Indonesia

In this briefing:

1. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates
2. EM Relative Strength Is Bottoming: Overweight
3. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
4. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals
5. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships

1. IDR, CPI, Oil, Trans-Java & Freeport Strengthen Widodo / Lippo Case Escalates / Efta Cepa / Debates

Prabowo has yet to dent Widodo’s 20-point lead in polls and, meanwhile, certain key macro-economic figures are finally swinging in the incumbent’s favor.  Jakarta and Surabaya are linked by toll road — after decades of work.  The Freeport mine nationalization went through, benefiting Widodo (but possibly no one else).  The Efta Cepa bodes well for other trade agreements in the works.  The Lippo Group scandal is escalating, but not yet affecting James Riady.  PT Toba Sejahtera Tbk suffered damaging NGO scrutiny.  Electoral authorities set the presidential debate schedule. 

Politics: Recent economic trends, such as inflation, the exchange rate and the price of oil, are benefiting President Joko Widodo.  Employment is an area where the president remains vulnerable, but Prabowo Subianto’s new television ads on the topic may be backfiring.  Prabowo has focused on lamenting the lack of professional careers for college graduates – a remote concern for the bulk of voters (Page 2).  The General Election Commission (KPU) has secured agreements from the two presidential campaigns regarding topics and formats for televised debates in the coming months.  The challenge for Widodo will be to shield his running mate from questions on matters beyond his narrow field of Islamic jurisprudence (p. 2).  After prolonged wrangling with Gerindra, the Islamic Justice Welfare Party (PKS) finally named two nominees for vice governor of Jakarta; neither seem dynamic (p. 4). 

Surveys: President Joko Widodo’s 20 percentage-point lead remained intact through the second week of December, according to a credible poll (p. 5).  

Justice: Anti-Corruption Commission (KPK) officials are scrutinizing State Minister for Sports and Youth Imam Nahrawi, after having arrested a deputy state minister for alleged kickbacks on grants to the National Sports Committee (Koni).  The affair could become an embarrassment for Widodo (p. 5).  KPK officials indicated the likelihood of pursuing a former Lippo Cikarang president director, but they have not yet conveyed any such signals about investigating group owner James Riady (p. 6).  An NGO alliance highlights conflicts of interest on the part of Coordinating Maritime Affairs Minister Luhut Panjaitan (p. 7).

Policy News: Officials signed a comprehensive partnership (Cepa) with four European states (including Switzerland and Norway) (p. 9).  The transaction to nationalize the Freeport mine concluded on 21 December.  The deal will benefit Widodo (and perhaps him alone) (p. 10). 

Infrastructure: The linkage of the Trans Java Toll Road – first envisioned in 1978 – finally occurred on 20 December.  Opposition figures, noting that previous administrations had put the plans in place, dispute how much credit should accrue to Widodo; in fact, he was the first to expedite land acquisition and thereby overcome the chief obstacle (p. 12).  

2. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

3. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019

In a follow up to my note from last year Overview of My Winners and Losers in 2017…and 5 High Conviction Ideas Going into 2018 I again look at my stock ideas that have worked out in 2018, those that have not and those where the verdict is still pending.

Last year I provided 5 high conviction ideas and here is their performance in a brutal year for Asian Stock Markets:

4 out of 5 had a positive performance.

Below I will make a new attempt to provide five high conviction ideas going into 2019.

4. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals

• US: Stocks fall on political turmoil despite positive noises from the Fed with a dovish rate hike, a reduction in expected 2019 hikes and positive trends on employment and inflation.
• Russia: Unexpected 25 bps rate hike in the face of higher inflation in Nov. Watch for impact of lower oil prices in coming quarters.
• Turkey: Economic developments remain negative. The outlook for retail sales is poor as the economy in general is faltering.
• Indonesia: Trade deficit in November. Exports down 3.3%; imports up 11.68%. This disappointing performance could be the beginning of a trend.

5. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships

• We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
• Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
• Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.

