Indonesia

In this briefing:

1. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil
2. Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll

1. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil

Macro Insights

In Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll, Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week.

Equity Bottom-up Insights

In Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics, CtossASEAN analyst, Jessica Irene zeros in on Indonesia’s largest pharma company as its consumer health division overtakes pharmaceuticals as a source of revenue and asks whether now is the time to revisit the stock. 

In Selamat Sempurna (SMSM IJ) – Truly Industrious, former Jakartan Angus Mackintosh circles back to Indonesia’s largest filter manufacturer, which he sees as one of the country’s best quality listed industrials. 

In Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance, banking specialist Daniel Tabbush circles back to PT BFI Finance Indonesia (BFIN IJ), which he suggests is an attractive prospect. 

In Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover? , out Thai guru Athaporn Arayasantiparb, CFA takes a look at Thanachart Capital (TCAP TB) as TMB Bank PCL (TMB TB) comes close to concluding its takeover. 

In Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?, Johannes Salim, CFA takes another looks at US-listed South East Asian e-commerce player Sea Ltd (SE US) and sees the company gaining ground in Indonesia, which is its most important growth market. 

In Jardine C&C (JCNC SP): Close the Stub Trade, Curtis Lehnert revisits his recommendation on Jardine Cycle & Carriage (JCNC SP) and suggests now is the time to close the trade idea. 

In M1 Offer Coming – Market Odds Suggest a Bump But…  Travis Lundy investigates that the take over of Konnectivity Pte. Ltd. by leading Singapore telecoms firm M1 Ltd (M1 SP). 

In Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties, Property Specialist Insight Provider Anni Kum suggests that recent large office acquisition by Gaw Capital in Singapore should benefit office player Tuan Sing Holdings (TSH SP). 

In Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer, event-driven specialist David Blennerhassett zeros in on Hotel Properties (HPL SP) after a recent change in shareholding. 

Sector and Thematic Insights

In Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand, Thai guru Athaporn Arayasantiparb, CFA searches for beneficiaries of the weaker oil price in Thailand. 

In The Four Vulnerabilities in Thai Property, Athaporn Arayasantiparb, CFA looks takes a step back to look at the Thai Property Sector and explores a number of vulnerabilities. 

2. Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll

Relatively benign inflation benefits Widodo as the 17 April election approaches, but a succession of scandals in ministries threatens to weaken his image for clean governance.  Prabowo is suffering embarassment from a proposal for a Koran-reading contest (he is illiterate in Arabic) — while Widodo’s readiness to take part sets a negative precedent for upholding  pluralism.  Indrawati is The Banker’s 2019 Finance Minister of the Year, despite the problematic investment climate.  Revenue collection was strong in 2018, suppressing the fiscal deficit to 1.8% of GDP.

Politics: Hard‑line Islamic backers of Gerindra Chair Prabowo Subianto risked appearing hypocritical when Acehnese clerics proposed a Koran‑reading contest for presidential contenders.  The foreign‑educated Prabowo is apparently unable to read Arabic, and he rejects the contest.  In contrast, campaign aides to President Joko Widodo gleefully agreed to it, perceiving an opportunity to impugn Prabowo’s religious credentials Widodo himself is non-committal, but the stance of his campaign officials serves, in effect, to legitimize the Acehnese practice of requiring that leaders be literate in Arabic.  The president and his advisors are again willing to sacrifice principles of pluralism to make perceived campaign gains (Page 2).  Authorities debunked a claim from a Partai Demokrat official that a voting‑fraud conspiracy is underway.  The episode reflects poorly on a prominent Demokrat vice secretary general, Andi Arief – but, for the pro‑Prabowo alli­ance, it deflects critical press attention from Prabowo’s Koran‑reading predicament (p. 3).  In a speech in Jakarta, Prabowo reiterated dire environmental warnings (p. 5).  Finance Minister Sri Mulyani Indrawati is The Banker’s 2019 Finance Minister of the Year (p. 5). 

Disasters: The Sunda Straits tsunami, triggered by the eruption of Anak Krakatau Volcano, caused 437 fatalities on 22 December (p. 6). 

Justice: For the third time in six months, a ministry faces investigation from the Anti‑Corruption Commission (KPK).  Unseemly revelations affect the Public Works Ministry, as investigators believe that kickbacks occurred on the procurement of water pipes for disaster relief in Palu.  Corruption in disaster relief is potentially subject to capital punishment.  The succession of ministerial‑level scandals risks jeopardizing Widodo’s crucial image for clean governance (p. 7).  The sentence for PT Nusa Konstruksi Enginiring Tbk (NKE) fell short of what prosecutors sought (p. 7). 

Policy News: At last, the administration is invoking new reformist rules on managing the civil service, by dismissing 480 personnel convicted of corruption.  A joint ministerial decree on the matter shows welcome attention to issues of institutional dysfunctions (p. 9).

