Indonesia

In this briefing:

1. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town
2. 2019 Elections – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?

1. Mitra Adiperkasa (MAPI IJ) – Retail Therapy Is Alive and Well – On the Ground in J-Town

With the huge investment that has been going into e-commerce in Indonesia, especially in the consumer space, there are doomsayers out there crying out that the end is nigh for traditional offline retail as we know it.

Anyone who has actually visited popular destination Jakarta malls such as Grand Indonesia or Kota Kassablanca with their eyes open would almost certainly take a different view. 

A visit to Mitra Adiperkasa (MAPI IJ) management in Jakarta last week confirmed that middle-class retail therapy in Indonesia is alive and well and the company is well positioned to take advantage.  

Mitra Adiperkasa (MAPI IJ) finished 2019 with +8% Same Store Sales Growth (SSSG), with a particularly strong performance from its Sports Station Stores within Ramayana Lestari Sentosa (RALS IJ) stores. 

The company continues to expand its footprint in Indonesia, with plans to increase its floor area by 60,000 sqm in 2019 and a focus on MAP Active, Fashion, and Starbucks. 

MAP continues to take an omnichannel approach to sales, working with all the major online marketplaces and selling through its own Mapemall.com. Online sales only account for around 1% of total sales currently. 

Mitra Adiperkasa (MAPI IJ) remains a key proxy for middle-class consumption in Indonesia, with an increasingly broad spectrum of exposure through alliances with other retailers such as Ramayana Lestari Sentosa (RALS IJ) and Pt Matahari Department Store (LPPF IJ), as well as through its Starbucks expansion. After a few years of restructuring, the company is now harvesting on its transformation, with its specialty business now growing at a faster pace, its department stores in much better shape, and Starbucks enjoying better scale benefits. The company’s margins have improved, it has a stronger balance sheet and more efficient working capital management. According to Capital IQ, the company is trading on 19.6x FY19E PER and 16.5x FY20E PER, with forecast EPS growth of +14.0% and +18.2% for FY19E and FY20E respectively, which continues to look attractive in valuation terms. 

2. 2019 Elections – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?

This insight is Part 2 of a six-part series on 2019 elections in which we evaluate key polls and their potential to re-shape the economic outlook and investment risk profiles. These six markets – Thailand, Indonesia, India, South Africa, Greece and Argentina – collectively represent one-quarter of the world’s population and more than $5 trillion in GDP. We review distinct domestic challenges as well as campaign pledges by incumbents (and their challengers) aimed at addressing them. We also humbly assign probabilities to baseline and alternative scenarios and their implications for macroeconomic outlook and investments.

Even amidst their diversity, these six jurisdictions display some remarkable similarities: subdued economic momentum, bouts of market volatility, signs of voter disquiet and/or disillusionment and an opposition looking to capitalize on all of these forces. In a bid to revive the ‘magic’ that had helped to install their administrations, many incumbent governments are now on the defence – either changing tack (and dialing back past policies) or attempting to convince voters to let their policies work their magic.

Please refer to other insights in this series:

• Elections 2019 – Part 1. Thailand: Magic Moment for Democracy’s Return?
• Elections 2019 – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
• Elections 2019 – Part 3. India: Modi’s Magic Touch Fades as Populism Makes a Comeback
• Elections 2019 – Part 4. South Africa: Ramaphosa – ANC’s Magician?
• Elections 2019 – Part 5. Greece: New Democracy Promises Magic Makeover
• Elections 2019 – Part 6. Argentina: Macri Magic and the Peronist Spell

In this briefing:

1. 2019 Elections – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?

1. 2019 Elections – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?

This insight is Part 2 of a six-part series on 2019 elections in which we evaluate key polls and their potential to re-shape the economic outlook and investment risk profiles. These six markets – Thailand, Indonesia, India, South Africa, Greece and Argentina – collectively represent one-quarter of the world’s population and more than $5 trillion in GDP. We review distinct domestic challenges as well as campaign pledges by incumbents (and their challengers) aimed at addressing them. We also humbly assign probabilities to baseline and alternative scenarios and their implications for macroeconomic outlook and investments.

