Wednesday, 9 January 2013

E Q U I T Y R E S E A R C H

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OVERWEIGHTYE13 Target 5,040

JCI Index (as of Jan 8, 2013) 4,397Market Cap. (Rp tn) 4,217 US$ (bn) 429.1

Chandra S Pasaribu(62-21) 351 0748chandra@danareksa.com

Market OutlookStructural transformation underway

Structural transformation underwayIndonesia’s economy is going through profound structural changes. Previously, inflation ran inthe high single digits, leading to double-digit interest rates. Financing costs were consequentlyrelatively high and money would be invested in time deposits. Now, however, inflation has beenbrought down to much lower levels – and this is likely to be sustained in the long run. As a result,we also have single-digit interest rates, which, in turn, pushes money into real asset investment.This macro-economic environment, characterized by benign inflation and low interest rates, moreclosely resembles that of developed economies - but with much better economic growthprospects. All in all, we believe the structural economic changes could ultimately translate intosustainable capital market growth accompanied by lower volatility.

Relying on domestic strengthGrowth in the capital market will continue to be fueled by domestic economic activities. The maindrivers for economic growth will be consumption and investment in addition to a slight recoveryin exports. Government spending has increased but realization remains a problem. Nonetheless,assuming a similar budget spending ratio, government spending should increase. All in all, thedomestic sectors - i.e. the consumer, manufacturing, retail and property sectors – all stand tobenefit, as do infrastructure and banks. The fate of the commodity sector, by comparison, hingeson global economic recovery, which still seems to be rather languid.

The government needs to implement policies carefullyCorporate governance in the private sector has remained prudent, marked by strong cash flowgeneration which has allowed companies to invest and expand their production capacity. We seehealthy profitability in addition to sound balance sheet fundamentals. So far, we have notwitnessed any currency financing mismatches - meaning tolerable exchange rate risks. Furthermore,gearing remains relatively low, allowing companies to gear up if needed. Against this backdrop,the government has a key role to play in maintaining a positive macroeconomic environment. Inour view, the government will seek to manage policy implementation in a careful manner,especially in regard to energy subsidies, minimum wages, electricity tariffs, and the domestic coalobligation. Improper policy implementation could have negative ramifications on economicstability, triggering higher inflation and denting the people’s purchasing power - key variableswhich underpin the current strong growth.

Our Target Index is 5,040We have a Target Index of 5,040 for 2013, translating into PER FY13 of 15.9x, offering upside potentialof 16.3%. In our universe of stocks, our top picks are BBRI, BMRI, GIAA, ICBP, JSMR, KLBF, MAPI, andSMGR. Among the smaller market cap stocks, we like BSDE, ASRI, GJTL, HEXA, and WINS.

2

9 January 2013

As it turned out, 2012 was an interesting year, marked by brisk domestic growth shieldingthe Indonesian economy from global turmoil. The main engines of growth were strongdomestic demand and high investment appetite. Monthly numbers in various sectorsreached record highs, evidence that the domestic growth was real and tangible. Theinvestment data for both domestic and foreign investment was especially encouraging.Demographics also worked in Indonesia’s favor, as the country is blessed with a young andproductive population, helping to create a dynamic workforce and growing demand in newmarkets, unleashing a positive chain reaction on the burgeoning economy.

The missing piece of the puzzle still lies in the hands of the government, however. Realizationof the government budget was disappointing and reached only around 70-80% of theamount budgeted at the beginning of the year. Interestingly, funds availability is not theobstacle to higher government spending as the government is actually sitting on more thanRp200tn of unspent funds from previous years. Rather, fears over corruption, lengthy andconvoluted bureaucratic processes, as well as time-consuming land acquisition, have allplayed a part in the languid pace of government spending. Going forward, the administrationwill need to address multiple problems to accelerate budget spending accordingly.

Exhibit 1 Main macro economy variables forecast

2008 2009 2010 2011 2012F 2013FIndicatorNational AccountGross Domestic Product YoY growth, % 6.0 4.6 6.2 6.5 6.3 6.5Household Consumption YoY growth, % 5.3 4.9 4.7 4.7 4.9 4.8Gross Fixed Investment YoY growth, % 11.9 3.3 8.5 8.8 11.0 10.6Manufacturing Production YoY Growth, % 3.7 2.2 4.7 6.2 5.6 6.3

Consumer Price IndexInflation rate, end of period, % 11.1 2.8 7.0 3.8 4.4 4.9

Interest rate3M deposit 11.2 7.5 7.1 6.8 5.7 5.63M deposit rate, average 8.5 9.3 6.8 6.9 5.9 5.6BI rate, end of period, % 9.3 6.5 6.5 6.0 5.8 5.8

Exchange rateExchange rate, eon of period 10,950 9,400 8,991 9,068 9,517 9,059Exhange rate, average 9,753 10,356 9,074 8,773 9,406 9,185

Source: DRI

At the beginning of 2012, the prospects for the economy were overshadowed by uncertaintycreated by the government’s indecisiveness over its fuel subsidies policy. After a lengthypolitical process the government finally decided not to reduce fuel subsidies. Nonetheless,the procrastination in regard to this policy decision created economic uncertainty and alsoraised inflationary expectations, since the general public took into account the possibilityof fuel price increases. Inflation subsequently rose - a self-fulfilling prophecy. Closer to theend of the year, the government issued a restrictive regulation in the mining sector, whichwas to prohibit the export of raw materials such as tin and nickel - the government’s raisond’etre being to create “higher value-added” as opposed to simply exporting raw materials.This is a good idea, we agree, but implementation was lacking and uncertainty was createdin the market. Negative sentiment was also created when the government approvedsignificant minimum wage hikes amounting to an average of 21.4% across the regions. Suchsudden cost increases have not been compensated by higher efficiency in doing business,such as in the areas of transportation, infrastructure and government administration.

A quick flashback

3

9 January 2013

The capital market discounted both the positives and the negativesThe stock market reacted accordingly to both the positive and negative developments inthe economy. The positives were reflected in a slew of mostly solid financial results in 1H12,continuing into 3Q12. However, countering these positive developments were theuncertainties over fuel subsidies, the rapid change in energy and mining regulations, and,of course, the huge and unprecedented hikes in minimum wages. The JCI started the yearat around the 3,800 level and then trended higher to 4,200 by early May 2012. After this, themarket experienced a steep correction, spooked by Europe’s economic woes and concernsover the prospects for the global economy. At the same time, the government was corneredby being indecisive over its fuel subsidies policy - creating a domestic overhang. As a result,the market plunged to the 3,600 level in early June 2012. However, after the announcementof sound financial results for 2Q12 and 3Q12, investor confidence returned, helping the JCIto rally to a new all-time high of 4,375 on 26 November 2012.

