13F), which we view as justified by Indomobil's stronger earnings CAGR of 29% in 2011-2014F (vs. 16% of Astra International). Risks that may impede the achievement of the target price: a deep economic recession globally or a collapse in commodity prices could slow Indonesia’s GDP growth and rural income, thus representing a potential downside risk to Indomobil's sales. Regulatory changes and natural disasters could also work against the interest of Indomobil.

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Infrastructure

CONSTRUCTION MATERIALS

EQUITY RESEARCH

Outlook 2013

Projects start getting realized, leading to growth and improved profitability

January 8, 2013

Maintain positive view on infrastructure sector We continue to favour infrastructure stocks as we think infra spending growth will sustain and corporate earnings growth would also benefit from improved profitability. We are of the view that infra spending in the country will continue to grow in the run-up to the election year, supported by (i) implementation of land acquisition regulation; (ii) higher budget for infra spending and, more importantly, improving realisation rates; and (iii) low interest rates and a favorable lending environment.

Sector implications We expect more commencement of new project developments that should benefit the construction sector. Demand for cement should remain robust, and companies with new capacity will likely benefit from higher capacity and better profitability. Toll road operators stand to benefit from higher tariffs and traffic, while Jasa Marga may start to enjoy additional revenue contribution from new project completion.

Our stock selections: JSMR, SMGR and INTP We retain our top sector picks: Jasa Marga, Semen Gresik and Indocement. Despite Jasa Marga’s high valuation relative to regional peers, we think completion of new toll roads should help investors appreciate the company’s growth prospects. We also expect Gresik to continue to enjoy market share gains as a result of the completion of its capacity expansion programme. We look for INTP’s relatively sustained profitability given price increases that negates cost increases.

Risks Key downside risks for the infra sector include macro risks such as economic slowdown, higher interest rates, exchange rate volatility and budget shortfall. Fig. 85: Summary of valuations

Source: Bloomberg, Nomura estimates. Note: Share prices are as of 2 January 2012.

Anchor themes

The infrastructure sector is one of the main growth engines for Indonesia's economy, driven by higher government infra spending and supported by recent passage of land acquisition regulation and a favourable lending environment.

Nomura vs consensus

Infrastructure is one of our favoured sectors in Indonesia. Our forecasts/TPs for stocks under coverage in the sector are 5% higher than Bloomberg consensus, on average.

Research analysts

Indonesia Basic Materials

Andy Lesmana, CFA - PTNI [email protected] +62 21 2991 3344

Indonesia Transport


Indonesia engineering and construction


Company

Infrastructure

Indocement Tunggal Perkasa

Holcim Indonesia

Semen Gresik

Wijaya Karya

Krakatau Steel

Jasa Marga

AKR Corporindo

Simple average

Aggregate

PriceMkt Cap

(USD mn)Avg 3M

(USD mn) Rec PER

12F (x)PER

13F (x)

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growth 12F (%)


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ROE 12F (%)

EV/EBIT

DA 12F

DVD yield 12F (%)

18.5 15.9 10.8 16.6 3.8 20.7 1.7

21,900 8,359 5.9 Buy 18.1 16.4 23.8 10.7 4.2 25.6 11.4 1.7

2,725 2,165 2.2 Buy 16.4 14.1 19.9 16.4 2.5 16.1 8.3 2.8

15,950 9,809 10.1 Buy 20.1 15.4 19.9 30.9 5.5 29.7 13.9 2.0

1,530 984 3.0 Buy 21.7 15.7 24.2 34.5 3.6 19.0 9.5 1.1

640 1,047 0.7 Neutral 7.3 9.0 159.4 -18.4 0.9 13.6 7.0 1.6

5,550 3,913 4.3 Buy 24.1 21.9 16.9 10.1 4.4 18.6 13.2 1.7

4,125 1,634 4.4 Buy 22.5 17.4 -69.4 30.1 4.1 19.3 14.6 1.5

22.4 17.4 10.1 25.9 4.2 22.1 2.1

271,423 254 16.4 14.0 5.1 16.7 3.3 20.2 2.5


Nomura | Infrastructure January 8, 2013

52

Ready to execute We remain bullish on the infrastructure sector despite the strong share price performance throughout 2012 YTD. We think that momentum for infrastructure development will build leading up to the elections in 2014, given passage of implementation regulation for land acquisition and higher budget allocation for infrastructure spending in 2013F.

Momentum continuing well into upcoming election year 2014

We expect infrastructure spending momentum will continue ahead of the elections in 2014. Historical data suggest that budgeted capital spending continues to increase despite upcoming elections – the capital spending budget in 2008 and 2009 was higher than in previous years, despite the 2009 election year. Some slowdown in revenue growth was seen in 2010, which was primarily due to change in the government cabinet members that had affected revenue recognition of the construction companies.

Fig. 86: Revenue trend of state-owned construction cos Revenues continued to rise in the years preceding and during the 2009 election year


Fig. 87: Trend of WIKA’s order book Order book also continued to flow before, during and after election year 2009

Source: Company data, Nomura estimates

Rising infrastructure spending was apparent in increases in revenues of state-owned construction companies ahead of previous election run-ups (which we see as an indicator of real infrastructure construction works). Revenues of Wijaya Karya, PT Pembangunan Perumahan (PTPP IJ, not rated) and Adhi Karya (ADHI IJ, not rated) – the three listed state-owned construction companies – increased by 26% and 43% in 2007 and 2008, respectively, followed by another 9.1% increase in 2009.

Evidence of such rising momentum is already starting to show, indicated by: (i) recent completion of a tender for expansion of the Jakarta seaport (PTPP was appointed as the main contractor); (ii) development of a dual-track railway to the Jakarta airport that is spearheaded by the Ministry of Transport and state-owned company, PT Sarana Multi Infrastruktur – as showcase for a public private partnership program and will receive government support; (iii) the upcoming tender for the Jakarta monorail and/or MRT; and (iv) ongoing development of a new toll road going to Bali international airport for the APEC meeting hosted by Indonesia in 2013. These are just a few major infrastructure projects that we think will commence construction works starting 2013.

Passage of land acquisition regulation and its implementation should boost infra development and construction We also expect recent passage of the implementation regulation for land acquisition will become effective and be in full implementation on the ground by 2013, which should help amplify infrastructure development and construction works. Recall that the land acquisition law itself was approved by parliament at the end of last year, and the implementation regulation was passed by the government in August this year. This was

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followed up by the national land agency (Badan Pertanahan Nasional or BPN) recently issuing the rules and mechanics of land acquisition for public use.

The new land acquisition law helps provide process and timing certainty for land acquisition that we believe should benefit infrastructure development. The land acquisition law provides that the whole process from socialization to the land rights transfer will be a maximum of 583 days or slightly more than 1.5 years (as compared to some former land acquisition processes that took up to 10 years).

In the implementation regulation, the government further allows some transition period, whereby infrastructure projects that have commenced the land acquisition process would continue to use old law/regulation until 2014, and only then would it be able to use the new law / regulation.

Fig. 88: Summary of key process and timeline for land acquisition process as referred to by the land acquisition bill The law helps provide certainty over process, cost and timing for land acquisition processes intended for development of public facilities including infrastructure

Source: Jasa Marga, Nomura research

2013 budget: more room for infrastructure despite higher subsidy The government is currently in discussions with Parliament on the state draft 2013 budget that was submitted mid-August. The 2013 budget is expected to be approved as a law by the Parliament by November this year.

While our economics team thinks that the draft budget could have been more encouraging, given the proposed higher spending allocation on subsidies compared with capital spending, we still see some silver lining in the budget:

• Higher amount of fuel subsidies in 2013 compared to 2012 should reduce risk of overspending in subsidies (which if it happens, may need to be compensated with a lower budget for infrastructure).

– Total fuel subsidies allocated for the 2013 budget are set at IDR194bn, which is 26.5% higher than the 2012 allocation. Total proposed subsidized fuel volume allocation for 2013 is 46mn kl, which is 4.5% higher than in 2012.

• Despite higher subsidies, the proposed budget allocation for capital spending and infrastructure spending continued to increase in 2013.

• As part of the effort to compensate higher fuel subsidy spending, Parliament has also approved the government’s proposal to increase electricity tariffs by 15% in 2013.

PLANNING PREPARATION104 – 242 working days

IMPLEMENTATION134 – 250 working days

HANDOVER

INITIAL DATA COLLECTION

PUBLICCONSULTATION

LOCATIONSETTLEMENT

INVENTORY, IDENTIFICATION,

APPRAISAL ANNOUNCEMENT

9 workingdays

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AND APPRAISAL

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REPEATED

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NEGOTIATION ON FORM OF

COMPENSATION

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72 work days


54

Fig. 89: Trend of subsidies Allowing more subsidies in the 2013 budget

Source: Ministry of Finance – Government 2013 draft budget; Nomura research

Fig. 90: Trend of infrastructure and capital spending Continues to push for infrastructure spending

Source: Ministry of Finance – Government 2013 draft budget; Nomura research

Favourable lending environment We also believe that the growth in infrastructure spending will be supported by the current favourable lending environment, marked by the low interest rate environment (the current BI policy rate is at an historical low) and banks’ growing appetite for increasing investment loans.

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Sector reviews Within the infrastructure sector, we favour the cement and toll road sector most. Our top picks within the infra sector remain Semen Gresik (SMGR IJ, Buy) and Jasa Marga (JSMR IJ, Buy). We expect Gresik will continue to gain market share on the back of its new capacity, and this should not only help to drive future growth, but also enhance margins due to economic scale efficiency. We expect Jasa Marga’s growth will pick up in 2013F and 2014F on the back of completion of new toll road projects.

Construction materials

Cement We have a positive view on the cement sector and have Buy ratings for all 3 listed cement companies under our coverage, with our top pick being Semen Gresik.

We expect that rising infrastructure spending will aid sustained growth in cement demand not only for infrastructure development but also the multiplier effect into property development (which has traditionally been the main purpose of cement consumption).

Up to 9M12, domestic cement consumption has increased by 15% y-y, higher than last year’s only 12.5%, largely due to companies ramping up utilization rates and some additional production capacity mainly from Semen Gresik, coming on stream. However, based on data from Semen Gresik, no other cement players are adding new capacity this year, except Semen Gresik. As a result, given strong demand and limited supply capacity, cement prices have been steadily increasing by an average of 5% over the year.

The cement companies will also likely benefit from lower coal prices, in our view, which represent 25-30% of their production costs, although this will likely be partially offset by the impact of higher fuel cost (that affects transportation and distribution costs, representing 15% of operating costs) for some cement companies.

Specific to Semen Gresik, the company has been gaining market share in the last two months as a result of the contribution from some 2.5mn tons of new capacity that commenced full operation mid-year. Another 2.5mn tons of new capacity is also expected to come on stream in 4Q12 and that should help provide a further boost to sales volume and market share gains, in our view.

Fig. 91: Trend of domestic cement sales Domestic cement sales continues to grow

Source: Indonesia cement association, Nomura research

Fig. 92: Trend of domestic market share Gresik sustained its trend of gaining market share in 2H12

Source: Indonesia cement association, Nomura research

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56

Steel Contrary to the cement sector, although the steel sector has benefited from rising domestic demand due to strength in the automotive and property sector, we expect local upstream players such as Krakatau Steel (KRAS IJ, Neutral) will likely continue to suffer from import competition and the resulting decline in selling price.

In particular, for Krakatau Steel, although iron ore prices have started to fall, hot-rolled coil (HRC) and cold-rolled coil (CRC) selling prices have also declined at a faster rate; thus, the operational challenges continue to add up with limited supply of gas (both for KRAS’ power plant and steel plant) and higher gas prices.

Nonetheless, expansion and operation revitalization programs continue to progress. KRAS’s iron-making project (in a JV with Aneka Tambang (ANTM IJ, not rated)), along with its steel slab plant and hot strip mill expansion that will increase capacity by 15-20%, are expected to be completed at the end of this year.

Toll road Toll road is one of our favoured sectors within the infrastructure space. Growth for toll road companies in our view will likely come not only from inflation-based tariff adjustments that are regularly done every two years, but also from car sales growth, which continues to reach new highs month by month. We think toll traffic growth could give the sector potential upside surprise.

In particular for Jasa Marga, while growth in 2012F will likely remain driven by tariff adjustments (most of Jasa Marga’s toll roads had tariff adjustments at end of 2011) and traffic growth, 2013F growth will also likely be driven by completion of new toll roads.

Fig. 93: Trend of monthly toll traffic and car sales Traffic growth has moved in tandem with car sales volume

Source: Jasa Marga; Indonesia auto sales / dealer association (Gaikindo); Nomura research

Fig. 94: Length of toll roads managed by JSMR Some 190 km of new toll roads to be added in the next three years

Source: Company data; Nomura estimates

Jasa Marga’s toll road length is expected to increase by 10% in 2013F, but equally important is the higher tariff per km of these new toll roads that should contribute to growth.

Construction We believe the growth prospects of the construction sector will become more attractive in 2013F, driven primarily by rising infrastructure development. The construction companies are likely to be early beneficiaries when infrastructure project construction commences, which we expect to pick up in 2013 given proposed budget spending.

Within the sector, Wijaya Karya (WIKA IJ, Buy) is our favoured play. Infrastructure development should benefit company’s construction business and concrete manufacturing operation, which controls 60% of local market share. In addition, we believe future earnings will also be supported by increasing revenue contribution from power plants (which is more stable compared to construction revenue) and the property business, which commands higher margins than the construction business. As a result,

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we expect WIKA’s gross margin to improve from its historical average of 10% to 13% in 2012F.

Fuel distribution We also think that Indonesia’s energy infrastructure business, primarily the fuel distribution business conducted by AKR Corporindo (AKRA IJ, Buy), will also be an attractive long-term play in the infrastructure sector. We expect the company to benefit from ongoing deregulation of the fuel distribution business that will allow: (i) an increasing role of private players, including foreign companies, in domestic fuel distribution (particularly non-subsidized fuel); and (ii) government adjustments to subsidized fuel prices, which would close the gap with non-subsidized fuel prices.

Plantations

AGRI-RELATED

EQUITY RESEARCH

Outlook 2013

Supply/demand still in favour, stock prices look interesting

January 8, 2013

Eyes on the S/U The latest supply and demand estimates for various vegetable oils by USDA still point towards a sharp move upwards for palm oil from current levels, although in our view, they do deflate the case for very high palm oil prices (~RM4,000/mt). We expect seasonal variance for palm and soy production, along with the already existing tightness in oilseed supply, to be constructive for palm prices and plantation stocks in the next five months.

Changes likely in 2013F Whilst the minimum wage increase is substantial, our analysis suggests the incremental impact on plantations’ cost of production vs our previous expectations is actually quite minimal. Fertiliser cost pressure is unlikely to increase, and may even ease. Changes in regulations related to foreign ownership and maximum acreage may increase the value of existing plantation assets.

Interesting stock prices Under the very pessimistic scenario of CPO prices remaining where they are (~RM2,100/mt) in perpetuity, there seems to be real value in LSIP. A more reasonable and realistic scenario with a mid-cycle CPO price of ~RM2,800/mt also points to value in AALI, LSIP and SIMP which are offering FCFE yields of 2%-4% above the RFR. Fig. 95: Valuations

Source: Bloomberg; Pricing as on 2 January, 2013

Anchor themes

We expect a tightening vegetable oil supply/demand balance to help push CPO prices to an average of MYR3,600/mt for 2013F.

Nomura vs consensus

Our 2013F CPO price estimate is 20% ahead of consensus.

Research analysts

ASEAN Agri-Related

Muzhafar Mukhtar, CFA - NSM [email protected] +60 3 2027 6891

Archit Singhal - NSFSPL [email protected] +91 22 672 35537

Company Price

Mkt Cap (USD

mn)Avg 3M

(USD mn) Rec PER

13F (x)PER

14F (x)

Net profit

growth 13F (%)

Net profit

growth 14F (%)

PB 13F (x)

ROE 13F (%)

EV/EBITDA

13F

DVD yield

13F (%)

Plantation 8.4 7.7 75.1 9.9 1.9 22.7 3.0

Astra Agro Lestari 20,050 3,274 1.8 Buy 9.0 9.1 70.4 -1.7 2.8 35.0 5.5 4.0

BW Plantation 1,390 582 2.1 Buy 9.0 6.2 88.9 45.4 2.5 31.6 8.0 1.1

Gozco Plantations 205 128 0.1 Neutral 6.4 4.7 88.1 34.8 0.7 11.5 6.6 1.7

PP London Sumatra 2,425 1,715 3.5 Buy 9.0 8.0 39.2 12.0 2.1 25.8 5.1 3.2

Salim Ivomas Pratama 1,230 2,017 0.9 Buy 7.4 6.5 117.6 13.6 1.2 17.9 3.6 2.5

Simple average 17.4 11.6 26.7 48.5 3.7 22.9 2.3

Aggregate 271,423 254 13.9 11.7 16.4 19.0 2.9 20.7 2.8


Nomura | Plantations January 8, 2013

59

Plantations outlook: 2013F

Supply-demand outlook

What’s changed? In its latest production estimates revisions, the USDA raised its implied vegetable oils stock/usage ratios for 2013F substantially to 10.3%, from the 7.5% initially expected in Sept’12; this was driven not by lower expectations of consumption or higher production expectations, but adjustments to estimates of existing stocks.

The S/U estimate for oilseeds was also raised, but only slightly; the existing tight supply situation for oilseeds (caused by three successive poor soybean harvests in the Americas within ~1.5yrs) is expected to remain, despite record output from South America in 1H13 already being pencilled in.

So what does that mean for the palm oil price outlook? The much higher S/U estimate definitely deflates the case for very high palm prices, in our view, (~RM4,000/mt), which fell within the range implied by previous estimates. However, the change in S/U from 2012 to 2013 is still expected by the USDA to be quite steep, which implies the swing in prices from current levels will still be relatively big.

Fig. 96: USDA revises its SUR estimate for veg oils upwards USDA's historical 2013F S/U estimates for veg oils & oilseeds indicate a sharp increase in SUR for veg oils esp. during Sep-Dec which is a result of higher estimates of beginning stocks for veg oils 2013F

Source: USDA FAS, Nomura research

Note: All estimates for 2012/13 MY

Fig. 97: Though 2013F still points to a sharp reduction in veg oil stock usage ratio (SUR) resulting in supply tightness Veg oil SUR to fall sharply in 2013F

Source: USDA FAS, Nomura research.

Month Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12

Veg oils

Beg stocks 13.5 13.4 13.5 14.2 15.6 17.0 17.3

Production 157.6 156.8 155.3 154.3 154.2 156.2 156.7

Consumption 155.9 155.6 154.9 154.7 155.1 155.8 155.8

Ending stocks 12.7 11.7 11.4 11.5 12.8 15.3 16.0

Stock usage ratio 8.1% 7.5% 7.4% 7.5% 8.3% 9.8% 10.3%

Oilseeds

Beg stocks 62.9 61.9 61.5 62.7 63.6 65.4 66.2

Production 470.8 465.8 457.3 453.1 457.7 462.1 463.0

Consumption 466.0 463.0 455.3 453.1 454.2 457.9 459.2

Ending stocks 65.8 63.1 60.9 60.4 64.0 66.5 66.9

Stock usage ratio 14.1% 13.6% 13.4% 13.3% 14.1% 14.5% 14.6%

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F

Vegetable oils (LHS) Oilseed (RHS)Palm oil (RHS)


60

Fig. 98: The sharp fall in veg oil S/U in 2013F; even factoring in forecasting errors and scatter, can result in a large upswing in CPO prices from current MYR2,100/mt Our CPO price forecast framework

Source: MPOB, IMF, DOSM, USDA, Nomura estimates

Note: Vegetable oil S/U based on FYE Sep. Ave CPO price for FYE Dec

Fig. 99: Large discount of palm to soy oil should further incentivise switching to palm oil Palm-soy oil discount has risen sharply in recent past


Other changes likely in store

Wages Minimum wage in Indonesia in 2013 has been raised 8-49%, depending on the province. Whilst this may seem incredibly concerning at first glance, our analysis suggests that: (1) the net impact on the plantation sector will be much less than the headline numbers suggest, (2) the incremental impact on our profit forecasts are very low, due to the relatively high increase in labour costs per ha we have already built in to account for the existing trend of strong wage inflation in Indonesia.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=579608&appname=GRP&cid=cDZkVXQ2YitsSzQ90

Export taxes & regulations Malaysia’s export tax structure will be altered substantially from 1 Jan 2013; from a situation of effectively zero tax on CPO exports, due to the presence of export-tax-free quotas, the new rules will see crude exports being lightly taxed at 4.5-8.5%, which will basically enable domestic downstream players to procure CPO feedstock at a lower price than their external competitors. Granted this advantage is not permanent as consumer countries can raise the tariffs on refined CPO products to restore the cost competitiveness of their own refiners, but any such moves will effectively raise costs for end consumers, helping to stoke inflation.

