Indonesian property remains attractive with influx of Foreign Direct Investment (FDI) in real estate sector increased by 22% YoY and reached USD2.04 bn in 9M17. The rise in real estate FDI outpaced the total FDI growth which only improved by 11% YoY to USD23.88 bn. Up to 9M17, the contribution of real estate FDI to total FDI up by 72 bps to 8.5% from similar period in 2016.
On October 25, 2017, Brent crude oil price rose to USD58.44/b (+2.85% YtD), while WTI price decreased to USD52.2/ton (-2.9% YtD), causing wider spread between the two benchmark prices, and indicating a sharp increase in U.S.
The Newcastle coal price was gradually down and bottomed at USD73.3/ton in mid-May’17. The Chinese Government’s decision to loosen the 276 working days ban has put a pressure on coal price.
The construction sector plunged about 20% Ytd, underperforming the JCI significantly by 32%. This was due to investor’s concern for 1) contractors funding constraints, 2) reduced visibility of new contract growth on perceived government budget limit and 3) government’s plan to limit contractor sourcing precast from subsidiary by 50%.
After seeing a 38% decline growth in 2015 to 6,068 units and a 8% growth in 2016 units to 6,554 units, Indonesia’s heavy equipment sales volume is back to double digit growth this year. As during 8M17, the nation’s sales heavy equipment sales expanded robustly by 62% to 7,091 units or already exceed full year 2016 sales.
Banks went through weak credit cycle from mid-2015 to 2017 on weak economy and rising non-performing loan (NPL). Many of the policy tone was very expansive to push the lackluster credit growth (i.e 200 bps rate cuts in 2016-2017, LTV relaxation in 2016, asset quality relaxation in 2015-2017); but elevated NPL and weak loandemand still hampered credit growth in 2016-2017.
Global economyis projected by IMF to expand by 3.6% in 2017 and 3.7% in 2018. Growth will be mainly driven by developing countries which are expected to grow 4.6% in 2017 and 4.9% in 2018. Developed countries growth is seen to strengthen at 2.2% rate in 2017 before it moderates to 2.0% in 2018.
JCI moved and closed below major resistance level of 6,082. Next resistance level is around the level of 6,130-6,160 which is resistance level of the mid-term uptrend channel. Support level at 5,970 is support level of the uptrend channel.
Indonesia’s exports grew 3.62% MoM (18.4% YoY) to USD15.1 bn in October, imports grew 11.04% MoM (23.33% YoY) to USD14.19 bn in October. Better global demand pushed Indonesia’s goods trade surplus higher to USD5.3 bn in 3Q17. Financial account (FA) recorded significant increase in surplus in 3Q17 to USD 10.4 bn which was driven by direct investment. BoP will remain in surplus for 4Q17 on the back of higher direct investment and easing CAD.
Statistics Office (BPS) data showed 3Q17 GDP growth had a mild increase at 5.06% YoY with quarterly growth came in at 3.18% QoQ (2Q17: 4.00% QoQ), which is below our estimation and Bloomberg consensus (see table on left). On the other hand, consumption still faced some challenges as it only grew 4.93% YoY (1H17: 4.94% YoY) which is actually in line with our expectation. Industry wise, GDP growth in 3Q17 was led by information and communication sector which grew 9.35% YoY in 3Q17. Indonesia’s February 2017 unemployment rate slightly eased to 5.50% from a year before at 5.61%. For 2018, we see that 5.3% is a realistic one, lower than government’s target at 5.4% as we see consumption will have gradual recovery.
BPS reported that October consumer price index only slightly increased by 0.01% MoM and edged down to 3.58% YoY, lower than our estimate, Bloomberg consensus (see table on the left) and central bank’s estimation (0.09% MoM). BPS noted that food price continued its deflationary trend in October of -0.45% MoM (0.80% YoY) due to onion and garlic harvest season in previous two months. October’s Large Wholesale Price Index (LWPI) for non Oil and Gas increased 0.45% MoM. Inflation will still be manageable for the remaining of 2017.
Top picks underperformed the JCI in June, weighed down by AISA and MEDC, Foreign investors net sellers in June, but still hold solid position in Indonesia market, A strong start in July and Remain positive on Indonesia equity market .
Same inflation level as previous year’s Lebaran, Significant pressure from transportation and electricity sectors, Taming food prices a success story and Retain year-end inflation forecast at 4.0% YoY .
17 companies out of 73 companies under our coverage universe have released their FY16 results by end of February. 36% of companies beat estimates, 24% fell short and the rest 40% were in line (counted as companies reporting net income within +/-5% of our estimates). We saw some of the major non-operational items affected the accuracy of our forecast that were mainly attributable to the: (i) big tax benefit by SMGR, ii) the absence of impairment loss by UNTR, iii) higher tax rate of 63% by INCO and iv) a significant turnaround into forex gain by AALI and JPFA.
