RHB Indonesia Morning Cuppa - 11 October 2016- (Construction, Property, Regional Plantation)

Good morning,

Construction: Positive Outlook Ahead

As at 9M16, the government has successfully disbursed IDR83trn (+7.4% YoY) in capital spending, in-line with our full year expectations of IDR195trn. Two state owned contractors have booked strong new contracts totalling IDR81.5trn YTD 9M16, more than double that of last year’s collection.Waskita Karyareceived IDR59trn in new contract orders, above our FY16F estimates while Pembangunan Perumahan’s (PTPP) new contracts hit IDR23.5trn, in-line with our estimates. We maintainOverweight on the sectorand Waskita Karya is our top pick.

¨ Expect higher government infrastructure spending in 2017.YTD 9M16, the government has disbursed IDR83.7trn (+7.4% YoY) in capital spending.However, September saw the slowest YTD pace of capital spending of IDR14.9trn, -25.8% YoY. This is in line with our expectations for the government to spendIDR195trn in 2016, 8.6% YoYlower compared to last year. As at 3Q16,the government budget deficit stood at 1.8% of GDP, lower than last year’s 2.2% over the same period, due to high collection from the tax amnesty program. We see room for the government to continue infrastructure spending without exceeding its budget deficit target of 3% for the rest of this year. Next year, we also expect a higher infrastructure budget of IDR337trn (+9%YoY).

¨ More new contracts win for PTPP.The company has received IDR23.5trn (+38.6% YoY) of new contracts YTD. This accounts for 75.8% to our full year estimates, in-line with our 2016 new contracts target of IDR31.5trn (+14.5% YoY). These new contracts include two new toll roads worth a total of IDR5.7trn, a mini gas power plant in Lombok Peaker and Makassar new port package B and C. We believe PTPP’s (PTPP IJ, BUY, TP: IDR5,400) target is achievable as the government is expected to announce several more projects by end 2016.

¨ Indonesia’s 11^thCommittee of the House of Representatives has agreed on the rights issuance of four SOEs, including PTPP. Management is still in discussion on the pricing but the Government has estimated that the rights will be priced c. IDR2,480 - IDR3,580.Assuming the rights issue price from the government,we expect PTPP’s net profit to jump to IDR1.35trn in FY17F post rights issue (vs IDR1.2trn pre rights issue) due to higher number of projects that the company can secure.Our P/E based TP for PTPP is expected to range from IDR4,485 – IDR4,960, depending on the size of the rights issue.

¨ Waskita Karya has the highest earnings visibility.YTD 9M16, Waskita Karya (WSKT IJ, BUY, TP:IDR 3,675) has collected IDR58trn (+213.5% YoY) in new contracts,exceeding our FY16F estimates of IDR50trn.Most of the new contracts collected this year are from its toll road investments and the trend should continue going into 2017 as we expect the company to acquire another five toll roads. Meanwhile, its outstanding order book should be sufficient to support the company’s earnings growth for the next three years.

¨ We estimate that Waskita Karya will report net profit of IDR900bn - IDR1trn in 9M16, given payments from several toll road projects. This is in line with our FY16 estimates of IDR1.6trn (+53% YoY). Meanwhile, Waskita Karya is expected to divest its toll road subsidiary –Waskita Toll Road (WTR) by the end of end 2016 or early 2017. The asset divestment should have a positive impact to the company’s cash flow in the future.

¨ Key risk. We are of view that delays in land acquisition process will be the biggest risk for the sector, although there had been significant improvements.

¨ Maintain Overweight. We maintain Overweight on the sector. Our top pick is Waskita Karya as it has the strongest earnings visibility amongst peers. (Dony Gunawan)

Link to report: Positive Outlook Ahead

Link to Daily report: Indonesia Morning Cuppa - 111016

Sector News Flash:

Property (Overweight), Revision To Foreign Property Ownership Regulation

The ministry of ATR/BPN has issued a revision to the regulation of foreign property ownership in Indonesia. We are positive on the new regulation, as it gives clarity and flexibility to foreigners, looking to own property under the “right to use” title. However, we are unsure as to the attractiveness of this new feature, when compared to other land rights, namely “right to own” and “right to build”. This is as residential permits and price floors are likely to limit foreigners’ appetite for properties in Indonesia.

¨ New regulation. The Ministry of Agrarian and Spatial Planning/the National Land Agency (Ministry of ATR/BPN)has issued a new regulation, no. 29/2016 to replace regulation no.13/2016, with regards to foreign property ownership in Indonesia. The revision includes:

i. Allowing foreigners to buy property under the “right to use” title, both in primary and secondary markets;

ii. For apartments, developers will be able to sell to foreigners without having to convert the entire development’s land title to “right to use”. Hence, the land title can be split between “right to build” and “right to use”, depending on the property owners’ citizenship;

iii. In addition to a minimum property purchase price for foreigners (Figure 1), the Government has also capped the land size for foreigners to a maximum of 2,000sqm. However, in certain circumstances where there will be a significant positive impact on the economy and with permission from the Minister, foreigners are allowed to own residential land in excess of 2,000sqm;

iv. Foreigners ’“right to use” title can be converted back to “right to own” or “right to build”, when the property is transferred to an Indonesian citizen, for the remainder of the period of validity.