Based on recent press releases, the Indonesian government is unlikely to respond to this move, which we see as being more aggressive against refineries in end consumer markets, rather than Indonesian refiners, who will still enjoy a feedstock cost advantage vs Malaysian counterparts on account of the higher export taxes on Indonesian CPO (plus Indonesia never relied on CPO imports from Malaysia in the first place).

China has also tightened its oversight on food safety, including imports of palm oil; we understand from industry sources that this does not involve changes in the current regulations, simply a stricter implementation of existing standards (eg, free fatty acid content).

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-12

(USD/mt)(%) Palm-soy oil discount (RHS)Palm oil discount to sybean oil (LHS)10 year average = -18.9%




61

Fertiliser After plantations reported seeing fertiliser costs per ha rise 20-25% in 2012, they may see a more beneficial outlook on this front in 2013, especially if natural gas prices in the US fall further on increased shale gas output. Our European Chemicals team expects fertiliser prices to come off ~6% on average in 2013F.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=567720&appname=GRP&cid=WXNmUnhJL1BJbGs90

Foreign ownership and maximum acreage There have been some political rumblings in media articles (Jakarta Globe) about the foreign ownership of plantations in Indonesia, with some officials expressing their opinion that the Indonesian government should restrict foreign ownership in plantation companies and encourage domestic production. It has also been pointed out in media articles (Jakarta Globe) that contradicting laws and decrees need to be reconciled (particularly regarding foreign ownership in and maximum acreage allowed to be held by a plantation). Debate in the DPR has been scheduled for April 2013.

We doubt retrospective action will be taken; if anything, the greater bias towards domestic participation and prevention of monopoly is likely to increase barriers of entry in palm oil, increasing the value of existing plantation assets and making it harder for veg oil supply to grow in the long run.

Infrastructure We expect the government to continue pushing for the acceleration of infrastructure development, and the seaport at Tanjong Priok will not be left behind. The port is embarking on a significant expansion project, costing ~USD2.5bn for the first phase, which will include a deeper draft, allowing ships of larger capacity to call on the port. Tanjung Priok is currently one of four main ports in Indonesia (others: Belawan, Tanjung Perak, Ujung Pandang), handling ~70% of total international cargo, with container traffic growing 23% y/y in 2011. The congested port is currently a key bottleneck in the palm oil supply chain; the expansion will thus likely help to ensure supply security.

Plantation stock prices look interesting

If we were to assume current low prices of ~RM2,100/mt were to be sustained, and only zero-growth capex (ie, replanting and replacement of depreciated equipment) was spent going forward, several names offer substantial FCFE yields above the risk free rate, specifically LSIP in Indonesia and FR and SIME among other regional plantation stocks. Even with a much more reasonable mid-cycle assumption of ~RM2,800/mt, prices still look attractive for AALI, LSIP and SIMP in Indonesia and FR, IFAR, and SIME among other regional stocks which offer FCFE yields of 2%-5% above the RFR.

Fig. 100: CPO: 2800, no growth capex scenario

Source: Bloomberg, Company data, Nomura estimates

CPO assumption TickerMarket cap

(USD mn)FCFE/market

capFCFE yield minus

RFR

2800 AALI IJ 3219 7.6% 2.4%

2800 BWPT IJ 580 4.3% -0.9%

2800 GZCO IJ 125 0.0% -5.2%

2800 LSIP IJ 1629 8.8% 3.6%

2800 SIMP IJ 1888 8.3% 3.1%

2800 GENP MK 2206 3.9% 0.4%

2800 IOI MK 10480 3.8% 0.3%

2800 KLK MK 7649 4.3% 0.8%

2800 SIME MK 18625 7.5% 4.0%

2800 FGV MK 5492 4.7% 1.2%

2800 FR SP 2589 9.6% 4.4%

2800 BAL SP 1530 3.5% -1.7%

2800 IFAR SP 1571 9.4% 4.2%

2800 GGR SP 6872 7.1% 1.9%




62

Fig. 101: CPO: 2100, no growth capex scenario

Source: Bloomberg, Company data, Nomura estimates

Fig. 102: Valuation comparison

Source: Bloomberg estimates for Not rated companies, Nomura estimates for covered companies

Note: Pricing as on 2 Jan, 2013

CPO assumption TickerMarket cap

(USD mn)FCFE/market

capFCFE yield minus

RFR

2100 AALI IJ 3219 4.9% -0.3%

2100 BWPT IJ 580 1.7% -3.5%

2100 GZCO IJ 125 -2.8% -8.0%

2100 LSIP IJ 1629 6.9% 1.7%

2100 SIMP IJ 1888 5.4% 0.2%

2100 GENP MK 2206 2.2% -1.3%

2100 IOI MK 10480 3.2% -0.3%

2100 KLK MK 7649 2.9% -0.6%

2100 SIME MK 18625 7.2% 3.7%

2100 FGV MK 5492 2.9% -0.6%

2100 FR SP 2589 7.3% 2.1%

2100 BAL SP 1530 -0.5% -5.7%

2100 IFAR SP 1571 6.3% 1.1%

2100 GGR SP 6872 5.6% 0.4%

Price TP Upside Mcap 2-yr EPS PEG

Company Ticker Rating LC LC (%) (USDmn) CY12F CY13F CY12F CY13F CAGR CY12F CY12F CY13F

Sime Darby SIME MK Buy 9.46 12.80 35 18,731 1.9 1.6 10.6 8.9 (1.0) n.a 3.4 2.3

IOI Corporation IOI MK Neutral 5.07 5.40 7 10,742 2.2 2.0 13.1 11.2 (11.0) n.a 3.8 4.6

Kuala Lumpur Kepong KLK MK Buy 22.68 29.00 28 7,977 3.2 3.0 22.0 16.8 16.3 1.0 3.4 3.6

Felda Global Ventures FGV MK Neutral 4.61 5.30 15 5,541 2.6 2.3 13.5 10.5 17.9 0.6 1.1 3.6

Genting Plantations GENP MK Neutral 8.97 10.00 11 2,243 2.0 1.8 24.3 14.9 26.2 0.6 1.5 1.6

Kulim Malaysia KUL MK Not rated 4.95 - - 2,092 1.4 1.4 21.2 17.7 16.6 1.1 1.2 1.3

United Plantations UPL MK Not rated 25 - - 1,714 2.4 2.2 15.8 13.8 8.9 1.5 4.8 4.8

Sarawak Oil Palms SOP MK Not rated 5.78 - - 831 2.1 1.9 11.9 12.0 9.8 1.2 0.8 0.6

IJM Plantations IJMP MK Not rated 2.97 - - 785 1.6 1.5 16.5 15.3 (7.1) n.a 3.1 3.1

Tradewinds Plantation TWPB MK Not rated 4.06 - - 708 1.1 1.0 14.0 10.0 23.2 0.4 3.1 4.4

Average (Malaysia) 2.0 1.8 16.2 13.0 10.7 0.9 2.8 3.3

Median (Malaysia) 2.0 1.8 15.1 12.0 16.3 0.9 3.1 3.6

Golden Agri-Resources GGR SP Buy 0.68 0.95 41 7,099 0.8 0.8 13.2 9.3 20.6 0.5 2.4 2.8

First Resources FR SP Buy 2.07 3.80 84 2,686 2.4 1.9 13.3 7.7 42.6 0.2 1.6 2.4

Indofood Agri Resources IFAR SP Buy 1.38 1.70 23 1,621 1.1 1.0 15.5 7.9 47.7 0.2 0.4 0.8

Bumitama Agri BAL SP Buy 1.06 1.40 32 1,526 3.0 2.4 20.0 11.3 57.5 0.2 - 0.7

Kencana Agri KAGR SP Not rated 0.345 - - 324 1.2 1.1 17.7 10.9 n.a. n.a 0.7 1.8

Average (Singapore) 1.7 1.4 15.9 9.4 42.1 0.2 1.0 1.7

Median (Singapore) 1.2 1.1 15.5 9.3 45.1 0.2 0.7 1.8

Astra Agro Lestari AALI IJ Buy 20050 29,000 45 3,272 3.5 2.8 15.3 9.0 29.4 0.3 4.0 4.0

Salim Ivomas Pratama SIMP IJ Buy 1230 1,900 54 2,016 1.4 1.2 17.1 7.7 59.1 0.1 1.7 2.3

London Sumatera LSIP IJ Buy 2425 3,300 36 1,715 2.6 2.1 12.5 9.0 24.8 0.4 4.1 3.2

BW Plantation BWPT IJ Buy 1390 2,100 51 584 3.3 2.5 16.9 9.0 65.7 0.1 1.0 1.1

Sampoerna Agro SGRO IJ Not rated 2700 - - 529 1.9 1.7 13.5 10.2 17.3 0.6 2.9 2.7

Bakrie Sumatera Plantation UNSP IJ Not rated 97 - - 138 0.1 0.1 3.6 3.4 49.1 0.1 3.6 1.0

Gozco Plantations GZCO IJ Neutral 205 230 12 127 0.8 0.7 12.0 6.4 59.3 0.1 0.4 1.7

JA Wattie JAWA IJ Not rated 375 - - 147 1.1 1.0 8.7 8.3 11.5 0.7 3.2 2.7

Average (Indonesia) 1.8 1.5 12.4 7.9 39.5 0.3 2.6 2.3

Median (Indonesia) 1.7 1.5 13.0 8.6 39.3 0.2 3.0 2.5

P/B P/E Div yield

Property

PROPERTY

EQUITY RESEARCH

Outlook 2013

Resilient demand and attractive valuation

January 8, 2013

Action: Maintain our positive view on the sector Total 2Q12 marketing sales of property companies under our coverage grew by 50% y-y. We believe the trend is sustainable, although we also think that it will continue at a more moderate level, supported by Indonesia’s continued robust economic growth and low interest rates.

Expect minimal impact from recent regulations Our discussions with the property companies indicate that impacts of the new LTV regulations are likely to be minimal, partly due to property companies and banks restructuring the down-payment requirement into instalments, and partly because of the ability of customers to meet the 30% down-payment requirement (given most property companies are targeting the higher end of the market).

Catalyst: Development of infrastructure More aggressive development of infrastructure such as toll roads is a potential upside catalyst for the property sector, as it should enhance value and attract demand.

Valuation: Our selections remain CTRA and BSDE We think that future growth will be driven more by volume rather than price increases. As such, we prefer names that are able to drive growth with less dependence on prices increases. We like Ciputra for its strong positioning in the market, reputation, strategy, and growth profile. We also like Bumi Serpong Damai for its attractive valuation; its share price fell recently on market belief of M&A.

Fig. 103: Stocks ratings and valuation

Source: Nomura research. All prices as of 2 January 2013;

Anchor themes

We have a positive view on the Indonesian property sector. We believe demand will remain robust given sustained economic growth and the low interest rates environment. Developments of new infrastructure such as toll roads should help sustain property demand growth and raise value, in our view.

Nomura vs consensus

Our forecasts are largely in line with bloomberg consensus estimates.

Research analysts

Indonesia Property


Company PriceMkt Cap

(USD mn)Avg 3M

(USD mn) Rec PER

12F (x)PER

13F (x)

Net profit growth 12F

(%)

Net profit growth 13F

(%)

PB 12F (x)

ROE 12F (%)

EV/EBIT

DA 12F

DVD yield 12F (%)

Property 19.9 14.9 32.4 34.1 2.5 12.8 0.8

Agung Podomoro 380 808 0.6 Neutral 10.5 9.4 38.3 11.8 1.6 15.8 6.0 2.1

Alam Sutera 610 1,130 4.5 Buy 13.7 11.4 51.0 20.4 3.2 25.8 10.4 0.0

Bumi Serpong Damai 1,110 2,014 4.0 Buy 19.1 15.0 21.2 27.2 2.5 14.0 11.6 1.1

Ciputra Development 800 1,258 1.0 Buy 26.4 13.4 41.5 96.3 2.2 8.7 10.7 0.9

Lippo Karawaci 1,000 2,242 5.6 Buy 25.1 18.4 29.9 36.6 2.4 10.0 15.6 0.6

Summarecon Agung 1,860 1,325 1.3 Buy 32.9 23.0 18.3 42.6 4.8 15.3 17.4 0.8

Simple average 22.4 17.4 10.1 25.9 4.2 22.1 2.1

Aggregate 271,423 254 16.4 14.0 5.1 16.7 3.3 20.2 2.5


Nomura | Property January 8, 2013

64

Volume-driven growth Although Indonesia’s property sector is currently in its third boom year, we argue that it is still in its midway of an up-cycle. Growth continues to be driven by fundamental factors including demographics, economic growth (well across the country), and low interest rates that we expect to continue in the near term. However, we also think that future growth will be more volume-driven than price-driven. As such, we prefer property names with capacity to grow volume such as Ciputra (CTRA IJ, Buy), Bumi Serpong Damai (BSDE IJ, Buy) and Summarecon (SMRA IJ, Buy).

Strong demand throughout the year

Throughout 9M12, demand for property had remained strong. Total quarterly marketing sales of property companies under our coverage on average grew by 60% y-y in the past 2.5 years. With the exception of Ciputra Development, which has benefited from rising property demand from geographically expanding its projects and which has driven its growth mostly by volume, growth for most property companies under our coverage has been driven by price increases.

Fig. 104: Trend of combined quarterly marketing sales 3Q12 marketing sales stagnated largely due to August holiday season


Fig. 105: Trend of companies’ quarterly marketing sales Most companies' marketing sales are on uptrend


In our view, this strong marketing sales trend has been driven by fundamental factors such as sustained economic growth, as well as demographic factors, further supported by a favourable interest rate environment.

A favourable lending environment has also been supportive of strong property demand, in our view, marked by multi-year low interest rates and extended mortgage loan tenure (from an average of 10 years in 2010 to recently as long as 20 years). This has resulted in all-time high outstanding mortgage loans, although such loans only represent 9% of total outstanding loans in the country’s banking sector, according to data from Bank Indonesia.

Expect minimal impact from regulatory changes Mid last year, the government issued new Loan to Value (LTV) regulations aimed at preventing a housing bubble. The LTV ratio is being lowered from 80% to 70% as a precautionary measure to prevent overheating in the property market.

Our discussions with the property companies indicate that impacts of the new LTV regulations are likely to be minimal. As the above charts indicate, subsequent to the passage of LTV regulation, property demand remained stable in 3Q12, and for some companies, marketing sales continued to grow in 3Q12. This is partly due to property companies and banks restructuring the down-payment requirement into instalments, and partly because of the ability of customers to meet the 30% down-payment requirement (given most property companies are targeting the higher end of the market), in our view.

0

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Nomura | Property January 8, 2013

65

Furthermore, based on our discussions with the central bank, we think that the central bank may pause a while from issuing further countercyclical regulation, at least in the short term. The central bank noted that property lending growth has recently slowed from the average of 40% y-y prior to the issue of the new LTV regulation to 25% y-y, which is in line with general loan growth. We would expect that if the central bank were to issue further countercyclical regulation targeted on the property sector, it would be to target potential speculative property purchases, such as a limit on LTV on second home purchases.

Our preferences within the sector

We maintain our positive view on the sector. We are of the view that Indonesia’s economic growth is sustainable, with interest rates likely to remain at low levels, providing support for property demand. More aggressive development of infrastructure such as toll roads is a potential upside catalyst for the property sector, as it should enhance value and attract demand, in our view.

However, we think that future growth will be driven more by volume rather than price increases. As such, we prefer names that are able to drive growth with less dependence on prices increases.

We like Ciputra for its strong positioning in the market, reputation, strategy, and growth profile. We also like Bumi Serpong Damai for its attractive valuation and significant landbank.

Telecoms / Towers

TELECOMS

EQUITY RESEARCH

Outlook 2013

No easy gains

January 8, 2013

Action/ valuation: Expect continued volatility in 2013F Comparing across the region, Indonesian telcos still appear attractive on various metrics – appealing consumer/ telephony demographics, growth driven by current low data penetration, and rising FCF yields. This should continue to bode well on a medium-term view, but as has been the case for many years now, the stocks tend to react a lot more to quarterly trends, which are likely to remain choppy in 2013F. Capex should remain high – we estimate total spend of USD3.5bn in FY13F. Operationally in 1H, data competition will be the main focus and this is where we expect more intensity – from Hutch and the incumbents. 2H should be more stable, but both XL and Indosat could look to exploit/ regain share post high investment phase. Overall, we are more cautious on Indonesian telcos in 2013F due to competition, capex, data economics (margins) and valuation concerns. Current FY13F P/E is 13-26x.

Action: Buy Indosat, Neutral Telkom and XL We see relatively higher operational leverage at Indosat given: 1) stable-to-improving operating trends; 2) new management appears to have an articulated mandate/ clear roles; 3) being able to offer 3G on 900Mhz should benefit data growth and 4) USD debt reduction should reduce FX volatility. For Telkom, operating trends should remain resilient, and its valuation of 13x FY13F earnings with 5% dividend yield looks appealing in a regional context. However, there are still uncertainties around execution and on its surplus cash deployment options. XL is in a data transition phase – this is likely to keep capex levels high. As well, it has been more difficult to differentiate on data vs voice, but XL’s execution remains its key strength, which should drive gradual return improvement.

Action: Towercos – some caution is warranted…. We remain structurally bullish on Indonesian towers, but following a 130-140% increase in share prices in 2012, we recommend some caution. Some concerns to note: 1) downward rental pressure – Indonesian tower rents of ~USD1,500 remain high vs the Indians at USD800; 2) potential listing of tower assets by top three telcos and 3) forex volatility. Protelindo is our relative preference, given its valuation/ growth differential to TBIG, but its low liquidity makes it a difficult investment, in our view. Fig. 106: Stocks for action

Source: Bloomberg, Nomura estimates. Prices as of Jan 2. TBIG’s target price is under review.

Anchor themes

Macro trends are positive in Indonesia, but competition, regulation and coverage challenges remain.

Nomura vs consensus

In comparison to consensus, our target price for Indosat is 10% ahead, 4% below for XL, and 18% below for PT Telkom.

Research analysts

ASEAN Telecoms

Sachin Gupta, CFA - NSL [email protected] +65 6433 6968

Pankaj Suri - NSFSPL [email protected] +91 22 4053 3724

Neeraja Natarajan - NSL [email protected] +65 6433 6961

Gopakumar Pullaikodi - NSFSPL [email protected] +91 22 4053 3733

Shweta Dixit - NSFSPL [email protected] +91 22 672 35457

Company Price

Mkt Cap (USD mn)

Avg 3M (USD mn) Rec

PER 13F (x)

PER 14F (x)



PB 13F (x)

ROE 13F (%)

EV/EBITDA

13F

DVD yield

13F (%) TPNet DTE 13F (%) Ticker

Telco & Tower 14.9 14.0 7.9 7.0 2.6 17.4 3.5

XL Axiata 5,700 5,028 3.9 Neutral 13.7 12.7 6.1 8.3 2.7 21.1 5.5 3.6 6,750 56 EXCL IJ

Indosat 6,450 3,634 1.4 Buy 26.2 23.4 -10.8 12.2 1.9 -0.3 4.7 1.9 7,500 78 ISAT IJ

PT Telkom 8,950 18,326 18.8 Neutral 12.5 12.0 6.9 4.7 2.3 19.4 4.2 5.2 8,600 net cash TLKM IJ

TBIG 5,450 2,639 1.9 Neutral 29.1 25.0 47.2 16.1 6.5 25.2 18.6 0.3 4,300 166 TBIG IJ

SMN (Protelindo) 23,000 2,433 0.0 Buy 27.3 22.2 47.3 23.0 8.3 35.9 12.9 0.0 35,000 212 TOWR IJ


Nomura | Telecoms / Towers January 8, 2013

67

2013 – More cautious… We are relatively more cautious on Indonesian telcos in 2013 than last year as: 1) we don't see competition moderating this year; in fact, we see potential upside risks in the data segment – Hutch is leading this already; 2) we think capex levels will remain high – our estimate for capex-to-sales this year is 30%; 3) in our view, data economics will still not be compelling enough; and 4) valuations aren’t inexpensive at FY13F P/E of 13-26x.

However, two key drivers that could keep Indonesian telcos in favour are: 1) continued operating momentum: we estimate 7% average revenue growth and 6% EBITDA growth and 6% NPAT growth (ex-Indosat) in 2013F; 2) macro, as usual, should also be a key driver, particularly for PT Telkom given its FCF yield of 9% and dividend yield of 5%.

Fig. 107: Indonesia – still early on the data S curve

Source: XL, Nomura research

Note: XL provided this chart as the S curve of its data trajectory. However, we think that this reflects data growth for the overall market as well.

Fig. 108: Indonesian telcos – capex trends


Fig. 109: Indonesian telcos – revenue growth trends


Fig. 110: Indonesian telcos – FCF yields, dividend yields


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68

Decent stock performances in 2012 • In Indonesia, the MSCI telcos index was up 27% in 2012, vs a 9% increase for the

MSCI market index, making telcos the third-best performing sector. This was driven by: 1) strong operating trends: we estimate 9% average revenue growth for top three telcos in 2012F, vs 5% in 2011; 2) management changes at Telkom, Telkomsel and Indosat; and 3) successful tower monetization for Indosat in August.