Economics: Fueled by commodity prices, state revenues attained 100 percent of the budget target in 2018, while spending reached 97 percent – producing a deficit equivalent to 1.8 percent of GDP (p. 10).  Inflation was low again in December, resulting in a 3.1 percent annual rate for 2018 (p. 11). 

Jakarta: The odd‑even license‑plate restrictions on traffic will remain in effect for at least another three months (p. 13). 

In this briefing:

1. Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance
2. Global Equity Strategy: Bearish with the Exception of EM.
3. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

1. Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance

PT BFI Finance Indonesia (BFIN IJ) has the second highest ROA of all 107 banks and finance companies in our Indonesia database, at 8.2% as at 2017. It is a specialty lender, focussing on leasing and consumer financing. It provides financing for new cars, used cars, motorcycles through dealers and sales representatives, consumer loans and investment leasing for new and used heavy equipment, trucks, medical devices and machinery. The range of sectors in which its clients operate includes mining, trading, construction, services, agriculture, manufacturing, transportation and infrastructure. As at 3Q18 approximately 60% of lending is consumer finance or collateralized lending, with the remainder including vehicle financing and lease financing. BFIN is the old PT Bunas Finance, before changing its name in 2001. The company stands out in Indonesia and in Asia on a multitude of variables. Its ROA last year was 8.6x higher than the full industry average in Indonesia, and even outside this profitable banking market, there are few that compare. The company appears unrecognized despite consistently superior operating metrics, perhaps due to limited analyst coverage (two analysts) and low market capitalization (US$682m). This can create an opportunity. 

2. Global Equity Strategy: Bearish with the Exception of EM.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering & Construction, and Transportation Sectors.

3. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business. 

Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers. 

Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.

The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).

The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.

It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term. 

Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively. 

In this briefing:

1. A Golden Future?
2. Uranium – About to Enter Its Own Nuclear Winter
3. Asian Frontier Monitor: One Belt New Road – Here Comes America
4. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain
5. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp

1. A Golden Future?

The ability to have stable prices has great value.

According to Edward Gibbon, the decaying Roman Empire exhibited five hallmarks: 1) concern with displaying affluence instead of building wealth; 2) obsession with sex; 3) freakish and sensationalistic art; 4) widening disparity between the rich and the poor; and 5) increased demand to live off the state. Most DMs and many EMs display similar symptoms today because fiscal and monetary policies, the foundation of both ancient and modern societies, are identical: increasing welfare outlays by artificially inflating the money supply. The Roman Empire took more than four centuries to destroy what the Republic had built in the previous five centuries because clipping and debasing coins inflated currency supplies slowly. Entering debits and credits in the books of commercial and central banks is much more efficient. 

2. Uranium – About to Enter Its Own Nuclear Winter

• Quantifying nuclear statistics with substantial discrepancies
• LT contracts & speculative hoarding driving recent 40% spot price increase
• Primary/secondary Uranium supplies currently 112% of 2017 demand
• Uranium supply deficits extremely unlikely before 2022
• Global Uranium demand to fall 25-40% by 2050
•  Primary Uranium sector LT SELL

We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.

Since plateauing and despite strong Chinese growth, nuclear power generation has fallen <2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.

The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.

As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.

3. Asian Frontier Monitor: One Belt New Road – Here Comes America

In our third report in the Belt and Road Initiative (BRI) or One Belt One Road (OBOR) series, we examine a brand-new US strategic initiative to finance emerging markets economies, including OBOR, African, and Latin American countries.

The on-going trade war between China and the US makes the issue very political. Rightfully so, we believe the creation of the International Development Finance Corporation (“IDFC”) could be politically-motivated, but IDFC is no competition to the BRI as the latter deploys much greater funding (about USD40bn a year).

However, we see the merits of IDFC and the positive effects on Emerging Asia. After all, more competition for influence and more fund flow will help fund projects, and, perhaps, help reduce poverty (if good governance is observed). We also expect IDFC’s USD60bn fund to create more investable projects for institutional investors and lower funding cost for countries that need large infrastructure funding and countries that have been suspicious of the BRI such as India, Indonesia, the Philippines, Vietnam, and Sri Lanka.

4. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain

The year 2018 was not the brightest for cryptocurrencies; Bitcoin (XBTUSD CURNCY) fell around 70% during 2018 and top altcoins like Ethereum (ETH BGN CURNCY), Ripple and Bitcoin Cash were also down around 80%, 85% and 95% respectively during last year. While it is difficult to pinpoint a single reason for this, a number of factors including, rising security concerns, increased scrutiny, failed institutional support and Bitcoin Cash hash wars have collectively contributed to this bearish sentiment in the cryptocurrency markets last year.

