Macquarie Research | EQUITIES

Indonesia Strategy
Where to be positioned

Jayden Vantarakis
PT Macquarie Sekuritas
+62 (21) 2598 8310
Jayden.Vantarakis@Macquarie.com

September 2018

In preparing this research, we did not take into account the investment objectives, financial situation and particular
needs of the reader. Before making an investment decision on the basis of this research, the reader needs to
consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular
investment needs, objectives and financial circumstances. Please see disclaimer.
Macquarie Research | EQUITIES

Indonesia Strategy

On the ground with differentiated insights into major listed stocks

Jayden Vantarakis Nathania Nurhalim Richardo Walujo

Strategy, Banks, Telcos, Cement, Consumer staples,
Mining Infrastructure Emerging leaders

Robert Pranata Richard Danusaputra

Astra, Retail, Property, Plantations
Tobacco

PAGE 2
 Macquarie Research | EQUITIES

Indonesia Strategy

The Indonesia Model Portfolio

• Quality compounders: BBCA, UNVR We prefer these over ‘market proxies’

• Exporters: ADRO, ITMG, INCO, INKP, UNTR Strongest case for EPS upgrades on IDR declines

• Select value: BBNI, LPPF, EXCL Attractive valuations for solid franchises

• Event trade: BDMN M&A Cash offer

• Weighted average upside to our top picks of 26% (including dividend yield of 2.2%)

Market cap Share price Rating Target price Upside PER (x) EPS growth (%) ROE (%) P/BV (x) Div yld (%)
Ticker US$m Rp/sh Rp/sh % 18e 18e 18e 18e 18e
BBCA 39,734 23,900 O-P 25,200 6.6 21.6 17.2 19.3 3.9 1.2
UNVR 23,731 46,125 O-P 60,500 33.2 37.4 34.4 147.6 46.4 2.0
BBNI 8,960 7,125 O-P 10,000 44.5 8.2 18.9 15.9 1.3 4.1
UNTR 8,080 32,125 O-P 44,300 41.7 11.8 27.4 20.9 2.3 3.8
INKP 6,419 17,400 O-P 20,750 19.9 9.6 62.6 19.0 1.7 0.6
BDMN 4,330 6,700 O-P 9,700 46.8 15.2 14.6 10.5 1.5 2.0
ADRO 3,796 1,760 O-P 2,700 58.2 7.3 7.5 14.2 1.0 4.8
INCO 2,231 3,330 O-P 4,800 44.1 33.2 nmf 3.6 1.2 -
EXCL 2,112 2,930 O-P 4,200 43.3 65.6 (15.3) 2.2 1.4 -
ITMG 1,964 25,775 O-P 29,700 27.5 7.3 2.9 25.3 1.7 12.3
LPPF 1,321 6,725 O-P 11,000 70.6 9.4 6.1 75.7 6.3 7.0

Source: FactSet, Macquarie Research, September 2018; prices as at 12 Sep 2018

PAGE 3
 Macquarie Research | EQUITIES

Indonesia Strategy

Model Portfolio up 10ppt vs MSCI Indo year to date

Index
Index - INTP
- INTP + UNTR
+ UNTR - TLKM
- TLKM
- PTPP
- PTPP+ UNVR
+ UNVR + INKP
+ INKP
3 Apr
3 Apr1818
+ INCO
+ INCO
155
155 - BBRI
- BBRI + +BBNI
BBNI 7 Aug 1818
7 Aug
- SCMA
- SCMA - ACES
- ACES + +LPPF
LPPF
145
145 + +BDMN
BDMN - MAPI
- MAPI + +ITMG
ITMG - UNTR
- UNTR
3 3May
May1717 2626Jul
Jul1717 ++TLKM
TLKM 142
1515Nov17
Nov17
135
135
BBCA,
BBCA,BBRI,
BBRI,SCMA,
SCMA, 132
ACES,
ACES,MAPI,
MAPI,BSDE,
BSDE,
125
125 CTRA,
CTRA,ADRO,
ADRO,UNTR,
UNTR,
INCO,
INCO,EXCL
EXCL
115
115 29
29Nov
Nov16
16(inception)
(inception) 116
111
- -INCO
INCO +PTPP
+PTPP
105
105 - -BSDE
BSDE +INTP
+INTP
- -CTRA
CTRA 16
16May
May1717
95
95

Model
Modelportfolio
portfolio(IDR)
(IDR) MSCI
MSCIIndo
Indo(IDR)
(IDR)

% 2017 2018 ytd

45

35 32 32
23 22
25

15

(5)
(3)
(15) (11)
(13)
(25) (21)
Model MSCI Indo Model MSCI Indo Model MSCI Indo Model MSCI Indo
Portfolio Portfolio Portfolio Portfolio

LCY USD LCY USD

Source: FactSet, Macquarie Research, September 2018; priced as at market close 12 September 2018 PAGE 4
 Macquarie Research | EQUITIES

Indonesia Strategy

Indonesia’s Quality 7: Quant screened, scoring highly in respective sectors

Top ranked quality alpha scores
score
• ACES, BBCA, HMSP, ITMG, LPPF, UNTR, UNVR
1.80
1.60
1.40
1.20 • Earnings quality based on visibility, stability, operating
1.00
0.80
accruals
0.60
0.40 • Alpha model also considers Valuation, Growth, Profitability,
0.20
0.00
Earnings and Price Momentum
-0.20
-0.40 • Relative to high beta large cap ‘proxies’ steady
outperformance since taper tantrum
Quality Score