• XL and PT Telkom were up 26-28%, and outperformed the JCI index by 13-15%. As a result, both XL and Telkom are amongst the top ten AEJ telcos. Indosat has gained 14% during the year – 1H12 had been disappointing for Indosat with a 25% drop; nonetheless it still managed to outpace the JCI index by 1% in 2012.

Amongst towercos, both SMN and TBIG were up 130-140% (outperforming the local market by an average of 120%), which compares with the 22% average rise across their global peers. Inti Bangun Sejahtera is up 500% since listing in Aug’12. This was driven by the strong growth outlook for towercos, which in turn is driven by structural shifts by the operators to lease rather than build.

Fig. 111: MSCI Indonesia sector indices – performances in 2012

Source: Bloomberg

Fig. 112: AEJ telcos – performances in 2012 (absolute)

Source: Bloomberg, Nomura Research

Fig. 113: AEJ telcos – performances in 2012 (relative to local markets)


Fig. 114: Global towercos – stock performances in 2012


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69

Fig. 115: PT Telkom – P/E band charts


Fig. 116: Indosat – P/E band charts


Fig. 117: XL – P/E band charts


Fig. 118: SMN – P/E band charts


Fig. 119: TBIG – P/E band charts


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70

Other key themes

Growing data while mitigating decline in voice/ SMS

• While Indonesian telcos remain focused on promoting data, they have also been trying to contain the structural decline in traditional telco services of voice and SMS, for which they have launched bucket plans and bundled plans. This should alleviate some pressure on margins from rising contribution of the low-margin data business over the near term, we believe.

• At the same time, telcos are trying to improve data economics by ‘competing along with collaboration’. XL has been vocal about network sharing, and has already started network sharing with its closest competitor Indosat. Apart from these, we have also seen sharing of passive networks – most of the operators, especially the smaller ones, appear inclined towards leasing towers instead of self-build. Indosat’s recent sale and leaseback arrangement of 2.5k towers to TBIG is a notable step in this direction.

• Some key ongoing telcos’ initiatives in the market that should aid in data growth include: (1) proliferation of smart-devices, especially the low-end ones; (2) sale of customised devices for quick access to social networking sites; and (3) carriers venturing further into eCommerce / mCommerce and media portals.

Fig. 120: Indonesian telcos – sequential segment growth


Fig. 121: Indonesian telcos – m-banking portals

Source: digitalkreatif.com, Nomura research

Competition: will Hutch be the next XL?

• Based on our recent discussions with companies, we note that Hutch is looking aggressive on data pricing. As well, it remains focused on ramping up its network capacity – retaliation from the top three telcos cannot be ruled out, in our view.

• Nonetheless, the following factors should continue to ensure that sanity prevails on pricing to some extent: (i) current network utilizations of 75-80% for the top three players; (ii) operators being relatively well placed to match competition; and (iii) low degree of price elasticity on voice/ SMS.

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Name of the mobile payment program XL Tunai (XL-Cash)Number of users by June'12 70kTarget user 42 million users of XLPilot Project (launched in) YogyakartaOperations Commenced 2012

Name of the mobile payment program T-cashTarget user 121 million users of TelkomselNumber of users by 2011 8.2 millionPilot Project (launched in) Jakarta, Bandung, Yogyakarta, MedanOperations Commenced 2007

Name of the mobile payment program Dompetku (Purse)Number of merchants target 2011 260 merchants at 7800 service pointsTarget user 55 million users of IndosatNumber of users by 2010 150 ThousandPilot Project (launched in) Jakarta, Bandung, SurabayaOperations Commenced 2009

PT XL Axiata

PT Telkomsel

PT Indosat


71

Fig. 122: Revenue shares


Fig. 123: EBITDA shares


Fig. 124: Subscriber shares


Spectrum issues: some respite on the way

Spectrum issues are back in the spotlight, given the upcoming 3G spectrum auctions and the recent government decree that allows telcos to roll out 3G networks (and offer 3G services) on 900Mhz.

Spectrum auctions • Two more carriers in 2.1GHz (carrier number 11 and 12, each of 5MHz) are likely

to be allocated over the next few months. Given XL’s spectrum limitations (owns 15MHz vs 30MHz for Telkomsel and Indosat in 900-1800 MHz), we expect it to be a key contender for this, along with Telkomsel.

• Based on our recent meeting with the regulator, the process of allocation will most likely be via a ‘beauty-contest’, which would cover market considerations, contenders’ strategic plans, and past performance amongst others. For more details, please refer to our note “Insights from regulators and smaller players”, October 18, 2012).

Indonesia Telecoms - Insights from across the value chain

• As per TeleGeography (Indonesia’s MoCI gets 3G spectrum sale process moving, 21 Dec 2012), the ministry is expected to set a minimum reserve fee of IDR200 billion for blocks of spectrum.

Spectrum neutrality • Recent introduction of spectrum neutrality is a relative positive for Indosat, we

believe, as: a) on 900Mhz, Indosat has 10Mhz, which is 2.5Mhz more than both Telkomsel and XL; and b) on 1800Mhz, it has significantly more spectrum than XL (but slightly less than Telkomsel). This should also allow Indosat to re-farm some of its voice services to higher frequencies and use data on lower frequencies – as data economics are relatively better on lower frequencies.

• Closing the coverage gap. Indosat’s BTS count at 21.6k is lower than 36-51k for peers. As well, Indosat is targeting to spend IDR6trn this year vs IDR9-10trn for peers. With 3G on 900Mhz now, Indosat should be able to close any potential coverage gaps at relatively lower costs given its spectrum advantages.

Fig. 125: GSM telcos – spectrum ownership

Source: Presentation on Digital Dividend by Mr Denny Setiawan, Directorate of Spectrum Policy and Planning, July 2012; Nomura research

Fig. 126: CDMA telcos – spectrum ownership

Source: Presentation on Digital Dividend by Mr Denny Setiawan, Directorate of Spectrum Policy and Planning, July 2012; Nomura research

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http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=568452&appname=GRP&cid=bW9WMWJVK3h2cjg90


72

Towers: we recommend to tread with some caution While we don’t dismiss the structural appeal of towers in Indonesia, following 130-140% share price increases in 2012, we recommend some caution. We are also mindful of the following risks.

• Downward rental pressure. Indonesian tower rents of ~USD1,500 remain high vs the Indians at USD800 – Indonesian telcos could look to renegotiate to get the rents reduced.

• Growth vs cost of investment – organic growth for independent towercos means 500 to 1.5k tower addition pa. Acquisitions will provide the big step-up, which could be either equity or debt funded. For debt, local debt (IDR denominated) is expensive (current 10-year bond rate is 6%), whereas vs USD debt (current 10-year bond rate of 2%), but USD debt could expose either the towercos and/or operators to forex risks given most of the revenues are IDR denominated.

• Telcos may look to list their own towers, especially if +10x EV/EBITDA valuations can be sustained vs core telco business at 5-6x. This may adversely impact the appeal of existing players.

Mitratel is good example of this, in our view and for the past two to three years, Telkom has stated of its intentions to list this asset. However, we understand there are still some shareholder issues in terms of transfer of Telkomsel’s tower portfolio into Mitratel.

• Ad-hoc issues, eg, rent payment default by CDMA telcos – recent press around Bakrie’s financial troubles could be a concern for tower companies in the event it defaults on rental payments. Bakrie accounts for 6-7% of TBIG’s and Protelindo’s revenues. Normally, rental payments can range from quarterly to annual payments upfront. As well, normally it would be rare for a telecom operator like Bakrie to ‘shut-down’ altogether, where it has 12mn total subs. It is more likely, in our opinion, that it could become a potential M&A target, in which case a lot of the leases could rollover.


73

Fig. 127: Sector Valuation

Note: Prices as on 2 Jan 2013. Ratings are as of the date of the most recently published report (http://www.Nomura.com ) rather than the date of this document. Source: Bloomberg, Nomura Research

Bloomberg Local Mkt Capticker price (USDmn) 11 12E 13E 11 12E 13E 11 12E 13E 11 12E 13E

WirelessAIS ADVANC TB Buy THB 209 20,450 23.4 17.4 15.2 10.8 9.9 9.1 4.0% 5.7% 6.6% 7.0% 4.9% 6.0%Axiata Group AXIATA MK Buy MYR 6.6 18,310 22.1 19.5 18.3 8.5 7.9 7.5 2.9% 3.6% 4.1% 2.0% 4.1% 6.1%Bharti Airtel BHARTI IN Reduce INR 320 22,318 25.4 30.5 22.3 7.9 7.5 6.6 0.3% 0.3% 0.7% 0.8% 1.7% 4.7%China Mobile 941 HK Neutral HK$ 91 258,922 12.8 12.5 11.9 5.0 4.9 4.7 3.4% 3.4% 3.6% 5.1% 5.8% 6.8%Digi.com Digi MK Neutral MYR 5.20 13,322 27.9 25.3 23.9 14.5 13.6 13.0 3.4% 4.2% 5.4% 4.3% 4.3% 4.3%Far EasTone 4904 TT Neutral NT$ 74 8,311 27.2 21.0 17.9 11.4 10.0 9.3 3.3% 4.3% 5.0% 4.8% 6.2% 6.7%Globe Telecom GLO PM Neutral PHP 1,089 3,528 14.5 14.0 13.4 5.7 5.6 5.4 5.8% 6.1% 6.3% 4.5% -1.1% 10.1%Idea Cellular IDEA IN Reduce INR 105 6,362 45.8 27.9 21.6 9.2 7.7 6.8 0.0% 0.0% 0.0% -4.2% 2.5% 2.5%Maxis Maxis MK Reduce MYR 6.6 16,335 22.6 22.8 22.8 12.5 12.8 12.6 6.1% 6.1% 6.1% 5.0% 5.0% 5.3%MobileOne M1 SP Buy S$ 2.7 2,006 14.9 16.9 15.7 8.9 9.4 8.9 5.4% 5.6% 5.6% 6.6% 5.0% 5.7%NTT DoCoMo 9437 JP Neutral JPY 124,000 59,045 10.1 10.3 10.4 2.8 3.0 3.0 4.5% 4.8% 4.8% 2.6% 2.7% 5.5%XL EXCL IJ Neutral IDR 5,700 5,026 15.0 14.5 13.7 6.3 5.9 5.5 2.3% 2.8% 3.6% 3.6% 1.1% 3.3%RCOM RCOM IN Neutral INR 75 2,857 33.4 23.5 17.0 8.4 7.9 7.4 0.7% 0.5% 0.6% n/a n/a n/aSK Telecom 017670 KS Buy KRW 150,500 11,425 6.6 10.5 9.3 3.9 4.4 4.1 6.2% 6.2% 6.2% 33.2% 17.7% 11.4%Taiwan Mobile 3045 TT Buy NT$ 105 13,756 21.2 18.6 17.1 15.0 14.0 13.4 4.2% 4.9% 5.3% 4.2% 5.2% 5.2%DTAC DTAC TB Buy THB 88 6,819 17.3 18.0 19.2 8.2 8.3 8.2 20.4% 5.6% 5.2% 10.0% 4.7% 2.7%Average 19.6 19.0 16.9 8.3 7.9 7.5 4.6% 4.0% 4.3% 6.0% 4.6% 5.8%Median 19.6 18.8 17.0 8.4 7.9 7.4 3.7% 4.6% 5.1% 4.5% 4.7% 5.5%

IntegratedChina Telecom 728 HK Neutral HK$ 4.0 45,836 17.4 16.1 13.9 4.1 4.0 3.7 2.0% 2.1% 2.1% 9.7% 6.9% 10.8%China Unicom 762 HK Buy HK$ 13 42,312 62.4 30.7 17.0 6.1 5.0 4.1 0.9% 1.0% 1.8% -3.5% -10.1% 1.1%Chunghwa 2412 TT Neutral NT$ 94 25,134 15.5 16.3 16.4 7.6 7.6 7.6 5.8% 5.5% 5.5% 3.7% 6.4% 6.4%eAccess 9427 JP Neutral JPY 62,100 2,471 31.5 29.5 26.6 6.1 6.0 5.9 1.3% 1.0% 0.0% 10.3% -0.6% -2.8%Jupiter Telecom 4817 JP Neutral JPY 107,900 8,500 19.8 19.8 18.4 5.4 5.3 5.1 1.7% 2.3% 2.4% 6.0% 6.2% 6.5%KDDI 9433 JP Buy JPY 6,090 26,727 9.8 8.6 7.3 3.5 3.3 2.9 2.6% 2.8% 3.1% 10.4% 5.1% 10.7%KT Corp 030200 KS Neutral KRW 35,400 8,691 6.5 7.3 7.9 3.7 3.6 3.5 5.6% 5.6% 5.6% 9.4% 6.2% 11.8%LG Uplus 032640 KS Buy KRW 7,650 3,703 11.1 57.3 10.7 5.4 5.4 4.0 2.0% 1.3% 3.3% -32.8% -7.4% 3.9%NTT 9432 JP Neutral JPY 3,630 49,353 8.4 8.2 7.8 2.9 2.9 3.0 3.9% 4.4% 4.7% 11.0% 6.2% 6.6%PLDT TEL PM Neutral PHP 2,560 13,409 12.7 15.0 14.3 7.8 7.8 7.2 7.4% 6.7% 4.9% 8.1% 6.2% 7.5%PT Indosat ISAT IJ Buy IDR 6,450 3,632 21.9 23.4 26.2 5.5 4.7 5.7 1.2% 0.7% 1.9% 3.6% 4.7% 7.5%PT Telkom TLKM IJ Neutral IDR 8,950 18,316 14.9 13.4 12.5 5.1 4.7 4.5 3.5% 4.7% 5.2% 9.8% 8.1% 9.3%SingTel ST SP Buy S$ 3.3 43,563 14.4 14.9 13.8 8.3 8.1 7.8 4.7% 5.1% 5.4% 6.5% 5.7% 6.1%Softbank 9984 JP Buy JPY 3,140 39,850 13.9 10.7 9.4 5.1 4.9 4.6 1.3% 1.3% 1.6% 9.0% 7.5% -0.9%StarHub STH SP Reduce S$ 3.8 5,351 21.5 19.0 19.2 10.3 9.8 9.8 5.2% 5.2% 5.2% 6.6% 6.1% 5.8%TM T MK Neutral MYR 6.0 6,984 34.6 24.1 22.9 7.6 7.5 6.7 8.3% 3.7% 3.9% 8.0% 2.7% 4.6%Telstra TLS AU Neutral A$ 4.4 58,046 15.7 14.5 14.7 6.7 6.4 6.5 6.3% 6.3% 6.3% 9.5% 9.4% 9.3%True TRUE TB Neutral THB 5.4 2,577 n/m n/m n/m 8.6 8.7 6.7 n/m n/m n/m -25.9% -4.6% -18.0%Average 16.8 18.6 15.1 6.1 5.9 5.5 3.7% 3.6% 3.7% 2.9% 3.5% 4.5%Median 15.3 16.8 14.5 6.1 5.6 5.6 3.5% 3.7% 3.9% 8.0% 6.1% 6.5%TowersSMN TOWR IJ Buy IDR 23,000 2,432 73.3 40.2 27.3 20.7 16.1 12.9 0.0% 0.0% 0.4% -0.6% -2.8% -0.4%TBIG TBIG IJ Neutral IDR 5,450 2,573 50.9 41.8 29.1 36.4 26.9 19.0 0.0% 0.0% 0.3% -3.4% -13.6% -1.1%Average 62.1 41.0 28.2 28.6 21.5 15.9 0.0% 0.0% 0.4% -2.0% -8.2% -0.7%Median 62.1 41.0 28.2 28.6 21.5 15.9 0.0% 0.0% 0.4% -2.0% -8.2% -0.7%

PE (x) EV/EBITDA (x) Div Yield (%) FCF Yield (%) CurrencyRating


74



75

Company profiles


76


Key company data: See page 2 for company data and detailed price/index chart.

Astra International ASII.JK ASII IJ

AUTOS & AUTO PARTS

EQUITY RESEARCH

Rising affordability boosts car sales

Earnings growth is set to accelerate as non-automotive divisions bottom out

January 8, 2013

Rating Remains

Buy

Target price Remains

IDR 9,500

Closing price January 2, 2013

IDR 7,500

Potential upside +26.7%

Action: Earnings growth will accelerate In our view, the share price of Astra International will move higher in 2013, driven by acceleration of earnings growth. Astra’s earnings growth is set to accelerate in 2013, after having slowed in 2012, in our view. We expect strong car sales, recovery in motorcycle sales, and stabilising coal and palm oil prices to boost earnings in 2013F.

Catalyst: Low-cost green car (LCGC) to increase affordability The introduction of LCGC and rising income will increase affordability that will allow car sales to double to at least 2 million units in 2017, in our view. Astra will command first-mover advantage in LCGC and we believe that the high barrier to entry will keep many of its competitors at bay for a few years. Only four producers plan to produce LCGC in the next few years due to requirement of high fuel efficiency (20km/lt) and high local content (80%) to qualify for upcoming tax incentives, we believe.

Risks to our view The inclusion of sariah financing to LTV (loan-to-value) regulation might pose a threat to automotive sales in 2013, but we expect any impact to be short lived and manageable. We see greater risks from a further collapse in agricultural prices, rapid depreciation of the rupiah, and diminishing credit availability, which would likely affect affordability and GDP growth.

Valuation: Maintain Buy and TP of IDR9,500 Our TP of IDR9,500 is based on a target P/E multiple of 15x, in line with our target multiple for the JCI, and our 2014F EPS forecast of IDR644.

31 Dec FY11 FY12F FY13F FY14F

Currency (IDR) Actual Old New Old New Old New

Revenue (bn) 162,564 179,570 179,570 206,062 206,053 243,291 243,291

Reported net profit (bn) 17,785 19,066 19,066 22,195 22,195 26,088 26,088

Normalised net profit (bn) 17,785 19,066 19,066 22,195 22,195 26,088 26,088

FD normalised EPS 439.31 470.95 470.95 548.25 548.24 644.40 644.40

FD norm. EPS growth (%) 23.0 7.2 7.2 16.4 16.4 17.5 17.5

FD normalised P/E (x) 17.1 N/A 15.9 N/A 13.7 N/A 11.6

EV/EBITDA (x) 11.8 N/A 10.9 N/A 9.7 N/A 8.5

Price/book (x) 5.0 N/A 4.3 N/A 3.7 N/A 3.2

Dividend yield (%) 2.6 N/A 3.1 N/A 3.7 N/A 4.3

ROE (%) 32.4 29.2 29.2 29.4 29.4 29.8 29.8

Net debt/equity (%) 52.6 46.9 46.9 42.9 42.9 40.0 40.0


Anchor themes

Astra's long-term growth potential remains strong, in our view. It benefits from a growing middle class and rising affordability. Car ownership remains low at less than 4% in Indonesia, vs 46% for G7 countries in 2011, on our estimates.

Nomura vs consensus

Our 2013-14F earnings forecasts are around 5% above consensus, as we are more optimistic on the car sales outlook.