In this note we take a look at several top cryptocurrency and blockchain developments from last year, to see how they would fare going into 2019.

This is a collaborative report between Douglas Kim and myself.

5. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp

• Global and Asia headwinds still rattle the gaming sector, but these three companies remain undervalued despite market sentiment.
• Macau’s solid year end performance continues to defy projections, producing a 14% y/y GGR increase.
• Galaxy will benefit disproportionately from the HKMB bridge traffic growth, MGM’s single digit market share will ramp up to double digits and Nagacorp may be the single most siloed gaming operator in all of Asia.

In this briefing:

1. Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed
2. Are Chip Oligopolies Real?
3. Global Banks: Some New Year Pointers
4. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy
5. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

1. Widodo, PDI-P Lead / Siregar to DC / Tobin Tax Unlikely / KPK Bomb Scare / Industry Minister Eyed

Widodo maintains his 20 point lead in a late December poll, while PDI-P looks poised to control over 40% of the next parliament — rendering the recalcitrant Party Chair Megawati an unconstructive power broker.  Uno is pressing salient points about inflation and jobs, but Prabowo strikes discordant tunes.  KPK members suffered bomb threats at their homes.  The Riau-1 case increasingly implicates the industry minister, Golkar Chair Airlangga Hartarto.  The new ambassador to the US is a competent economist. 

Politics: Megawati delivered a high‑profile address to party members and dignitaries, including President Joko Widodo, that showed no inkling of embracing economic or governance reforms, despite their clear urgency.  Widodo lavished praise on the chair of the party to which he belongs; the hyperbole merely underscored his awkwardness with the powerful and imperious party chair (Page 2).  Vice Presidential Nominee Sandiaga Uno reiterated the importance of prices and jobs to voters, and downplayed the benefits derived by the poor from infrastructure works.  He is honing his messaging, but he still lacks solutions and Prabowo Subianto strikes discordant tones (p. 3).  The Solidarity Party (PSI) gained notice by issuing ‘Falsehood Awards’ to Prabowo, Uno and Partai Demokrat’s Andi Arief.  But the inspired party is languishing with negligible popular support (p. 4). 

Surveys: President Joko Widodo still had a 20 percentage point lead over Prabowo Subianto as of late December, according to the survey firm Indikator Politik.  The poll also found that only 15 percent of respondents believe that Prabowo abducted pro‑democracy activists in 1997‑98, even though he himself has admitted to doing so (he denies having abducted those that never returned) (p. 5).  The Survey Network (LSI) noted continued strong support for Megawati’s PDI‑Perjuangan, while parties such as the National Democrat (Nasdem) Party, the National Mandate Party (Pan) and Hanura could suffer exclusion from the next parliament.  Islamic-oriented parties appear poised to lose a third of their seats – but it remains to be seen if Gerindra, which is expanding, embraces elements of an Islamic agenda.  Dominance by PDI‑P in the next parliament would bode ill for economic and institutional reform (p. 7).   

Justice: Although unharmed, two Anti-Corruption Commission (KPK) members were targets of attacks on their homes by unknown assailants.  Two Molotov cocktails hit Laode Syarif’s home and a fake pipe bomb was found at KPK Chair Agus Rahardjo’s (p. 9). 

Policy News: A former finance minister suggested a reverse Tobin tax on portfolio funds, but the current minister, Sri Mulyani Indrawati, pointed out its costliness (p. 10).  The information minister promised a long‑awaited ride‑sharing regulation soon (p. 13).

Appointments: A prominent macro‑economic policymaker of the Yudhoyono‑era, Mahendra Siregar, received induction as ambassador to the US, after having served for two years as the government’s chief advocate for the palm oil industry (p. 13). 

2. Are Chip Oligopolies Real?

In the semiconductor industry, particularly in the DRAM sector, there has been significant consolidation leading some to hypothesize that there’s now an oligopoly that will cause prices to normalize and thus end the business’ notorious revenue cycles.  Here we will take a critical look at this argument to explain its fallacy.

3. Global Banks: Some New Year Pointers

Here is a look at how regions fare regarding key indicators.

• PH Score = value-quality (10 variables)
• FV=Franchise Valuation
• RSI
• TRR= Dividend-adjusted PEG factor
• ROE
• EY=Earnings Yield

We have created a model that incorporates these components into a system that covers>1500 banks.

4. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy

In their public presentations, central banks seem to be contemplating the use of neutral interest rates (r*) in addition to unemployment/inflation theories. R* has the advantage of appearing to be subject to mathematical precision, yet it’s unobservable, and so unfalsifiable. Thus, it permits central banks to present any policy conclusion they want without fear of verifiable contradiction. R* is the policy rate that would equate the future supply of and demand for loans. It rises and falls as an economy strengthens and weakens. Long-term observation during the non-inflationary gold standard, period indicated that r* in an average economy was 2% plus, which would become 4% plus with today’s 2% inflation target. The Fed may soon end this tightening cycle with the fed funds rate at or near 2¾%, which would be r* if the rate of lending and borrowing in America remained stable thereafter. Rising (falling) lending would indicate a higher (lower) r*. 

5. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

In this briefing:

1. Uranium – About to Enter Its Own Nuclear Winter
2. Asian Frontier Monitor: One Belt New Road – Here Comes America
3. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain
4. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp
5. Ten Years On – Asia Outperforms Advanced Economies

1. Uranium – About to Enter Its Own Nuclear Winter

• Quantifying nuclear statistics with substantial discrepancies
• LT contracts & speculative hoarding driving recent 40% spot price increase
• Primary/secondary Uranium supplies currently 112% of 2017 demand
• Uranium supply deficits extremely unlikely before 2022
• Global Uranium demand to fall 25-40% by 2050
•  Primary Uranium sector LT SELL

We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.

Since plateauing and despite strong Chinese growth, nuclear power generation has fallen <2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.

The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.

As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.

2. Asian Frontier Monitor: One Belt New Road – Here Comes America

In our third report in the Belt and Road Initiative (BRI) or One Belt One Road (OBOR) series, we examine a brand-new US strategic initiative to finance emerging markets economies, including OBOR, African, and Latin American countries.

The on-going trade war between China and the US makes the issue very political. Rightfully so, we believe the creation of the International Development Finance Corporation (“IDFC”) could be politically-motivated, but IDFC is no competition to the BRI as the latter deploys much greater funding (about USD40bn a year).

However, we see the merits of IDFC and the positive effects on Emerging Asia. After all, more competition for influence and more fund flow will help fund projects, and, perhaps, help reduce poverty (if good governance is observed). We also expect IDFC’s USD60bn fund to create more investable projects for institutional investors and lower funding cost for countries that need large infrastructure funding and countries that have been suspicious of the BRI such as India, Indonesia, the Philippines, Vietnam, and Sri Lanka.

3. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain

The year 2018 was not the brightest for cryptocurrencies; Bitcoin (XBTUSD CURNCY) fell around 70% during 2018 and top altcoins like Ethereum (ETH BGN CURNCY), Ripple and Bitcoin Cash were also down around 80%, 85% and 95% respectively during last year. While it is difficult to pinpoint a single reason for this, a number of factors including, rising security concerns, increased scrutiny, failed institutional support and Bitcoin Cash hash wars have collectively contributed to this bearish sentiment in the cryptocurrency markets last year.

In this note we take a look at several top cryptocurrency and blockchain developments from last year, to see how they would fare going into 2019.

This is a collaborative report between Douglas Kim and myself.

4. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp

• Global and Asia headwinds still rattle the gaming sector, but these three companies remain undervalued despite market sentiment.
• Macau’s solid year end performance continues to defy projections, producing a 14% y/y GGR increase.
• Galaxy will benefit disproportionately from the HKMB bridge traffic growth, MGM’s single digit market share will ramp up to double digits and Nagacorp may be the single most siloed gaming operator in all of Asia.

5. Ten Years On – Asia Outperforms Advanced Economies

You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.

In this briefing:

1. Are Chip Oligopolies Real?
2. Global Banks: Some New Year Pointers
3. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy
4. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
5. A Golden Future?

1. Are Chip Oligopolies Real?

In the semiconductor industry, particularly in the DRAM sector, there has been significant consolidation leading some to hypothesize that there’s now an oligopoly that will cause prices to normalize and thus end the business’ notorious revenue cycles.  Here we will take a critical look at this argument to explain its fallacy.

2. Global Banks: Some New Year Pointers

Here is a look at how regions fare regarding key indicators.

• PH Score = value-quality (10 variables)
• FV=Franchise Valuation
• RSI
• TRR= Dividend-adjusted PEG factor
• ROE
• EY=Earnings Yield

We have created a model that incorporates these components into a system that covers>1500 banks.

3. Extraordinary Fiscal and Monetary Policies Have Disrupted the Global Economy

In their public presentations, central banks seem to be contemplating the use of neutral interest rates (r*) in addition to unemployment/inflation theories. R* has the advantage of appearing to be subject to mathematical precision, yet it’s unobservable, and so unfalsifiable. Thus, it permits central banks to present any policy conclusion they want without fear of verifiable contradiction. R* is the policy rate that would equate the future supply of and demand for loans. It rises and falls as an economy strengthens and weakens. Long-term observation during the non-inflationary gold standard, period indicated that r* in an average economy was 2% plus, which would become 4% plus with today’s 2% inflation target. The Fed may soon end this tightening cycle with the fed funds rate at or near 2¾%, which would be r* if the rate of lending and borrowing in America remained stable thereafter. Rising (falling) lending would indicate a higher (lower) r*. 

4. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

5. A Golden Future?

The ability to have stable prices has great value.

According to Edward Gibbon, the decaying Roman Empire exhibited five hallmarks: 1) concern with displaying affluence instead of building wealth; 2) obsession with sex; 3) freakish and sensationalistic art; 4) widening disparity between the rich and the poor; and 5) increased demand to live off the state. Most DMs and many EMs display similar symptoms today because fiscal and monetary policies, the foundation of both ancient and modern societies, are identical: increasing welfare outlays by artificially inflating the money supply. The Roman Empire took more than four centuries to destroy what the Republic had built in the previous five centuries because clipping and debasing coins inflated currency supplies slowly. Entering debits and credits in the books of commercial and central banks is much more efficient. 

In this briefing:

1. Global Equity Strategy: Bearish with the Exception of EM.
2. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
3. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?
4. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

1. Global Equity Strategy: Bearish with the Exception of EM.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering & Construction, and Transportation Sectors.

2. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business. 

Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers. 

Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.

The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).

The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.

It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term. 

Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively. 

3. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?

• A big takeaway from our conversations with Indo e-commerce industry sources is that they vouch for Shopee’s (Sea Ltd’s (SE US) e-commerce arm) MS gains story in the country.
• Indo e-commerce market has been enjoying super growth period (94% CAGR in 2015-18E) despite three major challenges (logistics, payment and highly subsidized market).
• With SE’s fund raising a matter of when, not if (2H20 as most likely timetable), Shopee’s tremendous progress in key metrics (MS, take rate) provides comfort.
• Assuming fair valuation of US$3 bn (vs. US$1.4 bn implied in SE’s ADR price) for Shopee, 12-mo PT for SE works out to be US$15.73/ADR, representing 43% upside potential.  

4. Global Semiconductor Sales Fall In November 2018. This Is Not A Good Sign.

The Semiconductor Industry Association (SIA) just announced that worldwide sales of semiconductors reached $41.4 billion for the month of November 2018, an increase of 9.8% YoY, but down 1.1% MoM, the first such decline since February 2018. While the decline is modest and total 2018 total semiconductor sales are on track to reach ~$470 billion for a YoY increase of 15.7%, any decline in what should be peak holiday season is not a good sign. 

Semiconductor sales historically track Wafer Fab Equipment (WFE) sales with a roughly six month time lag. North American WFE sales have been declining each month for the past six months meaning that this latest semiconductor MoM sales decline is right on schedule.  

Leveraging a decade’s worth of historical data, we analyse two key questions that are likely on every investors mind. Firstly,for how long should we expect semiconductor sales to continue their decline. Secondly, how steep should we expect that decline to be?    

In this briefing:

1. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
2. A Golden Future?
3. Uranium – About to Enter Its Own Nuclear Winter
4. Asian Frontier Monitor: One Belt New Road – Here Comes America
5. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain

1. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

2. A Golden Future?

The ability to have stable prices has great value.

According to Edward Gibbon, the decaying Roman Empire exhibited five hallmarks: 1) concern with displaying affluence instead of building wealth; 2) obsession with sex; 3) freakish and sensationalistic art; 4) widening disparity between the rich and the poor; and 5) increased demand to live off the state. Most DMs and many EMs display similar symptoms today because fiscal and monetary policies, the foundation of both ancient and modern societies, are identical: increasing welfare outlays by artificially inflating the money supply. The Roman Empire took more than four centuries to destroy what the Republic had built in the previous five centuries because clipping and debasing coins inflated currency supplies slowly. Entering debits and credits in the books of commercial and central banks is much more efficient. 

3. Uranium – About to Enter Its Own Nuclear Winter

• Quantifying nuclear statistics with substantial discrepancies
• LT contracts & speculative hoarding driving recent 40% spot price increase
• Primary/secondary Uranium supplies currently 112% of 2017 demand
• Uranium supply deficits extremely unlikely before 2022
• Global Uranium demand to fall 25-40% by 2050
•  Primary Uranium sector LT SELL

We have independently audited global nuclear construction statistics in order to determine future Uranium demand.  Although near-term statistics match those in the public domain, long-term demand determined via construction pipeline illustrates substantial discrepancies.  Compiling planned plant construction, operational extensions, nameplate upgrades, versus decommissioning announcements/events, and in many cases, public policy inertia; has led us to believe that despite historical primary supply shortages, global nuclear demand peaked in 2006.

Since plateauing and despite strong Chinese growth, nuclear power generation has fallen <2% over the past two decades, a decline that is predicted to accelerate as a number of developed and developing nations pursue other energy options.