Top quartile by global sector Large cap ‘quality’ has outperformed ‘proxies’
Relative
% performance
100.0
90.0 185
80.0 165
70.0 145
60.0 125
50.0 105
40.0
85
30.0
65
20.0
45
10.0
25
-

Sector percentile Quality / Proxies Presidential Election events

Source: Company data, Macquarie Research, September 2018 PAGE 5

 Macquarie Research | EQUITIES

Indonesia Strategy

The commodity tailwind is abating

Net commodity exports levelling off
US$m • Commodity exports are 60% of total
25,000

20,000
• Reflation of key commodity export prices (coal, CPO, metals)
15,000
was a driver and placed at elevated US$27b gross per quarter
10,000 • Non commodity exports declining in absolute USD terms;
5,000
evidence of industrial competitiveness lacking
- • Asynchronous oil price hikes remains the key risk factor
(5,000)

Base metals, gold Rubber CPO Coal Net oil and gas

Less competitive for non commodity exports

US$m
60,000

50,000

40,000

30,000

20,000

10,000

-
1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17
Others Major commodities

Source: Gov’t of Indonesia, Macquarie Research, September 2018 PAGE 6

 Macquarie Research | EQUITIES

Indonesia Strategy

Addressing gasoline subsidies unlikely before Apr 2019 elections

Onshore gasoline prices well below market
Rp/litre • Implicit subsidies for gasoline - well below market prices
12,000

11,000 • We estimate Pertamina is burdened with US$4.5bn pa run-rate

10,000
• Every US$5/bbl increase in oil price leads to US$1bn higher
9,000 21%
trade deficit
8,000

7,000
34%
• Price interventions in fuel, coal, toll roads, cement, lending rates
6,000 and food suppress the CPI
5,000
• Rising current account deficit, expected at 2.3% of GDP in 18e
Jan-16
Jan-14

Jan-15

Jan-17

Jan-18
Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

(vs 1.7% in 17a)

Estimated market prices "Premium" prices "Pertalite" prices

Widening driver of the trade deficit Forward outlook for oil and gas looks very poor
US$b
wells drilled
10 6.0%
1400 1318
5.0%
5
1172
1200 1127
4.0%

- 3.0% 1000 911 901 936

821 846
2.0%
800 678 672
(5) 1.0%
568 574
600
0.0% 442
(10)
-1.0% 400
270 252
(15) -2.0%
200
18e
19e
20e
16
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15

17

Oil and gas trade (US$b) % GDP

0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Exploration Exploitation
Source: Company data, Bloomberg, Macquarie Research, September 2018 PAGE 7
 Macquarie Research | EQUITIES

Indonesia Strategy

Indonesia screens weaker relative to other Asian EMs on external debt

Low reserves cover against foreign debt claims
% IDR/USD
FX reserves to external debt (inverted) • 0.4x FX reserve cover to external debt stands out
8.0
18 6,000
FX reserves to short-term
16
7.0
debt 7,000
8,000
• Twin deficit market, albeit under control on each
14
FX reserves to total
9,000
6.0
12 S&P upgrade
external
(May-17)
debt
10,000 • Broad EM contagion the key risk. Yields rising across the curve
10
5.0
8
11,000
12,000
with Indonesia performing in line for its rating
6
4.0 13,000
4 14,000
3.0 Fitch & Moody's upgrades
2 (Dec-11-Jan-12) 15,000
0
2.0 16,000
Sep-04

Sep-06

Sep-08

Sep-10

Sep-12

Sep-14

Sep-16
Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Jan-14

Jan-16

Jan-18
May-05

May-07

May-09

May-11

May-13

May-15

May-17

1.0

0.0 Indo Gov't 5 yr sovereign yield IDR/USD

CN IN ID KR MY PH TH TW AR TR ZA

Private external debt 17% of GDP EM concerns lifted yields across the curve
US$b
% % % Yield Investment grade
200
6 25.0 15.0
180 23.0
5 13.0 Brazil
21.0
160 12.0
19.0 11.0 Russia
4 Indonesia
140 17.0 8.6
8.3
9.0 India
120
3 15.0
8.0
100 13.0 7.0 Philippines
2 11.0 6.4
80 5.0
9.0 Singapore China
1 Vietnam
60 7.0 3.0 2.4 3.6 Malaysia
5.0
040 5.0 4.2 Thailand
1.0 US
Jan-13
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

2.9
2.3
-1.0
Private external debt % GDP (RHS) AAA AA A BBB BB B
Spread on US$ Indo 10yr sovereign yields vs US Treasuries

Source: Bloomberg, Bank Indonesia, Macquarie Research, September 2018 PAGE 8

 Macquarie Research | EQUITIES

Indonesia Strategy

We anticipate further rate hikes for stability

We pencil in a further rate rise this year
% • Easing cycle that began in 2Q15 has ended. We model 150bps
8.00%
total tightening in 18e
7.00% • Domestic-focused corporates with high FX debt followed by IDR
6.00%
debt are most potentially exposed
• Cashed-up businesses and exporters relatively better
5.00% O/N Repo
FASBI (O/N Deposit)
positioned
4.00% SBI
BI 7 day • BCA best positioned of the major banks for rate hikes
3.00%
Dec-13