Research analysts

Indonesia Autos & Auto Parts



Nomura | Astra International January 8, 2013

78

Key data on Astra International Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 129,991 162,564 179,570 206,053 243,291Cost of goods sold -103,117 -130,530 -144,985 -166,804 -197,332Gross profit 26,874 32,034 34,585 39,249 45,959SG&A -12,149 -14,202 -15,266 -17,600 -20,626Employee share expense

Operating profit 14,725 17,832 19,320 21,650 25,333

EBITDA 20,038 22,606 25,120 27,850 31,833Depreciation -5,298 -4,774 -5,800 -6,200 -6,500Amortisation -15 0 0 0 0EBIT 14,725 17,832 19,320 21,650 25,333Net interest expense 18 -14 -112 -5 -44Associates & JCEs 4,896 5,760 5,877 6,931 8,297Other income 1,485 2,194 2,387 2,984 3,432Earnings before tax 21,124 25,772 27,473 31,559 37,018Income tax -4,027 -4,695 -5,058 -5,653 -6,594Net profit after tax 17,097 21,077 22,415 25,907 30,424Minority interests -2,638 -3,292 -3,349 -3,712 -4,336Other items

Preferred dividends

Normalised NPAT 14,459 17,785 19,066 22,195 26,088Extraordinary items -93 0 0 0 0Reported NPAT 14,366 17,785 19,066 22,195 26,088Dividends -6,477 -8,016 -9,533 -11,097 -13,044Transfer to reserves 7,889 9,769 9,533 11,097 13,044

Valuation and ratio analysis

Reported P/E (x) 21.1 17.1 15.9 13.7 11.6Normalised P/E (x) 21.0 17.1 15.9 13.7 11.6FD normalised P/E (x) 21.0 17.1 15.9 13.7 11.6FD normalised P/E at price target (x) 26.6 21.6 20.2 17.3 14.7Dividend yield (%) 2.1 2.6 3.1 3.7 4.3Price/cashflow (x) 18.0 12.7 12.4 10.9 11.3Price/book (x) 6.2 5.0 4.3 3.7 3.2EV/EBITDA (x) 13.2 11.8 10.9 9.7 8.5EV/EBIT (x) 16.7 14.2 13.4 11.8 10.1Gross margin (%) 20.7 19.7 19.3 19.0 18.9EBITDA margin (%) 15.4 13.9 14.0 13.5 13.1EBIT margin (%) 11.3 11.0 10.8 10.5 10.4Net margin (%) 11.1 10.9 10.6 10.8 10.7Effective tax rate (%) 19.1 18.2 18.4 17.9 17.8Dividend payout (%) 45.1 45.1 50.0 50.0 50.0Capex to sales (%) 6.4 11.7 8.0 7.3 6.5Capex to depreciation (x) 1.6 4.0 2.5 2.4 2.4ROE (%) 32.2 32.4 29.2 29.4 29.8ROA (pretax %) 21.1 19.2 17.0 17.2 17.7

Growth (%)

Revenue 31.9 25.1 10.5 14.7 18.1EBITDA 23.8 12.8 11.1 10.9 14.3EBIT 15.4 21.1 8.3 12.1 17.0Normalised EPS 45.6 23.0 7.2 16.4 17.5Normalised FDEPS 45.6 23.0 7.2 16.4 17.5

Per share

Reported EPS (IDR) 354.86 439.31 470.95 548.24 644.40Norm EPS (IDR) 357.16 439.31 470.95 548.24 644.40Fully diluted norm EPS (IDR) 357.16 439.31 470.95 548.24 644.40Book value per share (IDR) 1,218.03 1,493.18 1,728.66 2,002.78 2,324.98DPS (IDR) 159.99 198.00 235.48 274.12 322.20Source: Company data, Nomura estimates

Relative performance chart (one year)

Source: ThomsonReuters, Nomura research

(%) 1M 3M 12M

Absolute (IDR) 3.4 1.4 1.8

Absolute (USD) 2.8 0.6 -4.2

Relative to index 0.8 -1.0 -8.1

Market cap (USDmn) 31,480.2

Estimated free float (%) 49.0

52-week range (IDR) 8300/6120

3-mth avg daily turnover (USDmn)

29.51

Major shareholders (%)

Jardine C&C 50.1

Source: Thomson Reuters, Nomura research

Notes


79

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 20,038 22,606 25,120 27,850 31,833Change in working capital -2,827 1,405 -306 -496 -701Other operating cashflow -359 -47 -254 545 -4,144Cashflow from operations 16,852 23,964 24,560 27,899 26,988Capital expenditure -8,371 -18,992 -14,420 -15,141 -15,898Free cashflow 8,481 4,972 10,140 12,759 11,090Reduction in investments 0 0 0 0 0Net acquisitions 0 0 0 0 0Reduction in other LT assets 81 15 0 0 0Addition in other LT liabilities 0 0 0 0 0Adjustments -15,968 -13,744 -4,037 -6,740 -2,142Cashflow after investing acts -7,406 -8,757 6,102 6,019 8,949Cash dividends -6,477 -8,016 -9,533 -11,097 -13,044Equity issue 1,527 1,370 0 0 0Debt issue 9,817 13,252 -5,854 2,814 1,814Convertible debt issue 0 0 0 0 0Others 846 8,263 2,410 3,085 1,228Cashflow from financial acts 5,713 14,869 -12,977 -5,199 -10,002Net cashflow -1,693 6,112 -6,875 820 -1,053Beginning cash 8,771 7,078 13,190 6,316 7,136Ending cash 7,078 13,190 6,315 7,136 6,082Ending net debt 24,660 31,800 32,820 34,814 37,681Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 7,078 13,190 6,316 7,136 6,082Marketable securities 0 0 0 0 0Accounts receivable 9,391 14,526 16,046 18,412 21,739Inventories 10,842 11,990 13,318 15,322 18,126Other current assets 3,628 3,950 4,363 5,007 5,912Total current assets 30,939 43,656 40,042 45,876 51,859LT investments 15,053 16,997 20,523 24,682 29,660Fixed assets 27,547 41,750 50,370 59,310 68,708Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets 39,318 51,118 51,629 54,211 59,109Total assets 112,857 153,521 162,564 184,079 209,336Short-term debt 17,803 21,040 18,302 19,618 20,466Accounts payable 9,275 15,542 17,263 19,861 23,496Other current liabilities 10,046 11,789 13,022 14,943 17,643Total current liabilities 37,124 48,371 48,588 54,422 61,606Long-term debt 13,935 23,950 20,834 22,331 23,297Convertible debt 0 0 0 0 0Other LT liabilities 3,109 5,362 5,923 6,796 8,025Total liabilities 54,168 77,683 75,344 83,550 92,927Minority interest 9,379 15,389 17,238 19,450 22,286Preferred stock 0 0 0 0 0Common stock 3,130 3,130 3,130 3,130 3,130Retained earnings 44,731 55,628 65,161 76,258 89,302Proposed dividends 0 0 0 0 0Other equity and reserves 1,449 1,691 1,691 1,691 1,691Total shareholders' equity 49,310 60,449 69,982 81,080 94,123Total equity & liabilities 112,857 153,521 162,564 184,079 209,336

Liquidity (x)

Current ratio 0.83 0.90 0.82 0.84 0.84Interest cover na 1,273.7 173.2 3,988.5 581.5

Leverage

Net debt/EBITDA (x) 1.23 1.41 1.31 1.25 1.18Net debt/equity (%) 50.0 52.6 46.9 42.9 40.0

Activity (days)

Days receivable 23.8 26.9 31.2 30.5 30.1Days inventory 32.1 31.9 31.9 31.3 30.9Days payable 29.3 34.7 41.4 40.6 40.1Cash cycle 26.6 24.1 21.7 21.2 21.0Source: Company data, Nomura estimates

Notes

Notes


80

Astra International: Focus charts Fig. 128: Astra: car sales (last Nov-12)

Source: Gaikindo (The Association of Indonesia Automotive Industries), Nomura research

Fig. 129: Astra: car market share (last Nov-12)

Source: Gaikindo (The Association of Indonesia Automotive Industries), Nomura research

Fig. 130: Astra Honda: motorcycle sales (last Nov-12)

Source: AISI (Indonesian Motorcycles Industry Association), Nomura research

Fig. 131: Astra Honda: motorcycle market share (last Nov-12)

Source: AISI (Indonesian Motorcycles Industry Association), Nomura research

Fig. 132: Pama (contract mining): coal delivered

Source: United Tractors, Nomura research

Fig. 133: Pama (contract mining): overburden removal


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Fig. 134: Komatsu equipment sales volume (last Nov-12


Fig. 135: Astra Agro: FFB production (nucleus estate)

Source: Astra Agro Lestari, Nomura estimate

Fig. 136: Astra: earnings breakdown (9M12)


Fig. 137: Astra: key assumptions

Key assumptions 2010A 2011A 2012F 2013F 2014F

Car sales (units) 426,467 482,659 599,000 698,950 789,109

+/- y-o-y 52% 13% 24% 17% 13%

Motorcycle sales (m units) 3.42 4.27 3.70 3.96 4.55

+/- y-o-y 27% 25% -13% 7% 15%

Heavy equipments sales (units) 5,404 8,467 6,983 7,826 9,824

+/- y-o-y 74% 57% -18% 12% 26%

Coal extraction by Pama (m tons) 78 87 93 100 107

+/- y-o-y 15% 12% 7% 8% 7%

FFB nucleus harvested (m tons) 3.26 3.50 3.58 3.71 3.71

+/- y-o-y 0% 7% 2% 4% 0%

Source: Nomura estimates

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4-wheelers30.1%

Auto components5.0%

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equipments18.4%

Agribusiness9.1%

Others3.8%


82



Bank Mandiri BMRI.JK BMRI IJ

BANKS

EQUITY RESEARCH

Our preferred bank sector pick

A key beneficiary of forthcoming bank regulations; resolution of legacy NPLs

January 8, 2013

Rating Remains

Buy


IDR 10,200


IDR 8,250


Action: Reaffirm Buy and TP of IDR10,200 We view Mandiri as one of the key beneficiaries from forthcoming regulation on the multi-licensing regime in Indonesia, which will regulate bank activities and network expansion on the basis of capital, and one of the least impacted banks by Bank Indonesia’s plans to set minimum credit-mix thresholds for small business and productive loans.

Catalyst: Eventual resolution of legacy NPLs Mandiri is also a key beneficiary from a constitutional court ruling that allows state banks to grant debt principal reductions to debtors. It has IDR32tn of outstanding written-off NPLs (equivalent to 46% of capital) – resolution of these legacy NPLs would boost its NPL recovery incomes, in our view.

Diminishing risk from the variable-rate bond portfolio The steep fall in treasury yield to 1.95%, if sustained, could be negative for Mandiri’s earnings as it affects coupons on its variable-rate bond holdings. However, income from these bonds had declined to 13.8% of its pre-tax profit in 3Q12 and the contribution may diminish further given our forecast of sustained growth of its loan portfolio and non-interest incomes.

Valuation: Still inexpensive, below six-year mean Our GGM-derived TP of IDR10,200 is based on 2.7x FY13F BVPS of IDR3,777, implying a target FY13F P/E of 13.6x. The current P/E of 10.9x is still well below its mean 12-month forward consensus P/E of 13x over 2006-12 despite much lower cost of capital at present. We reaffirm our Buy recommendation.



PPOP (bn) 16,237 20,456 20,456 25,828 25,828 31,912 31,912






Price/adj. book (x) 3.1 N/A 2.6 N/A 2.2 N/A 1.8



ROE (%) 21.9 20.6 20.6 21.6 21.6 22.2 22.2

ROA (%) 2.5 2.4 2.4 2.6 2.6 2.8 2.8


Anchor themes

We think Indonesian banks can sustain a strong earnings outlook despite headwinds from global economic uncertainties, owing to pro-growth fiscal and monetary policies and prudent macroeconomic management in the country.

Nomura vs consensus

Nomura's earnings forecasts for FY13-14F are 2-7% above consensus estimates.

Research analysts

Indonesia Banks



Nomura | Bank Mandiri January 8, 2013

84

Key data on Bank Mandiri Profit and Loss (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FInterest income 33,932 37,730 41,775 50,228 59,844Interest expense -14,413 -15,954 -15,574 -18,500 -22,545Net interest income 19,519 21,776 26,200 31,728 37,300Net fees and commissions 5,102 6,543 7,852 9,422 11,306Trading related profits 859 1,000 1,146 1,203 1,263Other operating revenue 1,454 3,230 4,017 4,603 5,284Non-interest income 7,415 10,773 13,014 15,228 17,853Operating income 26,934 32,549 39,215 46,956 55,153Depreciation

Amortisation

Operating expenses -12,075 -16,312 -18,759 -21,128 -23,241Employee share expense

Op. profit before provisions 14,859 16,237 20,456 25,828 31,912Provisions for bad debt -616 -1,811 -2,198 -3,006 -3,819Other provision charges -501 522 -400 -400 -400Operating profit 13,742 14,948 17,858 22,422 27,693Other non-operating income 230 163 321 312 300Associates & JCEs

Pre-tax profit 13,972 15,111 18,179 22,734 27,993Income tax -4,603 -3,480 -3,636 -4,547 -5,599Net profit after tax 9,369 11,631 14,543 18,187 22,394Minority interests -151 -450 -585 -702 -842Other items

Preferred dividends

Normalised NPAT 9,218 11,181 13,958 17,485 21,552Extraordinary items 1,065

Reported NPAT 9,218 12,246 13,958 17,485 21,552Dividends -3,226 -2,449 -2,792 -3,497 -4,310Transfer to reserves 5,992 9,797 11,167 13,988 17,242


Reported P/E (x) 18.7 15.5 13.7 10.9 8.9Normalised P/E (x) 18.7 17.0 13.7 10.9 8.9FD normalised P/E (x) 18.7 17.0 13.7 10.9 8.9FD normalised P/E at price target (x) 23.2 21.1 17.1 13.6 11.0Dividend yield (%) 1.9 1.3 1.5 1.8 2.3Price/book (x) 4.1 3.1 2.6 2.2 1.8Price/adjusted book (x) 4.1 3.1 2.6 2.2 1.8Net interest margin (%) 5.32 5.04 5.14 5.28 5.30Yield on interest earning assets (%) 9.25 8.73 8.20 8.35 8.50Cost of interest bearing liabilities (%) 4.05 4.00 3.19 3.32 3.56Net interest spread (%) 5.20 4.73 5.01 5.03 4.94Non-interest/operating income (%) 27.5 33.1 33.2 32.4 32.4Cost to income (%) 44.8 50.1 47.8 45.0 42.1Effective tax rate (%) 32.9 23.0 20.0 20.0 20.0Dividend payout (%) 35.0 20.0 20.0 20.0 20.0ROE (%) 24.5 21.9 20.6 21.6 22.2ROA (%) 2.26 2.52 2.35 2.58 2.79Operating ROE (%) 36.5 26.8 26.4 27.8 28.5Operating ROA (%) 3.37 3.08 3.01 3.31 3.58

Growth (%)

Net interest income 16.3 11.6 20.3 21.1 17.6Non-interest income 30.9 45.3 20.8 17.0 17.2Non-interest expenses 20.6 35.1 15.0 12.6 10.0Pre-provision earnings 19.5 9.3 26.0 26.3 23.6Net profit 28.8 21.3 24.8 25.3 23.3Normalised EPS 28.6 10.0 23.8 25.3 23.3Normalised FDEPS 28.8 10.0 23.8 25.3 23.3Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) 3.1 15.5 24.2

Absolute (USD) 2.3 13.9 14.8

Relative to index 0.8 5.8 9.6





17.37


Republic of Indonesia 60.0


Notes


85

Balance Sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash and equivalents 9,522 11,358 13,048 14,869 16,961Inter-bank lending 37,474 61,210 62,431 65,553 68,830Deposits with central bank 24,857 36,153 39,548 44,798 50,821Total securities 114,321 102,832 102,832 103,982 103,982Other interest earning assets

Gross loans 246,201 314,342 383,497 457,637 546,220Less provisions -11,522 -12,168 -13,503 -15,709 -18,728Net loans 234,678 302,174 369,994 441,928 527,492Long-term investments 6 6 6 6 6Fixed assets 5,527 6,590 7,908 9,094 10,458Goodwill

Other intangible assets

Other non IEAs 23,390 31,569 37,883 41,672 45,839Total assets 449,775 551,892 633,650 721,901 824,390Customer deposits 362,212 422,250 477,632 543,265 618,545Bank deposits, CDs, debentures 7,630 12,654 21,675 24,137 26,903Other interest bearing liabilities 13,183 19,767 22,189 24,919 28,000Total interest bearing liabilities 383,025 454,671 521,495 592,320 673,448Non interest bearing liabilities 24,680 34,566 37,420 39,763 42,731Total liabilities 407,705 489,237 558,915 632,083 716,178Minority interest 527 861 1,300 1,690 2,028Common stock 17,459 28,862 28,862 28,862 28,862Preferred stock

Retained earnings 24,442 33,506 45,015 59,709 77,763Reserves for credit losses

Proposed dividends

Other equity -358 -575 -443 -443 -443Shareholders' equity 41,543 61,793 73,435 88,128 106,183Total liabilities and equity 449,775 551,892 633,650 721,901 824,390Non-performing assets (IDR) 6,019 7,010 8,045 9,726 12,362

Balance sheet ratios (%)

Loans to deposits 68.0 74.4 80.3 84.2 88.3Equity to assets 9.2 11.2 11.6 12.2 12.9

Asset quality & capital

NPAs/gross loans (%) 2.4 2.2 2.1 2.1 2.3Bad debt charge/gross loans (%) 0.25 0.58 0.57 0.66 0.70Loss reserves/assets (%) 2.56 2.20 2.13 2.18 2.27Loss reserves/NPAs (%) 191.4 173.6 167.8 161.5 151.5Tier 1 capital ratio (%) 10.1 12.4 13.8 14.5 15.1Total capital ratio (%) 13.4 15.0 16.1 16.4 16.8

Growth (%)

Loan growth 26.1 28.8 22.4 19.4 19.4Interest earning assets 13.3 22.1 14.4 14.2 14.5Interest bearing liabilities 11.8 18.7 14.7 13.6 13.7Asset growth 14.0 22.7 14.8 13.9 14.2Deposit growth 13.4 16.6 13.1 13.7 13.9

Per share

Reported EPS (IDR) 439.40 529.33 598.22 749.38 923.66Norm EPS (IDR) 439.40 483.31 598.22 749.38 923.66Fully diluted norm EPS (IDR) 439.40 483.31 598.22 749.38 923.66DPS (IDR) 153.66 104.97 119.64 149.88 184.73PPOP PS (IDR) 708.25 701.82 876.68 1,106.90 1,367.65BVPS (IDR) 1,978.56 2,648.28 3,147.20 3,776.93 4,550.72ABVPS (IDR) 1,978.56 2,648.28 3,147.20 3,776.93 4,550.72NTAPS (IDR) 1,978.56 2,648.28 3,147.20 3,776.93 4,550.72Source: Company data, Nomura estimates

Notes


86

One of the key beneficiaries of forthcoming regulations

Bank Indonesia (BI) plans to regulate bank activities and network expansions on the basis of capital by grouping banks into four buckets based on Tier-1 capital. Banks with Tier-1 capital of >IDR30tn (Mandiri, BRI, BCA and BNI) will be permitted to have wider scope of activities and network outreach than banks in lower buckets. Most of the remaining Top-15 banks in Indonesia will fall under the second bucket (Tier-1 capital: IDR5tn to IDR30tn) with lesser scope of activities. BI also plans to base its licensing for network expansion in high banking density zones on the cost efficiency of the bank. Such a ruling may also benefit Indonesia’s four largest banks given their generally higher cost efficiency, with their ratios of operating cost/operating revenue of below the 70% possible threshold, except for BNI (a ratio of 72% in 9M12), in our view.

However, BI’s plans to set a minimum threshold of 20% contribution of small business loans (Micro/SMEs or UMKM) may be a potential impediment to the loan growth of some major banks, particularly corporate lenders with low risk appetite and/or lacking infrastructure to lend to this segment such as BCA (which has exposure of only 10% to this segment). Even with a long transition period of six years, we view this regulation as potentially impeding the credit growth prospects of such banks. We believe Mandiri should have little problem in meeting this regulation as it is rapidly expanding its micro and retail loans (which accounted for 15.8% of its loan portfolio as of September 2012).

Meanwhile, we view BI’s plan to set a target for productive loans to be at least twice the contribution of consumption loans in the portfolio might also be a potential impediment for some banks, but not for Mandiri. It remains unclear at this stage if such a ruling (if any) would be applied uniformly across the industry or differentiated for the four groups of banks and if niche banks (such as BTN, a mortgage specialist bank) or banks with large consumer loans (such as BTPN and Danamon) would be exempted. With consumption loans only contributing 14.4% of Mandiri’s loan portfolio as of September 2012, such a ruling, in our view, would not have any impact on the bank.

Fig. 138: Ratio of operating cost/operating revenue in 9M12 (%)


Fig. 139: Mix of small business loans (UMKM) as of Sept 2012(% of loan portfolio)


Diminishing risk from the variable rate bond portfolio

The yield on three-month treasuries fell sharply to 1.95% during a bond auction earlier this month, from 3.72% in November (c.4% in Jun-Oct). The steep fall in treasury yield, which is out of line with the term structure of interest rates in Indonesia (three-month interbank rate at 4.9%), was a repeat of February 2012, when the yield briefly declined to below 2%. The decline was driven by a strong demand for short-term papers by foreign portfolio investors as evident from the strong inflows into the bond market in Indonesia in recent months. If the low yield is sustained in coming months, this would negatively impact Mandiri’s earnings given its large holding of variable rate government bonds

61.863.6 64.2

71.8 72.074.0 75.4

78.180.3

83.087.0

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BI plans to regulate bank activities & network expansions on the basis of capital and may set minimum thresholds for SME and productive loans

We view Mandiri as a key beneficiary from forthcoming regulations

The contribution of income from variable rate bonds declined to 13.8% of Mandiri’s pre-tax profit in 3Q12


87

(IDR70tn as of Sept 2012, accounting for 13.5% of its total earning assets), whose coupons are linked to the treasury yields. With these bonds yielding around 4% in 3Q12, they contributed income equivalent to 13.8% of Mandiri’s pre-tax earnings during the quarter.

Despite its significant earnings contribution, we view the risk from Mandiri’s large portfolio of variable rate bonds as diminishing given: 1) our view that such low yields are not sustainable in the longer term; 2) we expect Mandiri’s loan portfolio and non-interest income growth to be sustained; and 3) the bank will likely continue reducing its bond holdings through participation in debt-switch auctions with the government and/or private sale of its bonds, as demonstrated earlier this year.

