Indonesia

In this briefing:

1. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
3. Japan – Chinese Flu
4. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

1. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

3. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

4. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

In this briefing:

1. Widodo Withstands Prabowo’s Debate Pressure / BI Hints at Lower 1Q CAD / Gerindra Prepares Dispute
2. Battery Technology- The Key To An Electric Vehicle Future
3. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
4. Malaysian Telcos: Look for Improvements to Continue in 2019.
5. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

1. Widodo Withstands Prabowo’s Debate Pressure / BI Hints at Lower 1Q CAD / Gerindra Prepares Dispute

Prabowo performed forcefully in the 30 March presidential debate, but Widodo remained unflustered and debunked the Gerindra chair’s particularly dark realpolitik vision.  Prabowo fell ill later in the week but apparently recovered, and a major rally will occur in Jakarta on 7 April.  But virtually all polls show Widodo maintaining his large lead through mid-March and no developments seem likely to alter the standings.  But if Widodo’s 17 April margin of victory is unexpectedly narrow, Prabowo campaign officials seem certain to allege fraud and contest the outcome.  This scenario would present prolonged tension and uncertainty through 8 August. 

Politics: Gerindra Chair Prabowo Subianto missed three successive campaign appearances due to an unspecified malady (Page 2).  Supporters of Prabowo – namely, his brother Hashim Djojohadikusumo and the National Mandate Party (Pan) founder Amien Rais – warned of potential electoral fraud and threatened to mobilize “people power” after election day.  This highlights the importance of Widodo winning by a wide margin, lest a narrow victory lends credence to claims of fraud (p. 2).  Prabowo pressured President Joko Widodo more aggressively in the fourth presidential debate on 30 March, but he also lost his temper and appeared condescending – while Widodo coolly parried incessant jabs.  Prabowo sought to portray Widodo as being innocently out of touch with harsh realities in security, diplomacy and governance.  He depicted foreigners – including diplomats, journalists and investors – as duplicitous, disrespectful and untrustworthy.  For his part, Widodo chided Prabowo for being fearful and lacking confidence in Indonesian institutions, especially the military.  Prabowo insisted that willful leadership is essential to make Indonesia strong, prosperous and self‑sufficient.  He closed by reiterating his pledge to end food imports.  While his display of mettle may help his appeal among some voters, his bluster – debunked with effect by Widodo – may have alienated others (p. 3).  While scrutinizing the Golkar parliamentarian Bowo Pangarso regarding dealings with a state fertilizer firm, personnel from the Anti-Corruption Commission (KPK) discovered Rp8 billion in his company’s basement – neatly sorted in 400,000 envelopes.  He was allegedly preparing a vote‑buying operation in his Central Java electoral district (p. 13). 

Surveys: Indobarometer corroborated findings from other polls and measured Widodo’s lead at 18 percentage points as of mid‑March (p. 14). 

Security: Counter‑terror police apprehended a figure in West Java whom they suspect is a leader of the formidable Jemaah Ansharut Daulah (JAD) terrorist group (p. 15). 

Economics: A Bank Indonesia (BI) deputy governor cited the possibility of a significantly lower current account deficit for the first quarter of 2019, but warned that it could widen again in the second quarter (p. 16).  Oil production fell short of the government’s target again (p. 16).  

Jakarta: The public works minister openly rebuked Governor Anies Baswedan for making no progress on a ‘naturalization’ project to rectify drainage in the Ciliwung River.  Baswedan has refused to evict riverbank squatters who obstruct the work (p. 16). 

2. Battery Technology- The Key To An Electric Vehicle Future

The Insight is structured as follows:

• A. Key  Conclusions
• B. Report Highlights
• C.History of Electric Vehicles
• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
• F. Batteries Beyond Li-ion
• G. Supply Constraints for Key Raw Materials
• H. The Competitive Landscape

A. Key  Conclusions

Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors. 

Quite apart from the technology,  the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework. 

3. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

4. Malaysian Telcos: Look for Improvements to Continue in 2019.

The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.

• Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
• Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
• DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.

Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far. 

Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.

5. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

In this briefing:

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
2. Japan – Chinese Flu
3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

2. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

In this briefing:

1. Battery Technology- The Key To An Electric Vehicle Future
2. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
3. Malaysian Telcos: Look for Improvements to Continue in 2019.
4. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
5. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks

1. Battery Technology- The Key To An Electric Vehicle Future

The Insight is structured as follows:

• A. Key  Conclusions
• B. Report Highlights
• C.History of Electric Vehicles
• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
• F. Batteries Beyond Li-ion
• G. Supply Constraints for Key Raw Materials
• H. The Competitive Landscape

A. Key  Conclusions

Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors. 

Quite apart from the technology,  the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework. 

2. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

3. Malaysian Telcos: Look for Improvements to Continue in 2019.

The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.

• Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
• Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
• DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.

Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far. 

Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.

4. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

5. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks

In this briefing:

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
2. Japan – Chinese Flu
3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
4. Matahari Department Store (LPPF IJ) – A Retail Conundrum

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

2. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

4. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

In this briefing:

1. Japan – Chinese Flu
2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
3. Matahari Department Store (LPPF IJ) – A Retail Conundrum

1. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

3. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

In this briefing:

1. Japan – Chinese Flu
2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
3. Matahari Department Store (LPPF IJ) – A Retail Conundrum
4. January Chip Revenues Down 15.6% Year-On-Year

1. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

3. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

4. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

In this briefing:

1. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
2. Malaysian Telcos: Look for Improvements to Continue in 2019.
3. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
4. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
5. Map Aktif Follow-On Offering – Lace up for a Potential Long Run

1. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

2. Malaysian Telcos: Look for Improvements to Continue in 2019.

The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.

• Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
• Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
• DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.

Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far. 

Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.

3. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress. 

4. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks

5. Map Aktif Follow-On Offering – Lace up for a Potential Long Run

CVC is looking to raise about US$353m through the sale of about 648m Map Aktif Adiperkasa PT (MAPA IJ) shares in the follow-on offering.

Map Aktif (MAPA) is a sports, leisure, and kids retailer in Indonesia. It is a subsidiary of Mitra Adiperkasa (MAPI IJ).  The selldown might not be totally unexpected as CVC planned to exit its investment by 2020. However, post this selldown it will still have 192m share left.

In this briefing:

1. Sea Ltd (SE US): Placing Price Leaves Money on the Table

1. Sea Ltd (SE US): Placing Price Leaves Money on the Table

Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.

In this briefing:

1. Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle

1. Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle

Our positive view of the Asian region in 2018 was not reflected in stock market performance. But now is not the time to discard fundamentals and fundamental analysis. Unlike the US, the Asian region is in the early stages of a profit upcycle. As we have argued on many occasions, that is the building block required to kick start the investment cycle. But theoretical explanations of the growth process aside, is there any empirical support for the argument that profits and investment, and therefore growth, are related? We would answer in the affirmative and, in the following report, we try to show how the process works and where Asia stands on two of our Austrian Stress Indicators (ASIs). Market volatility aside, the conditions for good growth gains are firmly in place in most of the region.