The announcement of hefty minimum wage hikes created negative sentiment in the market.However, the blue chips brushed aside the concerns over this issue and stayed upbeat. Someprofit taking took place at the end of the year due to both domestic concerns and globaleconomic uncertainties. Taking profits is always an attractive option in uncertain times.Nonetheless, we firmly believe that Indonesia remains on the radar screen for manyinvestors, although caution is warranted due to headwinds from government regulations.

Exhibit 2. JCI Kaleidoscope 2012

Source: IDX, Danareksa Sekuritas

4,317

4,375

3,655

3,200

3,400

3,600

3,800

4,000

4,200

4,400

4,600

2-Ja

n-1

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12-J

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1-Fe

b-1

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11-F

eb-1

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21-F

eb-1

2

2-M

ar-1

2

12-M

ar-1

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22-M

ar-1

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12

11-A

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31-M

ay-1

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-12

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-12

30-J

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-12

10-J

ul-

12

20-J

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30-J

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9-A

ug

-12

19-A

ug

-12

29-A

ug

-12

8-Se

p-1

2

18-S

ep-1

2

28-S

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8-O

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2

18-O

ct-1

2

28-O

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7-N

ov-

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17-N

ov-

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27-N

ov-

12

7-D

ec-1

2

17-D

ec-1

2

27-D

ec-1

2

Indonesia regainsInvestment Grade

from Moody's (Baa3)

Issue on fuel price

increase by government

Regulation onMineral ExportsRestrictions

issued

Recovery on China

economy

BI Rate

drops 25bpsto 5.75%

Greece reachesa debt swapt

Greece

parliamentary election

Implementation on

LTV regulation

Issue on US

fiscal cliff

Obama

Re-elected

Greece

ask forreelection

4

9 January 2013

The stability in 2012 of three main macro economy indicators - inflation, interest rates andthe exchange rate - helped underpin a conducive environment for domestic consumptionand investment. In 2012 we witnessed record high monthly sales for cement, automobilesand motorcycles. We note that Indonesia might have undergone a structural shift in itseconomy leading to lower inflation. In the past (i.e. pre-crisis 97/98), near “double digits”inflation was “normal”. At that time, Indonesia managed its inflation at a level slightly below10% with interest rates in the “high teens”. After the Asia financial crisis, however, inflationtended to slow to “mid-single digit” levels coupled with interest rates in the “mid teens”.Recently, Indonesia’s inflation rate has been maintained in the “low single digit” regionaccompanied by “single digit” interest rates. It appears that Indonesia’s inflation is now moreclosely aligned with inflationary levels in neighboring countries, evidence, we believe, ofa structural shift in Indonesia’s economy.

Exhibit 3. Macro economy forecast breakdown by sector and consumption

Sector 2012F 2013F 2013F, % Y-o-Y 2013F, % Q-o-QQ1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1. Agriculture 3.8 3.3 3.2 3.4 3.3 3.2 20.9 2.6 4.7 -20.52. Mining and Quarrying 2.2 1.5 1.3 1.6 1.6 1.4 0.5 -0.3 1.6 -0.33. Manufacturing 5.6 6.3 6.1 6.2 6.5 6.5 -1.7 2.9 3.4 1.84. Electricity, Gas, and Clean Water 5.6 6.0 5.9 5.9 6.1 6.3 -2.2 4.6 1.3 2.55. Construction 7.2 6.9 7.1 6.8 6.9 6.7 -3.9 4.1 3.5 3.16. Trade, Hotel, and Restaurant 8.9 9.1 9.2 8.9 9.2 9.1 -1.7 4.9 4.5 1.27. Transportation and Communication 10.1 9.9 10.0 9.8 10.0 9.9 1.2 1.7 4.0 2.78. Finance, Leasing, and Business Services 6.7 6.8 6.9 7.1 6.9 6.4 2.5 1.8 1.3 0.69. Services 5.6 5.9 5.7 5.9 6.0 6.0 -1.2 2.8 3.0 1.3GROSS DOMESTIC PRODUCT 6.3 6.5 6.4 6.4 6.6 6.6 1.5 2.8 3.4 -1.3

1. Consumption Expenditures: Household 4.9 4.8 5.0 4.6 4.8 5.0 0.6 1.0 2.3 0.92. Consumption Expenditures: Government 7.6 6.5 4.2 6.3 6.1 7.9 -47.3 29.8 12.0 40.93. Gross Fixed Capital Formation 11.0 10.6 11.0 10.9 9.7 10.7 -4.2 6.2 3.2 5.44. Export of Goods and Services 1.8 10.3 6.5 10.1 11.8 12.6 -4.8 4.7 -1.6 14.85. Import of Goods and Services 6.6 11.0 6.9 9.9 12.3 14.5 -4.1 12.4 -2.7 9.26. Total Consumption 5.3 5.0 4.9 4.8 4.9 5.5 -7.6 3.8 3.5 6.27. Domestic Demand 6.9 6.6 6.6 6.6 6.3 7.0 -6.6 4.5 3.4 6.0

Source: DRI

DRI expects that inflation shall be sustained in the region of 4-5% in 2013 – as in 2012. Themain risk to inflation comes from higher commodity prices - especially those of rice andenergy. The price of rice will be largely determined by how successful harvests are in thepeak harvesting period of April/May. Usually, inflation tends to be high at the beginningof the year until the harvesting period. Another risk will come from energy costs - especiallyfuel. Note that Indonesia is currently a net importer of oil. Strong domestic growth hastranslated into higher-than-expected demand for fuel, especially cheap subsidized fuel.Last year, the government signaled its willingness to raise fuel prices in order to rein in fuelsubsidies, if necessary. This policy was instigated in response to rising oil prices. Thegovernment would have needed to increase fuel prices if the average reference price (ICP)was above US$120.75 per barrel. Last year, however, the oil price never touched the thresholdand the government ultimately decided not to increase fuel prices. Unfortunately, speculationover possible fuel price hikes did spike inflationary expectations. We believe that it isimportant for the government to keep speculative activities in check. Fortunately, the loweroil price has reduced the urgency to raise subsidized fuel prices. Hence, there is a goodchance that 2012 inflation is at the low end of the range, due to the unexpected inflationarising from speculation on fuel subsidy reductions in 2012. Although the government hasnot stated any intent to raise subsidized fuel prices, discussions on this matter did resurfaceat the end of 2012.

