Indonesia Strategy

Positive News on Politics and Oil

[Citi Report]

News improves - Latest conditions, with lower oil prices, positive news on the
political situation, coupled with signs of Jokowi pushing for infrastructure-related
projects, should be seen as positive catalysts for the market. We maintain our index
target of 5,925 by end of 2015. The market is trading on 14.6x 1-fwd PER. Our top
picks are ASII, BBNI, BBRI, SMGR, INTP, CPIN, UNTR, BSDE, CTRA and DSNG.

Fuel price hike to impact earnings; min wage hike and BPJS to the rescue —
We expect the fuel price hike to impact earnings in 4Q14-1Q15 but we expect a
recovery starting in 2Q15. Higher minimum wages, direct cash transfer and
implementation of universal health care (BPJS) should somewhat help purchasing
power and consumer confidence. Our conversation with middle- to lower-middleincome
people indicated these people had started reducing their medical expenses
for other purposes due to free medical services from the government.

Subsidized oil prices; government is making money selling at subsidized
price — With lower Brent oil prices at US$66/bbl, this should translate to gasoline
prices of around Rp7,000/litre vs a subsidized price of Rp8,500 for gasoline and
Rp7,500/litre for diesel. As such, currently the government is making money selling
at the subsidized price. The government could save more than US$20bn in fuel
subsides for the next year if the oil price remains at this level. There could be a
chance that the government could lower the subsidized price next year and
implement a fixed-price subsidy or even float the fuel prices based on the market.
But this will need parliamentary approval.

Indonesian marketing feedback in Asia last week - General feedback from
clients is mainly neutral to slightly positive on Indonesia. Main topics discussed are
1) Golkar split-up scenarios and parliament situation; 2) impact on the fuel price
hike and lower oil prices; 3) next catalysts for the market, especially for 1H15; 4)
plays for the Indonesia universal healthcare reform; 5) plays on the oil and gas
reform, and thus we highlight names in the supporting oil & gas sectors. Not much
pushback for our Banking picks (BBRI, BBNI) and there are quite a bit of interest in
BMRI. Most also agree on property picks. Investors stay cautious on the consumer
sector due to the fuel-price hike. Pushbacks are strongest on our contrarian view,
ASII and UNTR, due to competition in the auto sector and low coal prices.


Complete Report - 9 Dec 2014 for Prospect 2015