Even amidst their diversity, these six jurisdictions display some remarkable similarities: subdued economic momentum, bouts of market volatility, signs of voter disquiet and/or disillusionment and an opposition looking to capitalize on all of these forces. In a bid to revive the ‘magic’ that had helped to install their administrations, many incumbent governments are now on the defence – either changing tack (and dialing back past policies) or attempting to convince voters to let their policies work their magic.

Please refer to other insights in this series:

• Elections 2019 – Part 1. Thailand: Magic Moment for Democracy’s Return?
• Elections 2019 – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
• Elections 2019 – Part 3. India: Modi’s Magic Touch Fades as Populism Makes a Comeback
• Elections 2019 – Part 4. South Africa: Ramaphosa – ANC’s Magician?
• Elections 2019 – Part 5. Greece: New Democracy Promises Magic Makeover
• Elections 2019 – Part 6. Argentina: Macri Magic and the Peronist Spell

In this briefing:

1. 2019 Elections – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
2. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

1. 2019 Elections – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?

This insight is Part 2 of a six-part series on 2019 elections in which we evaluate key polls and their potential to re-shape the economic outlook and investment risk profiles. These six markets – Thailand, Indonesia, India, South Africa, Greece and Argentina – collectively represent one-quarter of the world’s population and more than $5 trillion in GDP. We review distinct domestic challenges as well as campaign pledges by incumbents (and their challengers) aimed at addressing them. We also humbly assign probabilities to baseline and alternative scenarios and their implications for macroeconomic outlook and investments.

Even amidst their diversity, these six jurisdictions display some remarkable similarities: subdued economic momentum, bouts of market volatility, signs of voter disquiet and/or disillusionment and an opposition looking to capitalize on all of these forces. In a bid to revive the ‘magic’ that had helped to install their administrations, many incumbent governments are now on the defence – either changing tack (and dialing back past policies) or attempting to convince voters to let their policies work their magic.

Please refer to other insights in this series:

• Elections 2019 – Part 1. Thailand: Magic Moment for Democracy’s Return?
• Elections 2019 – Part 2. Indonesia: Jokowi’s Policies – Magic Bullet or Bitter Pill?
• Elections 2019 – Part 3. India: Modi’s Magic Touch Fades as Populism Makes a Comeback
• Elections 2019 – Part 4. South Africa: Ramaphosa – ANC’s Magician?
• Elections 2019 – Part 5. Greece: New Democracy Promises Magic Makeover
• Elections 2019 – Part 6. Argentina: Macri Magic and the Peronist Spell

2. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year – the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs – it should be a bumper year for the oil service (E&C) companies.  This should be positive for the LNG contractors such as Mcdermott Intl (MDR US), TechnipFMC PLC (FTI FP), Chiyoda Corp (6366 JP) and Jgc Corp (1963 JP) .

In this briefing:

1. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies
2. Indonesia’s Negative Investment List – “Open For Business” Is Lip-Service Only
3. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default
4. BTPS – Sharia Lender Improves High Returns
5. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”

1. A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year – the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs – it should be a bumper year for the oil service (E&C) companies.  This should be positive for the LNG contractors such as Mcdermott Intl (MDR US), TechnipFMC PLC (FTI FP), Chiyoda Corp (6366 JP) and Jgc Corp (1963 JP) .

2. Indonesia’s Negative Investment List – “Open For Business” Is Lip-Service Only

First of all, Kung Hei Fat Choy and Saang Tai Gin Hon in the Year of the Earth Pig! As equity markets in Asia mostly take a break today we turn our attention to Indonesia.