¨ Positive for developers... We see further improvement for the sector from this new development, as it indicates that the Government is serious in allowing foreign property ownership. Developers in general are positive about the new regulation, in particular strata-title apartment sales, as they can now sell apartment units to foreigners without having to convert the land title (for the entire apartment tower) to “right to use”.

¨ ..but from foreigners’ point of view? We however believe that the attractiveness of the “right to use” title for foreigners, when compared to other land rights (“right to own” and “right to build”) remains low, as it is still the weakest form of land title. Hence, we suggest that the Government implement the following to attract higher foreign property ownership:

i. Government would need to provide assurance on foreigners’ proof of residence or domicile. Note that currently, foreigners’ work permits have to be renewed every six months, and if the foreigners’ domicile no longer qualifies, they are mandated to release or transfer their properties within a year, or risk having the property being auctioned off by the Government;

ii. Government would also need to allow foreigners to rent out their properties. In doing so, the Government would also benefit from higher tax revenues from taxing rental income.

¨ Potential beneficiaries. With the price floors (Figure 1), the new policy should benefit luxury property developers such as Intiland Development (DILD IJ, BUY, TP: IDR675), Pakuwon Jati (PWON IJ, NR), and Ciputra Property (CTRP IJ, NR), in our view. (Lydia Suwandi)

Link to report: Revision To Foreign Property Ownership Regulation

Sector Update:

Regional Plantation (Neutral), Inventory To Rise Further As Peak Season Approaches

Malaysia’s CPO output remained weak in September, as El Nino delayed the peak production cycle further. We expect the peak months to only be in Oct/Nov, coinciding with the bumper soybean harvest in US. This could result in some near-term weakness for CPO and soybean prices. We maintain our MYR2,500 CPO price per tonne assumption (YTD: MYR2,550) and NEUTRAL sector call. Our regional Top Picks remain KL Kepong, Golden Agri and London Sumatra. We also like Sime Darby for the situational restructuring angle.

¨ Malaysia’s CPO production rose 0.8% MoM in Sept, while YTD production decline narrowed to 15.3%. We expect a bigger jump in FFB output in Oct/Nov, as the peak production period has been delayed due toEl Nino.

¨ Exports fell back in September (-20.4% MoM), as Deepavali demand waned and as China utilised its soybean stocks. Exports to China saw a MoM decline of 33.9%, while India fell 40.3%, EU dropped 27% and the US declined 24.5%.

¨ Thus, Malaysia’s YTD-Sep exports dropped -6%, with China’s exports decline narrowing to -32.6% YoY, India to -8.7%, US to -7% and the EU to -14%. We expect demand from India to improve in the coming months from the change in import taxes.

¨ Inventory rose 5.7% MoM to 1.55m tonnes, due to the higher output, bringing the stock/usage ratio up to 8.3% (August: 7.9%), which is lower than the 12-year average of 10%. We expect inventory levels to continue climbing in the next couple of months, as production picks up pace.

¨ Recent developments:

i. The latest crop US soybean estimates reflect an estimated 9% increase YoY (to 116.5m tonnes), vs +7% a month ago. This could result in stock levels in the US rising 90% YoY at end-2016(Figure 6);

ii. South American soybean planting may be lower than expected, (-0.5m ha YoY in 2017F), due to weaker exports recorded in the last few months as well as some dryness in Brazil and Argentina (Figure 7). This compares to the average 2.3m ha increase per year over the last five years. If this pans out, it should help to reduce the high soybean stock level, caused by four years of bumper crops in the US, in 2017;

iii. The 17 oils and fats production deficit may reverse in 2017 to a surplus, based on current estimates of production growth of 10m tonnes and a consumption increase of 4.9m tonnes in 2017. This could result in a pullback in edible oil prices in 2017.

¨ Still NEUTRAL. We expect some price weakness in the near term, due to the peak production period for CPO (due in Oct/Nov) and the upcoming bumper soybean crop in the US (harvesting in Oct/Nov) and South America (harvesting in 2Q17). We keep our MYR2,500/tonne CPO price assumption for 2016-2017. Our regional Top Pick remains Kuala Lumpur Kepong (KL Kepong) (KLK MK, BUY, TP: MYR26.40). In Singapore, we prefer Golden Agri (GGR SP, BUY, TP: SGD0.44) and Indonesia, London Sumatra (LSIP IJ, BUY, TP: IDR1,800). (Hoe Lee Leng, Hariyanto Wijaya CFA CPA, Christine Chua)

Link to report: Inventory To Rise Further As Peak Season Approaches