A solid macro economy

5

9 January 2013

Bank Indonesia, acting as the central bank, continues to pursue a policy mix in how itmanages interest rates. Nonetheless, our economist thinks that the central bank will notshift too far away from inflation targeting. This will remain the main consideration inmanaging interest rates. In 2012, low inflation allowed Bank Indonesia to maintain its BIrate at 5.75% for almost ten months. With the likelihood of low inflation being sustainedin 2013, Bank Indonesia should be able to maintain its BI rate at 5.75%. Additionally, centralbanks across the globe are also tending to maintain low reference rates in considerationof the lethargic global recovery. This will give BI more room to maintain a low BI rate.

Despite the low BI rate, the banking sector continues to enjoy a high interest margin ofnearly 6.0%. Bank Indonesia’s policy to push down lending rates has proven to be lesseffective. In many other countries the net interest margin is much lower than in Indonesia,providing higher efficiency in the banking system. This shows that Indonesia’s bankingindustry has strong pricing power. In our view, low banking penetration with a highlyconcentrated banking industry has resulted in a less competitive environment to drivedown the price of money (interest rates).

The rupiah weakened in 2012 mainly due to negative sentiment created by heightenedglobal uncertainty, capital outflows seeking “safe havens” and fears over the negativecurrent account. By the end of 2012, the rupiah had weakened by 8.0% from Rp9,069/USDat the beginning of the year to Rp9,793/USD by the end of December 2012. The movementsin the rupiah have gone against the regional pattern where local currencies have tendedto strengthen against the US dollar. According to DRI, the fundamental value of the rupiahshould be Rp9,236/USD. Compared to the current exchange rate of around Rp9,600/USD,the rupiah is therefore undervalued by 4-5%. Our economist states that the actual exchangerate should not deviate too much from its fundamental value. Therefore, we expect therupiah to strengthen in 2013 rather than weaken. Furthermore, the quantitative easingundertaken in the US should weaken the dollar against other currencies, meaning that therupiah stands to strengthen.

Exhibit 4. The rupiah is forecast to strengthen in 2013

Source: DRI

7,800

8,000

8,200

8,400

8,600

8,800

9,000

9,200

9,400

9,600

9,800

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1M

ay-1

1Ju

n-1

1Ju

l-1

1A

ug

-11

Sep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2M

ay-1

2Ju

n-1

2Ju

l-1

2A

ug

-12

Sep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3M

ay-1

3Ju

n-1

3Ju

l-1

3A

ug

-13

Sep

-13

Oct

-13

No

v-1

3D

ec-

13

Forecast

6

9 January 2013

Exhibit 6. Sound financial system to support the growing economy

Source: DRI

Domestic growth underpinning the economyDRI forecasts GDP growth of 6.5% in 2013, or slightly higher than 2012’s estimated 6.3%. Themain engines of growth remain domestic consumption and investment. Low inflation andlow interest rates should be sustained in 2013. This will help induce a stronger appetite forconsumption and investment. Note that domestic consumption accounts for about 55-60%of the total economy. As such, solid domestic demand is of vital importance in promotingfurther growth and stability. On the external front, DRI expects stronger export activities witha slightly brighter outlook in the global markets. Government expenditures, however, shallremain tempered since the government may not be able to accelerate infrastructuredevelopment.

Banking Pressure Index - Indonesia

-0.14

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Exhibit 5. Several approaches to determine the rupiah exchange rate

Indicator Dec-08 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

Actual 10,950 9,400 9,115 9,083 8,924 8,991 8,709 8,597 8,823 9,068 9,180 9,480 9,588PPP 8,573 8,512 8,652 8,784 8,982 9,040 8,990 8,956 9,043 9,108 9,106 9,207 9,283Trend PPP 8,997 8,330 8,814 9,381 8,837 8,934 9,104 8,808 8,559 9,113 9,859 9,510 9,397REER 8,311 8,648 8,721 8,791 8,856 8,917 8,974 9,028 9,080 9,131 9,182 9,233 9,283Trend REER 9,288 8,935 8,902 8,887 8,888 8,903 8,930 8,971 9,023 9,086 9,156 9,227 9,299Competing Currency 10,616 10,333 9,739 9,617 9,109 9,131 8,738 8,615 8,845 9,233 8,913 9,153 9,126Econometric 10,561 8,587 8,371 9,249 8,732 8,706 9,093 9,236 8,800 9,555 9,380 9,268 9,059Fundamental Value 9,391 8,901 8,866 9,118 8,901 8,938 8,971 8,936 8,892 9,204 9,257 9,266 9,241Deviasi, % -14.2 -5.3 -2.7 0.4 -0.3 -0.6 3.0 3.9 0.8 1.5 1.0 -2.3 -3.6

Source: DRI

7

9 January 2013

Exhibit 7. Rising consumer confidence to support domestic consumption

Source: DRI

Exhibit 8. Strong business confidence bodes well for capacity expansion

Source: DRI

Domestic consumption is expected to grow by 4.7% in 2013, or slightly slower than 2012’sestimated 4.8%. Meanwhile, capital formation is expected to grow by 11.0% in 2013, or a bithigher than 2012’s estimated 10.3%. We expect that both consumer confidence and businesssentiment shall remain high in 2013, fuelling domestic consumption and investment. Bothdomestic and foreign investment numbers are impressive, given a welcome boost byIndonesia’s investment grade rating awarded in 2012. Now Indonesia is simply reaping thebenefits. The low interest rate environment will encourage investment since financialreturns are less attractive. Companies will be more willing to invest given the low interestcosts.