National cigarettes sales volume growth reached its slowest pace in 2015 where sales volume in 2015 was on the same level as in 2014. However, sales volume has started to grow in 2016 where as of 1H16 sales volume grew by 0.3% in 1H16. On QoQ basis in 2Q16, sales volume accelerated by 13.4% QoQ and 6.4% YoY. We can somewhat attribute the volume rebound to better economic growth in 2016 in the mid of lower inflation (thus better purchasing power) and reasonable excise tax increase in 2016 by 11.2% (about the same level as nominal GDP growth). In 2017, we expect cigarettes sales volume growth to rebound by 2% with better purchasing power.
High grade coal (coking coal) demand will continue to outpace supply in 2017, ending two years of oversupply condition. Demand from China, India and Japan steel markets remains buoyant, but supply is expected to decrease due to China’s coal production cut since mid-2016, creating a global coking coal deficit. Global coking coal price starts to rally to USD130/Mt in June 2016 and remains above USD160/Mt since September.
We see Indonesia GDP growth accelerating from 5.1% in 2016F to 5.3% in 2017F driven mainly by higher consumption. We believe low inflation and interest rate environment coupled with rising commodity prices should help boost purchasing power and enable a further consumption recovery. 2Q16 saw private consumption improve to 5.04% after registering sub-5% growth since 2Q15. We also expect higher investment driven by a robust consumption growth outlook, better political stability, recovery in exports, and likely further sovereign credit rating upgrades on more realistic budget which can improve the policy to be more effective and predictable.
In June 2016, loans of banking industry grew by 8.8% YoY while deposit only grew by 3.6% YoY during the same period, both were considerably slower than at the end of 2015. The slowing down of loans and deposit growth is a structural trend that has begun since 2011. Nevertheless, a trend must stop somewhere and we expect that loans growth could start to accelerate in 2017 on the back of higher economic growth and central’s bank consistent expansive monetary policy. BI expects industry loans to grow by 11% YoY in 2017, and we also believe that loans to grow by 11.0% YoY in 2017.
As recent damaging El Nino phenomenon has come to an end, we expect both palm oil production in Indonesia and Malaysia to gradually recover towards the end of this year before entering low-crop season in 1H16. We might see Indonesia’s palm oil output to increase to 33 mn ton next year, modestly higher compared to this year’s expectation of 31 mn ton as crop resumes its yearly growth momentum.
Despite of the government efforts to implement some measures to boost demand, the property sector has not shown an improvement yet in 2016. Softer demand still continues. Marketing sales achievement has shown little improvement from last year’s even worse performance. We believe that these are mostly triggered by the vertical development segment, while residential segment remain stable.
Incorporating the sluggish global economic recovery and low commodity prices, the government set lower state revenues of Rp 1,738 tn in 2017 or 2.7% lower than the target in the revised 2016 budget. However, total spending for infrastructure is budgeted at Rp337 tn still grow by 11% YoY. We believe 2016 would be another significant year for the construction sector since that most infrastructure projects are expected to forge ahead since we need infrastructure development to go on and spur future growth.
Indonesia Consumer Confidence Index has rebounded strongly since late 2015, and stood at 116.8 as of October 2016. The upward pattern of CCI is quite consistent and clear as economic growth in 2016 has been recovered from weakness in 2015 along with controlled inflation, thus, lifting purchasing power of Indonesians. We expect that CCI will remain on an elevated level in 2017, pinned by stronger GDP growth and still controlled inflation. Stronger purchasing power in 2017 is a support for consumer products volume growth in 2017. Relatively high consumer confidence and purchasing power also means that consumer companies can pass rising input costs to consumer with ease.
Indonesian equities performed impressively in 10M16 (+18% and +25% in USD term) and we expect a repeat in 2017, as underlying fundamentals continue to support growth and a further re-rating
The upstream Oil & Gas (O&G) segment finds and produces crude oil and natural gas (NG). As a price taker, upstream O&G, also known as exploration and production (E&P), has direct exposure to oil price volatility and, to a certain extent, gas price volatility. During a downturn, E&P companies will look for ways to cut costs. After the steep decline in oil prices from the recent peak in Jun 14, we have seen an average capex cut of 15% by oil majors (ie BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell, Statoil and Total SA) and an average cut of 16% by national oil companies (eg CNOOC, Pertamina, Petrobas, Petronas, Petrochina) in 2015.
The Indonesian equity market was very bullish in August (month-to-date 25 Aug) rising 4.6% as foreign fund continued flowing in. However, our model portfolio was only inched up by 0.3% in July, underperforming the JCI significantly, dragged by worse-than-expected return in EXCL (-17%), JSMR (-4.2%) and GGRM (-1.0%).