Fig. 140: Trend of three-month treasury yield (% pa)

Source: Ministry of Finance, Bank Indonesia, Nomura research

Fig. 141: Mandiri’s income from variable rate bonds (IDR tn)


Valuation still inexpensive, well below the six-year mean

We reiterate our Buy rating for Mandiri, and maintain our Gordon Growth-derived target price of IDR10,200, which assumes 22% sustainable ROAE, 8.5% nominal long-term growth and 13.5% cost of capital to arrive at our FY13F target P/B of 2.7x on our BVPS forecast of IDR3,777. Our target price of IDR10,200 implies a target FY13F P/E of 13.6x. The stock trades at FY13F P/E of 10.9x – this is still well below its mean 12-month forward consensus P/E of 13x over 2006- 2012 despite 400bps lower sovereign yields at present in comparison to the average yields over the past six years.

Mandiri’s still attractive valuation is despite the stock’s significant share price gains of 18.5% YTD, which outperformed the overall market index (JCI: +11.2%) and the financial sector index (JAKFIN: +10.3%). The bank remains as our preferred stock in Indonesia’s banking sector given its strong management, its improving banking franchise, and our forecast of its strong earnings growth in the next two years.

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The stock currently trades at FY13F P/E of 10.9x, still well below its mean 12-month forward consensus P/E over 2006 to 2012

We view the risk from bond holdings as diminishing as the low yields are not sustainable in the longer term, while Mandiri’s other income sources will continue to grow


88

Fig. 142: Relative share price performance in the past 2 years(end 2010=100)


Fig. 143: Mandiri’s 12m forward consensus P/E (x)

Source: Bloomberg consensus, Nomura research

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Jakarta Financial Index Bank Mandiri

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Bank Negara Indonesia BBNI.JK BBNI IJ

FINANCIALS

EQUITY RESEARCH

Investing for franchise improvement

Improving core profitability and resolution of legacy NPLs may boost earnings growth

January 8, 2013

Rating Remains

Buy


IDR 5,000


IDR 3,725


Action: Maintain Buy We reaffirm our Buy rating on BNI as we forecast stronger core earnings growth despite the bank’s investments in network and human resources. We maintain our TP of IDR5,000 and view the stock valuation as attractive, having underperformed peers in the past two years.

Catalyst: Resolution of legacy NPLs; sale of BNI Life BNI is a key beneficiary of the constitutional court ruling allowing state banks to grant debt principal reductions to debtors. With outstanding written-off NPLs of IDR24tn (equivalent to 58% of capital), resolution of legacy NPLs could boost its NPL recovery income in coming years, in our view. Meanwhile, we believe that the plan to sell stakes in BNI Life to a foreign strategic partner might also be another catalyst for the stock to reverse its underperformance.

We forecast stronger earnings growth in next two years We forecast BNI’s earnings growth to accelerate to 17.4% in FY13F and 16.2% in FY14F, from 11.8% in FY12F, driven by stronger underlying profit (PPOP) growth in the next two years on the back of the bank’s stable NIMs, strong loan growth and improving cost ratios. Our current forecasts exclude potential earnings upside from resolution of legacy NPLs.

Valuation: A laggard stock with low valuation Our GGM-derived TP of IDR5,000 is based on 1.9x FY13F book, implying a P/E of 12.1x. The stock trades at an FY13F P/E of 9.1x, significantly below its five-year mean of 10.7x, which is undemanding, in our view.



PPOP (bn) 7,952 9,042 9,042 11,041 11,041 13,546 13,546






Price/adj. book (x) 1.9 N/A 1.6 N/A 1.4 N/A 1.2



ROE (%) 16.7 16.2 16.2 16.7 16.7 17.0 17.0

ROA (%) 2.2 2.0 2.0 2.1 2.1 2.1 2.1


Anchor themes

We believe Indonesian banks can sustain a strong earnings outlook despite headwinds from global economic uncertainties in light of pro-growth fiscal and monetary policies and prudent macroeconomic management in the country.

Nomura vs consensus

Nomura's earnings forecast for FY13F is in line with consensus estimate.

Research analysts

Indonesia Banks



Nomura | Bank Negara Indonesia January 8, 2013

90

Key data on Bank Negara Indonesia Profit and Loss (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FInterest income 18,837 20,692 22,852 26,836 31,504Interest expense -7,117 -7,496 -7,331 -8,673 -10,122Net interest income 11,721 13,196 15,522 18,163 21,382Net fees and commissions 2,386 2,657 3,055 3,514 4,041Trading related profits 1,138 1,601 1,376 1,653 1,794Other operating revenue 372 722 874 949 1,159Non-interest income 3,897 4,980 5,305 6,116 6,993Operating income 15,617 18,176 20,827 24,279 28,375Depreciation

Amortisation

Operating expenses -8,300 -10,224 -11,785 -13,239 -14,829Employee share expense

Op. profit before provisions 7,317 7,952 9,042 11,041 13,546Provisions for bad debt -2,063 -655 -1,327 -1,827 -2,562Other provision charges 254 -54 81 -50 -50Operating profit 5,509 7,243 7,796 9,164 10,934Other non-operating income -24 219 347 416 200Associates & JCEs

Pre-tax profit 5,485 7,461 8,143 9,580 11,134Income tax -1,382 -1,653 -1,629 -1,916 -2,227Net profit after tax 4,103 5,808 6,514 7,664 8,907Minority interests -1 18 0 -13 -16Other items

Preferred dividends

Normalised NPAT 4,102 5,826 6,514 7,651 8,892Extraordinary items



Reported P/E (x) 15.5 12.0 10.7 9.1 7.9Normalised P/E (x) 15.5 12.0 10.7 9.1 7.9FD normalised P/E (x) 15.5 12.0 10.7 9.1 7.9FD normalised P/E at price target (x) 20.7 16.0 14.3 12.2 10.5Dividend yield (%) 1.8 1.7 1.9 2.2 2.5Price/book (x) 2.1 1.9 1.6 1.4 1.2Price/adjusted book (x) 2.1 1.9 1.6 1.4 1.2Net interest margin (%) 5.73 5.63 5.57 5.51 5.51Yield on interest earning assets (%) 9.20 8.83 8.19 8.14 8.12Cost of interest bearing liabilities (%) 3.65 3.46 2.81 2.85 2.89Net interest spread (%) 5.56 5.36 5.38 5.29 5.22Non-interest/operating income (%) 25.0 27.4 25.5 25.2 24.6Cost to income (%) 53.1 56.2 56.6 54.5 52.3Effective tax rate (%) 25.2 22.2 20.0 20.0 20.0Dividend payout (%) 30.0 20.0 20.0 20.0 20.0ROE (%) 18.8 16.7 16.2 16.7 17.0ROA (%) 1.81 2.23 2.03 2.08 2.11Operating ROE (%) 25.2 20.8 19.4 20.1 20.9Operating ROA (%) 2.44 2.77 2.43 2.49 2.60

Growth (%)

Net interest income 5.3 12.6 17.6 17.0 17.7Non-interest income 19.1 27.8 6.5 15.3 14.3Non-interest expenses 19.1 23.2 15.3 12.3 12.0Pre-provision earnings -1.6 8.7 13.7 22.1 22.7Net profit 65.1 42.0 11.8 17.4 16.2Normalised EPS 48.7 29.2 11.8 17.4 16.2Normalised FDEPS 48.7 29.2 11.8 17.4 16.2Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) 4.2 -5.1 -2.6

Absolute (USD) 3.5 -5.9 -7.5



Estimated free float (%)



7.17


Republic of Indonesia 60.0


Notes


91

Balance Sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash and equivalents 5,481 6,198 7,031 8,087 9,303Inter-bank lending 39,730 51,458 55,848 61,433 64,687Deposits with central bank 13,564 18,895 21,601 24,772 28,523Total securities 45,738 46,875 51,580 52,671 53,871Other interest earning assets

Gross loans 136,357 163,533 192,531 231,037 277,245Less provisions -6,957 -7,029 -7,655 -8,432 -9,844Net loans 129,400 156,505 184,876 222,605 267,401Long-term investments 24 24 27 29 32Fixed assets 3,838 4,053 4,458 4,904 5,394Goodwill


Other non IEAs 10,806 15,050 16,555 18,211 20,032Total assets 248,581 299,058 341,977 392,713 449,242Customer deposits 194,375 231,296 266,503 306,748 353,171Bank deposits, CDs, debentures 3,326 7,019 5,724 6,297 6,926Other interest bearing liabilities 6,901 8,990 11,329 12,462 13,708Total interest bearing liabilities 204,601 247,305 283,556 325,506 373,805Non interest bearing liabilities 10,830 13,910 15,577 18,585 19,369Total liabilities 215,431 261,215 299,133 344,091 393,174Minority interest 30 110 31 31 115Common stock 23,623 23,623 23,507 23,623 23,624Preferred stock

Retained earnings 9,990 14,422 19,771 26,119 33,481Reserves for credit losses

Proposed dividends

Other equity -494 -312 -466 -1,152 -1,152Shareholders' equity 33,120 37,733 42,812 48,591 55,953Total liabilities and equity 248,581 299,058 341,977 392,713 449,242Non-performing assets (IDR) 1,692 2,562 5,731 5,907 6,719

Balance sheet ratios (%)

Loans to deposits 70.2 70.7 72.2 75.3 78.5Equity to assets 13.3 12.6 12.5 12.4 12.5

Asset quality & capital

NPAs/gross loans (%) 1.2 1.6 3.0 2.6 2.4Bad debt charge/gross loans (%) 1.51 0.40 0.69 0.79 0.92Loss reserves/assets (%) 2.80 2.35 2.24 2.15 2.19Loss reserves/NPAs (%) 411.2 274.3 133.6 142.7 146.5Tier 1 capital ratio (%) 16.3 15.8 15.4 13.2 11.4Total capital ratio (%) 18.7 17.9 17.1 14.7 12.7

Growth (%)

Loan growth 13.6 20.9 18.1 20.4 20.1Interest earning assets 9.2 19.8 14.7 15.2 14.7Interest bearing liabilities 2.8 20.9 14.7 14.8 14.8Asset growth 9.3 20.3 14.4 14.8 14.4Deposit growth 3.1 19.0 15.2 15.1 15.1

Per share

Reported EPS (IDR) 241.83 312.40 349.32 410.27 476.79Norm EPS (IDR) 241.83 312.40 349.32 410.27 476.79Fully diluted norm EPS (IDR) 241.83 312.40 349.32 410.27 476.79DPS (IDR) 65.98 62.48 69.86 82.05 95.36PPOP PS (IDR) 431.41 426.44 484.84 592.03 726.38BVPS (IDR) 1,775.98 2,023.37 2,295.71 2,605.59 3,000.38ABVPS (IDR) 1,775.98 2,023.37 2,295.71 2,605.59 3,000.38NTAPS (IDR) 1,775.98 2,023.37 2,295.71 2,605.59 3,000.38Source: Company data, Nomura estimates

Notes


92

Resilient NIMs in the face of falling asset yields

We forecast BNI’s earnings growth to accelerate to 17.4% in FY13F and 16.2% in FY14F, from 11.8% in FY12F, on the back of stronger growth of underlying profit (PPOP) despite our assumption of its declining NPL recovery income to IDR1.35tn in FY13F and IDR1.25tn in FY14F (versus IDR1.7tn for both FY11 and FY12F). However, please note that our earnings forecasts exclude earnings upside from the potential resolution of the bank’s legacy NPLs arising from the constitutional court ruling (that allows state banks to grant debt principal reductions to debtors) – such resolution of BNI’s legacy NPLs (if any) could boost the bank’s NPL recovery income in coming years. BNI has outstanding written-off NPLs of IDR24tn – these were equivalent to 58% of its equity capital as in September 2012.

Meanwhile, BNI’s NIM has recovered to 5.72% in 3Q12 vs 5.53% in 2Q12 and 5.32% in 1Q12. As such, the bank was able to maintain its NIM stable at 5.52% in 9M12 (same as last year) despite a steep fall in sovereign yields in Indonesia. We expect the bank to be able to maintain its NIMs in the next two years, despite rising competition, as we see scope for BNI to increase its LDR further and improve its loan portfolio mix towards higher-margin retail loans.

Fig. 144: Trend of BNI’s annual NIMs and LDRs (% pa)


Fig. 145: Trend of BNI’s quarterly NIMs (% pa)


We forecast BNI’s pre-provision operating profit to grow by 22-23% in FY13-14F vs. only 13.7% y-y in FY12F, driven by stable NIMs, strong loan growth (20% pa) and improving cost/income ratios.

Fig. 146: Trend of BNI’s earnings growth (% y-y)


Fig. 147: Trend of underlying profits (4-quarter rolling sums) (IDR bn)


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We forecast stronger earnings growth in next two years driven by underlying profits (PPOP).

BNI has maintained stable NIMs despite falling asset yields in the past two years


93

As shown in the figure below, BNI has greater dependence of earnings from NPL recovery income in comparison to peer major banks such as Mandiri and BRI. NPL recovery income (from written-off NPLs) at BNI contributed 21.4% of its pre-tax profit in 9M12, higher than peers such as Mandiri (10.2% contribution) and BRI (9.3% contribution). However, BNI’s dependence on NPL recovery income to sustain its earnings growth has declined from as high as 33.2% in FY10. BNI’s much greater reliance on NPL recovery income (in comparison to peers) has led to its lower earnings visibility as we expect the contribution of such income would normally diminish over time in line with the bank’s improving asset quality (excluding the impact from the resolution of legacy NPLs).

BNI has lower underlying profitability in comparison to peer corporate lenders such as Mandiri and BCA (see figure below). We forecast BNI’s pre-provision ROAA at 2.82% in FY12F, lower than 3.04% in FY11 and 3.24% in FY10 due to strong operating expense growth arising from the bank’s investments in network and human resources to improve its banking franchise. In comparison, we forecast higher pre-provision ROAAs for Mandiri (3.57%) and BCA (3.44%) in FY12F. Fig. 148: NPL recovery income contribution to pre-tax profit (% of total)


Fig. 149: Comparison of pre-provision profit/average assets (% pa)


We view BNI’s lower core profitability is attributable to its higher cost structure. In the figure below, we show that BNI’s operating revenue/average asset ratio is on par with peer corporate lenders Mandiri and BCA, indicating similar productivity ratios. However, BNI’s operating cost/average asset ratio is well above its peers – this led to its significantly lower ROAAs. We believe that this gives better scope for BNI to improve its ROAAs and ROAEs in the longer run once the bank starts slowing growth of its network expansion and human resources and instead focuses on improving productivity. Fig. 150: Trend of operating revenue/average assets (% pa)


Fig. 151: Trend of operating cost/average assets (% pa)


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NPL recovery income at BNI contributed 21.4% to its pre-tax profit in 9M12 vs 9-10% at peers BRI and Mandiri

BNI has lower core profitability in comparison to peer corporate lenders such as Mandiri and BCA

We believe BNI’s higher cost structure gives scope for an improvement in its ROAA and ROAE in the longer run


94

Strong NPL recoveries have reduced credit cost

BNI’s overall loan provisioning, net of recoveries, has declined dramatically in the past three years (see figure below), albeit this was largely due to the bank’s large NPL recovery income since 2010 arising from BNI’s operational turnaround strategy under a new management. Under our current earnings forecast assumptions (which exclude potential resolution of legacy NPLs), we expect BNI’s credit cost (net of recoveries) to rise slightly to 89bp in FY13F and 103bp in FY14F, from 70bps in FY12F (FY11: 47bps). Meanwhile, BNI’s asset quality was relatively stable – we assume a slight downtrend in its new NPL formation (as a percentage of average loans) to 150bp in FY13-14F, from 170bp in FY12F (FY11: 272bp; FY10: 330bp).

Fig. 152: Trend of BNI’s credit cost (net of recoveries) (IDR bn)


Fig. 153: Trend of BNI’s new NPL formation (IDR bn)


Valuation: A laggard stock with low valuation

Our GGM-derived TP of IDR5,000 (unchanged) is based on 1.9x FY13F book, implying a P/E of 12.1x, using the following key assumptions: 19% sustainable ROE, 8.5% nominal long-term growth, and 14% cost of equity capital. BNI’s share price has underperformed peer major banks substantially in the past two years. The stock trades at an FY13F P/E of 9.1x – this is below its five-year mean of 10.7x. BNI’s relative P/E versus the average for Top-5 Indonesian banks in our coverage has also declined to 80%, from 100% two years ago.

Fig. 154: BNI’s relative share price performance vs. peers (end 2010=100)

Source: Bloomberg

Fig. 155: BNI’s 12-mth forward consensus P/E (x)

Source: Bloomberg consensus

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BNI

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BNI’s credit cost has declined sharply owing to NPL recoveries aside from a slight downtrend in the pace of new NPL formation

Stock trades at FY13F P/E of 9.1x, below its five-year mean of 10.7x, and at 20% discount to average multiple of Top-5 banks in our coverage


Indocement Tunggal PerkasaINTP.JK INTP IJ


EQUITY RESEARCH

Price leader in the industry

Still attractive, higher selling prices help to mitigate potential rising costs

January 8, 2013

Rating Remains

Buy


IDR 26,900


IDR 21,900


Action: Reiterating Buy recommendation Despite recent outperformance of the cement sector and INTP’s share price, we still favour the sector, as in our view the sector and INTP will continue to benefit from rising infrastructure spending and a strong property market. INTP’s cement selling prices have increased by 6.4% year to date to September 2012 (fastest in the past three years) due to strong demand and tight supply, and this has helped improve INTP’s operating margins, and mitigate potential rising operating costs, in our view.

Catalysts: Progress of new plants and further rise in selling prices Given high demand and tight supply conditions, we would expect cement companies, including INTP, to increase cement selling prices, partly to pass on the impact of potentially higher operating costs. We also expect that additional volume from INTP’s new plant, which INTP expects to complete in 4Q13, to be a catalyst for the share price.

Valuation and risks We derive our target price for INTP based on DCF. Despite our assumption of lower margin, we recently raised our TP due to higher production volume assumptions (as we assume higher new capacity in 2015F), and a higher EV/EBITDA multiple for our DCF terminal value (from 8x to 9x) to reflect peers’ and more recent INTP EV/EBITDA trading range. Downside risks include macro risks (that may affect demand), competition (leading to inability to increase selling prices), rising costs faster than expected, and delayed expansion.



Revenue (bn) 13,888 16,809 16,809 18,548 18,548 20,740 20,740



FD normalised EPS 976.96 1,209.29 1,209.29 1,338.94 1,338.94 1,502.75 1,502.75






ROE (%) 25.0 25.6 25.6 23.6 23.6 22.4 22.4

Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash


Anchor themes

As the second-largest cement producer, Indocement will continue to benefit from rising domestic cement consumption, in our view. Earnings growth will be more volume growth, as higher selling prices will offset any potential rise in operating costs.

Nomura vs consensus

Nomura's earnings forecasts are approximately 5% lower than consensus for FY13/14F, as we assume lower margins than consensus.

Research analysts




Nomura | Indocement Tunggal Perkasa January 8, 2013

96

Key data on Indocement Tunggal Perkasa Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 11,138 13,888 16,809 18,548 20,740Cost of goods sold -5,597 -7,474 -8,915 -9,903 -11,078Gross profit 5,540 6,414 7,894 8,645 9,662SG&A -1,521 -1,996 -2,297 -2,507 -2,795Employee share expense


EBITDA 4,641 5,082 6,248 6,843 7,586Depreciation -621 -664 -652 -705 -719Amortisation

EBIT 4,020 4,418 5,597 6,138 6,867Net interest expense 167 282 188 268 328Associates & JCEs

Other income 62 8 37 39 39Earnings before tax 4,248 4,708 5,821 6,446 7,234Income tax -1,024 -1,107 -1,368 -1,515 -1,700Net profit after tax 3,224 3,601 4,453 4,931 5,534Minority interests 0 -5 -2 -2 -2Other items

Preferred dividends


Reported NPAT 3,225 3,596 4,452 4,929 5,532Dividends -967 -1,079 -1,335 -1,479 -1,660Transfer to reserves 2,257 2,517 3,116 3,450 3,872



Growth (%)


Per share

Reported EPS (IDR) 875.95 976.96 1,209.29 1,338.94 1,502.75Norm EPS (IDR) 875.95 976.96 1,209.29 1,338.94 1,502.75Fully diluted norm EPS (IDR) 875.95 976.96 1,209.29 1,338.94 1,502.75Book value per share (IDR) 3,552.35 4,266.52 5,182.73 6,158.88 7,259.95DPS (IDR) 262.79 293.09 362.79 401.68 450.83Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) -5.8 7.6 27.7

Absolute (USD) -6.4 6.8 20.2

Relative to index -8.5 5.2 17.8



52-week range (IDR) 23250/15800


5.95


Birchwood (Heidelberg) 51.0

Mekar Perkasa 13.0


Notes

Earnings growth to slow down in 2013F due to our assumption of lower margins, and growth will only pick up in 2014F due to full-year earnings contribution from new plant.