80

90

100

110

120

130

140

150

160

170

Jan

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-11

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11

Sep

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No

v-11

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

BSI Present Situation Expectations

Consumer Confidence Index

60

65

70

75

8085

90

95

100

105

110

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

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Jan

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Jul-

12

Fuel Price Hike I

Fuel Price Hike II

Foodstuff price rose Inflation increase

Fuel price hike III

Fuel price decreased

Foodstuff price rose

94.7

8

9 January 2013

Exhibit 9. A negative balance of payments in the past supported growth throughinvestments

Source: Bank Indonesia, BPS

Exhibit 10. Foreign investment realization by sector

Source: BKPM

Indonesia’s exports faced a challenging period in 2012 given Europe’s economic woes, theslowdown in China, and the slower-than-expected recovery in the US and Japan. All in all,Indonesia’s exports are expected to grow by 6.4% in 2012 and by a brisker 12.8% in 2013.Overall, our economist team feels that the worst is over. Already there are some encouragingsigns that the US and Japan will continue to stimulate their respective economies to fosterrecovery. Falling inflation in China will help the Chinese government to promote moregrowth this year. Europe’s fate remains uncertain, however, since the beleaguered regionhas not found the magic formulae to heal its moribund economy. As for Indonesia’s imports,they are expected to grow 8.1% in 2012 and by a brisker 11.0% in 2013. Accelerated growthin imports reflects the strong growth in foreign and domestic investment. Currently,Indonesia is not able to manufacture capital goods such as sophisticated engines and otherspecial equipment. The demand for these goods is met by imports. But as long as the importsare largely productive goods, we are not unduly concerned.

24.5%

47.1%

28.4%

Primary Sector Secondary Sector Tersier Sector

-12

-8

-4

0

4

8

12

Dec

-81

Dec

-82

Dec

-83

Dec

-84

Dec

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-86

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-87

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-88

Dec

-89

Dec

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Dec

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-95

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-96

Dec

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Dec

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-00

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-9

-6

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0

3

6

9US$ Bn %GDP

9

9 January 2013

Exhibit 11. Low exports contribution shielded the domestic economy from the globalslowdown

Source: BPS, Bloomberg and CEIC

Exhibit 12. Countries with high exports to GDP ratios are likely to be significantlyaffected by the global slowdown

Malaysia Phillippines Singapore Thailand Korea Taiwan Hong Kong

2000 119.8 51.4 192.3 66.8 35.7 52.9 143.32001 110.4 46.0 187.8 65.9 33.5 50.0 138.72002 108.3 46.7 188.8 64.2 31.7 52.2 149.52003 106.9 47.2 207.4 65.7 33.1 55.5 171.02004 115.4 48.6 219.3 70.7 36.7 61.4 190.22005 117.5 46.1 229.7 73.6 36.6 62.5 198.72006 116.5 46.6 233.4 73.6 38.3 68.0 205.52007 110.0 43.3 217.7 73.4 40.4 72.1 208.02008 103.2 36.9 241.4 76.4 54.2 73.0 212.42009 96.4 32.2 224.8 68.4 46.0 62.5 195.02010 97.3 34.8 207.2 71.3 49.7 73.5 223.12011 94.2 29.0 209.0 77.6 54.1 75.8 229.6

Source: CEIC, DRI

Government spending could be a key factor in promoting domestic growth. Highergovernment spending - especially in infrastructure - will have a trickle-down effect on theeconomy. It will directly create demand for capital goods and services. Furthermore, andjust as importantly, it might create better efficiency in the economy since better infrastructurecould lead to lower transportation and handling costs. Better provision of electricity couldimprove the production process, enabling the use of new machinery in an uninterruptedproduction process. Nonetheless, growth in government spending is expected to remainstable at 6.0% in 2013 (since the government will continue to struggle to promoteaccelerated infrastructure development, we believe).

Export ratio to Indonesia PDB

26.3

24.624.2

29.8

29.4

31.0

34.132.2

30.5

32.7

39.041.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

10

9 January 2013

72

80

88

96

104

112

120

128

136

Jan

-90

Mar

-91

May

-92

Jul-

93

Sep

-94

Nov

-95

Jan

-97

Mar

-98

May

-99

Jul-

00

Sep

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80

86

91

97

102

108

113

119

124

130

LEI (LHS) CEI (RHS)

Recession

Expansion phase

Expansion

phase

Expansion phase

Expansion phase

Exhibit 13. The Indonesian economy is still in its expansionary stage

Source: DRI

The State budgetThe House of Representatives has approved the state budget. Some select underlyingassumptions of the state budget are:

1. GDP growth of 6.8%

2. Interest rate SPN of 5.0%

3. Rupiah/USD exchange rate of Rp9,300/USD

4. ICP Oil price at US$100 per barrel

5. Oil lifting volume of 900k barrels per day

6. Gas lifting volume of 1.360 Mboepd

The government intends to maintain its fiscal stimulus. Total government revenues areexpected to grow to Rp1,529.7tn (+12.6% yoy) while expenditure is targeted to reachRp16,83.0tn (+8.7% yoy). With higher revenues growth, the budget deficit is expected todecline to 1.7% of GDP or Rp153.3tn from 2012’s budget target of 2.2% of GDP. Thegovernment also seeks to improve the tax ratio from 11.9% in 2012 to 12.9% in 2013. Thegovernment is keen to improve this ratio as it is still low on a regional comparison withcountries such as Thailand and Malaysia having a tax to GDP ratio close to 15%. In short,the state budget remains prudently managed but with no significant change in the growthstimulus.

Despite the state budget’s seeming lack of stimulus, an improvement in the actualizationof spending could be crucial. In previous years, the government spending ratio has onlyreached around 80-90% of the total budgeted amount although tax collection revenueshave tended to be met. As such, the budged deficit has never reached the intended level.As a consequence, the government has almost Rp215tn sitting in its account in the centralbank. Even in 2012, the government was not able to meet its spending target, with a shortfallof again around 90%.