The macro-trend not replacing existing nuclear infrastructure means (dependent on assumptions), according to our calculations, global uranium demand will decrease between 20 to 40% by 2050.

As opposed to signifying a fundamental change in underlying demand, we believe that recent Uranium price increases are the result of producers closing primary operations, and substituting production with purchases on the spot market to meet long-term contract obligations.  In addition, hedge funds are buying physical uranium in order to realise profits on potential future commodity price increases.  Critically, we determine that primary and secondary supplies are more than sufficient to meet forecast demand over the next four to five years; before taking into account substantial existing global uranium stocks, some of which are able to re-enter the spot market at short notice.

4. Asian Frontier Monitor: One Belt New Road – Here Comes America

In our third report in the Belt and Road Initiative (BRI) or One Belt One Road (OBOR) series, we examine a brand-new US strategic initiative to finance emerging markets economies, including OBOR, African, and Latin American countries.

The on-going trade war between China and the US makes the issue very political. Rightfully so, we believe the creation of the International Development Finance Corporation (“IDFC”) could be politically-motivated, but IDFC is no competition to the BRI as the latter deploys much greater funding (about USD40bn a year).

However, we see the merits of IDFC and the positive effects on Emerging Asia. After all, more competition for influence and more fund flow will help fund projects, and, perhaps, help reduce poverty (if good governance is observed). We also expect IDFC’s USD60bn fund to create more investable projects for institutional investors and lower funding cost for countries that need large infrastructure funding and countries that have been suspicious of the BRI such as India, Indonesia, the Philippines, Vietnam, and Sri Lanka.

5. This Week in Blockchain & Cryptos: A Bitcoin Reversal; More Red Flags for Bitmain

The year 2018 was not the brightest for cryptocurrencies; Bitcoin (XBTUSD CURNCY) fell around 70% during 2018 and top altcoins like Ethereum (ETH BGN CURNCY), Ripple and Bitcoin Cash were also down around 80%, 85% and 95% respectively during last year. While it is difficult to pinpoint a single reason for this, a number of factors including, rising security concerns, increased scrutiny, failed institutional support and Bitcoin Cash hash wars have collectively contributed to this bearish sentiment in the cryptocurrency markets last year.

In this note we take a look at several top cryptocurrency and blockchain developments from last year, to see how they would fare going into 2019.

This is a collaborative report between Douglas Kim and myself.

In this briefing:

1. Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll
2. Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance
3. Global Equity Strategy: Bearish with the Exception of EM.
4. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
5. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?

1. Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll

Relatively benign inflation benefits Widodo as the 17 April election approaches, but a succession of scandals in ministries threatens to weaken his image for clean governance.  Prabowo is suffering embarassment from a proposal for a Koran-reading contest (he is illiterate in Arabic) — while Widodo’s readiness to take part sets a negative precedent for upholding  pluralism.  Indrawati is The Banker’s 2019 Finance Minister of the Year, despite the problematic investment climate.  Revenue collection was strong in 2018, suppressing the fiscal deficit to 1.8% of GDP.

Politics: Hard‑line Islamic backers of Gerindra Chair Prabowo Subianto risked appearing hypocritical when Acehnese clerics proposed a Koran‑reading contest for presidential contenders.  The foreign‑educated Prabowo is apparently unable to read Arabic, and he rejects the contest.  In contrast, campaign aides to President Joko Widodo gleefully agreed to it, perceiving an opportunity to impugn Prabowo’s religious credentials Widodo himself is non-committal, but the stance of his campaign officials serves, in effect, to legitimize the Acehnese practice of requiring that leaders be literate in Arabic.  The president and his advisors are again willing to sacrifice principles of pluralism to make perceived campaign gains (Page 2).  Authorities debunked a claim from a Partai Demokrat official that a voting‑fraud conspiracy is underway.  The episode reflects poorly on a prominent Demokrat vice secretary general, Andi Arief – but, for the pro‑Prabowo alli­ance, it deflects critical press attention from Prabowo’s Koran‑reading predicament (p. 3).  In a speech in Jakarta, Prabowo reiterated dire environmental warnings (p. 5).  Finance Minister Sri Mulyani Indrawati is The Banker’s 2019 Finance Minister of the Year (p. 5). 

Disasters: The Sunda Straits tsunami, triggered by the eruption of Anak Krakatau Volcano, caused 437 fatalities on 22 December (p. 6). 

Justice: For the third time in six months, a ministry faces investigation from the Anti‑Corruption Commission (KPK).  Unseemly revelations affect the Public Works Ministry, as investigators believe that kickbacks occurred on the procurement of water pipes for disaster relief in Palu.  Corruption in disaster relief is potentially subject to capital punishment.  The succession of ministerial‑level scandals risks jeopardizing Widodo’s crucial image for clean governance (p. 7).  The sentence for PT Nusa Konstruksi Enginiring Tbk (NKE) fell short of what prosecutors sought (p. 7). 