In this briefing:

1. EM Relative Strength Is Bottoming: Overweight
2. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
3. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals
4. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
5. Time-Out Not Time up for Trade War

1. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

2. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019

In a follow up to my note from last year Overview of My Winners and Losers in 2017…and 5 High Conviction Ideas Going into 2018 I again look at my stock ideas that have worked out in 2018, those that have not and those where the verdict is still pending.

Last year I provided 5 high conviction ideas and here is their performance in a brutal year for Asian Stock Markets:

4 out of 5 had a positive performance.

Below I will make a new attempt to provide five high conviction ideas going into 2019.

3. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals

• US: Stocks fall on political turmoil despite positive noises from the Fed with a dovish rate hike, a reduction in expected 2019 hikes and positive trends on employment and inflation.
• Russia: Unexpected 25 bps rate hike in the face of higher inflation in Nov. Watch for impact of lower oil prices in coming quarters.
• Turkey: Economic developments remain negative. The outlook for retail sales is poor as the economy in general is faltering.
• Indonesia: Trade deficit in November. Exports down 3.3%; imports up 11.68%. This disappointing performance could be the beginning of a trend.

4. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships

• We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
• Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
• Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.

5. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

In this briefing:

1. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019
2. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals
3. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships
4. Time-Out Not Time up for Trade War
5. Semiconductor WFE Outlook. Things Just Got Really Ugly

1. Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019

In a follow up to my note from last year Overview of My Winners and Losers in 2017…and 5 High Conviction Ideas Going into 2018 I again look at my stock ideas that have worked out in 2018, those that have not and those where the verdict is still pending.

Last year I provided 5 high conviction ideas and here is their performance in a brutal year for Asian Stock Markets:

4 out of 5 had a positive performance.

Below I will make a new attempt to provide five high conviction ideas going into 2019.

2. RRG Global Macro – US Fed Positive Outlook – Stocks Fall.  Politics Take Over from Fundamentals

• US: Stocks fall on political turmoil despite positive noises from the Fed with a dovish rate hike, a reduction in expected 2019 hikes and positive trends on employment and inflation.
• Russia: Unexpected 25 bps rate hike in the face of higher inflation in Nov. Watch for impact of lower oil prices in coming quarters.
• Turkey: Economic developments remain negative. The outlook for retail sales is poor as the economy in general is faltering.
• Indonesia: Trade deficit in November. Exports down 3.3%; imports up 11.68%. This disappointing performance could be the beginning of a trend.

3. Universal, SegaSammy & Dynam Sit Best Positioned Among Japan Companies in Race for IR Partnerships

• We’ve reviewed 10 companies in the sector. Of those, three are the consensus favorites of our Tokyo based panel of industry, financial and economics observers of the IR initiative over many years.
• Based on pachinko alone, the stocks of these companies are fully valued. Based on potential tailwind from a license award within 6 months, they could be vastly undervalued.
• Each of the three noted here brings strength to a bid less based on financials than corporate focus, outlook and experience in the field.

4. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

5. Semiconductor WFE Outlook. Things Just Got Really Ugly

SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.

Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year. 

These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season. 

There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.  

In this briefing:

1. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
2. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk
3. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
4. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets
5. The Year of Dithering Dangerously

1. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

2. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk

Macro Insights

In his appropriately named insight, The Year of Dithering Dangerously, Kevin O’Rourke suggests that President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture. 

In Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI, Kevin O’Rourke comments on the most important political developments over the past week. 

In his Insight Indonesia: All Together NowNicholas Chia provides up with an interesting update on the Indonesian Economy. 

In Thailand: Wobbles En Route to Slower but Still-Sustained Growth Momentum, Jason Tan writes on Thailand following some faltering GDP numbers. 

In Political Pit Stop (December): First Month of Campaigning, our Thai guru Athaporn Arayasantiparb, CFA comments on the state of political activity over the last month in Thailand as campaigning begins for the upcoming election. 

In The Philippines: Reforms Under a Political Cloud; BSP May Turn DovishManu Bhaskaran comments on recent economic developments in the Philippines. 