Sep-14
Dec-14

Sep-15
Dec-15

Sep-16
Dec-16

Sep-17
Dec-17

Sep-18
Dec-18
Jun-14

Jun-15

Jun-16

Jun-17

Jun-18
Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

FX and IDR debt to Equity Major bank funding composition

As at end FY17
% %
>500 Greyed out deemed to have
13
high degree of pricing power
38 32 6
43 43 41
200 53 51 51
59
163 11
75
150 11 13 20
122122 8 16
11 8
80
93 90 12
100 77 57
68 68 40 41 46 41 47 42
59 56 35
46 42 40 39 22 29
50 38 36 30
29 28
19

-
TPIA
TBIG
ISAT
SMRA

ASII
MYOR
JPFA

SMGR
CTRA

MNCN

BRPT
VIVA

TLKM
TOWR
EXCL
MAPI

BSDE

ICBP
PWON

UNVR
INDF

FX IDR Time Wholesale funding CASA

Source: Company data, Bloomberg, Macquarie Research, September 2018 PAGE 9
 Macquarie Research | EQUITIES

Indonesia Strategy

Election effects have been broadly positive 6 months into the event
7-39% outperformance vs EM in USD terms
50 % • The last 3 elections had market favourable outcomes with
40
39
relative outperformance against MSCI EM
30
19
• Jokowi’s VP choice was a compromise, narrowed race to two
20
10
tickets and headed off potentially divisive religious tactics
10 7 7
• Early published polls put Jokowi-Ma’ruf electability at 53% vs
-
(2) Prabowo-Sandi low 20%s
(10)

(20) • Campaigning kicks off September 23

Pre - Pre - Post Post Pre - Pre - Post Post Pre - Pre - Post Post
6m 3m - 3m - 6m 6m 3m - 3m - 6m 6m 3m - 3m - 6m

2004 2009 2014

Parliamentary split of supporting tickets Registration for parliamentary candidates 4-17 Jul 2018

Registration for President-Vice President 4-10 Aug 2018

Finalisation and announcement of President-Vice President pairs 20 Sep 2018

Announcement of the ballot box numbers of the pairs 21 Sep 2018

Prabowo-Uno,
39.8
Campaign period for parliament and President-Vice President 23 Sep 18 - 13 Apr 19
Jokowi-Amin,
60.2 Quiet period 14 - 16 Apr 2019

Election for parliament and President-Vice President 17 Apr 2019

Result announcements 25 Apr - 22 May 2019

Source: FactSet, Gov’t of Indonesia, Macquarie Research, September 2018 PAGE 10

Macquarie Research | EQUITIES

Indonesia Banks
Once the dust settles

Jayden Vantarakis
PT Macquarie Sekuritas
+62 (21) 2598 8310
Jayden.Vantarakis@Macquarie.com

September 2018

In preparing this research, we did not take into account the investment objectives, financial situation and particular
needs of the reader. Before making an investment decision on the basis of this research, the reader needs to
consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular
investment needs, objectives and financial circumstances. Please see disclaimer.
 Macquarie Research | EQUITIES

Indonesia Banks

Preferred banks are BNI and Danamon

12 mth forward P/BV multiples attractive
x
4.5

4.0
4.3
• Bank share de-rating has opened an opportunity
3.5 3.6

3.0
3.4 • We recently adjusted earnings to reflect limited loan re-pricing
3.4
2.5
3.5 for state banks, a flatter credit charge profile and slower loan
2.0 2.1
1.9 1.7
2.3 1.9 growth (11% in 19e)
1.6 1.7
1.5 1.5
1.2 1.2
1.0 1.1
1.0
0.5
0.8 • BCA resilient ROA 2.8-3.0%. 6x book growth over a decade.
BCA BRI Mandiri BNI Danamon BTN
US$3bn surplus capital, positive leverage to rising rates and
+/- 1 std. dev Average Trading
privately-owned
Book compounding of the major banks • Danamon M&A tender offer into end-18, underlying business
% BRI - 6.3x
in 10 yrs
improvements
20% Cagr
BCA - 5.9x
600
in 10 yrs • BNI under-appreciated Corporate franchise at an appealing
20% Cagr
500 valuation
400
BNI - 3.8x in

300
10 yrs 14%
Cagr • We lifted BRI to Outperform on valuation grounds
Mandiri - 3.6x
200 in 10 yrs 14%
Cagr
• Neutral on Mandiri at current levels
100 • BTN is our key sell idea on rates
10 11 12 13 14 15 16 17 18e 19e 20e

BCA BRI Mandiri BNI

PAGE 12
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Fundamental upside skew favourable

Relative to consensus eps we are below by 4%
Most fundamental upside for BNI average in 19e
% %
80
Average bull case upside +16% 15.0
69
Average bear case upside 0% 10.1
60 10.0

41 3.7
5.0
40
22 -
20 10
6
2 0 (5.0)
- (5.1) (5.9)
(2) (10.0)
(4)
(20) (11) (11)
(15.0)
(14.2) (14.3)
(40) (28)
(20.0)
BNI BCA BRI Danamon Mandiri BTN BCA BNI Danamon Mandiri BRI BTN