Policy News: At last, the administration is invoking new reformist rules on managing the civil service, by dismissing 480 personnel convicted of corruption.  A joint ministerial decree on the matter shows welcome attention to issues of institutional dysfunctions (p. 9).

Economics: Fueled by commodity prices, state revenues attained 100 percent of the budget target in 2018, while spending reached 97 percent – producing a deficit equivalent to 1.8 percent of GDP (p. 10).  Inflation was low again in December, resulting in a 3.1 percent annual rate for 2018 (p. 11). 

Jakarta: The odd‑even license‑plate restrictions on traffic will remain in effect for at least another three months (p. 13). 

2. Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance

PT BFI Finance Indonesia (BFIN IJ) has the second highest ROA of all 107 banks and finance companies in our Indonesia database, at 8.2% as at 2017. It is a specialty lender, focussing on leasing and consumer financing. It provides financing for new cars, used cars, motorcycles through dealers and sales representatives, consumer loans and investment leasing for new and used heavy equipment, trucks, medical devices and machinery. The range of sectors in which its clients operate includes mining, trading, construction, services, agriculture, manufacturing, transportation and infrastructure. As at 3Q18 approximately 60% of lending is consumer finance or collateralized lending, with the remainder including vehicle financing and lease financing. BFIN is the old PT Bunas Finance, before changing its name in 2001. The company stands out in Indonesia and in Asia on a multitude of variables. Its ROA last year was 8.6x higher than the full industry average in Indonesia, and even outside this profitable banking market, there are few that compare. The company appears unrecognized despite consistently superior operating metrics, perhaps due to limited analyst coverage (two analysts) and low market capitalization (US$682m). This can create an opportunity. 

3. Global Equity Strategy: Bearish with the Exception of EM.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering & Construction, and Transportation Sectors.

4. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town

A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business. 

Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers. 

Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.

The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).

The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.

It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term. 

Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively. 

5. Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?

• A big takeaway from our conversations with Indo e-commerce industry sources is that they vouch for Shopee’s (Sea Ltd’s (SE US) e-commerce arm) MS gains story in the country.
• Indo e-commerce market has been enjoying super growth period (94% CAGR in 2015-18E) despite three major challenges (logistics, payment and highly subsidized market).
• With SE’s fund raising a matter of when, not if (2H20 as most likely timetable), Shopee’s tremendous progress in key metrics (MS, take rate) provides comfort.
• Assuming fair valuation of US$3 bn (vs. US$1.4 bn implied in SE’s ADR price) for Shopee, 12-mo PT for SE works out to be US$15.73/ADR, representing 43% upside potential.  

In this briefing:

1. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp
2. Ten Years On – Asia Outperforms Advanced Economies
3. Asian Credit Monitor: 2019 Portfolio Strategy, US Rate Trajectory, China Reform Pause
4. Forecasting the Semiconductor Market
5. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil

1. Asia Gaming Preview 2019: Part Two Picks: Galaxy, MGM China and Nagacorp

• Global and Asia headwinds still rattle the gaming sector, but these three companies remain undervalued despite market sentiment.
• Macau’s solid year end performance continues to defy projections, producing a 14% y/y GGR increase.
• Galaxy will benefit disproportionately from the HKMB bridge traffic growth, MGM’s single digit market share will ramp up to double digits and Nagacorp may be the single most siloed gaming operator in all of Asia.

2. Ten Years On – Asia Outperforms Advanced Economies

You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.

3. Asian Credit Monitor: 2019 Portfolio Strategy, US Rate Trajectory, China Reform Pause

If we had to make a base observation for Asia credit markets over 2018, it was certainly caught “wrong-footed” like most of its other risky asset counterparts. The combination of a more hawkish Fed in 2018, global quantitative tightening, late-cycle economic conditions, volatility and a strong USD have all served to impact almost all the asset classes negatively. According to some asset allocators, the only asset class which returned positive in 2018 was cash, every other traditional asset class saw losses.

USD direction will further dictate the impact on overall Asian risk, in our view, with many undervalued Asian currencies following their sharp declines in 2018. One of our scenarios includes a range-bound USD in 1H19, followed by a possible reversal in 2H19 on any dovish Fed policy/US economic weakness. In this case, it has the potential to attract incremental portfolio inflows back into Asian risk. We expect a slightly tighter bias in monetary policy in most Asia ex-Japan nations which is supportive for their respective currencies.