In Philippine Monetary Policy: Relief from No Rate Hike, Jun Trinidad comments on the economic outlook in the Philippines following a lack of action at BSP’s last policy meeting. 

In Singapore-Malaysia Tensions Rise Anew in Airspace and Maritime Disputes, Jason Tan comments on the resurgence of political tension between Singapore and Malaysia. 

Equity Bottom-Up Insights

In SCMA (SCMA IJ) – Biting the Digital Bullet, former Jakartan and CrossASEAN Insight Provider Angus Mackintosh circles back to leading Surya Citra Media Pt Tbk (SCMA IJ) following a conversation with management focusing on its digital aspirations. 

In BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap, Nicolas Van Broekhoven revisits Breadtalk (BREAD SP) following the opening of Din Tai Fung in London. 

In MER (MER PM): Solid Fundamentals at No. 1 Philippine Power Producer, Dr. Andrew Stotz, CFA  works his magic on this leading Philippines utility company. 

In PTT (PTT TB): Planned Listing of Retail Business in 2019, Dr Andrew Stotz, CFA circles back to PTT PCL (PTT TB) following the announcement of its intention to list its retail business.  

In SCC (SCC TB): Potential Beneficiary from US-China Trade War, Dr. Andrew Stotz, CFA revisits Siam Cement (SCC TB) as a potential beneficiary souring US-China relations. 

In PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office, our friends at Country Group revisit media player Plan B Media (PLANB TB) in Thailand. 

In SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability, Dr. Andrew Stotz, CFA takes a close look at this leading construction player. 

In SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off, Dr. Andrew Stotz, CFA comments on electronics manufacturing company and takes a positive view. 

Sector and Thematic Insights

In a fascinating Insight, How the Mighty Fall…Or Should That Be A “Who Will”? Thai Guru Athaporn Arayasantiparb, CFA refers to Jim Collins’ book ‘How the Mighty Fall’ and highlights some interesting pitfalls that see some great companies decline or even collapse and follows them in stages. He applied the approach to companies in Thailand. 

In Revisiting the Renewable Energy Space, Athaporn Arayasantiparb, CFA checks out two stocks in the Thai renewable energy space. 

In Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis, Athaporn Arayasantiparb, CFA picks out the most interesting pieces of breaking news over the past week or so in Thailand. 

3. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI

The Prabowo-Uno campaign are focusing on Central Java while elements on both fringes of the religious spectrum debate poligamy and whether Widodo is ‘criminalizing’ clerics.  The KPK is investigating the head of the State Power Company (PLN) after court convicted BlackGold owner Johannes Kotjo.  Information Minister Rudiantara wants IPOs for four giant startups.  BI cited positive macro indicators, including 13% October credit expansion, but the World Bank warned that FDI inflows are too low. 

4. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets

• New industry data this week, plus take-aways from  our latest discussions with company managements, all confirm that the likely trend in the industrial segment of the global real estate industry is for rental rates to rise.
• The growth in e-commerce is continuing to accelerate globally. In some key market, this is “triggering a land grab for distribution space that experts say is accelerating”.
• Therefore, the increasing scarcity value of well situated industrial real estate in high demand markets is likely to continue to push up rental rates to higher and higher levels.
• Given our expectation that fundamentals driving the growing demand for Last Mile Industrial real estate are likely to persist, we continue to expect this segment to outperform the broader Real Estate sector for the foreseeable future.

5. The Year of Dithering Dangerously

President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture.  Prospects for improvement in a second Widodo term are questionable. 

In this briefing:

1. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
2. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

1. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC

Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.

Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.

Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.

2. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

Media Partners Asia suggests that the advertising revenues for the Free-to-Air TV industry in Indonesia can grow +5.6% CAGR  between 2017-2023.

Internet companies are driving growth at the margin but also make-up 2/3rds of the 15% of total spend on digital advertising, which suggests only 5% lost from TV. 

Surya Citra Media Pt Tbk (SCMA IJ) is on the cusp of a significant move into the digital advertising and content space through Vidio.com, Kapanlagi.com, as well as its payments gateway Dana. 