Bear Bull

Lower bound - full restructured loan coverage Upside - optimised at 15.5% CET-1 % Average
Adj BPS Target ROE Fair P/B Fair value Adj BPS Free capital Target ROE Fair P/B Fair value Fair value
Mid-19e 3-yr x Rp/sh Mid-19e Mid 19e 3-yr x Rp/sh Rp/sh
BCA 5,764 22.5% 4.2 24,384 5,764 854 22.5% 4.2 25,238 24,811
BRI 1,509 17.3% 1.9 2,857 1,113 452 23.6% 2.8 3,544 3,201
Mandiri 3,188 16.0% 1.6 5,673 3,425 539 17.6% 1.9 6,996 6,335
BNI 5,707 16.8% 1.8 10,027 5,274 906 19.1% 2.1 12,033 11,030
BTN1 1,376 14.6% 1.3 1,810 2,094 - 12.8% 1.1 2,245 2,028
Danamon2 4,735 14.5% 1.4 6,456 4,735 263 14.5% 1.4 6,719 6,588
1 For BTN we apply a 13% dilution factor for expected additional capital required in 20e
2 Danamon is based on 2.1x 3Q18 P/BV as we assume a cash offer for minorities through the MUFG takeover proceedings

PAGE 13
Source: Macquarie Research, FactSet consensus, Company data, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

The rising value of transactional networks

Major bank digital transactions • Mobile banking offering and cash recycling machines for
b tx deposit-taking are the latest customer-facing investments
12.0 11.3

9.6
• QR code standardization by 4Q18 the next milestone
10.0 3.1
8.0 2.4 • Leading banks on consumer tech BCA, BRI, Mandiri
8.0
6.5

6.0
1.7
3.0 • BNI the market leader on Corporate Cash Management
5.2 1.1 2.6
4.4 2.0
4.0 3.4
0.7
1.3
1.6 • BCA and Mandiri processing of major tech platform payments
2.5 1.2
2.0
1.9 0.8
3.8 4.2 4.7 5.2
• We estimate each 25bp onshore risk-free rate hike adds
3.2
US$3.6bn NPV to BCA’s transactional franchise
2.1 2.6
1.5 1.7
0.0
09 10 11 12 13 14 15 16 17
ATM Internet Mobile

Market share of Corporate cash management Top 4 dominated digital transactions in FY17

Based on 2Q18 Basel III Liquidity Based on total annual report

Coverage Ratio disclosures on reported transactional statistics
‘wholesale operational deposits’
BTN Others BTN
4% 12% BNI CIMB 1%
23%
Other banks
1%
12%
Permata
BCA
6%
BNI 35%
10%

BCA
16% Mandiri
20% BRI
20%
BRI Mandiri
19% 21%

PAGE 14
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Just ‘over the hump’ on asset quality, does recent volatility cause fresh concerns?
State bank total impaired loans declining
%
12

10
• Absolute restructured and non performing (‘impaired’) loans
level stabilizing and starting to decline in percentage terms
8

6
• Banks working through these portfolios keeping credit
4
charges elevated for next 1-2 years
2 • BCA and Danamon better placed than state banks to weather
-
a further economic downturn

Total BTN Mandiri BNI BRI

Credit charges easing Impaired loan coverage on average 55%

% %
250
As at 2Q18
4.50 212 209
193 193
4.00 200
3.50 146 146
150 136
3.00 118 124
114
105 107 109
92
2.50 100 73 73
65 60 58
2.00 50 55
44 40 40 48
50
1.50 14
1.00 -
0.50
-

Total BTN Mandiri BNI BRI

Non performing Loans Impaired All loans at risk

PAGE 15
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Efficiency more of a concern amidst anemic balance sheet growth

Total branch numbers steady
k branches
25

19.3
19.9 20.1 20.2 20.1 • Private banks leading efficiency drive, in particular Danamon
20 18.1
2.2 2.1 2.0 1.8
16.2
2.2
2.2
1.7
1.4 1.3
1.0
1.2
1.0
1.0
1.0 • State bank employee and branch expansion ongoing
14.1 2.0 1.0
15 1.8 1.0
11.3
12.0 1.8
1.5
1.7
0.9
0.9
• Fee income tailwinds for BRI and BCA
1.6
10 1.6 0.9
1.5
1.5 0.9
0.8 15.3 15.7 16.1 16.3
13.2 14.4
11.6
5 9.9
7.4 8.1

-
08 09 10 11 12 13 14 15 16 17
State banks BCA Danamon Other mid-tier banks

Employee numbers declining Fees/Assets of the top 4 banks

k employees %
300 1.7

243 247 244 242

250 235 1.5
222
210 48 45 41 1.5
198 47 39
200 182 183 38 1.3 1.3
36
30 44 36
29 29 61 50 1.2 1.2
68
150 62 65 26 27 1.1
62 25 1.1
50 51 23
21 1.0
100 20 20 1.0
20 20 20 0.9

124 131 132

50 106 115
83 83 86 93 98 0.7 0.8

- 0.5
08 09 10 11 12 13 14 15 16 17 10 11 12 13 14 15 16 17 18e 19e 20e
State banks BCA Danamon Other mid-tier banks
BNI BRI Mandiri BCA
PAGE 16
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Mortgage rates are rising