97

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 4,641 5,082 6,248 6,843 7,586Change in working capital -477 -309 -582 -275 -332Other operating cashflow -1,040 -1,131 -1,368 -1,515 -1,700Cashflow from operations 3,124 3,643 4,298 5,053 5,554Capital expenditure -551 -600 -536 -1,839 -1,977Free cashflow 2,573 3,043 3,762 3,214 3,577Reduction in investments 1 -7 0 0 0Net acquisitions 0 0 0 0 0Reduction in other LT assets 20 -34 14 -8 -11Addition in other LT liabilities 22 25 32 24 18Adjustments 224 314 225 308 367Cashflow after investing acts 2,841 3,341 4,032 3,538 3,951Cash dividends -828 -967 -1,079 -1,335 -1,479Equity issue 0 0 0 0 0Debt issue 49 -194 -23 -27 -33Convertible debt issue

Others 0 0 0 0 0Cashflow from financial acts -780 -1,161 -1,102 -1,363 -1,512Net cashflow 2,061 2,180 2,931 2,175 2,440Beginning cash 2,623 4,685 6,864 9,795 11,970Ending cash 4,685 6,864 9,795 11,970 14,410Ending net debt -4,315 -6,688 -9,642 -11,844 -14,317Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 4,685 6,864 9,795 11,970 14,410Marketable securities 0 0 0 0 0Accounts receivable 1,355 1,935 1,842 2,033 2,273Inventories 1,300 1,328 2,198 2,442 2,732Other current assets 145 186 157 174 188Total current assets 7,484 10,313 13,993 16,619 19,602LT investments 31 38 38 38 38Fixed assets 7,703 7,639 7,524 8,658 9,916Goodwill


Other LT assets 127 161 147 156 166Total assets 15,346 18,151 21,702 25,470 29,722Short-term debt 257 45 153 126 93Accounts payable 399 596 611 678 759Other current liabilities 691 835 987 1,095 1,226Total current liabilities 1,348 1,476 1,751 1,899 2,078Long-term debt 113 131 0 0 0Convertible debt

Other LT liabilities 785 810 842 867 885Total liabilities 2,246 2,417 2,593 2,766 2,963Minority interest 23 28 30 32 34Preferred stock 0 0 0 0 0Common stock 3,035 3,035 3,035 3,035 3,035Retained earnings 10,042 12,671 16,044 19,637 23,691Proposed dividends

Other equity and reserves

Total shareholders' equity 13,077 15,706 19,079 22,672 26,726Total equity & liabilities 15,346 18,151 21,702 25,470 29,722

Liquidity (x)

Current ratio 5.55 6.99 7.99 8.75 9.43Interest cover na na na na na

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cashNet debt/equity (%) net cash net cash net cash net cash net cash

Activity (days)


Notes

Strong internally generated cashflows should allow the company to undertake aggressive capex plan without requiring additional external funding.

Notes

Strong balance sheet position


98

2013: some challenges, but still positive We expect cement demand to continue to be robust in 2013 given rising government infrastructure spending and property building activities. However, challenges remain, as cost pressure is likely to emerge as a result of higher labour costs, electricity costs, and potentially higher fuel prices. This risk is likely, in our view, to be mitigated by higher cement selling prices, which we see to continuing its uptrend into 2013F, though at more moderate pace. As a price leader, and with better cost efficiency, we believe INTP is in a better position to weather rising cost risks than other players.

Better stand on rising costs

Favourable demand environment continues We expect that domestic demand growth will remain high in 2013F, driven by rising infrastructure spending and property development that activities.

As a result, given the supply and demand situation, we think there is some room for the cement players to further increase its selling price by some 4-5% next year, which would be used partly to offset the potential cost increases.

Notwithstanding, we do not expect that the selling price increase will be aggressive and will be less than the 4-5% rate, as they continue to be cautious of potential foreign and import competition.

Rising costs threat We also expect that in 2013 cement players with face some rising cost challenges resulting from higher minimum wages, higher electricity tariff (15% increase in electricity tariff to be implemented in stages next year), and potentially higher fuel prices.

We believe the impact of these cost increases, however, will be partly offset by selling price increases, which INTP has proven to be able to do this year, despite rising competition from a new player in West Java.

Recent upgrades We recently upgraded our target price (to IDR26,900 from IDR23,400) for INTP, based on the following adjustments to our assumptions:

• We increased our sales volume assumptions for INTP, given its ability to optimize its utilization rates which it had proven in 2012 (we estimate that INTP capacity utilization rates has exceeded 90% in 2012 compared to approximately 85% utilization rate in 2011). We also increased our sales volume forecasts for 2015F, as we assume higher additional capacity that will be completed in 2015F by 4.4mn tons (we have previously only assumed 2.5mn tons additional to come in 2015F).

• We also assume higher cement selling price throughout our DCF forecast year given stronger-than-expected price increases in 2012.

• Although we expect that INTP would benefit from the lower coal prices environment and be able to secure coal supply contracts at lower price than last year, we also note there is a potential increase in other cost components; as such, we lowered our margins assumptions.

• We also adjusted our terminal value EV/EBITDA multiple from 8x to 9x, which is where INTP and its cement peers have recently traded, which we view as a reflection of positive market sentiment on cement and other infrastructure-related stocks.


Indomobil Sukses InternationalIMAS.JK IMAS IJ

AUTOS & AUTO PARTS

EQUITY RESEARCH

A market-share gainer

Indomobil likely to double its market share in five years despite short-term hiccups

January 8, 2013

Rating Remains

Buy

Target price Remains IDR 8,500

Closing price January 2, 2013 IDR 5,300


Indomobil likely to win market share Our strong conviction is based on our view that Nissan (and in later stage Volkswagen) will be successful in Indonesia. Nissan’s plan to introduce two new models each year, to design for the local market, and to localise production are the right ingredients to gain market share, in our view. Beside Nissan, Indomobil is also an exclusive distributor of Volkswagen, which seems to expand its presence in Indonesia.

Short term hiccup does not change our view We are not overly concerned by the recent hiccups in Nissan sales. Nissan continues to complete its product offering at different price range and models. This is complimented by Indomobil’s effort to expand Nissan distribution network from 65 outlets in 2011 to 85 in 2012 (+31% y-y) to support future growth. For comparison, Toyota has 214 outlets, Daihatsu has 181 outlets, and Suzuki has 202 outlets in 2011.

Catalyst: Product improvement and more new models Indomobil/Nissan will step up its marketing campaign to boost its brand image and refine its Nissan Evalia to address consumer’s complains in 1H13, according to the company. It also aims to aggressively increase its market share in car financing for Nissan, which was still less than 15% of Nissan credit sales in 9M12. Beyond 2013F, we believe the launch of Low-Cost Green Car (LCGC) in 2014 will continue to support growth.

Reiterate Buy rating and TP of IDR8,500 We reiterate Buy. Our TP of IDR8,500 is based on 18x FY13F P/E, at a slight premium to peer Astra International (ASII IJ, Buy) (15x FY13F), which is justified by its stronger earnings growth of 29%, in our view.



Revenue (bn) 15,777 21,594 21,594 27,508 27,508 34,924 34,924

Reported net profit (bn) 813 961 961 1,329 1,329 1,741 1,741

Normalised net profit (bn) 813 961 961 1,329 1,329 1,741 1,741


FD norm. EPS growth (%) 89.4 -20.9 -20.9 38.3 38.3 31.0 31.0





ROE (%) 27.3 19.0 19.0 22.2 22.2 24.3 24.3

Net debt/equity (%) 66.0 63.6 63.6 63.6 63.6 59.1 59.1


Anchor themes

We expect Indomobil to double its market share in the next five years, with Nissan adding high-volume models to its product line-up. In the longer-term, Indomobil should benefit further as exclusive distributor of Volkswagens that plans to step up its presence.

Nomura vs consensus

We are more optimistic than consensus on the medium-term outlook; our FY14F earnings are 17% higher than consensus estimates.

Research analysts

Indonesia Autos & Auto Parts



Nomura | Indomobil Sukses International January 8, 2013

100

Key data on Indomobil Sukses International Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 10,935 15,777 21,594 27,508 34,924Cost of goods sold -9,530 -13,787 -19,061 -24,311 -30,906Gross profit 1,405 1,989 2,534 3,197 4,019SG&A -1,076 -1,384 -1,877 -2,159 -2,482Employee share expense 0 0 0 0 0Operating profit 329 605 657 1,039 1,537

EBITDA 404 715 817 1,254 1,797Depreciation -75 -110 -160 -215 -260Amortisation 0 0 0 0 0EBIT 329 605 657 1,039 1,537Net interest expense -152 -152 -174 -190 -215Associates & JCEs 271 315 362 435 465Other income 194 420 490 588 706Earnings before tax 642 1,188 1,334 1,872 2,492Income tax -99 -217 -240 -356 -503Net profit after tax 542 971 1,094 1,516 1,989Minority interests -98 -158 -133 -187 -248Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 444 813 961 1,329 1,741Extraordinary items 4 0 0 0 0Reported NPAT 449 813 961 1,329 1,741Dividends 0 -163 -192 -266 -435Transfer to reserves 449 650 769 1,063 1,306


Reported P/E (x) 24.1 15.5 15.2 11.0 8.4Normalised P/E (x) 24.4 15.5 15.2 11.0 8.4FD normalised P/E (x) 22.9 12.1 15.2 11.0 8.4FD normalised P/E at price target (x) 36.7 19.4 24.5 17.7 13.5Dividend yield (%) na 1.1 1.3 1.8 3.0Price/cashflow (x) na 69.1 10.5 12.1 8.4Price/book (x) 8.8 3.1 2.7 2.3 1.9EV/EBITDA (x) 27.3 17.2 15.4 11.1 8.5EV/EBIT (x) 30.8 19.3 17.8 12.8 9.6Gross margin (%) 12.8 12.6 11.7 11.6 11.5EBITDA margin (%) 3.7 4.5 3.8 4.6 5.1EBIT margin (%) 3.0 3.8 3.0 3.8 4.4Net margin (%) 4.1 5.2 4.5 4.8 5.0Effective tax rate (%) 15.5 18.3 18.0 19.0 20.2Dividend payout (%) 0.0 20.1 20.0 20.0 25.0Capex to sales (%) 2.0 7.9 3.0 2.3 1.9Capex to depreciation (x) 3.0 11.3 4.0 3.0 2.5ROE (%) 52.3 27.3 19.0 22.2 24.3ROA (pretax %) 9.9 9.8 8.1 9.5 10.6

Growth (%)

Revenue 57.6 44.3 36.9 27.4 27.0EBITDA 107.1 76.8 14.2 53.5 43.3EBIT 152.5 84.0 8.5 58.2 47.9Normalised EPS 210.4 57.8 1.3 38.3 31.0Normalised FDEPS 231.2 89.4 -20.9 38.3 31.0

Per share

Reported EPS (IDR) 219.49 342.94 347.56 480.63 629.53Norm EPS (IDR) 217.37 342.94 347.56 480.63 629.53Fully diluted norm EPS (IDR) 231.90 439.17 347.56 480.63 629.53Book value per share (IDR) 601.89 1,691.59 1,969.64 2,354.14 2,826.29DPS (IDR) 0.00 59.00 69.51 96.13 157.38Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) 1.0 -3.6 -19.1

Absolute (USD) 0.4 -4.3 -23.8

Relative to index -1.7 -6.0 -28.9





2.99


Salim Group 70.4


Notes


101

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 404 715 817 1,254 1,797Change in working capital -762 -741 280 -335 -256Other operating cashflow 120 208 305 290 204Cashflow from operations -238 182 1,401 1,209 1,744Capital expenditure -223 -1,241 -640 -645 -655Free cashflow -461 -1,059 761 564 1,089Reduction in investments 0 0 0 0 0Net acquisitions -441 -465 -362 -435 -465Reduction in other LT assets -619 -469 -753 -765 -960Addition in other LT liabilities -353 31 37 38 47Adjustments 0 0 0 0 0Cashflow after investing acts -1,874 -1,961 -317 -598 -288Cash dividends 0 -163 -192 -266 -435Equity issue 391 2,751 0 0 0Debt issue 1,457 385 194 953 953Convertible debt issue 0 0 0 0 0Others 117 76 133 187 248Cashflow from financial acts 1,965 3,049 135 874 767Net cashflow 91 1,087 -182 276 478Beginning cash 446 537 1,624 1,442 1,718Ending cash 537 1,624 1,442 1,718 2,196Ending net debt 3,790 3,089 3,465 4,142 4,617Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 537 1,624 1,442 1,718 2,196Marketable securities 0 0 0 0 0Accounts receivable 895 1,223 1,538 1,809 2,009Inventories 1,543 2,428 3,133 3,996 5,080Other current assets 1,582 2,146 2,230 2,641 3,133Total current assets 4,556 7,420 8,343 10,164 12,419LT investments 1,110 1,575 1,937 2,372 2,837Fixed assets 746 1,877 2,357 2,787 3,182Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets 1,573 2,042 2,795 3,560 4,520Total assets 7,985 12,914 15,431 18,883 22,957Short-term debt 2,236 2,398 981 1,172 1,363Accounts payable 1,403 2,090 3,133 3,996 5,080Other current liabilities 578 926 1,268 1,615 2,051Total current liabilities 4,217 5,414 5,383 6,784 8,494Long-term debt 2,091 2,315 3,925 4,688 5,451Convertible debt 0 0 0 0 0Other LT liabilities 69 100 137 175 222Total liabilities 6,377 7,830 9,445 11,647 14,167Minority interest 331 406 539 726 974Preferred stock 0 0 0 0 0Common stock 995 3,685 3,685 3,685 3,685Retained earnings 212 1,041 1,810 2,873 4,179Proposed dividends 0 0 0 0 0Other equity and reserves 70 -48 -48 -48 -48Total shareholders' equity 1,277 4,678 5,447 6,510 7,815Total equity & liabilities 7,985 12,914 15,431 18,883 22,957

Liquidity (x)

Current ratio 1.08 1.37 1.55 1.50 1.46Interest cover 2.2 4.0 3.8 5.5 7.2

Leverage


Activity (days)


Notes

Notes


102

Indomobil: Focus charts Fig. 156: Nissan sales volumes in Indonesia (last Nov-12)

Source: Gaikindo

Fig. 157: Nissan market share in Indonesia (last Nov-12)

Source: Gaikindo, Nomura Research Fig. 158: Market share of Indonesia automobile sales, 9M12

Source: Gaikindo, Nomura research

Fig. 159: Gross profit breakdown (9M12)

Source: Company info

Fig. 160: Indomobil volume assumptions

(units) 2011 2012F 2013F 2014F

Nissan (exclusive) 56,137 65,800 88,015 139,981

+/- yoy 17.2% 33.8% 59.0%

Hino (non-exclusive) 5,800 5,800 6,090 7,004

+/- yoy 0.0% 5.0% 15.0%

Volkswagen, Audi, Volvo, others 2,500 1,200 1,200 1,260

+/- yoy -52% 0% 5%

Source: Nomura estimates

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Nissan market share

Nissan market share (12m moving average)

Toyota36.2%

Daihatsu14.6%

Isuzu3.0%

Mitsubishi13.5%

Suzuki11.5%

Honda6.2%

Nissan 6.0%

Others9.0%

Automotive54.3%

Financial services13.8%

Rental 6.6%

Others 25.3%


Jasa Marga JSMR.JK JSMR IJ

TRANSPORT/LOGISTICS

EQUITY RESEARCH

More than just tariff and volume

Future growth to accelerate on higher tariff, more volumes, and contribution of new projects

January 8, 2013

Rating Remains

Buy




One of our top picks in the infrastructure sector We think that Jasa Marga’s growth is about to get more exciting next year as prospects of accelerating earnings growth start to crystallize, supported not only by tariff adjustments and traffic growth, but also completion of new projects. We expect some 190km of new toll road projects will be completed over the next three years, starting with some 60km in 2013F.

Key growth drivers: tariff, traffic and project completions Earnings growth for Jasa Marga in the near to medium term would include not only that from the impact of tariff adjustments and traffic growth, but also revenue contribution from completion of new toll road projects. In 2013F, 11 of a total of 13 JSMR toll roads will have tariff adjustments to be implemented in the fourth quarter. These tariff adjustments will have a full-year impact in 2014F, when new toll roads completed in 2013F will also make full-year earnings contributions.

Valuation and risks We use DCF to derive our target price of IDR6,875 for JSMR, with a 9.9% discount rate (Rm premium of 6%, Rf 6% and Beta of 1 to derive CoE of 12%). Cashflows are discounted back to 2013F. Key downside risks include macro risks, higher operating costs, project delays and regulatory risks.



Revenue (bn) 4,960 5,810 5,810 6,634 6,634 8,491 8,491









ROE (%) 16.7 18.6 18.6 18.9 18.9 22.8 22.8

Net debt/equity (%) 60.3 76.9 76.9 98.9 98.9 98.1 98.1


Anchor themes

Jasa Marga is the largest toll operator and should benefit most from toll road development in Indonesia. The development of 40% more new toll roads by the company over the next three years enhances visibility of earnings growth prospects.

Nomura vs consensus

Our TP is 2.6% higher than Bloomberg consensus, reflecting our aggressive long-term view (our forecast FY14EBITDA is 9% higher than consensus).

Research analysts

Indonesia Transport



Nomura | Jasa Marga January 8, 2013

104

Key data on Jasa Marga Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 4,380 4,960 5,810 6,634 8,491Cost of goods sold -1,646 -1,801 -2,118 -2,349 -2,814Gross profit 2,734 3,159 3,692 4,284 5,678SG&A -745 -878 -1,019 -1,184 -1,422Employee share expense


EBITDA 2,521 2,958 3,360 3,965 5,258Depreciation -532 -677 -688 -864 -1,003Amortisation

EBIT 1,989 2,281 2,673 3,101 4,255Net interest expense -533 -509 -522 -738 -991Associates & JCEs

Other income 20 -45 -45 -45 -45Earnings before tax 1,476 1,727 2,105 2,317 3,219Income tax -292 -408 -526 -579 -805Net profit after tax 1,184 1,319 1,579 1,738 2,414Minority interests 9 21 -13 -14 -16Other items

Preferred dividends


Reported NPAT 1,193 1,340 1,566 1,724 2,398Dividends -716 -536 -627 -690 -959Transfer to reserves 477 804 940 1,034 1,439



Growth (%)


Per share

Reported EPS (IDR) 175.44 197.06 230.35 253.52 352.65Norm EPS (IDR) 175.44 197.06 230.35 253.52 352.65Fully diluted norm EPS (IDR) 175.44 197.06 230.35 253.52 352.65Book value per share (IDR) 1,138.38 1,224.85 1,257.70 1,419.09 1,670.33DPS (IDR) 105.29 78.82 92.14 101.41 141.06Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) -2.6 -3.5 32.1

Absolute (USD) -3.2 -4.2 24.4

Relative to index -5.3 -5.8 22.3





4.32


Government of Indonesia 70.0

Public 30.0


Notes

Growth in 2012F will mostly be driven by full year impact of 2011 tariff adjustments, while 2013F and 14F growth will be mostly driven by completion of new toll road projects (130km by 2014F)


105

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 2,521 2,958 3,360 3,965 5,258Change in working capital 53 809 -320 179 293Other operating cashflow -810 -961 -1,089 -1,359 -1,838Cashflow from operations 1,764 2,806 1,951 2,785 3,714Capital expenditure -2,835 -3,074 -3,091 -5,261 -4,914Free cashflow -1,071 -268 -1,140 -2,476 -1,200Reduction in investments 70 -7 36 -3 -3Net acquisitions 0 0 0 0 0Reduction in other LT assets 134 -181 -27 -29 -26Addition in other LT liabilities 436 13 995 91 170Adjustments

Cashflow after investing acts -431 -443 -136 -2,416 -1,058Cash dividends -596 -716 -536 -627 -690Equity issue -1 0 -2 0 0Debt issue 1,699 635 297 2,220 1,988Convertible debt issue 0 0 0 0 0Others 26 277 -883 78 144Cashflow from financial acts 1,128 196 -1,124 1,672 1,442Net cashflow 697 -247 -1,260 -744 384Beginning cash 3,314 4,011 3,764 2,504 1,759Ending cash 4,011 3,764 2,504 1,759 2,144Ending net debt 4,138 5,020 6,577 9,542 11,145Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 4,011 3,764 2,504 1,759 2,144Marketable securities 27 39 0 0 0Accounts receivable 0 0 0 0 0Inventories 0 0 0 0 0Other current assets 52 194 102 116 146Total current assets 4,090 3,997 2,606 1,875 2,289LT investments 366 361 364 367 369Fixed assets 14,195 16,592 18,995 23,392 27,303Goodwill 42 41 37 33 30Other intangible assets

Other LT assets 259 440 467 496 521Total assets 18,952 21,431 22,469 26,163 30,513Short-term debt 1,317 1,656 2,289 2,012 1,012Accounts payable 514 636 592 714 854Other current liabilities 647 1,476 1,109 1,180 1,363Total current liabilities 2,478 3,768 3,990 3,906 3,229Long-term debt 6,832 7,128 6,792 9,289 12,277Convertible debt

Other LT liabilities 1,282 1,295 2,290 2,381 2,551Total liabilities 10,592 12,191 13,071 15,576 18,056Minority interest 619 911 845 938 1,098Preferred stock 0 0 0 0 0Common stock 5,735 5,735 5,735 5,735 5,735Retained earnings 2,006 2,594 2,817 3,915 5,623Proposed dividends



Liquidity (x)

Current ratio 1.65 1.06 0.65 0.48 0.71Interest cover 3.7 4.5 5.1 4.2 4.3

Leverage


Activity (days)

Days receivable 0.0 0.0 0.0 0.0 0.0Days inventory 0.0 0.0 0.0 0.0 0.0Days payable 99.1 116.5 106.0 101.4 101.7Cash cycle -99.1 -116.5 -106.0 -101.4 -101.7Source: Company data, Nomura estimates

Notes

Capital expenditure will increase as Jasa Marga completes development of some 190km new toll roads up to 2015F

Notes

We expect leverage to rise but remain manageable with debt to equity ratio reaching slightly below 100% by 2013F


106

A lot more new roads coming up Jasa Marga is one of our top picks in the infrastructure sector. Future earnings growth would be supported by completion of new toll roads that we estimate total approximately 190km in length of additional roads over the next three years. The company should also be a key beneficiary of recent passage of land acquisition bill, in our view.