The company will also enter a new advertising medium of outdoor billboards, where it will seek to consolidate the industry through acquisitions, with the aim of controlling 50% of this market. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best media proxy for advertising in Indonesia. It has seen its two main Free-to-Air stations SCTV and Indosiar command number 1 & 2 audience share positions over the last two months, giving an overall prime-time audience share YTD of 35%.  The company estimates that the core business can probably achieve growth of +10% over the next two years. The real kicker to growth for the company will come from its significant move into the digital and content space through a series of acquisitions, mainly from its parent Elang Mahkota Teknologi Tbk (EMTK IJ). These transactions are will be done at arm’s length so as to avoid any corporate governance concerns. According to CapIQ consensus, the company is trading on 16.7x FY19E PER and 15.1x FY20E PER, with forecast EPS growth of 8.6% and 10.6% for FY19E and FY20E respectively. The company also has a dividend yield of 3.9% for FY19E and generates an ROE of 32%.

In this briefing:

1. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets
2. The Year of Dithering Dangerously
3. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
4. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

1. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets

• New industry data this week, plus take-aways from  our latest discussions with company managements, all confirm that the likely trend in the industrial segment of the global real estate industry is for rental rates to rise.
• The growth in e-commerce is continuing to accelerate globally. In some key market, this is “triggering a land grab for distribution space that experts say is accelerating”.
• Therefore, the increasing scarcity value of well situated industrial real estate in high demand markets is likely to continue to push up rental rates to higher and higher levels.
• Given our expectation that fundamentals driving the growing demand for Last Mile Industrial real estate are likely to persist, we continue to expect this segment to outperform the broader Real Estate sector for the foreseeable future.

2. The Year of Dithering Dangerously

President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture.  Prospects for improvement in a second Widodo term are questionable. 

3. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC

Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.

Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.

Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.

4. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

Media Partners Asia suggests that the advertising revenues for the Free-to-Air TV industry in Indonesia can grow +5.6% CAGR  between 2017-2023.

Internet companies are driving growth at the margin but also make-up 2/3rds of the 15% of total spend on digital advertising, which suggests only 5% lost from TV. 

Surya Citra Media Pt Tbk (SCMA IJ) is on the cusp of a significant move into the digital advertising and content space through Vidio.com, Kapanlagi.com, as well as its payments gateway Dana. 

The company will also enter a new advertising medium of outdoor billboards, where it will seek to consolidate the industry through acquisitions, with the aim of controlling 50% of this market. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best media proxy for advertising in Indonesia. It has seen its two main Free-to-Air stations SCTV and Indosiar command number 1 & 2 audience share positions over the last two months, giving an overall prime-time audience share YTD of 35%.  The company estimates that the core business can probably achieve growth of +10% over the next two years. The real kicker to growth for the company will come from its significant move into the digital and content space through a series of acquisitions, mainly from its parent Elang Mahkota Teknologi Tbk (EMTK IJ). These transactions are will be done at arm’s length so as to avoid any corporate governance concerns. According to CapIQ consensus, the company is trading on 16.7x FY19E PER and 15.1x FY20E PER, with forecast EPS growth of 8.6% and 10.6% for FY19E and FY20E respectively. The company also has a dividend yield of 3.9% for FY19E and generates an ROE of 32%.

In this briefing:

1. Time-Out Not Time up for Trade War
2. Semiconductor WFE Outlook. Things Just Got Really Ugly
3. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
4. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk
5. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI

1. Time-Out Not Time up for Trade War

• Xi and Trump walk away from Buenos Aires with something to sell at home
• But trade negotiations will be dominated by fraught disagreements
• After 90-day negotiations, further delays to tariff escalation are likely 

2. Semiconductor WFE Outlook. Things Just Got Really Ugly

SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.

Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year. 

These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season. 

There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.  

3. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

4. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk

Macro Insights

In his appropriately named insight, The Year of Dithering Dangerously, Kevin O’Rourke suggests that President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture. 

In Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI, Kevin O’Rourke comments on the most important political developments over the past week. 

In his Insight Indonesia: All Together NowNicholas Chia provides up with an interesting update on the Indonesian Economy. 