11

9 January 2013

Exhibit 14. Summary of state budget 2013

2012 2013APBN-P RAPBN Diff. against APBNP 2012

Rp bn Rp bn Rp bn %

A. State Revenue and Grant 1,358,205.0 1,529,673.1 171,468.1 12.6 I. Domestic revenue 1,357,380.0 1,525,189.5 167,809.5 12.4

Tax Revenue 1,016,237.3 1,192,994.1 176,756.8 17.4Non Tax Revenue 341,142.6 332,195.4 (8,947.2) (2.6)

II. Grants 825.1 4,483.6 3,658.5 443.4B. State Expenditures 1,548,310.4 1,683,011.1 134,700.7 8.7 I. Central Government Expenditures 1,069,534.4 1,154,380.9 84,846.5 7.9

Ministries/Agencies Expenditure 547,925.6 594,597.6 46,672.0 8.5 Non Ministries/Agencies Expenditure 521,608.9 559,783.3 38,174.4 7.3 Additional budget - 12,745.4 12,745.4 Adjustment for Education - 3,938.1 3,938.1 Non Education - 8,807.3 8,807.3

II. Transfer to region 478,775.9 528,630.3 49,854.4 10.4 Balance Fund 408,352.1 444,798.8 36,446.7 8.9 Special Autonomy & Adjusmnet fund 70,423.9 83,831.5 13,407.6 19.0Total Budget for Education 310,847.9 336,849.0 26,001.1 8.4% to State Budget 20.1 20.0 (0.1) (0.5)

C. Primary Balance (72,319.9) (40,094.2) 32,225.7 (44.6)D. Overall Balance (A-B) (190,105.3) (153,338.0) 36,767.3 (19.3)

% terhadap PDB (2.2) (1.7) 0.6E. Financing (I + II) 190,105.3 153,338.0 (36,767.3) (19.3)

Domestic Financing 194,531.0 172,792.1 (21,738.9) (11.2)Foreign Financing (4,425.7) (19,454.1) (15,028.4) 339.6

Source: Ministry of Finance

The unspent budget is undesirable since the money could be used to improve the country’sinfrastructure, raising Indonesia’s competiveness. Poor infrastructure means congestion onroads and at ports and airports, meaning higher handling and transportation costs for bothgoods and people. Inadequate electricity supply is also an obstacle to investment. Note thatstate electricity firm PLN is still struggling to meet the target of 10,000MW in phase one andtwo. As a result of poor infrastructure, the cost of doing business in Indonesia increases.This is reflected in the rising incremental capital output ratio (ICOR). In the period 1993-96,the ICOR was around 3.8. It then rose to 4.1 in 2003 and then to 5.1 in 1H12. This means thatto create 1% of economic growth, Indonesia will need to invest 5.2% of GDP (a lower figureis better or more efficient).

Exhibit 15. Rising ICOR is evidence of greater inefficiency in capital utilization

Source: DRI

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

15

20

25

30

35

40

ICOR Investment contribution to PDB

12

9 January 2013

The unspent budget also weakens the financial balance. Raising tax revenues but notinjecting the money back into the economy is simply tightening policy by accident. Thisunintentionally puts the brakes on economic growth. As such, we believe the governmentshould make greater efforts toward addressing this issue.

The homework: energy subsidiesTotal subsidies budgeted in the state budget amount to Rp317.2tn in 2013, or an increaseof 29.4% from 2012. Of that amount, energy subsidies constitute 87%, consisting ofRp193.8tn (+41.1%) for fuel subsidies and Rp80.9tn (+24.6%) for electricity subsidies. Thehigher fuel subsidies are attributable to higher consumption volume of 46mn kiloliters in2013 from 40mn kiloliters in 2012. Pertamina (the state-owned oil company) predicts thatfuel consumption for 2012 could reach 45.3mn kiloliters. If this number is reached, theassumption of 46mn kiloliters for 2013 might well be understated. This would mean higher-than-expected fuel subsidies. Other key variables affecting the amount of fuel subsidieswill be the oil price and the rupiah exchange rate. Lower-than-expected oil prices will meanlower fuel subsidies and vice versa, while a stronger rupiah will also mean lower fuelsubsidies and vice versa.

Exhibit 16. Fuel subsidies and its main assumptions

2012 2013Revised state budget State budget Diff to state budget

Nominal %

Subsidies (Rp bn) 137,380 193,805 56,425 41.1 - Subsidized fuel and biofuel (Rp bn) 91,891 146,462 54,571 59.4

- Subsidized fuel (Premium) and biofuel 51,698 87,195 35,497 68.7- Kerosene 7,883 8,035 153 1.9- Diesel oil and biofuel 32,310 51,232 18,921 58.6

- Subsidized LPG 3Kg tube (Rp bn) 29,126 26,452 (2,674) (9.2)

ParameterICP (US$/barrel) 105 100Exchange rate (Rp/US$) 9,000 9,300Fuel and biofuel volume (‘000 Kl) 40,000 46,000Fuel selling price- Subsidized fuel (Premium) 4,500 4,500- Kerosene 2,500 2,500- Diesel oil and biofuel 4,500 4,500

Source: DRI

Can fuel subsidies be reduced?On one side, there is the view that fuel subsidies should be reduced to improve thesustainability of the state budget and to improve the effectiveness of spending. There isalso the argument that fuel subsidies are largely enjoyed by those who don’t need them– i.e. the fuel subsidies are unfairly targeted toward private vehicle owners. However, itshould be remembered that public transportation in many of Indonesia’s major cities is poorand not a desirable option. So, rather than increasing fuel prices, the government isexploring the possibility of limiting fuel subsidies. For instance, it may seek to prohibit theuse of subsidized fuel for private vehicles in greater Jakarta or even Java. Yet such a policywould be a nightmare to enforce and the government would need to build the necessaryinfrastructure to monitor and minimize the misuse of subsidized fuel.

13

9 January 2013

Reducing fuel subsidies will increase the flexibility of the budget, making it less dependenton the oil price. The money could be reallocated for infrastructure development. Reallocationof the budget is not the problem. What is the problem, however, is the government’s inabilityto spend its budget on infrastructure. In this situation, who is the better spender? Thegeneral public enjoying subsidies and spending their money on consumption goods or thegovernment spending the money on infrastructure? Unless the government is able toimprove infrastructure development, it is wise for the government to keep the fuel subsidypolicy unchanged.

A reduction in fuel subsidies would also cause higher inflation which, in turn, would reducethe people’s purchasing power. DRI expects additional inflation of 0.7% for every 10%increase in subsidized fuel prices. Currently, subsidized petrol costs only around 50 centsper liter in Indonesia, probably only half the economic cost. This, however, encourages fuelsmuggling to destinations out of Indonesia, putting an additional burden on the statebudget.

Electricity tariff hikesElectricity subsidies increased by 24.6% to Rp80.9tn in 2013, underpinned by 9% higherelectricity demand, a weaker exchange rate and tariff hikes of 15%. The House ofRepresentatives has agreed to increase electricity tariffs by an average of 15% in 2013.Nonetheless, the increase will not be across the board as tariffs for small households willremain unchanged. Moreover, the electricity tariff hikes will take place every three monthsto spread the burden across 2013. PLN is targeted to increase the electrification ratio andimprove the energy mix towards coal and gas while, at the same time, reducing the usageof expensive high speed diesel.