Existing toll roads continue to support basic growth

In the near term, until 2013F, Jasa Marga’s earnings growth will continue to be driven by traffic growth and the full-year impact of toll road tariff adjustments that were implemented in 2012 on 2 of its 13 toll roads.

However, the remaining 11 of the 13 toll roads currently operated by Jasa Marga will have their tariffs adjusted in 2H13, that will have full-year impact in 2014F. This, coupled with continued traffic growth and full-year contribution of new toll road to be completed in 2013F (the company has scheduled development completion of some 45km of toll roads in 2013F), will be the key earnings driver in 2014F. We would expect that this 2014F earnings growth prospect will gain better visibility by mid 2013F.

Contribution of new toll roads projects

Currently Jasa Marga is in the process of developing nine new toll roads with total additional toll road length of 190km, with target completion in 2014, and full-year contribution starting 2015.

Completion of these new toll roads will help enhance Jasa Marga’s earnings growth prospects because not only will these new toll roads mean more traffic, but revenue per km per unit of traffic from these new toll roads will also be much higher than existing toll roads operated by Jasa Marga, we believe.

The new toll roads represent an increase of 35% in total toll road length operated by Jasa Marga by 2015F, while at the same time we forecast Jasa Marga’s revenue to increase by 67% from 2012F to 2015F.

Fig. 161: Trend of monthly toll traffic and car sales Traffic growth has moved in line with car sales volume

Source: Jasa Marga, Indonesia auto sales / dealer association (Gaikindo); Nomura research

Fig. 162: Length of toll roads managed by JSMR Some 190km of new toll roads to be added in the next 3 years

Source: Jasa Marga; Nomura research

Subsiding execution risks Beyond the revenue growth that these new toll roads will contribute to Jasa Marga’s earnings, we also think that the completion of the new toll road will help to reduce any perceived execution risk, particularly on the general development of toll roads in Indonesia, which will help alleviate valuation of Jasa Marga.

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Kalbe Farma KLBF.JK KLBF IJ

HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

More to offer from here

Strong growth in prescription business likely to continue in the long term

January 8, 2013

Rating Remains

Buy




Absolute growth for pharmaceuticals, margin is less a concern With the launch of National Social Security scheme in 2014, pharma spending by the government could reach up to ~40% of last year’s ethical pharma sales, in our view. We believe this should benefit Kalbe as a leading name in Indonesia’s pharma sector. The company targets to raise the contribution of ‘unbranded generics’ to 18% revenue (vs. 9% in 1H12) by 2019F. The margin effect from the change in the business mix is less of a concern for us as Kalbe has maintained the profitability of each segment.

Better health awareness due to rising middle-class income We believe improved purchasing power, which encourages Indonesian consumers to upgrade their standard of living, should lead to better health awareness. As the education level in Indonesia has also risen in the past decade (secondary school enrolment was at 77% in 2010 vs. 53% in 2000), we believe the next stage of growth will be focused more on consumption vs. consumer health well-being earlier.

Maintain Buy We maintain our Buy rating with a TP of IDR1,200. Our TP implies FY14F P/E of 24x, which is still at a discount to JCI Consumer’s 25x P/E. Our TP is at an 18% discount to our DDM valuation, with 11% WACC and 7% growth assumption. We forecast an 18% earnings CAGR over FY11-16F. The cash holdings of ~USD200mn (as in 1H12) should give Kalbe the ability to expand inorganically through M&As, which is not incorporated into our earnings growth assumptions. Potential catalysts include the likely launch of the National Social Security scheme in 2014 and the rising middle-class population that we expect to drive further growth in the healthcare sector.



Revenue (bn) 10,912 14,011 14,011 16,446 16,446 19,417 19,417









ROE (%) 25.6 26.4 26.4 27.8 27.8 28.7 28.0



Anchor themes

We remain positive on long-term growth in Indonesia's consumption, but rising competition may affect companies' earnings performance going forward. We note, however, the intensity of competition varies across subsectors, and we prefer companies with strong branding or effective product placements.

Nomura vs consensus

Our FY13F earnings estimate is in line with consensus.

Research analysts

Indonesia Consumer Related

Janni Asman - PTNI [email protected] +62 21 2991 3345



Nomura | Kalbe Farma January 8, 2013

108

Key data on Kalbe Farma Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 10,227 10,912 14,011 16,446 19,417Cost of goods sold -5,060 -5,361 -7,288 -8,624 -10,382Gross profit 5,166 5,551 6,723 7,822 9,035SG&A -3,375 -3,583 -4,401 -5,030 -5,866Employee share expense


EBITDA 2,014 2,176 2,562 3,071 3,489Depreciation -197 -197 -230 -270 -310Amortisation -26 -11 -10 -10 -10EBIT 1,791 1,968 2,322 2,791 3,169Net interest expense 34 84 80 90 85Associates & JCEs 0 0 0 0 0Other income -55 -64 0 0 0Earnings before tax 1,770 1,987 2,402 2,881 3,254Income tax -427 -464 -601 -720 -814Net profit after tax 1,344 1,523 1,802 2,161 2,441Minority interests -57 -41 -49 -59 -67Other items

Preferred dividends


Reported NPAT 1,286 1,482 1,752 2,102 2,374Dividends -711 -891 -1,139 -1,471 -1,781Transfer to reserves 575 591 613 631 594


Reported P/E (x) 40.8 35.4 30.0 25.0 22.1Normalised P/E (x) 40.8 35.4 30.0 25.0 22.1FD normalised P/E (x) 44.2 38.4 32.5 27.1 24.0FD normalised P/E at price target (x) 47.4 41.1 34.8 29.0 25.7Dividend yield (%) 1.4 1.7 2.2 2.8 3.4Price/cashflow (x) 43.5 40.1 39.6 29.7 27.0Price/book (x) 9.8 8.4 7.4 6.5 5.9EV/EBITDA (x) 27.3 25.1 21.4 17.9 15.8EV/EBIT (x) 30.7 27.8 23.7 19.7 17.3Gross margin (%) 50.5 50.9 48.0 47.6 46.5EBITDA margin (%) 19.7 19.9 18.3 18.7 18.0EBIT margin (%) 17.5 18.0 16.6 17.0 16.3Net margin (%) 12.6 13.6 12.5 12.8 12.2Effective tax rate (%) 24.1 23.4 25.0 25.0 25.0Dividend payout (%) 55.3 60.1 65.0 70.0 75.0Capex to sales (%) 4.0 4.3 5.0 4.3 3.6Capex to depreciation (x) 2.1 2.4 3.0 2.6 2.3ROE (%) na 25.6 26.4 27.8 28.0ROA (pretax %) 35.6 35.4 34.1 33.6 32.5

Growth (%)


Per share

Reported EPS (IDR) 27.45 31.62 37.38 44.84 50.65Norm EPS (IDR) 27.45 31.62 37.38 44.84 50.65Fully diluted norm EPS (IDR) 25.34 29.19 34.51 41.40 46.75Book value per share (IDR) 114.64 132.58 150.96 171.50 190.76DPS (IDR) 15.17 19.01 24.30 31.39 37.98Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) 14.3 28.0 63.5

Absolute (USD) 14.2 26.3 55.7






5.88


PT Gira Sole Prima 10.2

PT Santa Seha Sanadi 9.6


Notes


109

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 2,014 2,176 2,562 3,071 3,489Change in working capital -103 -167 -560 -485 -610Other operating cashflow -602 -591 -567 -669 -773Cashflow from operations 1,308 1,418 1,435 1,918 2,106Capital expenditure -411 -469 -700 -700 -700Free cashflow 897 949 735 1,218 1,406Reduction in investments -48 -5 0 0 0Net acquisitions

Reduction in other LT assets 35 -57 -115 -90 -110Addition in other LT liabilities -4 14 36 29 35Adjustments

Cashflow after investing acts 881 901 656 1,156 1,330Cash dividends -254 -711 -891 -1,139 -1,471Equity issue 31 70 0 0 0Debt issue -315 116 -140 0 0Convertible debt issue

Others -4 14 36 29 35Cashflow from financial acts -541 -511 -995 -1,110 -1,437Net cashflow 339 389 -338 45 -106Beginning cash 1,563 1,902 2,291 1,953 1,998Ending cash 1,902 2,291 1,953 1,998 1,892Ending net debt -1,878 -2,151 -1,953 -1,998 -1,892Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 1,902 2,291 1,953 1,998 1,892Marketable securities

Accounts receivable 1,263 1,530 1,965 2,306 2,723Inventories 1,551 1,705 2,197 2,599 3,129Other current assets 316 430 552 647 764Total current assets 5,032 5,956 6,666 7,551 8,508LT investments 48 54 54 54 54Fixed assets 1,605 1,860 2,330 2,760 3,150Goodwill


Other LT assets 347 404 519 610 720Total assets 7,032 8,275 9,569 10,974 12,432Short-term debt 24 140 0 0 0Accounts payable 488 850 1,156 1,368 1,647Other current liabilities 634 640 822 965 1,139Total current liabilities 1,146 1,631 1,978 2,333 2,786Long-term debt 0 0 0 0 0Convertible debt 0 0 0 0 0Other LT liabilities 114 128 164 193 228Total liabilities 1,261 1,759 2,143 2,526 3,014Minority interest 398 301 350 409 476Preferred stock

Common stock 512 512 512 512 512Retained earnings 5,581 6,407 7,269 8,232 9,134Proposed dividends

Other equity and reserves -720 -705 -705 -705 -705Total shareholders' equity 5,374 6,215 7,076 8,039 8,942Total equity & liabilities 7,032 8,275 9,569 10,974 12,432

Liquidity (x)


Leverage


Activity (days)


Notes

Notes


110

Kalbe Farma focus charts Fig. 163: Kalbe’s revenue breakdown (1H12)


Fig. 164: Kalbe’s pharmaceutical sales breakdown (1H12)


Fig. 165: Indonesia pharmaceutical industry sales


Fig. 166: Indonesia pharmaceutical sales breakdown


Fig. 167: Indonesia workforce education*

* Note: From Feb 2011, the data show that workforce with education above primary school is larger than those with an education level up to the primary level

Source: Indonesia Statistics, Nomura research

Fig. 168: Secondary school enrolment* (% of age group)

* Note: Number school applicants in secondary school from total population in the agegroup intended for the level of education Source: CEIC, United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics, Nomura research

Prescription25%

Consumer health16%

Nutritional22%

Distribution37%

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Semen Indonesia SMGR.JK SMGR IJ


EQUITY RESEARCH

Volume growth kicking in

Most favoured play in the cement sector with growth driven by capacity expansion

January 8, 2013

Rating Remains

Buy


IDR 17,900


IDR 15,950


Largest cement company in Indonesia Semen Gresik recently changed its name to Semen Indonesia (SI). We view SI as the best play for investors to gain exposure in Indonesia’s fast-growing cement sector. SI is the largest cement company in the country with more than 40% share of industry capacity, and geographically well diversified with facilities located across 3 main Indonesian islands.

With most aggressive but well executed growth plans SI will be the only major cement producer in Indonesia adding new capacity until 1H13. This year alone, the company will add 6mn tons of new capacity. 3mn tons have been recently completed, thereby increasing SI’s total capacity to 23mn tons, which has allowed SI to increase its market share from below 40% in 1H12 to 41.7% in 3Q12. Another 2.5mn tons and 2mn tons would be completed by 4Q12 and 1Q13, respectively, that will bring total capacity to 28mn tons by 1Q13, which we expect would help SI to gain market share further, given strong demand. We would also expect that the company would benefit from economic scale efficiency and hence margin improvement.

Valuation We use DCF to derive our TP of IDR17,900 for SI to reflect its growth profile driven by new capacity expansion. Our DCF uses WACC of 10.1% (Rm premium of 6%, Rf of 6%, and Beta 1.1 to derive CoE of 12.6%). Recent completion of the initial phase of capacity expansion has helped alleviate some execution risk. The key downside risks would include macro risks, higher energy costs, and more intense competition. We are currently reviewing our numbers.



Revenue (bn) 16,379 19,612 19,612 24,071 24,071 27,781 27,781



FD normalised EPS 661.68 793.27 793.27 1,038.36 1,038.36 1,292.41 1,292.41






ROE (%) 29.7 29.7 29.7 31.8 31.8 31.8 31.8

Net debt/equity (%) net cash 1.6 1.6 net cash net cash net cash net cash


Anchor themes

We believe Indonesia's economy is set to take on a new growth trajectory. The robust macro story, coupled with fiscal budget deployment, should help to propel infrastructure investment spending and further unlock full growth potential, in our view.

Nomura vs consensus

Our DCF-based TP is 15% higher than consensus, reflecting our confidence in the company's expansion plans and longer-term prospects.

Research analysts




Nomura | Semen Indonesia January 8, 2013

112

Key data on Semen Indonesia Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 14,344 16,379 19,612 24,071 27,781Cost of goods sold -7,534 -8,892 -10,761 -13,011 -14,760Gross profit 6,810 7,487 8,851 11,060 13,021SG&A -2,321 -2,649 -3,048 -3,486 -3,867Employee share expense


EBITDA 4,964 5,399 6,820 8,626 10,377Depreciation -475 -561 -1,017 -1,052 -1,223Amortisation

EBIT 4,489 4,838 5,803 7,574 9,154Net interest expense 203 182 49 100 410Associates & JCEs

Other income 30 70 73 74 75Earnings before tax 4,723 5,090 5,925 7,748 9,639Income tax -1,064 -1,135 -1,185 -1,550 -1,928Net profit after tax 3,659 3,955 4,740 6,198 7,711Minority interests -26 -30 -35 -39 -45Other items

Preferred dividends





Growth (%)

Revenue -0.3 14.2 19.7 22.7 15.4EBITDA 4.1 8.8 26.3 26.5 20.3EBIT 3.4 7.8 20.0 30.5 20.9Normalised EPS 9.2 8.0 19.9 30.9 24.5Normalised FDEPS 9.2 8.0 19.9 30.9 24.5

Per share

Reported EPS (IDR) 612.53 661.68 793.27 1,038.36 1,292.41Norm EPS (IDR) 612.53 661.68 793.27 1,038.36 1,292.41Fully diluted norm EPS (IDR) 612.53 661.68 793.27 1,038.36 1,292.41Book value per share (IDR) 2,024.18 2,438.56 2,901.05 3,622.10 4,499.17DPS (IDR) 248.33 330.78 317.31 415.34 516.97Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) 7.8 12.3 42.4

Absolute (USD) 7.1 11.5 34.1






10.06


Government 51.0

Public 49.0


Notes

Revenue growth to pick up in 2013F given full-year operation of new production capacity and contribution of a new cement mill in 1Q13F. Margins expected to improve in 2014F on the back of economies of scale

efficiencies.


113

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 4,964 5,399 6,820 8,626 10,377Change in working capital -284 -149 -1,011 -470 -373Other operating cashflow -828 -873 -1,063 -1,376 -1,443Cashflow from operations 3,853 4,377 4,746 6,781 8,561Capital expenditure -4,123 -4,539 -4,754 -489 -518Free cashflow -271 -163 -8 6,292 8,043Reduction in investments 1,077 55 110 -13 -15Net acquisitions 0 0 0 0 0Reduction in other LT assets 25 -7 8 -2 -3Addition in other LT liabilities 75 37 65 88 69Adjustments 0 0 0 0 0Cashflow after investing acts 907 -77 175 6,364 8,094Cash dividends -1,822 -1,473 -1,962 -1,882 -2,464Equity issue 0 0 0 0 0Debt issue 485 1,196 2,960 -20 -56Convertible debt issue

Others -15 -6 -17 -20 -23Cashflow from financial acts -1,352 -283 981 -1,922 -2,542Net cashflow -446 -361 1,156 4,442 5,552Beginning cash 4,235 3,789 3,428 4,584 9,026Ending cash 3,789 3,428 4,584 9,026 14,578Ending net debt -3,103 -1,536 268 -4,194 -9,802Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 3,789 3,428 4,584 9,026 14,578Marketable securities 113 253 253 253 253Accounts receivable 1,717 1,829 2,418 2,968 3,425Inventories 1,624 2,006 2,211 2,674 3,033Other current assets 94 129 177 218 253Total current assets 7,338 7,645 9,643 15,139 21,542LT investments 423 228 118 131 146Fixed assets 7,663 11,641 15,378 14,815 14,111Goodwill


Other LT assets 140 147 139 141 144Total assets 15,563 19,661 25,278 30,226 35,942Short-term debt 87 78 58 94 38Accounts payable 892 1,183 1,179 1,426 1,618Other current liabilities 1,539 1,628 1,463 1,800 2,086Total current liabilities 2,518 2,889 2,701 3,320 3,742Long-term debt 600 1,814 4,794 4,738 4,738Convertible debt

Other LT liabilities 306 343 408 496 565Total liabilities 3,423 5,046 7,902 8,554 9,045Minority interest 133 151 168 188 210Preferred stock 0 0 0 0 0Common stock 2,051 2,051 2,051 2,051 2,051Retained earnings 9,955 12,413 15,156 19,433 24,636Proposed dividends



Liquidity (x)


Leverage

Net debt/EBITDA (x) net cash net cash 0.04 net cash net cashNet debt/equity (%) net cash net cash 1.6 net cash net cash

Activity (days)


Notes

Our estimated capex spending does not yet include the planned capex to further expand capacity by 3mn tons each in 2015F and 2016F, or the Vietnam acquisition, which we believe SI would be able to comfortably meet.

Notes

High cash balance indicates SI would be able to comfortably meet its capex spending for Vietnam acquisition and further capacity expansion.


114

Becoming a more dominant player SI continues to be our top pick within the cement sector. Rising infra spending and property demand continues to be the main drivers for demand growth, and new capacity will help SI to benefit from the trend and market share.

Reaping benefits from new plants SI’s new cement plant in Tuban commenced its full commercial operation in July, and as a result, the company’s monthly cement sales volume in July reached a record high, and it has been gaining more domestic market share.

Fig. 169: All cement producers have been ramping up volume All producers set record high monthly sales during 2012

Source: Indonesia cement association; Nomura Research; Note:

Fig. 170: Cement domestic sales market share SI's new cement plant has helped it gain market share

Source: Indonesia cement association; Nomura Research

This trend of gains in market share is likely to continue as SI continues to ramp up its capacity, with another 3mn tons in Tonasa by 4Q12 and another 2mn tons of cement milling plant in 1Q13. As a result, by mid 2013F SI would have effective new capacity of 28mn tons compared to just 20mn tons in 2011.

Semen Indonesia The company recently attained shareholders’ approval to change its name into Semen Indonesia, which will subsequently become a holding company for future expansions. The Semen Gresik brand, however, will continue to exist and will be the main company’s brand to sell its product in Java. With the formation of a strategic holding company, development of new plants in new locations in future would be done through a separate subsidiary entity, wholly owned by SI.

Management believes that this consolidation exercise would benefit the company in the long term, as it helps integrate the business of different entities in different regions, and helps provide a better foundation to grow further without many regional issues.

Acquisition of a Vietnamese cement producer The company has also recently announced that it has successfully completed the acquisition of 70% stake in Thang Long Cement, a Vietnam based cement producer with total production capacity of 2.3mn tons.

The company’s management was quoted in the local media (Bisnis Indonesia and Investor Daily, December 19, 2012) as stating that the acquisition cost of the 70% equity stake in Thang Long was USD150mn with implied company’s valuation of USD335mn or USD145/ton enterprise value, lower than the company’s current valuation. This is lower than SI’s current trading EV/ton multiple of USD365/ton and just slightly higher than SI’s recent brownfield 5mn tons expansion of USD140/ton, presumably due to lower profitability of its Vietnamese cement operation (USD65-70/ton cement selling price in Vietnam, according to management of SI).