In 2019, risk-reward dynamics have improved particularly for Asian investment grade (“IG”) where we see more limited MTM pressure. We expect a more defensive market at least in 1H19 which supports our heavier IG bias. We suspect larger investors would continue to reallocate depending on the outcomes of the China-US trade dispute and their view on US risk (arguably near its last late-cycle expansion legs). We continue to be extremely selective in Asian high yield (“HY”) which have been impacted by idiosyncratic situations including credit deterioration and rising defaults. Exogenous factors such as the potential for “fallen angel” risk (i.e. a migration from issuers on the cusp of IG, “BBB-”  into HY) as well as net portfolio outflows from HY, EM and leveraged loan funds are ongoing concerns. Despite cheaper valuations in Asian HY, we still see skewed risk-reward (with larger potential risks).

In the US, our base case expects the Fed to hike 1-2 times (quarter point each) for 2019, premised on still below-trend inflation and external factors. We think it is near the tail-end of its current tightening cycle, but we would continue to monitor the US supply-side (labour markets, employment gaps, prices) for further clues. A sustained upshot to the previous factors may have the potential to prolong the Fed’s tightening cycle.

On China’s side, we have seen a critical reversal in policy towards selective expansion/accommodation again as economic reforms instituted 3 years ago have been reprioritized. China’s difficult task to balance growth targets and restructure its economy is a perennial issue. We would also expect defaults to remain elevated domestically/internationally as a new paradigm of credit investing takes root in China.

Finally, we would like to wish our readers luck in investing and trading in the year ahead.

4. Forecasting the Semiconductor Market

This is the time of year that Objective Analysis releases its semiconductor forecast.  This post is based upon a video posted on the WeSRCH website that explains the Objective Analysis 2019 semiconductor forecast.

Although accurate semiconductor forecasts are straightforward to produce, the consistently-accurate methodology spelled out in this Insight is rarely used.

The forecast predicts that the downturn that the industry is currently entering will be longer than most, with profits eluding chip companies until 2022.

5. The New Year’s Week that Was in ASEAN@Smartkarma – Indo Pharma, Industrials, and Weaker Oil

Macro Insights

In Strong Revenues / Benign CPI / Indrawati’s Award / Prabowo’s Arabic / Scandals Mount / Tsunami Toll, Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week.

Equity Bottom-up Insights

In Kalbe Farma (KLBF IJ): Navigating Through the New Pharma Dynamics, CtossASEAN analyst, Jessica Irene zeros in on Indonesia’s largest pharma company as its consumer health division overtakes pharmaceuticals as a source of revenue and asks whether now is the time to revisit the stock. 

In Selamat Sempurna (SMSM IJ) – Truly Industrious, former Jakartan Angus Mackintosh circles back to Indonesia’s largest filter manufacturer, which he sees as one of the country’s best quality listed industrials. 

In Indonesia Banks – Exceptional ROA Still Unrecognized at PT BFI Finance, banking specialist Daniel Tabbush circles back to PT BFI Finance Indonesia (BFIN IJ), which he suggests is an attractive prospect. 

In Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover? , out Thai guru Athaporn Arayasantiparb, CFA takes a look at Thanachart Capital (TCAP TB) as TMB Bank PCL (TMB TB) comes close to concluding its takeover. 

In Sea Ltd: A Surprise Winner in Cut-Throat E-Commerce Battle?, Johannes Salim, CFA takes another looks at US-listed South East Asian e-commerce player Sea Ltd (SE US) and sees the company gaining ground in Indonesia, which is its most important growth market. 

In Jardine C&C (JCNC SP): Close the Stub Trade, Curtis Lehnert revisits his recommendation on Jardine Cycle & Carriage (JCNC SP) and suggests now is the time to close the trade idea. 

In M1 Offer Coming – Market Odds Suggest a Bump But…  Travis Lundy investigates that the take over of Konnectivity Pte. Ltd. by leading Singapore telecoms firm M1 Ltd (M1 SP). 

In Tuan Sing: Beneficiary of Exuberant Demand for Prime Office Investment Properties, Property Specialist Insight Provider Anni Kum suggests that recent large office acquisition by Gaw Capital in Singapore should benefit office player Tuan Sing Holdings (TSH SP). 

In Hotel Properties Ltd– Dissolution of Wheelock-OBS Partnership Could Pave Way for Privatization Offer, event-driven specialist David Blennerhassett zeros in on Hotel Properties (HPL SP) after a recent change in shareholding. 

Sector and Thematic Insights

In Thai Macro Watch: Traditional ‘Weak Oil’ Plays in Thailand, Thai guru Athaporn Arayasantiparb, CFA searches for beneficiaries of the weaker oil price in Thailand. 

In The Four Vulnerabilities in Thai Property, Athaporn Arayasantiparb, CFA looks takes a step back to look at the Thai Property Sector and explores a number of vulnerabilities.