When President Joko Widodo (Jokowi) took office in 2014 one of the first speeches he made to a foreign audience contained the claim that Indonesia was “open for business”. Fast-forward four years to December 2018 and the government’s announcement that its Negative Investment List (NIL) was being revised and that 54 sectors were to be opened to foreign investment. The president sticking to his word? Well, no. That policy lasted less than seven days – the list of sectors wasn’t even published – before the announcement came that it was under review. Cabinet ministers were scrapping with each other, private sector businesses were unhappy and Indonesia’s proclivity to retreat into its nationalist shell was on full show once again.

3. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default

We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.

4. BTPS – Sharia Lender Improves High Returns

Bank Tabungan Pensiunan Nasional Syariah (BTPS IJ) is 70%-owned by Bank Tabungan Pensiunan Nasional (BTPN IJ), the specialized pension lender in Indonesia. The focus of BTPS is small-sized loans, under Sharia law and primarily to women and the under-banked. The business is fairly new, but credit metrics and returns have been exceptional for the past five years, and rising. The company has seen its ROA rise from 4.54% to 9.11%, from 2014 to 2018, which ranks it as one of the most profitable lenders in Asia, and likely anywhere.

5. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”

• US-China trade negotiations are focusing on the easy parts to avoid truly difficult discussions on thornier structural issues.
• Beijing is trying to buy their way to a compromise by taking out their checkbook and promising to buy more US products.
• A truly comprehensive trade pact will be difficult, perhaps even impossible, to reach.
  That’s because many of the problems Washington wants resolved in China will require more than a few regulatory tweaks.
• The bureaucratic harassment, theft of intellectual property, and overt favoritism toward local firms that make doing business in China difficult for American chief executives are caused by the very way the Chinese economy works.
• Changing these procedures means changing China’s basic economic system. Beijing’s leaders cannot possibly achieve such an overhaul in the short term—assuming they even want to.

CNBC Interview of David Riedel on US-China Trade

In this briefing:

1. Medco’s “Okay” Offer For Ophir After Fortuna Setback
2. SMFG (8316 JP): On Target But Drifting Off Radar

1. Medco’s “Okay” Offer For Ophir After Fortuna Setback

On 30th January 2019, Indonesian oil and gas company Medco Energi Internasional T (MEDC IJ) announced an agreement to acquire Ophir Energy (OPHR LN) in a £390mn cash deal (at an offer price of £0.55/share).  

Medco initially made an unsolicited approach for Ophir at £0.58/share on 22nd October 2018, and indicated a “willingness to consider offering Ophir’s shareholders additional potential consideration via contingent value rights in relation to the Fortuna LNG asset in Equatorial Guinea (which at the time was awaiting an extension approval) subject to further analysis and due diligence“. Given uncertainty that persevered on Fortuna’s license extension, Medco revised its bid to £0.538/share on 20th December 2018.

On 7th January 2019, Ophir announced that it was recording a $300mn non-cash impairment following the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. Ophir had previously written down $310mn back in September. Subsequently, Medco revised its bid further down to £0.485 on 11th January 2019 but this offer was rejected by Ophir’s board.

Medco’s latest offer of £0.55/share is a 66% premium to the closing price of £0.33 on 28 December 2018.  Ophir’s board has unanimously recommended the latest offer stating that the deal offered “upfront cash value” to its shareholders and that the offer price “reflects the future prospects of Ophir’s high-quality assets“.

The deal is conditional on receiving 75% shareholder approval, receiving of clearances from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

Medco’s offer does provide long-suffering Ophir shareholders with an okay exit in a less-than-ideal situation. Ophir’s shares have been trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder may warrant such an outcome. But I’d be disinclined to chase through terms.

2. SMFG (8316 JP): On Target But Drifting Off Radar

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s full-year target of ¥700 billion for consolidated net profits.  Nevertheless, 3Q results (October-December 2018) were well down year-on-year, with rising funding costs and higher credit costs offsetting much of the positives from the earlier deconsolidation of its two retail banking subsidiaries.  Full-year guidance remains unchanged.  SMFG is now poised to exceed its ¥700 billion FY3/2019 consolidated net profit target, although probably not by much.