Upward move across the curve
% pa
Weighted avg. sample of best
12.0 offer rates of 7 major banks
(combined 90% share)
• Initial response to higher onshore rates was shorter promo tenor
11.0
• Recent changes are hikes across the curve
10.0
• Macro-prudential easing (higher LTV and lower RWA) not
9.0
effective as demand is predicated on price
8.0
• Banks still require at least 10-15% down payment for risk
year
7.0 mitigation
1 2 3 4 5 6 7+

May-18 Aug-18 Feb-18

BCA and CIMB Niaga most attractive offers Risk Weights lowered, LTVs raised
% pa % RWA
14 50 45
13 45 40
40 35 35
12 Mandiri Maybank
BRI 35
11 30 25
10 25 20
BNI 20
9
15
8 BTN 10

7 5
BCA % LTV
0
6 CIMB 0 50 55 60 65 70 75 80 85 90 95 100
Niaga year
5 New Old
1 2 3 4 5 6 7+
PAGE 17
Source: Company data, Bank Indonesia, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

BNI - Corporate tailwinds under-appreciated

Most profitable Corporate franchise
% pa
FY10-FY17
3.0
ROA ranges
• Corporate Bank (50% of BNI) is best amongst state peers
2.5 2.3 with least volatile ROA and sound credit metrics
2.0
2.0 1.7 • #1 for Corporate cash management float balances
1.4
1.4
1.5
• SOE leverage amidst a state-led investment drive
0.9
1.3
1.0
• Smallest of the top 4 means continued operating leverage
0.5 0.7

-
0.4 • ROE at 16% for 1.2x P/BV is very attractive, priced at similar
BNI Mandiri BRI
levels to BTN but a much stronger franchise
Average ROA Average Credit Charge

Continuing scale benefits Base rates already rising rapidly

% %
60% 10
5.0%
9
55%
4.0% 3.75%
8
49% 3.11% 50%
3.0% 7

44% 45% 6
2.0%
5
1.0% 40%
4

0.0% 35%
10 11 12 13 14 15 16 17 18e 19e 20e

Cost to income ratio (RHS) Opex/Assets 3 mth JIBOR

PAGE 18
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

BNI - Potential further upside to the thesis

Credit metrics improving
%
20.0%
18.0% 17.7% • Credit metrics improving, even as loan growth slows
16.0%
14.0%
• 80% of net loans to low risk segments
12.0%
10.2%
10.0%
7.8% • Credit RWA intensity amongst most conservative in ASEAN.
8.0%
6.0%
7.1%
Moving to same base as Mandiri adds ~3ppt to CET-1
3.8%
4.0% 3.1%
2.0%
2.0% 2.2% • Stock pricing in 2.3-2.7% credit charge vs 1.5-2.0% likely
0.0%
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 in our view
Impaired / Total loans NPLs / Total loans

80% of loans to less risky segments Credit RWA optimization upside 3.1ppt to CET-1
Other
consumer Net loans %
2% 4Q14 to 2Q18 21.0

Small (ex
Payroll
KUR) 20.0 Moves RWA intensity
Loans
3%
12% in Corporate/Medium
KUR small Corporate - 19.0 to same base as
business loans Infrastructure
32%
Mandiri +3.1
8%
18.0
19.8
17.0 -0.4
Medium
18% Corporate -
Plantations 16.0 17.2
Corporate & 14%
SOE (other)
11% 15.0
2Q18 IFRS-9 Impact Credit RWA Potential
optimisation

PAGE 19
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Danamon – Meaningful steps taken on merger, we estimate 45% upside from here
Asymmetric payoff
Rp/sh
10,000 +45% 9,731

9,500 • Stages 1 and 2 of MUFG takeover complete. MUFG at 40%

8,921
9,000
8,500 8,323 • Recent BTPN-SMBC tender offer affirms >80% ownership is
8,000 possible
7,500
7,000 6,700 6,795 • Merger with MUFG-owned Bank BNP a key milestone before
6,500 moving up to 99%
6,000
5,500 • Tender offer for minorities expected pre Stage 3 at 2.1x P/BV
5,000
Stock price Standalone Stage 1 Stage 2 Stage 3 • Anticipating announcement late 4Q18 on next steps
fair value

Average M&A control multiple 2.6x P/BV Improvements on opex and funding at the core bank
P/B (x)
8.0% Rpt 250
6.0
7.5%
5.0 200
BII 7.0%
Ekonomi 6.8%
4.0 Saudara 6.5% 150
Permata Lippo Sahabat 6.0%
3.0 NISP Lippo
5.5% 100
BII Niaga
2.0 Mutiara Anda Danamon
Niaga Buana 5.0% 5.0%
50
Danamon 4.5%
1.0 Windu
BCA
4.0% 0
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
-
Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18

Assets (RHS) Opex/Assets

PAGE 20
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

BCA - Ready for rising rates, but the market largely appreciates that already
12mth NIM sensitivity to each +25bps
bps
15.0
Top 4 Mid Tier
• Core bank 30% ROE with US$3bn surplus equity
9.3
10.0
6.3
4.9
• Most positively disposed to rising domestic rates. The market
5.0
1.0
2.1 largely gets this, stock has been resilient
-
• Mortgage leader, albeit shorter promo tenor and rates rising
(5.0)
(5.3)
• Least directly afflicted by populist Gov’t policy
(10.0)
• System is consolidating. Panin or Permata EPS accretive at
(10.7)
(15.0) 2-3x P/BV acquisition multiples, though unlikely BCA participates
BCA Mandiri BNI BRI Danamon BTN Coverage

