RHB Indonesia Morning Cuppa - 3 October 2016- (Tax Amnesty, Money Supply)

Good morning,

Tax amnesty 1^st phase: Finish on a high note

The conclusion of phase 1 of the tax amnesty program was encouraging; with total penalty payment reached IDR97.2tn, a significant achievement and way above market’s initial expectation. This achievement is mainly attributed to government’s various efforts to push ahead with various regulation and instruments to lure more participants to join this program. While the penalty payment in 1st phase was still short than the government’s full target of IDR165tn, the rapid progress on toward the end of 1^st phase was above expectation has created stronger momentum and exuberance to the capital market.

Total asset declared in the 1st phase of the tax amnesty program reached IDR3,621tn (USD278b), with domestic declaration dominated the board, accounts for 70% of total asset declaration while asset repatriation accounts for mere 3.7% . On the asset repatriation, Singapore, Cayman Island, Hong Kong, China and Virgin Island are the main source. (please refer the figure 1 – 3 for more details).

Going forward, we believe the pace of tax amnesty will be moderate, especially given the progressive penalty scheme of which most of participant would join the 1st phase given its cheapest rate. Similarly, the Indonesia Businessmen Association also said that 95% of major businessmen have participated in the 1st phase of the tax amnesty. Having said that, market will likely to put less emphasizes on the tax amnesty progress and rather would focus more on the macro and corporate earnings. In our view, as the overall economic recovery will still be a gradual process, corporate earnings growth in 3Q16 would likely to see slight softness on q-q basis as a result of normalisation post Lebaran season.

Over the medium to longer term, we maintain our constructive view on Indonesia market, mainly driven by favorable macro situation which support corporate earnings. We believe that Indonesia will continue its positive economic growth trend, aided by stable Rupiah and low inflationary environment which will pave the way for more easing policy. We expect real GDP to expand by 5.3% in 2017, slightly faster than an estimate of +5.1% in 2016.

During the recent cabinet meeting, President Joko Widodo has instructed to increase the capital spending budget for 2017 to be increased by IDR100trn to c. IDR400trn, partly driven by the successful implementation of tax amnesty, which will pave the way for higher compliance level of tax payers and an increase in government tax revenue.

Our TOP picks in the market are Astra Int’l (ASII IJ), Bank Negara Indonesia (BBNI IJ), Telkom Indonesia (TLKM IJ), Indofood (INDF IJ), Bumi Serpong (BSDE IJ) and Waskita Karya (WSKT IJ). (Helmy Kristanto)

Link to Daily report: Indonesia Morning Cuppa - 031016

Economic Highlights:

Money Supply and Loan Growth Decelerate in August

¨ Indonesia’s money supply (M2) growth edged down to 7.7% y-o-y in August, from +8.2% in July and +8.7% in June. The decrease was due to a slowdown in net domestic operation, on account of slower loan growth. This was partly mitigated by a pick-up in net foreign operation.

¨ At the same time, total loans growth decreased, on account of slower growth in loans extended for working capital and investment. Deposit growth, likewise, moderated inAugust, due to slower increases in demand and time deposit.Going forward, we expect demand for private credit to pickup, aided by easing monetary policy and a rebound in economic growth that could induce more household spending and borrowing.

¨ Bank Indonesia (BI) board of governors’ meeting decided to cutthe BI 7-Day (Reverse) Repo rate to 5.0% on 22^ndSeptember2016. Similarly, deposit facility and lending rates were cut to 4.25% and 5.75% respectively.For the rest of the year, we expect the BI to cut reserve requirement, but will likely retain its policy rate unchanged at the current level. Further out, we expect the BI to slash its key policy rate by another 50 basis points in 2017 to support economic growth.

¨ Meanwhile, Indonesia rupiah (IDR) appreciated of late, partly due to unchanged Fed rate in September and tax amnesty realisation. Further out, the IDR is still susceptible to global financial markets even though the selling pressure will unlikely be as severe as last year. As a whole, we expect the IDR to trade toward IDR13,100 in 2016. (Rizki Fajar)

Link to report: to be sent out later

Media Highlights:

Economics

Indonesia to increase capital spending budget by IDR100trn

Corporates

The Government increases FY17 cigarette excise tax by weighted average of 10.54% YoY

FY17 cigarette excise tax increase by 10.54%YoY (vs 2011-2015 average increase of 6.2%). The Government of Indonesia has just announced the increase in FY17 cigarette excise tax by weighted average of 10.54% YoY. The highest excise tax increase is 13.46% for SPM and the lowest excise tax increase is 0% for SKT class IIIB. The Government increases cigarette retail price by on average 12.26%.

Flat growth in FY17F domestic cigarette volume. We estimate increase in FY17 excise tax by on average 10.54% (vs 2011-2015 average increase of 6.2%) and moderate FY17 increase in Indonesian purchasing power should make flat growth FY17F domestic cigarette volume.

Recovery in Gudang Garam’s (GGRM IJ, NR) share price should be an opportunity to trim position in Gudang Garam as we think there is downside risk in Gudang Garam’s FY16 earnings. (Hariyanto Wijaya CFA CPA)

Pembangunan Perumahan targets IDR23.5trn new contracts for 9M16

Pembangunan Perumahan (PTPP IJ, BUY, TP: IDR5,400) estimated that it has received IDR23.5trn (+38.6% YoY) of new contracts as of 9M16, accounted for 75.8% to our FY estimate. PP’s CEO stated that the company has received IDR21trn as of the third week of September with carry over contracts of IDR39trn. Hence, It is in-line with our FY16F new contract target of IDR31.5trn (+14.5% YoY). The new contracts include 2 new toll routes worth IDR3trn and IDR2.7trn, Mini Gas power plant Lombok Peaker worth IDR1.42trn and Makassar New Port pack B&C worth IDR891bn. (Dony Gunawan)

Media Nusantara Citra aims 7% growth for FY16

Mitra Keluarga revised capex to IDR60-70bn

Waskita to acquire 2 toll road projects

Aprindo to stop paid plastic bag program in October

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