In Thailand: Wobbles En Route to Slower but Still-Sustained Growth Momentum, Jason Tan writes on Thailand following some faltering GDP numbers. 

In Political Pit Stop (December): First Month of Campaigning, our Thai guru Athaporn Arayasantiparb, CFA comments on the state of political activity over the last month in Thailand as campaigning begins for the upcoming election. 

In The Philippines: Reforms Under a Political Cloud; BSP May Turn DovishManu Bhaskaran comments on recent economic developments in the Philippines. 

In Philippine Monetary Policy: Relief from No Rate Hike, Jun Trinidad comments on the economic outlook in the Philippines following a lack of action at BSP’s last policy meeting. 

In Singapore-Malaysia Tensions Rise Anew in Airspace and Maritime Disputes, Jason Tan comments on the resurgence of political tension between Singapore and Malaysia. 

Equity Bottom-Up Insights

In SCMA (SCMA IJ) – Biting the Digital Bullet, former Jakartan and CrossASEAN Insight Provider Angus Mackintosh circles back to leading Surya Citra Media Pt Tbk (SCMA IJ) following a conversation with management focusing on its digital aspirations. 

In BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap, Nicolas Van Broekhoven revisits Breadtalk (BREAD SP) following the opening of Din Tai Fung in London. 

In MER (MER PM): Solid Fundamentals at No. 1 Philippine Power Producer, Dr. Andrew Stotz, CFA  works his magic on this leading Philippines utility company. 

In PTT (PTT TB): Planned Listing of Retail Business in 2019, Dr Andrew Stotz, CFA circles back to PTT PCL (PTT TB) following the announcement of its intention to list its retail business.  

In SCC (SCC TB): Potential Beneficiary from US-China Trade War, Dr. Andrew Stotz, CFA revisits Siam Cement (SCC TB) as a potential beneficiary souring US-China relations. 

In PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office, our friends at Country Group revisit media player Plan B Media (PLANB TB) in Thailand. 

In SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability, Dr. Andrew Stotz, CFA takes a close look at this leading construction player. 

In SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off, Dr. Andrew Stotz, CFA comments on electronics manufacturing company and takes a positive view. 

Sector and Thematic Insights

In a fascinating Insight, How the Mighty Fall…Or Should That Be A “Who Will”? Thai Guru Athaporn Arayasantiparb, CFA refers to Jim Collins’ book ‘How the Mighty Fall’ and highlights some interesting pitfalls that see some great companies decline or even collapse and follows them in stages. He applied the approach to companies in Thailand. 

In Revisiting the Renewable Energy Space, Athaporn Arayasantiparb, CFA checks out two stocks in the Thai renewable energy space. 

In Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis, Athaporn Arayasantiparb, CFA picks out the most interesting pieces of breaking news over the past week or so in Thailand. 

5. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI

The Prabowo-Uno campaign are focusing on Central Java while elements on both fringes of the religious spectrum debate poligamy and whether Widodo is ‘criminalizing’ clerics.  The KPK is investigating the head of the State Power Company (PLN) after court convicted BlackGold owner Johannes Kotjo.  Information Minister Rudiantara wants IPOs for four giant startups.  BI cited positive macro indicators, including 13% October credit expansion, but the World Bank warned that FDI inflows are too low. 

In this briefing:

1. Semiconductor WFE Outlook. Things Just Got Really Ugly
2. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
3. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk
4. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
5. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets

1. Semiconductor WFE Outlook. Things Just Got Really Ugly

SEMI, the global industry association serving the manufacturing supply chain for the electronics industry, published three different forecasts for wafer fab equipment (WFE) sales in the past week. While the forecasts differ in approach and detail, they all agree on one thing, WFE revenues are continuing to fall and the outlook for 2019 is sharply down on previous estimates.

Specifically, Q4 2018 WFE revenues are set to decline 20.8% or $3.3 billion QoQ and the forecast which had just six months ago predicted 7% growth in 2019 is now calling for an 8% decline next year. 