The megabanks are always a ‘crowded trade’ for foreign investors when it comes to exposure to the Japanese banking sector: the choice usually coming down to either MUFG or SMFG.  Mizuho, which significantly outperformed both MUFG and SMFG throughout CY2018, is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

In this briefing:

1. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default
2. BTPS – Sharia Lender Improves High Returns
3. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”
4. RRG Global Macro Weekly – Poland and Malaysia Face External Forces in 2019
5. The Week that Was in ASEAN@Smartkarma – Export Revival, Indonesia Property, and Vietnamese Banks

1. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default

We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.

2. BTPS – Sharia Lender Improves High Returns

Bank Tabungan Pensiunan Nasional Syariah (BTPS IJ) is 70%-owned by Bank Tabungan Pensiunan Nasional (BTPN IJ), the specialized pension lender in Indonesia. The focus of BTPS is small-sized loans, under Sharia law and primarily to women and the under-banked. The business is fairly new, but credit metrics and returns have been exceptional for the past five years, and rising. The company has seen its ROA rise from 4.54% to 9.11%, from 2014 to 2018, which ranks it as one of the most profitable lenders in Asia, and likely anywhere.

3. China Strategy of Promising to Buy Stuff Just Might Work on Trump as He Looks for an Easy “victory”

• US-China trade negotiations are focusing on the easy parts to avoid truly difficult discussions on thornier structural issues.
• Beijing is trying to buy their way to a compromise by taking out their checkbook and promising to buy more US products.
• A truly comprehensive trade pact will be difficult, perhaps even impossible, to reach.
  That’s because many of the problems Washington wants resolved in China will require more than a few regulatory tweaks.
• The bureaucratic harassment, theft of intellectual property, and overt favoritism toward local firms that make doing business in China difficult for American chief executives are caused by the very way the Chinese economy works.
• Changing these procedures means changing China’s basic economic system. Beijing’s leaders cannot possibly achieve such an overhaul in the short term—assuming they even want to.

CNBC Interview of David Riedel on US-China Trade

4. RRG Global Macro Weekly – Poland and Malaysia Face External Forces in 2019

• Poland: Could be a beneficiary of Brexit if Poles return to boost domestic demand. Unemployment of 5.5% provides room for workers.
• Brazil: Congress returning to discuss market-friendly policies from Bolsonaro – Pensions are top of list for reform
• Malaysia: Extremely dependent on external trade Malaysia has done well recently but may face headwinds if global growth slows.

5. The Week that Was in ASEAN@Smartkarma – Export Revival, Indonesia Property, and Vietnamese Banks

Macro Insights

In Asian Exports – Ripple Out Effect, Sharmila Whelan analyses the outlook for Asian exports after a weaker end to last year but sees a potential recovery ahead.

In The Dollar Is Already Dead, economist Dr. Jim Walker suggests that the outlook for the dollar is less than rosy and is not as important as it once was in policy making terms.

In Election Body Pressured / Lippo Tested / FDI / AGO Martyrs Foe / SMI on GDP / Matchfixing / CPO Fuel, Kevin O’Rourke comments on the most significant political and economic developments in Indonesia over the past week. 

Equity Bottom-Up Insights

In MacroAsia (MAC PM) – Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground, Lloyd Moffatt circles back to this aircraft Philippines aircraft maintenance player after a conversation with management on the ground. 

In DTAC: Survived 2019 but Pressured on All Sides. Maintain Reduce., our friends at New Street Research revisit Total Access Communication (DTAC TB) after a difficult 2018 and continue to see hurdles ahead. 