Exhibit 17. Electricit tariff in several countries

Source: Kompas Newspaper

Last year, PLN raised tariffs by 10% on average. In 2013, the modest electricity tariff increasesshould only have a very small impact on inflation. Electricity tariffs in Indonesia are stillconsidered low, offering competitiveness from affordable energy costs. However, accordingto the Ministry of Energy, the economical cost of power generation is now around Rp1,261/kWh (US$0.13). Based on 2011 data, from the total electricity generation, around 41% wasgenerated using coal, 32% using fossil fuels such as high speed diesel, IDO and MFO, whilegas contributed 24% and the remainder came from geothermal generation. If PLN couldreduce its usage of fossil fuels and switch to gas, coal and geothermal generation, power

0.16

0.14

0.14

0.12

0.08

0.08

0.07

0.07

0.06

0.06

0.06

0.05

0.02

Japan

Netherland

England

Singapore

India

Thailand

New Zealand

US

Australia

Indonesia

South Korea

Russia

South Africa US$/kWh

14

9 January 2013

Coal41%

Gas24%

Geothermal3%

Fuel32%

generation costs could fall significantly. Improving the power generation mix should leadto higher efficiency. Transmission and interconnectivity also pose obstacles in increasingthe electrification ratio, which currently stands at 74%. At the moment only Java-Bali andSumatra have interconnections.

Exhibit 18. Coal is the main source for electricity generation, although expensive fossilfuels still contribute significantly

Source: PLN

15

9 January 2013

In 2012, developments on both the global and domestic economic fronts significantlyaffected sentiment in the capital market. Nonetheless, strong domestic demand gave a largeboost to companies operating in certain sectors (especially the consumer, property,infrastructure, and banking sectors). In contrast, commodity-related stocks performedlethargically as weak global demand tempered commodity prices. Hence, Indonesia’srelatively low export contribution to GDP turned out to be a blessing in disguise, shieldingthe economy from the global slowdown.

Continuing to performThe JCI was ranked eighth in the region in 2012, down from third-place in the previous year.Strong recoveries were seen in the Philippines, Thailand and India, leading these marketsto outperform. However, in 2011 these markets had been hit hard by the global slowdown.All in all, the JCI was a more consistent performer, climbing 3.2% in 2011 and advancing afurther 12.9% in 2012, supported by better corporate performance. For 2013, we believe thatthe JCI can retain its growth momentum, underpinned by positive macro economic factorssuch as benign inflation and strong domestic demand. In relative valuation terms, however,the JCI is already trading at a premium to the average for the global market. And we considerfurther out-performance difficult to achieve. Hence, in order for the JCI to post further gains,other markets will need to recover and this may depend largely on global economic recovery.

Exhibit 19 Indonesia has performed moderately but consistently

Source: IDX

The Capital market

3.25.45.8

7.38.99.49.8

12.913.4

19.722.922.9

25.833.0

35.8

0 5 10 15 20 25 30 35 40

ChinaRusia

London Stock ExchageDow Jones

TaiwanKorea

MalaysiaIndonesia

S&PSingaporeHongkong

JepangIndia

PhilippineThailand

%

Sector performanceSupported by strong domestic demand, the outperforming sectors were the property,manufacturing, infrastructure, trade and distribution, and consumer sectors. Robust domesticdemand has unleashed a positive chain reaction on the economy, boosting activities in theindividual sectors. We have witnessed record high monthly production numbers formotorcycles, cement and in the automotive sector. Low interest rates and easy availabilityof financing have encouraged consumers to purchase more durable goods, includingelectronic equipment, cars, and motorcycles. And house purchases have been stimulated bybanks’ willingness to make mortgage loans. Against this backdrop, significant capacityexpansion has taken place in the cement and automotive industries. Investment numbershave been very strong indicating expansion in production capacity. Furthermore, demandfor industrial estates has surged as companies seek out new locations for new factories andwarehouses. The price of industrial estates has jumped from an average of only US$40 persqm to above US$150 per sqm in strategic locations such as Bekasi (west of Jakarta).

16

9 January 2013

Indonesia’s middle-income class of 55mn people are the new engine of growth. Demandfrom the middle-income class will go beyond staple foods and clothing. Demand will moveinto higher value-added goods such as processed foods, education, home appliances,recreation and services. As demand swings into higher value-added goods, the economywill grow further and more investment will be needed. As such, it is vital that the momentumgrowth is maintained through sufficient investment in capacity. To provide goods andservices in a timely manner, the economy will need adequate supporting infrastructure,much of which will need to come from higher government spending in infrastructure.Based on the 2013 budget, the government has earmarked Rp201.3tn for infrastructureinvestment, targeting the construction of 15 new airports, 383km of new railways, and19,370km of new inter-province highways.

The underperforming sectors in 2012 were commodity-related such as coal and agriculture.These sectors will likely remain stagnant as long as global recovery fails to materialize. Akey factor is undoubtedly cost management since only the lowest cost producers willsurvive. Low commodity prices might affect supply as small miners and plantation ownersopt to halt loss-making operations, providing a cushion against further price declines. Allin all, we feel that both sectors have bottomed - although recovery remains in question.

Exhibit 20. Domestic-oriented sectors outperformed the market

Source: IDX

Sufficient liquidity but not greatTrading liquidity was relatively stable with daily turnover of Rp4.8 tn in 2012, or similar tolast year’s figure. Monthly trading value trended up at the beginning of the year due togrowing confidence in the outlook for the domestic economy. However, investor appetitethen diminished due to the negative sentiment created by the European financial crisiscoupled with mounting fears that subsidized fuel prices would be hiked. Confidence wasbuoyed up, however, by the announcement of positive corporate results. In the bankingsector, fears of NM compression were overdone. Other sectors such as the consumer andretail sectors continued to shine despite the government procrastination on fuel subsidies.Higher monthly trading value was seen after the announcement of the 1H12 results. In 2013,the bourse expects daily turnover to increase to Rp5.5tn

Domestic market participants remained dominant in the market (they accounted for two-thirds of the trading value). Most domestic investors are institutions as retail investors arestill few in number. Based on KSEI (the custodian agency) data, the total number of accountsreached around 350,000 as of October 2012. This is still a very low number considering that

-26.4

-3.9

11.9

12.9

15.7

19.0

27.3

29.0

29.7

42.4

-30 -20 -10 0 10 20 30 4 0 50

Mining

Agriculture

Finance

JCI Index

Manufacture

Consumer

Trade & Service

Basic Industry

Infrastructure

Construction and Property

%

17

9 January 2013

there are 55mn people categorized as middle-class in Indonesia. Retail investors generallyinvest through mutual funds - both in equity and bonds. This has led to strong participationfrom institutional investors. There are three main types of domestic institutional investors,namely: 1) mutual funds, 2) insurance (this includes Jamsostek) and 3) pension funds.