At BCA’s core is a 30% ROE banking franchise

%
35%

30% 29.6%
3.3%
25% 3.4%
20% 17.8% 5.1%

15%

10%

5%

0%
4Q17a 17.5% Tier 1 Credit RWA 15.5% Tier 1 Optimised
optimisation

PAGE 21
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

BRI – Getting ‘KUR’ushed. Valuation is attractive enough

Micro yields structurally declining
%
35
• KUR appears set to become permanent. Structural lowering of
30
margins and micro profitability
25

20 • Yields on loans <Rp25m 15.75% net, Kupedes migrating

15 >Rp100m. Both compress yields
10
• KUR a 2.5% ROA product assuming low gross loss rates of
5
1.3% (30yr average in the space is 2.1%)

Kupedes pricing range Total micro

• Gov’t has limited space to move subsidies and may in fact need
KUR - effective to BRI KUR - paid by debtor to cut given optimistic energy subsidy targets for FY19
• Most negative NIM sensitivity of the top 4 due to limited loan
Kupedes customer acquisition stalling
repricing
m Rpm
5.0 55
• Ought to cap re-rating potential, historic trading range probably
50
4.5
43
4546 irrelevant until KUR is wound back
4242 45
4.0 40
3839
37 40
3.5 3334
3132 35
29 29303030
3.0 2829 2929
2728 30
26
24
2.5 2323
22 25
20
2.0 20

Kupedes borrowers Balance per borrower (RHS)

PAGE 22
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Mandiri – Neutral at current levels

ROA has been dictated by the credit charge
%
3.5% 2%

1%
• Risk reward looks balanced at current levels
3.0%

2.5%
0% • Credit charges probably settle out at current levels; unlikely to
2.0%
-1%
go back to net zero
-2%
1.5%
-3% • Funding position less stable than peers based on LCR
1.0%
-4% disclosures. Highest reliance on wholesale discretionary
0.5% -5% funds in absolute terms
0.0% -6%
1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 • Stock a third more expensive than BNI on multiples with less
ROA Net credit charge (RHS)
potential upside to assumptions (credit, margin)

Funding position less stable than major peers

%
100
12 17 22
28 27 33 34 31 26
80 12 43 50 57 57
34
60 22 29 27
44
17 31 33
40 11 13
73 21 8 24 58
27 12 20
12 40
20 39 32 33 20 11 34
28 24 20
16 12 9
-

Non operational wholesale Non stable retail

Wholesale Operational savings Retail/SME Stable
PAGE 23
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Banks

Valuation matrix
BCA BRI Mandiri BNI BTN Danamon
Ticker BBCA IJ BBRI IJ BMRI IJ BBNI IJ BBTN IJ BDMN IJ
Market Cap US$m 39,337 23,961 19,860 8,870 1,789 4,287
ADV US$m 21.7 27.2 16.3 9.3 3.6 1.6
Price IDR/sh 23,900 2,910 6,375 7,125 2,530 6,700
Target IDR/sh 25,200 3,200 6,120 10,000 2,000 9,700
Recommendation O-P O-P N O-P U-P O-P
19e Div yield % 1.6 3.8 2.7 4.9 2.3 2.4
12-mth TSR % 7.1 13.8 (1.3) 45.2 (18.6) 47.2

ROE %
16a 20.4 20.2 10.3 13.9 15.9 7.6
17a 19.1 18.5 12.5 14.7 14.8 9.9
18e 19.3 17.4 14.2 15.9 13.6 10.5
19e 20.0 16.3 14.7 16.4 12.7 10.6

P/E x
16a 28.6 13.7 21.5 11.7 10.2 24.1
17a 25.3 15.4 15.0 9.7 8.8 17.4
18e 21.6 11.8 12.3 8.2 8.6 15.2
19e 18.1 11.4 10.9 7.3 8.3 14.1

P/B x
16a 5.2 2.5 2.0 1.5 1.4 1.8
17a 4.5 2.2 1.8 1.3 1.2 1.7
18e 3.9 1.9 1.7 1.3 1.1 1.5
19e 3.4 1.8 1.5 1.1 1.0 1.4

PAGE 24
Source: Macquarie Research, Factset, September 2018. Priced as at close 12 September 2018
Macquarie Research | EQUITIES

Indonesia Mining
Own exporters

Jayden Vantarakis
PT Macquarie Sekuritas
+62 (21) 2598 8310
Jayden.Vantarakis@Macquarie.com

September 2018

In preparing this research, we did not take into account the investment objectives, financial situation and particular
needs of the reader. Before making an investment decision on the basis of this research, the reader needs to
consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular
investment needs, objectives and financial circumstances. Please see disclaimer.
 Macquarie Research | EQUITIES

Indonesia Mining

Coal Miners – attractive valuations, valuable FX income

ITMG best levered to pickup in Newcastle
US$/t Quarterly realized ASP • ASP improvements led by ITMG due to higher grades
100.0

90.0 • Cash margin less due to cost inflation, higher strip ratios.
80.0 PTBA best shielded
70.0
• Thermal coal forecast US$107/t in FY18e and US$85/t in
60.0
FY19e
50.0
• DMO is more than priced in at current levels in our view
40.0