We view this acquisition positively. Not only it would diversify SI’s revenue stream, but Vietnam’s capacity will serve as a potential alternative source of supply to meet growing domestic demand.

0

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United Tractors UNTR.JK UNTR IJ

ENGINEERING & CONSTRUCTION

EQUITY RESEARCH

Recovery ahead

Modest economic recovery in China and US in 2013 will boost sentiment and help sales

January 8, 2013

Rating Remains

Buy


IDR 33,000


IDR 20,950


Key earnings drivers are more stable than share price suggests We believe the 41% decline in UT’s share price from the peak in Apr-12 is excessive relative to the level of volatility in UT’s earnings. It generates two-third of its earnings from stable business of contract mining and after-sales services, which are still doing well despite the weak sentiment in the coal mining sector.

Demand for coal will continue to grow The medium-term coal production outlook remains promising with the International Energy Agency (IEA) expecting the world to burn 1.2m more tons of coal per annum in 2017, led by India and China. This will support coal price, in our view, and UT should perform well so long as coal price is high enough to encourage coal mining expansion. UT commands a strong market leadership; it was responsible for about one-third of coal production and 44% of heavy equipment sales in Indonesia in 9M12.

Catalyst: Sales volume might have bottomed… We believe the knee-jerk reaction to a falling coal price has passed and the sales volume of Komatsu equipment should soon bottom and recover. A forecast pick-up in demand from the construction sector should also help volume recover in 2013-14F; thus, we see positive sentiment ahead.

Valuation: retain Buy We expect earnings growth to slow to 4% in 2012F before accelerating to 12% in 2013F and 18% in 2014F. The share price trades at attractive valuation of 11.5x 2013F and 9.7x 2014F P/Es, and we retain our Buy rating. Our TP of IDR33,000 provides 57.5% upside and is based on a target 2014F P/E of 15x, in line with our target market multiple.



Revenue (bn) 55,053 58,214 58,214 62,715 62,715 72,497 72,497



FD normalised EPS 1,885.07 1,691.91 1,691.91 1,827.06 1,827.06 2,155.00 2,155.00

FD norm. EPS growth (%) 64.8 -10.2 -10.2 8.0 8.0 17.9 17.9





ROE (%) 27.8 21.9 21.9 21.5 21.5 22.2 22.2



Anchor themes

As a sole distributor of Komatsu equipment and a contractor to coal-mining companies, UT's earnings are driven by coal production growth instead of coal price. An acceleration in infrastructure development also bodes well for heavy-equipment demand.

Nomura vs consensus

Our earnings forecast is 10% above consensus in FY13F, largely because we expect the coal price to at least start to stablise, if not recover.

Research analysts

Indonesia Research Team



Nomura | United Tractors January 8, 2013

116

Key data on United Tractors Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 37,324 55,053 58,214 62,715 72,497Cost of goods sold -30,528 -44,859 -47,435 -50,717 -58,342Gross profit 6,796 10,194 10,779 11,998 14,155SG&A -1,633 -2,578 -2,731 -3,136 -3,667Employee share expense 0 0 0 0 0Operating profit 5,163 7,615 8,048 8,862 10,489

EBITDA 8,019 11,041 12,248 13,462 15,289Depreciation -2,857 -3,426 -4,200 -4,600 -4,800Amortisation 0 0 0 0 0EBIT 5,163 7,615 8,048 8,862 10,489Net interest expense -140 -39 14 163 159Associates & JCEs 23 28 32 36 42Other income -51 131 19 19 19Earnings before tax 4,994 7,735 8,113 9,080 10,709Income tax -1,187 -1,885 -2,031 -2,267 -2,673Net profit after tax 3,808 5,850 6,081 6,813 8,036Minority interests -2 1 2 2 2Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 3,806 5,851 6,083 6,815 8,038Extraordinary items 67 50 75 75 75Reported NPAT 3,873 5,901 6,158 6,890 8,113Dividends -1,539 -2,360 -2,463 -2,756 -3,245Transfer to reserves 2,334 3,541 3,695 4,134 4,868



Growth (%)

Revenue 27.6 47.5 5.7 7.7 15.6EBITDA 8.8 37.7 10.9 9.9 13.6EBIT -0.1 47.5 5.7 10.1 18.4Normalised EPS 0.6 50.7 -1.9 8.0 17.9Normalised FDEPS 0.6 64.8 -10.2 8.0 17.9

Per share

Reported EPS (IDR) 1,164.13 1,738.85 1,712.77 1,847.17 2,175.11Norm EPS (IDR) 1,144.00 1,724.12 1,691.91 1,827.06 2,155.00Fully diluted norm EPS (IDR) 1,144.00 1,885.07 1,691.91 1,827.06 2,155.00Book value per share (IDR) 4,850.30 7,056.16 8,046.66 9,154.96 10,460.03DPS (IDR) 462.60 632.79 660.33 738.87 870.04Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) 22.9 1.7 -19.4

Absolute (USD) 22.1 1.0 -24.1




52-week range (IDR) 33400/16600


12.68


Astra International 59.5


Notes

Earnings will be relatively resilient in

our view.


117

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 8,019 11,041 12,248 13,462 15,289Change in working capital -3,909 1,104 2,313 -332 -676Other operating cashflow -1,290 -1,714 -1,890 -1,972 -2,375Cashflow from operations 2,820 10,431 12,671 11,158 12,237Capital expenditure -4,291 -9,565 -9,250 -8,250 -8,250Free cashflow -1,471 866 3,421 2,908 3,987Reduction in investments 33 5 103 103 103Net acquisitions -160 -173 -32 -36 -42Reduction in other LT assets -162 -336 -45 -64 -140Addition in other LT liabilities 90 973 109 155 336Adjustments 0 0 0 0 0Cashflow after investing acts -1,671 1,334 3,556 3,065 4,244Cash dividends -1,539 -2,360 -2,463 -2,756 -3,245Equity issue -41 6,644 0 0 0Debt issue 1,912 -977 -1,983 -453 0Convertible debt issue 0 0 0 0 0Others -78 1,154 -2 -2 -2Cashflow from financial acts 253 4,461 -4,448 -3,211 -3,248Net cashflow -1,418 5,795 -892 -147 997Beginning cash 2,776 1,358 7,153 6,261 6,114Ending cash 1,358 7,153 6,261 6,114 7,111Ending net debt 4,322 -2,449 -3,540 -3,847 -4,844Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 1,358 7,153 6,261 6,114 7,111Marketable securities 0 0 0 0 0Accounts receivable 5,215 9,833 8,772 9,450 10,924Inventories 6,932 7,129 6,498 6,948 7,992Other current assets 2,043 1,528 1,616 1,741 2,012Total current assets 15,548 25,643 23,146 24,253 28,039LT investments 443 616 645 678 717Fixed assets 13,261 19,396 24,346 27,896 31,246Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets 449 785 830 894 1,034Total assets 29,701 46,440 48,967 53,721 61,036Short-term debt 2,982 2,587 544 453 453Accounts payable 5,531 10,303 10,895 11,649 13,400Other current liabilities 1,406 2,039 2,156 2,323 2,685Total current liabilities 9,919 14,930 13,595 14,425 16,539Long-term debt 2,699 2,116 2,176 1,814 1,814Convertible debt 0 0 0 0 0Other LT liabilities 917 1,890 1,999 2,153 2,489Total liabilities 13,536 18,936 17,770 18,392 20,842Minority interest 29 1,183 1,182 1,180 1,177Preferred stock 0 0 0 0 0Common stock 4,613 10,636 10,636 10,636 10,636Retained earnings 11,139 15,343 19,037 23,172 28,040Proposed dividends 0 0 0 0 0Other equity and reserves 384 341 341 341 341Total shareholders' equity 16,136 26,320 30,015 34,149 39,017Total equity & liabilities 29,701 46,440 48,967 53,721 61,036

Liquidity (x)

Current ratio 1.57 1.72 1.70 1.68 1.70Interest cover 36.8 196.3 na na na

Leverage

Net debt/EBITDA (x) 0.54 net cash net cash net cash net cashNet debt/equity (%) 26.8 net cash net cash net cash net cash

Activity (days)


Notes

Cash flow can sustain dividends. Capex is likely to decline if growth in contract mining decelerates

Notes

UT balance sheet is strong and is relatively unleveraged


118

United Tractors: Focus charts Fig. 171: Revenues breakdown (9M12)


Fig. 172: EBIT breakdown (9M12)


Fig. 173: Pama’s coal delivered (contract mining), last Nov-12

Source: Company data

Fig. 174: Pama’s overburden removal, last Nov-12


Fig. 175: Komatsu equipment sales, last Nov-12


Fig. 176: Sales volume of UT’s own coal mines, last Nov-12


Heavy equipment

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119

Fig. 177: Key assumptions

2010A 2011A 2012F 2013F 2014F

Komatsu machinery 5,404 8,467 6,983 6,000 7,536

+/- yoy 57% -18% -14% 26%

Pama coal extraction (m ton) 78 87 93 100 107

+/- yoy 11% 7% 8% 7%

Pama over burden (m bcm) 652 792 860 860 946

+/- yoy 22% 9% 0% 10%

UT's coal sales volume (m ton) 3.1 4.5 6.1 6.5 7.0

+/- yoy 47% 36% 7% 8%

Average UT's coal price (US$/ton) 111 88 86 90 94

+/- yoy -21% -2% 5% 5%

Source: Company date, Nomura estimates

Valuation methodology and risks Our target price of IDR33,000 translates to a FY14F P/E of 15x (FY14F EPS: IDR2,175), which is in line with our target P/E for the market (JCI). Risks to our target price come from potential deteriorating business due to falling coal prices or a liquidity squeeze.


120



Wijaya Karya WIKA.JK WIKA IJ

ENGINEERING & CONSTRUCTION

EQUITY RESEARCH

Looking into 2013 with optimism

Better confidence, supportive regulatory environment and new projects visibility

January 8, 2013

Rating Remains

Buy


IDR 1,800


IDR 1,530


Action: Reiterate our Buy recommendation Wijaya Karya is part of our infrastructure theme for Indonesia. The contractors are the early beneficiaries of rising infrastructure spending, and WIKA, being one of the largest state-owned contractors in the country with a well-established track record, is well positioned to capture the opportunity, in our view. We remain positive on WIKA and recently upgraded our TP by +33%, retaining our Buy recommendation.

Catalyst: better market confidence and new projects The market’s favourable stance towards the construction sector is very apparent from the recent IPO of another state-owned contractor company, Waskita Karya (WSKT IJ, not rated), that reportedly attracted 9x oversubscription (Bisnis Indonesia, 14 December 2012). This reflects a strong investor interest in the infrastructure sector and increased confidence in the government’s ability to accelerate infrastructure development, in our view. We also expect new major project tenders won by WIKA to be the other catalysts.

Valuation and risks Our 12-month target price of IDR1,800 is based on a blended SOTP and DCF valuation. Our DCF extends to 2020F at WACC of 10.8%. For SOTP, we have used 7x EV/EBITDA multiples for construction business, DCF for power plants, NAV (with 30% discount) for real estate business, and book value for WIKA's other investments. Risks to our view include: macro risks, lower margins (from competition or rising costs), higher capex, and regulatory risks.



Revenue (bn) 7,841 9,414 9,414 11,644 11,644 13,272 13,272

Reported net profit (bn) 352 437 437 588 588 778 778

Normalised net profit (bn) 352 437 437 588 588 778 778







ROE (%) 18.2 19.0 19.0 21.3 21.3 23.7 23.7



Anchor themes

WIKA stands to benefit from rising infrastructure spending and construction works, in addition to an improving business mix with the contribution of more stable investment income.

Nomura vs consensus

Our FY13F/FY14F earnings forecasts are 2%/3% higher than consensus, largely reflecting our higher margin assumptions, but are in line with company guidance.

Research analysts




Nomura | Wijaya Karya January 8, 2013

122

Key data on Wijaya Karya Income statement (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FRevenue 6,062 7,841 9,414 11,644 13,272Cost of goods sold -5,389 -6,979 -8,273 -10,210 -11,657Gross profit 673 862 1,140 1,434 1,616SG&A -196 -211 -287 -354 -403Employee share expense

Operating profit 477 651 853 1,079 1,212

EBITDA 571 763 966 1,216 1,383Depreciation -51 -68 -73 -88 -103Amortisation -43 -44 -40 -49 -68EBIT 477 651 853 1,079 1,212Net interest expense 19 19 -17 -11 -6Associates & JCEs

Other income -23 -43 -38 -36 66Earnings before tax 473 627 799 1,032 1,272Income tax -162 -239 -315 -399 -447Net profit after tax 311 388 483 633 825Minority interests -26 -36 -46 -45 -47Other items

Preferred dividends

Normalised NPAT 285 352 437 588 778Extraordinary items

Reported NPAT 285 352 437 588 778Dividends -57 -100 -106 -131 -176Transfer to reserves 228 252 332 457 602



Growth (%)

Revenue -8.3 29.3 20.1 23.7 14.0EBITDA -7.8 33.6 26.6 25.9 13.7EBIT -1.9 36.5 31.1 26.5 12.3Normalised EPS 46.9 23.4 23.8 34.5 28.6Normalised FDEPS 46.9 23.4 20.3 38.4 28.6

Per share

Reported EPS (IDR) 47.49 58.59 72.53 97.52 125.39Norm EPS (IDR) 47.49 58.59 72.53 97.52 125.39Fully diluted norm EPS (IDR) 47.49 58.59 70.46 97.52 125.39Book value per share (IDR) 300.26 343.26 419.50 481.15 578.12DPS (IDR) 9.50 16.59 17.52 21.14 28.42Source: Company data, Nomura estimates



(%) 1M 3M 12M

Absolute (IDR) -6.1 18.6 150.8

Absolute (USD) -6.7 17.7 136.1

Relative to index -8.8 16.2 141.0

Market cap (USDmn) 984.1




3.03


Government of Indonesia 66.4

Public 33.6


Notes

We expect margins to continue to improve due to increasing contribution from the higher-margin recurring income business. However, we have also lowered our margin assumptions as we expect cost pressure to rise.


123

Cashflow (IDRbn) Year-end 31 Dec FY10 FY11 FY12F FY13F FY14FEBITDA 571 763 966 1,216 1,383Change in working capital 93 505 -242 -6 40Other operating cashflow -162 -286 -366 -449 -383Cashflow from operations 502 982 358 762 1,040Capital expenditure -168 -457 -180 -199 -218Free cashflow 334 525 178 563 822Reduction in investments -28 -15 -168 -718 -203Net acquisitions 0 0 -35 0 0Reduction in other LT assets -324 -798 -574 208 187Addition in other LT liabilities -178 275 139 200 147Adjustments 0 0 0 0 0Cashflow after investing acts -196 -13 -460 254 952Cash dividends -57 -100 -106 -131 -176Equity issue 53 13 132 0 0Debt issue 242 118 538 2 -4Convertible debt issue 0 0 0 0 0Others -25 -1 10 0 0Cashflow from financial acts 213 30 574 -129 -180Net cashflow 17 17 114 125 772Beginning cash 1,210 1,227 1,244 1,358 1,482Ending cash 1,227 1,244 1,358 1,482 2,254Ending net debt -864 -786 -358 -482 -1,254Source: Company data, Nomura estimates

Balance sheet (IDRbn) As at 31 Dec FY10 FY11 FY12F FY13F FY14FCash & equivalents 1,227 1,244 1,358 1,482 2,254Marketable securities 0 0 0 0 0Accounts receivable 2,476 2,942 3,358 4,166 4,734Inventories 681 873 1,161 1,436 1,636Other current assets 565 768 825 1,021 1,164Total current assets 4,949 5,827 6,701 8,105 9,788LT investments 150 165 368 1,086 1,289Fixed assets 406 751 819 881 928Goodwill 8 5 5 5 5Other intangible assets

Other LT assets 773 1,574 2,149 1,941 1,754Total assets 6,286 8,322 10,041 12,017 13,764Short-term debt 87 207 250 250 250Accounts payable 1,220 2,119 2,040 2,518 2,874Other current liabilities 2,335 2,802 3,400 4,196 4,790Total current liabilities 3,642 5,128 5,690 6,964 7,915Long-term debt 276 251 750 750 750Convertible debt

Other LT liabilities 451 726 865 1,065 1,212Total liabilities 4,369 6,105 7,305 8,779 9,877Minority interest 115 148 208 253 300Preferred stock 0 0 0 0 0Common stock 1,184 1,197 1,329 1,329 1,329Retained earnings 618 872 1,200 1,656 2,258Proposed dividends



Liquidity (x)

Current ratio 1.36 1.14 1.18 1.16 1.24Interest cover na na 50.0 100.9 204.5

Leverage


Activity (days)


Notes

The company sold back some of its treasury shares to the market in early 2012 which helped sustain its cash levels

Notes

We expect the company to be able to manage its working capital requirement and increase its long term investments to remain in net cash position.


124

Remain positive into 2013F We think infrastructure will remain the main theme for Indonesia in 2013F. We not only expect more projects to be rolled out in 2013F, but also believe that realization of some projects in 2013F, such as toll roads and airports, will help reduce execution risks in the infrastructure sector.

More projects, more completion, all positive

We think that the volume of infrastructure development in Indonesia will continue to pick up in 2013F. As we highlighted in our infrastructure note on 26 October 2012, this development goes beyond just toll road development that has gained more publicity than other infrastructure projects such as airports, seaports and railway.

In addition to completion of the new Bali airport toll road in mid 2013, the Ministry of Transportation expects completion of Indonesia’s second largest airport development in Medan in 1Q13 and development of the dual track railway that links West and East Java.

The infrastructure development momentum continues to build up as Jakarta gets ready for development of monorail and MRT (for the MRT project, WIKA’s consortium is one of two short-listed contractors), and several sections of toll roads that get developed not only by state-owned entities, but also the private sector (such as Serpong-Balaraja, and Cikampek-Palimanan toll roads), which help ensure project line-up for construction companies, particularly state-owned ones such as WIKA.

Supportive regulatory environment The rising momentum for infrastructure development was also partly a function of recent passage of land acquisition law last August, in our view.

This law was subsequently followed by respective government constituents including the national land agency (Badan Pertanahan Nasional or BPN) – which has been appointed by the law as the land acquirer on behalf of the government – and the Ministry of Finance as well as the Ministry of Internal Affairs, who hold the responsibility of ensuring the fund required to acquire the land. Local media, Kontan, on December 18, reported that BPN has recently issued its decree for the land acquisition.

We would expect that the new land acquisition law would be in full implementation for new projects starting next year. Meanwhile, although existing projects can only use the new land acquisition law starting 2015F, the government through the Ministry of Public Works is preparing regulation for transition periods. This regulation for transition periods

While existing projects will have to wait until 2015F before they can use this law to secure land, we would expect that the law would be in full implementation for new projects starting next year. Meanwhile, the government through the Ministry of Public Works, is preparing the regulation for the transition period for implementation in 2013F-14F. This regulation will allow some initial preparation process for existing toll roads to take place in 2013F/14F such that these existing projects are ready for implementation of the land acquisition law by 2015F.

Company specific update Operationally, WIKA will also benefit from increasing contribution from its investments such as real estate, power plants and toll roads. In 2011, there was only 1 power plant that contributing to company’s business. However, 3 new power plants contributed to WIKA’s revenue starting 2H12, and another one is coming on stream starting 2Q13, adding contribution of recurring income to the company’s.

On the other hand, local media (Bisnis Indonesia, December 21) reported that the governor of Jakarta has included development cost of Jakarta MRT into the 2013 budget and classified the project as a priority in 2013F. WIKA is one of two contractor consortiums short-listed for the MRT project and, as such, this recent update is a positive development for WIKA, in our view.


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126

Appendix A-1

Analyst Certification

I, Wilianto Ie, 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 Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Previous rating Date of changeAstra International ASII IJ IDR 7,850 04-Jan-2013 Buy Not rated Neutral 13-Jun-2012 Bank Negara Indonesia BBNI IJ IDR 3,800 04-Jan-2013 Buy Not rated Not Rated 30-Sep-2010 Bank Mandiri BMRI IJ IDR 8,250 04-Jan-2013 Buy Not rated Neutral 15-Jun-2010 Indomobil Sukses International IMAS IJ IDR 5,350 04-Jan-2013 Buy Not rated Not Rated 30-Jan-2012 Indocement Tunggal Perkasa INTP IJ IDR 22,050 04-Jan-2013 Buy Not rated Neutral 23-Aug-2011 Jasa Marga JSMR IJ IDR 5,600 04-Jan-2013 Buy Not rated Not Rated 02-May-2011 Kalbe Farma KLBF IJ IDR 1,040 04-Jan-2013 Buy Not rated Not Rated 30-Jan-2012 Semen Indonesia SMGR IJ IDR 15,750 04-Jan-2013 Buy Not rated Not Rated 02-May-2011 United Tractors UNTR IJ IDR 21,400 04-Jan-2013 Buy Not rated Not Rated 09-Nov-2011 Wijaya Karya WIKA IJ IDR 1,530 04-Jan-2013 Buy Not rated Neutral 22-Dec-2011


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128

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