Mutual funds comprise assets from both retail and institutional money. Some smallinstitutions get fund managers to manage their assets simply because of economies of scale.For the insurance industry, we suspect that participation has increased significantly due tostrong growth in unit-linked products. Moreover, Bapepam-LK requires that insurancemoney raised in Indonesia is also invested in the Indonesian capital markets. As a result ofthe strong economic growth, Jamsostek (employment insurance) has more funds to investas average salaries have increased and the formal employment base has widened. In total,Jamsostek has around Rp130tn of assets under management with around 20% investeddirectly in equities. The large corporate pension funds that invest directly in the capitalmarket are usually the state-owned company pension funds such as Telkom, Pertamina,plantation companies and others. Nonetheless, the weighting of equities remains relativelylow at around 10-15%. Most of the assets are invested in fixed income instruments such asgovernment bonds and time deposits. Declining interest rates, however, might bring abouta higher allocation in equities in a bid to meet return targets.

Exhibit 21. Daily transactions turnover was down by 8.6% yoy to Rp4.5tn per day

Source: IDX

Exhibit 22. Net foreign inflows reached Rp15.7tn in 2012

Source: IDX

0.0

2.0

4.0

6.0

8.0

10.0

Jan

-11

Feb

-11

Mar

-11

Ap

r-11

May

-11

Jun

-11

Jul-

11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-12

May

-12

Jun

-12

Jul-

12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

3,300

3,500

3,700

3,900

4,100

4,300

4,500

Average Daily transaction (LHS) JCI Index (RHS)

Rp trn

(4,0

09)

2,1

23

(2,2

66)

17,5

15

646 4

,11

5

5,1

86

(8,4

49)

1,64

4

2,1

30

2,5

65

2,9

91

2,4

55

(1,5

03)

9,0

69

1,4

65

(7,8

25)

(1,9

73)

4,5

87

413

9,35

6

2,6

55

(3,0

74)

123

-20,000-16,000-12,000

-8,000-4,000

04,0008,000

12,00016,00020,000

Jan

-11

Feb

-11

Mar

-11

Ap

r-11

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-11

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-12

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-12

Dec

-12

Rp bn

18

9 January 2013

0% 50% 100% 150% 200% 250%

Singapore

Malaysia

United Kingdom

United States

Thailand

Philippines

India

Indonesia

China

Performance of the newcomersIn 2012 there were about 22 IPOs and 23 rights issues raising total funds of Rp28.9tn orrepresenting less than 1% of total market capitalization. The funds raised through IPOsreached Rp10.1tn, with the amounts raised varying from between Rp100bn up to Rp2.1tn.The relatively large IPOs were only MNC Skyvision with an IPO size of Rp2.1tn, BPD Jatim ofRp1.3tn and Waskita of Rp1.2tn. Despite the new IPOs, many large companies have yet toenter the capital market. Currently, Indonesia’s market cap to GDP ratio is around 50% (inUS$ terms), still low on a regional comparison. This shows that the depth of the Indonesiancapital market remains shallow. In other words, the capital market does not adequatelyrepresent the economy as a whole. Still missing are a number of state-owned companiessuch as the plantation companies which account for about 20-25% of the total CPOproduction, Pertamina (the state-owned oil company), PLN (the state-owned electricitycompany), Pelindo (port company), and Angkasa Pura (airport services). Furthermore, anumber of large private groups in consumer products (such as the Wings group, the Djarumgroup and the Sosro group) have not been tempted to list their shares on the capital market.High returns from retained earnings coupled with bank loans appear to have been sufficientfor these companies to fulfill their capital expenditures. With ROEs still around 20-30%, thereis less reason to get listed.

Exhibit 23. Indonesia’s market capitalization to GDP remains low; more new names areneeded to create market depth

Source: Bloomberg

Share price performanceOf the twenty two newly listed companies since the beginning of the year, only two showednegative share price returns in 2012. The other companies recorded share price gains upto a remarkable 420%. This shows that listings on the stock exchange are beneficial forfounding shareholders, unlocking the value of their respective companies. By listing theirshares, companies are forced to improve corporate governance and implement morestringent financial discipline. Overall, the excellent share price performance of the newly-listed companies despite the global turmoil should encourage more companies to list theirshares.

19

9 January 2013

Rights issuesThe capital market remains an attractive place for listed companies to raise additionalcapital. Some 23 companies conducted rights issues in 2012, raising proceeds of Rp18.8tnin total. Companies to conduct rights issues in 2012 included banks (such as Bank BTN, BankPermata, and Bank OCBC-NISP) and two resource energy companies (Sugih Energy andExploitasi Energy Indonesia). Banks were forced to raise more capital due to restrictiveregulations from the Central Bank adopting Basel standards.