These latest forecasts cast a dark shadow over the predictions of the leading WFE manufacturers that H1 2019 would be stronger than H2 2018 and we anticipate a strong downward revision of forward guidance in the upcoming earnings season. 

There may be a glimmer of hope on the horizon however as SEMI forecasts a strong rebound in the second half of 2019 leading to a return to growth of ~20% in 2020. Let’s see.  

2. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

3. The Week that Was in ASEAN@Smartkarma – Dithering Dangerously, Digital Transformation, and Breadtalk

Macro Insights

In his appropriately named insight, The Year of Dithering Dangerously, Kevin O’Rourke suggests that President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture. 

In Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI, Kevin O’Rourke comments on the most important political developments over the past week. 

In his Insight Indonesia: All Together NowNicholas Chia provides up with an interesting update on the Indonesian Economy. 

In Thailand: Wobbles En Route to Slower but Still-Sustained Growth Momentum, Jason Tan writes on Thailand following some faltering GDP numbers. 

In Political Pit Stop (December): First Month of Campaigning, our Thai guru Athaporn Arayasantiparb, CFA comments on the state of political activity over the last month in Thailand as campaigning begins for the upcoming election. 

In The Philippines: Reforms Under a Political Cloud; BSP May Turn DovishManu Bhaskaran comments on recent economic developments in the Philippines. 

In Philippine Monetary Policy: Relief from No Rate Hike, Jun Trinidad comments on the economic outlook in the Philippines following a lack of action at BSP’s last policy meeting. 

In Singapore-Malaysia Tensions Rise Anew in Airspace and Maritime Disputes, Jason Tan comments on the resurgence of political tension between Singapore and Malaysia. 

Equity Bottom-Up Insights

In SCMA (SCMA IJ) – Biting the Digital Bullet, former Jakartan and CrossASEAN Insight Provider Angus Mackintosh circles back to leading Surya Citra Media Pt Tbk (SCMA IJ) following a conversation with management focusing on its digital aspirations. 

In BreadTalk (BREAD SP): As Din Tai Fung Opens in London, CEO Puts Out Target to Double Mkt Cap, Nicolas Van Broekhoven revisits Breadtalk (BREAD SP) following the opening of Din Tai Fung in London. 

In MER (MER PM): Solid Fundamentals at No. 1 Philippine Power Producer, Dr. Andrew Stotz, CFA  works his magic on this leading Philippines utility company. 

In PTT (PTT TB): Planned Listing of Retail Business in 2019, Dr Andrew Stotz, CFA circles back to PTT PCL (PTT TB) following the announcement of its intention to list its retail business.  

In SCC (SCC TB): Potential Beneficiary from US-China Trade War, Dr. Andrew Stotz, CFA revisits Siam Cement (SCC TB) as a potential beneficiary souring US-China relations. 

In PLANB: Solid Outlook for Music Marketing Business Under BNK48 Office, our friends at Country Group revisit media player Plan B Media (PLANB TB) in Thailand. 

In SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability, Dr. Andrew Stotz, CFA takes a close look at this leading construction player. 

In SVI (SVI TB): Production Capacity Expansion Should Continue to Pay Off, Dr. Andrew Stotz, CFA comments on electronics manufacturing company and takes a positive view. 

Sector and Thematic Insights

In a fascinating Insight, How the Mighty Fall…Or Should That Be A “Who Will”? Thai Guru Athaporn Arayasantiparb, CFA refers to Jim Collins’ book ‘How the Mighty Fall’ and highlights some interesting pitfalls that see some great companies decline or even collapse and follows them in stages. He applied the approach to companies in Thailand. 

In Revisiting the Renewable Energy Space, Athaporn Arayasantiparb, CFA checks out two stocks in the Thai renewable energy space. 

In Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis, Athaporn Arayasantiparb, CFA picks out the most interesting pieces of breaking news over the past week or so in Thailand. 

4. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI

The Prabowo-Uno campaign are focusing on Central Java while elements on both fringes of the religious spectrum debate poligamy and whether Widodo is ‘criminalizing’ clerics.  The KPK is investigating the head of the State Power Company (PLN) after court convicted BlackGold owner Johannes Kotjo.  Information Minister Rudiantara wants IPOs for four giant startups.  BI cited positive macro indicators, including 13% October credit expansion, but the World Bank warned that FDI inflows are too low. 

5. Rental Rates for Last Mile Industrial Real Estate Poised to Move Higher in Most Key Global Markets

• New industry data this week, plus take-aways from  our latest discussions with company managements, all confirm that the likely trend in the industrial segment of the global real estate industry is for rental rates to rise.
• The growth in e-commerce is continuing to accelerate globally. In some key market, this is “triggering a land grab for distribution space that experts say is accelerating”.
• Therefore, the increasing scarcity value of well situated industrial real estate in high demand markets is likely to continue to push up rental rates to higher and higher levels.
• Given our expectation that fundamentals driving the growing demand for Last Mile Industrial real estate are likely to persist, we continue to expect this segment to outperform the broader Real Estate sector for the foreseeable future.

In this briefing:

1. The Year of Dithering Dangerously
2. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC
3. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

1. The Year of Dithering Dangerously

President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture.  Prospects for improvement in a second Widodo term are questionable. 

2. Tobacco: A Framework for Analyzing the Sin Sector from an ESG Perspective, with a Focus on ITC

Contrary to the perception that the rising adoption of socially responsible investment practices has caused Big Tobacco to be shunned by portfolio managers, our shareholding analysis shows that institutional holding in most of these ‘sin’ stocks has increased in the last 4 and 8 quarters.

Nevertheless, Big Tobacco suffered a pounding in 2018. Investors had bought into tobacco premising reduced risk products (Eg: e-cigarettes, Heat Not Burn products) would reduce regulatory risk and reverse decades of sales decline. As it turned out, regulators frowned at the popularity of vaping amongst teens in the US, calling out companies for baiting youngsters into long-term smoking habits. Regulators also told off companies for marketing e-cigarettes and HNBs as healthier options, as tobacco still kills.

Ethical portfolios with negative screens (for example, ones that will not invest in tobacco stocks) have underperformed in the long-term past. There is a growing tribe of funds committed to responsible investing with positive ESG screens. For such funds, we present in this insight a framework for analyzing the sector from an ESG perspective. A deep dive into ITC Ltd (ITC IN), the only cigarette major to turn in a positive performance this year, vindicates, in our view, its efforts to materially de-risk its asset and revenue profile, coupled with very high levels of commitment towards community development.

3. SCMA (SCMA IJ) – Biting the Digital Bullet – On the Ground in J-Town

Media Partners Asia suggests that the advertising revenues for the Free-to-Air TV industry in Indonesia can grow +5.6% CAGR  between 2017-2023.

Internet companies are driving growth at the margin but also make-up 2/3rds of the 15% of total spend on digital advertising, which suggests only 5% lost from TV. 

Surya Citra Media Pt Tbk (SCMA IJ) is on the cusp of a significant move into the digital advertising and content space through Vidio.com, Kapanlagi.com, as well as its payments gateway Dana. 

The company will also enter a new advertising medium of outdoor billboards, where it will seek to consolidate the industry through acquisitions, with the aim of controlling 50% of this market. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best media proxy for advertising in Indonesia. It has seen its two main Free-to-Air stations SCTV and Indosiar command number 1 & 2 audience share positions over the last two months, giving an overall prime-time audience share YTD of 35%.  The company estimates that the core business can probably achieve growth of +10% over the next two years. The real kicker to growth for the company will come from its significant move into the digital and content space through a series of acquisitions, mainly from its parent Elang Mahkota Teknologi Tbk (EMTK IJ). These transactions are will be done at arm’s length so as to avoid any corporate governance concerns. According to CapIQ consensus, the company is trading on 16.7x FY19E PER and 15.1x FY20E PER, with forecast EPS growth of 8.6% and 10.6% for FY19E and FY20E respectively. The company also has a dividend yield of 3.9% for FY19E and generates an ROE of 32%.