In RHT Health Trust – Cash on Sale, Royston Foo looks at RHT Health Trust (RHT SP) after the disposal of its portfolio of Indian assets to Fortis. On 15^th January 2019, RHT Health Trust (RHT SP) announced the completion of the disposal of RHT’s entire asset portfolio of clinical establishments and hospitals in India to Fortis. 

in ACB: Quality at a Reasonable Price, Paul Hollingworth takes a close look at this leading Vietnamese bank and takes a positive view. The fundamental trends at Asia Commercial Bank/Vietnam (ACB VN) are benign and stand out within Vietnam’s improving banking universe. 

Sector and Thematic Insights

In this Smartkarma Original, Indonesia Property – In Search of the End of the Rainbow? Introduction to a Series., Angus Mackintosh and Jessica Irene examine the outlook for Indonesian Property and look for potential catalysts for this laggard sector. 

In INDO Snippets: Social Media on Presidential Debate, Battle of Mobile Payment Platform OVO & Go-Pay, Jessica Irene brings together substantive and significant on the ground chatter that may potentially have a meaningful impact on the Indonesian Equity Market. 

In Singapore Real Deals (Issue 2): The Under-Supplied Executive Condominium Market, property specialist Anni Kum produces a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. 

In this briefing:

1. Election Body Pressured / Lippo Tested / FDI / AGO Martyrs Foe / SMI on GDP / Matchfixing / CPO Fuel

1. Election Body Pressured / Lippo Tested / FDI / AGO Martyrs Foe / SMI on GDP / Matchfixing / CPO Fuel

Police interrogated members of the independent General Election Commission (KPU), pursuant to a spurious case in which a coordinating minister has a conflict of interest.  If police persist, perceptions of the election’s legitimacy could suffer.  Lippo is under scrutiny for repudiating a foreign creditor — and the Information Ministry.  FDI fell y-o-y in Q418 but rose q-o-q.  Prosecutors blundered by jailing an opposition agitator for anodyne tweets.  Indrawati is sanguine about 2019 GDP.  The Football Association — a coveted rentier structure — is up for grabs again.  Pertamina’s Eni JV for green fuels from CPO is questionable on numerous levels.

Politics:  The Gerindra parliamentary candidate Ahmad Dhani suffered incarceration for having issued tweets in 2017 that judges deemed hateful.  The rock star is uncouth and has evoked hatefulness at times (he dressed as a Nazi in a 2014 ad for Prabowo Subianto) – but his sentence reflects work by prosecutors that is shoddy if not expressly politicized.  President Joko Widodo may lose more, from damage to his image, than he gains from the jailing of an opponent.  In any event, the case focuses overdue scrutiny on draconian aspects of the 2008 Electronic Transactions and Information Law (UU ITE) (Page 2).  Gerindra Chair Prabowo Subianto again harped on his claim that state debt is excessive.  Apart from being false, the claim is far from the concerns of voters.  With 10 weeks left to campaign, Prabowo has yet to critique Widodo effectively (p. 4). 

Election Preparations: If police continue to pursue spurious complaints from Hanura Chair Oesman Sapta Odang, the effectiveness of the General Election Commission (KPU) will be at stake (p. 5).  The 17 February one‑on‑one presidential debate will allow for unrestricted sparring during one segment (p. 6). 

Justice: Press scrutiny is focusing on a Commercial Court ruling that accepted a dubious settlement in bankruptcy proceedings for the Lippo Group subsidiary PT Internux.  The majority of creditors are clearly group affiliates.  Accepting their 30‑year restructuring hurts an offshore creditor, Raiffeisen, while mistreating the Information Ministry (p. 7). 

Papua: Yet another attack in Nduga District struck an aircraft, killing a soldier (p. 8).

Policy News: The government’s index of bureaucratic‑reform progress was static in 2018 (p. 10).  Pertamina intends to develop biorefineries in Sumatra with Italy’s Eni S.p.A., for the stated goals of promoting clean energy and reducing the trade deficit.  But the scheme may well do neither, if palm plantations expand at the expense of forest, while palm oil (CPO) exports contract.  The energy minister also mentioned subsidizing green fuel, which would be fiscally unsound and inequitable (p. 11). 

Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong confirmed that fourth‑quarter Foreign Direct Investment (FDI) fell 12 percent year‑on‑year, although it at least rebounded 10 percent from the third quarter.  He reiterated criticism of government ranks for mis‑implementing the president’s policy vision (p. 13).  Finance Minister Sri Mulyani Indrawati emphasized potential to sustain GDP growth in 2019 based on consumer demand from households (p. 15).  

In this briefing:

1. SMFG (8316 JP): On Target But Drifting Off Radar
2. Follow The Money
3. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
4. Semiconductor Memory Business Shrinking Fast
5. The Dollar Is Already Dead

1. SMFG (8316 JP): On Target But Drifting Off Radar

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s full-year target of ¥700 billion for consolidated net profits.  Nevertheless, 3Q results (October-December 2018) were well down year-on-year, with rising funding costs and higher credit costs offsetting much of the positives from the earlier deconsolidation of its two retail banking subsidiaries.  Full-year guidance remains unchanged.  SMFG is now poised to exceed its ¥700 billion FY3/2019 consolidated net profit target, although probably not by much.

The megabanks are always a ‘crowded trade’ for foreign investors when it comes to exposure to the Japanese banking sector: the choice usually coming down to either MUFG or SMFG.  Mizuho, which significantly outperformed both MUFG and SMFG throughout CY2018, is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

2. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

3. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

4. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

5. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. SMFG (8316 JP): On Target But Drifting Off Radar
2. Follow The Money
3. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price
4. Semiconductor Memory Business Shrinking Fast
5. The Dollar Is Already Dead

1. SMFG (8316 JP): On Target But Drifting Off Radar

Consolidated results for the nine months to end-December 2018, announced by SMFG (8306 JP) on 31 January 2019, represented 91% of management’s full-year target of ¥700 billion for consolidated net profits.  Nevertheless, 3Q results (October-December 2018) were well down year-on-year, with rising funding costs and higher credit costs offsetting much of the positives from the earlier deconsolidation of its two retail banking subsidiaries.  Full-year guidance remains unchanged.  SMFG is now poised to exceed its ¥700 billion FY3/2019 consolidated net profit target, although probably not by much.

The megabanks are always a ‘crowded trade’ for foreign investors when it comes to exposure to the Japanese banking sector: the choice usually coming down to either MUFG or SMFG.  Mizuho, which significantly outperformed both MUFG and SMFG throughout CY2018, is nominally the cheapest of the three megabanks on standard valuation methods; however, the difference between all three at present is marginal.  We expect that all three megabank groups will continue to see further downward pressure on domestic margins, while their overseas operations (especially in Asia) remain vulnerable to any further increases in US$ interest rates.  In the absence of any significant catalysts to prompt foreign investors to actively buy the shares, we expect all three megabanks to disappoint in terms of share price performance in CY2019.

2. Follow The Money

• January data on investor positioning show a big improvement in risk appetite for Emerging Markets
• Two-year ahead returns from risk assets likely to be sizeable and positive
• However, not clear that we are yet definitely at the ‘bottom’
• Strongest convictions are to favour EM over US and China over India

3. Quick Take: Asian LNG Spot Prices Fall Below the UK NBP Gas Price

Asian LNG spot prices have dropped for a short time below the UK NBP gas price, reversing the established trend that sees Asian LNG offering a premium to the European LNG price benchmarks. This note takes a look at the latest trends in the LNG markets and the renewed plans unveiled by Qatar to challenge its competitors, in particular, those from the US.

4. Semiconductor Memory Business Shrinking Fast

Earnings have been announced for Intel, Samsung, SK hynix, and Western Digital, and the memory business is clearly undermining all of these companies’ earnings.  In this Insight I review each of the  companies to show where they are, and will explain what the future holds for them as today’s oversupply unfolds.