30.0

PTBA ITMG ADRO Average

Cash margin improvement led by PTBA ITMG reserves uplift also a positive
US$/t mt
40.0 450
400 Acquisition
35.0
350
30.0
300
Reserves
25.0 upgrade
250
20.0 200
15.0 150

10.0 100
50
5.0
0
-

Indominco Trubaindo & Bharinto Kitadin & Td Mayang Jorong NPR

PTBA ITMG ADRO Average

PAGE 26
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Mining

Vale Indonesia – Opportunity has opened up

Rising operating leverage
US$/t • Nickel LR price US$20.7k/t in 22e
30,000

25,000
• Positive operating leverage in 19e beyond cost inflation
rising
20,000
operating
leverage
• Only major commodity with decent long-run demand story
15,000
from Electric Vehicles
10,000 • Divestment 20% should clear an overhang
5,000

-
10a 11a 12a 13a 14a 15a 16a 17a 18e 19e 20e 21e 22e

ASP Cash cost

LR forecast US$20.7k/t Expansion in the money on our forecasts

kt
US$/t 95
22,000
20,710 90

85 88 88 88 88 88

80 83
18,000
17,000 81
75 79
77 78 77 78 78
76 76
70
72
71
14,000 65
67 67
12,200
60

55
10,000 07 08 09 10 11 12 13 14 15 16 17 18e 19e 20e 21e 22e 23e 24e 25e
Spot Macquarie LR Est Discounted into the
stock Production Rated capacity

PAGE 27
Source: Company data, Macquarie Research, September 2018
 Macquarie Research | EQUITIES

Indonesia Mining

Valuation Matrix
Company Mkt cap Price Target Rating 12-mth PE (x) EV/Ebitda (x) P/BV (x) Div yld (%) ROE (%)

Name Ticker (US$m) (LCY) (LCY) TSR (%) 18e 19e 18e 19e 18e 19e 19e 19e

Coal ITM ITMG IJ 1,973 25,775 29,700 O-P 27.8 7.6 7.9 3.5 3.6 1.7 1.8 12.5 22.1

Adaro ADRO IJ 3,742 1,760 2,700 O-P 58.1 7.4 7.4 2.8 2.7 1.0 0.9 4.7 12.7

Bukit Asam PTBA IJ 3,084 3,940 4,850 O-P 30.2 7.1 9.2 4.5 5.7 2.6 2.4 7.1 26.8

Average 8,800 41.5 7.4 8.2 3.6 4.0 1.7 1.6 7.3 19.7

Nickel Vale Indo INCO IJ 2,312 3,330 4,800 O-P 45.7 35.6 15.3 10.0 6.1 1.2 1.2 1.6 7.8

Antam ANTM IJ 1,511 890 - N-R - 50.0 42.8 11.9 11.1 1.1 1.1 - 2.6

Average 3,822 41.3 26.2 10.7 8.1 1.2 1.2 1.0 5.8

Total 12,622 17.6 13.6 5.7 5.2 1.5 1.5 5.4 15.5

PAGE 28
Macquarie Research | EQUITIES

Other sectors
Key thoughts on major stocks from our team

In preparing this research, we did not take into account the investment objectives, financial situation and particular
needs of the reader. Before making an investment decision on the basis of this research, the reader needs to
consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular
investment needs, objectives and financial circumstances. Please see disclaimer.
 Macquarie Research | EQUITIES

Unilever Indonesia

Quality, resilient margin over various cost pressures. Valuation to remain premium
UNVR margin resiliency in the past 2 decades Domestic funds provided structural support on valuation
60% 45%
Domestic investors owned
50% 43% of UNVR free float
40% (Jul’18).
40% Despite cost pressures such as rupiah
depreciation, raw material increase, inflation in
30% 2005/08/11/13/15 35%

20%
30%
10%

0% 25%

Gross Margin Operating Margin Net Margin 20%

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Decent profit growth with consistently superior ROE • UNVR Indo launched several new products in new
subcategory to gain back market share in Personal care.
30% 160%
We think 1H18 is the bottom of its operational performance.
25%
20% 120% • Ytd UNVR increased price by almost 2%, we estimate price
15% increase needed to offset cost increase is 2.1%-2.5%.
80%
10% • Growing domestic funds continue to provide structural
5% 40% support to UNVR valuation, due to scarcity of quality in the
0% consumer space and UNVR large index weight.
-5% 0%
09 10 11 12 13 14 15 16 17 18e 19e

Revenue growth Profit growth ROE, RHS

Source: Company data, Bloomberg, Macquarie Research, September 2018 PAGE 30

 Macquarie Research | EQUITIES

Indah Kiat Pulp Paper

Structural beneficiary of China’s environmental policies

INKP product’s ASP and MQ18 assumption Quasi-oligopoly market on hardwood pulp producers
YTD ASP
Pulp: +32% YoY
Fibria + Suzano
Paper: +25% YoY 17%
Packaging:+17% YoY APP + Paper Excellence
13%
April

CMPC
58%

5% UPM

4% Others
3%

As at end FY17

INKP - improving profitability and lower gearing • Beneficiary of China’s waste paper import restrictions that
200% 18% 18% 20%
caused lower input cost and higher export prices for INKP.
17%
180% 18%
• Fully integrated structure, USD earner, and MSCI
160% 16%
140%
14%
14%
inclusion gather more attention and liquidity.
120% 10%
9%
12%
• The group increased ASP across its paper product by
100% 10%
80%
7%
8%
4%-5% in September, should support stronger 4Q18
5%
60% 6% numbers.
40% 2% 4%
20%
1% 1%
2%
• INKP IJ, OP, Rp20,750/sh, implies 8x 19PE and 7x
0% 0% EV/Ebitda, reflecting a 20% disc to peers.
10 11 12 13 14 15 16 17 18e 19e 20e