5. The Dollar Is Already Dead

The past year has all been about dollar strength. That is an accepted wisdom. But the truth of the matter is that the dollar averaged 93.6 on the DXY in 2018 (3 January 2018 to 31 December 2018) and, as we write, stands at 95.5. From 1 January 2015 to 1 July 2017 the DXY averaged 97.2. The dollar is not strong, even by recent history standards. Moreover, it is no longer as important as it once was in policy making terms – and neither is the Federal Reserve.

In this briefing:

1. Election Body Pressured / Lippo Tested / FDI / AGO Martyrs Foe / SMI on GDP / Matchfixing / CPO Fuel

1. Election Body Pressured / Lippo Tested / FDI / AGO Martyrs Foe / SMI on GDP / Matchfixing / CPO Fuel

Police interrogated members of the independent General Election Commission (KPU), pursuant to a spurious case in which a coordinating minister has a conflict of interest.  If police persist, perceptions of the election’s legitimacy could suffer.  Lippo is under scrutiny for repudiating a foreign creditor — and the Information Ministry.  FDI fell y-o-y in Q418 but rose q-o-q.  Prosecutors blundered by jailing an opposition agitator for anodyne tweets.  Indrawati is sanguine about 2019 GDP.  The Football Association — a coveted rentier structure — is up for grabs again.  Pertamina’s Eni JV for green fuels from CPO is questionable on numerous levels.

Politics:  The Gerindra parliamentary candidate Ahmad Dhani suffered incarceration for having issued tweets in 2017 that judges deemed hateful.  The rock star is uncouth and has evoked hatefulness at times (he dressed as a Nazi in a 2014 ad for Prabowo Subianto) – but his sentence reflects work by prosecutors that is shoddy if not expressly politicized.  President Joko Widodo may lose more, from damage to his image, than he gains from the jailing of an opponent.  In any event, the case focuses overdue scrutiny on draconian aspects of the 2008 Electronic Transactions and Information Law (UU ITE) (Page 2).  Gerindra Chair Prabowo Subianto again harped on his claim that state debt is excessive.  Apart from being false, the claim is far from the concerns of voters.  With 10 weeks left to campaign, Prabowo has yet to critique Widodo effectively (p. 4). 

Election Preparations: If police continue to pursue spurious complaints from Hanura Chair Oesman Sapta Odang, the effectiveness of the General Election Commission (KPU) will be at stake (p. 5).  The 17 February one‑on‑one presidential debate will allow for unrestricted sparring during one segment (p. 6). 

Justice: Press scrutiny is focusing on a Commercial Court ruling that accepted a dubious settlement in bankruptcy proceedings for the Lippo Group subsidiary PT Internux.  The majority of creditors are clearly group affiliates.  Accepting their 30‑year restructuring hurts an offshore creditor, Raiffeisen, while mistreating the Information Ministry (p. 7). 

Papua: Yet another attack in Nduga District struck an aircraft, killing a soldier (p. 8).

Policy News: The government’s index of bureaucratic‑reform progress was static in 2018 (p. 10).  Pertamina intends to develop biorefineries in Sumatra with Italy’s Eni S.p.A., for the stated goals of promoting clean energy and reducing the trade deficit.  But the scheme may well do neither, if palm plantations expand at the expense of forest, while palm oil (CPO) exports contract.  The energy minister also mentioned subsidizing green fuel, which would be fiscally unsound and inequitable (p. 11). 

Economics: Investment Coordinating Board (BKPM) Chair Tom Lembong confirmed that fourth‑quarter Foreign Direct Investment (FDI) fell 12 percent year‑on‑year, although it at least rebounded 10 percent from the third quarter.  He reiterated criticism of government ranks for mis‑implementing the president’s policy vision (p. 13).  Finance Minister Sri Mulyani Indrawati emphasized potential to sustain GDP growth in 2019 based on consumer demand from households (p. 15).