Debt/Equity ROE, RHS

• Key risk: transfer pricing and capital allocation

Source: Company data, Bloomberg, Macquarie Research, September 2018 PAGE 31

 Macquarie Research | EQUITIES

Astra International

Value starts to emerge

ASII PE band • Outperform, TP: Rp 8,100

(current price Rp 7,125)
• Attractive valuation, trading below -1
standard deviation below
• Improving market share from higher volume
of Toyota Rush and Daihatsu Terios
• We see limited earnings downside as 2W and
UNTR will compensate 4W weakness

Industry vs. Astra 3-month rolling volume growth Non-Auto to drive ASII earnings

Source: Gaikindo, Company data, Macquarie Research, September 2018

PAGE 32
 Macquarie Research | EQUITIES

United Tractors

The cycle continues and we remain buyers

Industry heavy equipment sales

• Outperform, TP: Rp 44,300
(current price Rp 32,125)
• We forecast earnings will grow 35% in
FY18e even after the 48% jump in 2017
• The growth is driven by:
• Stripping ratio improvement
• Strong demand for heavy equipment

Pama overburden volume and volume growth UNTR PE band

Source: Company data, Macquarie Research, September 2018

PAGE 33
 Macquarie Research | EQUITIES

Matahari Department Store

Well positioned with attractive valuation and dividend yield

LPPF SSSg by region

• Outperform, TP: Rp 11,000
(current price Rp 6,550)
• LPPF currently trades at 10x 18E PE
• Assuming 80% dividend payout ratio,
it offers 8% dividend yield
• The stock is trading below its -2 std
deviation below

LPPF dividend payout ratio LPPF PE band

Source: Company data, Macquarie Research, September 2018

PAGE 34
 Macquarie Research | EQUITIES

Indonesia Telecoms

Network gap to enable price hikes

What we saw in June:

 Bonus reductions by Tsel & XL
 Direct price hike by ISAT on its core data packages
 Sim registration fully enforced; no more pre-activated sim cards available
 Retailers not pushing starter packs to customers as agressively as before
 Catalyst: Tsel to hike data prices significantly from July

 A two-horse race is better:

 price hikes are easier to sustain EXCL/ISAT Tsel
Data revenue mkt share:
when there is an obvious network 26% 66%

gap between EXCL and ISAT 24% 64%

22% 62%
 TLKM and EXCL are the only ones 20% 60%
making proper investment in their 18% 58%
4G network 16% 56%
14% 54%
 TLKM: Outperform, Rp4,000 target 12% 52%
(current price Rp3,370) 10% 50%
3M13
6M13
9M13

3M14
6M14
9M14

3M15
6M15
9M15

3M16
6M16
9M16

3M17
6M17
9M17

3M18
2013

2014

2015

2016

 EXCL: Outperform, Rp4,200 target 2017

XL Axiata (LHS) Indosat (LHS) Telkomsel (RHS)
(current price Rp2,930)

Source: Company data, Bloomberg, Macquarie Research, September 2018 PAGE 35

Macquarie Research | EQUITIES

Important Disclosures:

Recommendation definitions Volatility index definition* Financial definitions

Macquarie - Australia/New Zealand
Outperform – return > 3% in excess of benchmark return
Neutral – return within 3% of benchmark return
Underperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth
plus 12 month forward market dividend yield.
Macquarie – Asia/Europe
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected <-10%
Mazi Macquarie - South Africa
Outperform – return > 10% in excess of benchmark return
Neutral – return within 10% of benchmark return
Underperform – return > 10% below benchmark return
Macquarie - Canada
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Macquarie - USA
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
This is calculated from the volatility of historic price
movements.
Very high–highest risk – Stock should be expected to
move up or down 60-100% in a year – investors should be
aware this stock is highly speculative.
High – stock should be expected to move up or down at
least 40-60% in a year – investors should be aware this
stock could be speculative.
Medium – stock should be expected to move up or down
at least 30-40% in a year.
Low–medium – stock should be expected to move up or
down at least 25-30% in a year.
Low – stock should be expected to move up or down at
least 15-25% in a year.
* Applicable to Australian/NZ stocks only
Recommendation – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging, IFRS
impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests
EPS = adjusted net profit /efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average total
assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average number of
shares
All Reported numbers for Australian/NZ listed stocks
are modelled under IFRS (International Financial
Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2018

AU/NZ Asia RSA USA CA EUR
Outperform 52.87% 61.26% 48.86% 47.54% 69.86% 46.61% (for global coverage by Macquarie, 3.51% of stocks followed are investment banking clients)
Neutral 34.10% 27.25% 36.36% 46.72% 21.92% 43.22% (for global coverage by Macquarie, 2.10% of stocks followed are investment banking clients)
Underperform 13.03% 11.49% 14.77% 5.74% 8.22% 10.17% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients)

PAGE 36
Macquarie Research | EQUITIES

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PAGE 37
 Macquarie Research | EQUITIES

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