Exhibit 24. IPO in 2012

Listing date No of Share IPO Price Last price Return Fund Raisedmn Rp/share Rp/share Ytd, % Rp bn

1 PADI Minna Padi Investama 9-Jan-12 300 395 1050 166 118.52 TELE Tiphone Mobile Indonesia 12-Jan-12 1,350 310 530 71 418.53 ESSA Surya Esa Perkasa 1-Feb-12 250 610 3100 408 152.54 BEST Bekasi Fajar Industrial Estate 10-Apr-12 1,765 170 680 300 300.15 RANC Supra Boga Lestari 7-Jun-12 313 500 780 56 156.56 TRIS Trisula International 28-Jun-12 300 300 340 13 90.07 KOBX Kobexindo Tractors 5-Jul-12 273 400 590 48 109.08 TOBA Toba Bara Sejahtra 6-Jul-12 211 1900 1300 -32 400.39 MSKY MNC Sky Vision 9-Jul-12 1,413 1520 2475 63 2,147.510 ALTO Tri Banyan Tirta 10-Jul-12 300 210 305 45 63.011 GLOB Global Teleshop 10-Jul-12 111 1150 1150 0 127.812 GAMA Gading Development 11-Jul-12 4,000 105 350 233 420.013 BJTM Bank Pembangunan Daerah Jawa Timur 12-Jul-12 2,984 430 370 -14 1,282.914 IBST Inti Bangun Sejahtera 31-Aug-12 154 1000 5200 420 154.215 NIRO Nirvana Development 13-Sep-12 6,000 105 245 133 630.016 PALM Provident Agro 8-Oct-12 659 450 460 2 296.617 NELY Pelayaran Nelly Dwi Putri 11-Oct-12 350 168 197 17 58.818 TAXI Express Transindo Utama 2-Nov-12 1,051 560 860 54 588.719 BSSR Baramulti Suksessarana 8-Nov-12 262 1950 1950 0 509.920 ASSA Adi Sarana Armada 12-Nov-12 1,360 390 430 10 530.421 WIMM Wismilak Inti Makmur 18-Dec-12 630 650 750 15 409.522 WSKT Waskita Karya 19-Dec-12 3,082 380 440 16 1,171.3

Total 10,135.9

Source: Bloomberg as of Dec 26, 12

Exhibit 25. Rights Issue in 2012

Listing date No of Share Excercise Fund Raisedmn price, Rp Rp bn

1 FREN Smartfren Telecom 22-Feb-12 3,959 100 3962 KIAS Keramika Indonesia Asosiasi 1-Mar-12 6,504 128 8333 RAJA Rukun Raharja 14-May-12 340 677 2304 SUGI Sugih Energy 21-May-12 24,273 100 2,4275 NISP Bank OCBC NISP 5-Jun-12 1,507 1000 1,5076 BSIM Bank Sinarmas 29-Jun-12 1,150 250 2887 TRIO Trikomsel Oke 2-Jul-12 312 856 2678 TRIO Trikomsel Oke 2-Jul-12 943 856 8089 SMMT Golden Eagle Energy 2-Jul-12 820 500 41010 ITTG Leo Investments 11-Jul-12 985 104 10211 MCOR Bank Windu Kentjana International 12-Jul-12 526 200 10512 SUPR Solusi Tunas Pratama 28-Aug-12 135 4800 64813 BEKS Bank Pundi Indonesia 13-Sep-12 2,500 120 30014 MDRN Modern Internasional 2-Nov-12 960 550 52815 BBTN Bank Tabungan Negara (Persero) 23-Nov-12 1,513 1235 1,86816 COWL Cowell Development 30-Nov-12 4,116 220 90617 BNLI Bank Permata 6-Dec-12 1,643 1215 1,99618 BIPP Bhuwanatala Indah Permai 14-Dec-12 1,130 151 17119 HOME Hotel Mandarine Regency 17-Dec-12 1,031 100 10320 CNKO Exploitasi Energi Indonesia 20-Dec-12 4,710 500 2,35521 INPC Bank Artha Graha Internasional 21-Dec-12 4,513 111 50122 MYOH Samindo Resources 26-Dec-12 735 830 61023 SRAJ Sejahteraraya Anugrahjaya 27-Dec-12 5,535 260 1,439

Total 18,797

Source: Bloomberg as of Dec 26, 12

20

9 January 2013

State-owned companies potentialThere are currently 140 state-owned companies under the Ministry of State-ownedenterprises, of which 18 are already listed on the IDX. The total assets of the state-ownedcompanies reached Rp3,375tn in 2011 of which Rp1,934tn worth of the assets are alreadylisted. This leaves unlisted assets of Rp1,441tn. To put this number into context, the totalassets of all listed companies reached Rp4,271tn. Therefore, the unlisted SOE assets are about34% of the total assets of listed companies.

The Ministry of SOE is still keen to list SOEs in order to achieve: 1) better performance, 2) morestringent financial discipline 3) stricter corporate governance and 4) access to the capitalmarket to raise funds. At the same time, however, the government wants to keep controland hold absolute majority stakes in SOEs. As a result, companies are constrained unless thegovernment is willing to add more capital. Lately we have seen SOEs conduct rights issuesfollowed by placements where the government’s stake is diluted as the rights are sold toinvestors. This scheme will stop, however, as soon as the government’s stake is diluted to50.1%.

Determining the potential market capitalization of the non-listed SOEs might provide anindication of the potential depth of the market. The total equity of non-listed SOE is aboutRp657tn. The PBV of the JCI is around 2.83x in FY12. Using this multiple, the valuation of theremaining non-listed SOEs could reach Rp1,860tn or around 45% of the total current marketcapitalization. This shows that the capital market currently lacks depth. What is needed aremore listings of both SOE and private companies.

21

9 January 2013

Exhibit 26. Financial Summary of state owned companies

2010 2011 2012EASSETPertamina 267 312 349PLN 370 415 472

SOE Listed - Banks 1,023 1,410 1,621SOE Listed - Non Bank 231 272 313Total SOE Listed 1,253 1,682 1,934

Others SOE 452 536 620Total 2,341 2,945 3,375

EQUITYPertamina 104 119 135PLN 150 155 184

SOE Listed - Banks 99 158 181SOE Listed - Non Bank 104 147 169Total SOE Listed 203 305 351

Others SOE 114 110 169Total 570 689 839

SALESPertamina 438 590 527PLN 103 208 214

SOE Listed - Banks 74 119 146SOE Listed - Non Bank 133 213 244Total SOE Listed 206 332 390

Others SOE 217 248 301Total 964 1,378 1,432

NET PROFITPertamina 17 21 24PLN 10 7 12

SOE Listed - Banks 17 34 40SOE Listed - Non Bank 25 31 41Total SOE Listed 41 65 81

Others SOE 20 22 27Total 88 116 144

IDXAsset 5,048 5,527 6,077Equity 1,352 1,533 1,679Sales 1,503 1,760 1,993Net Profit 202 241 271

PBV 3.18 2.77 2.33

Equity SOE - Non Listed 657Market cap at 2.83x Rp tn 1,860

Source: Ministry of State Owned Enterprises

22

9 January 2013

Things to watch out forThere have been signs that the government is showing more nationalistic tendencies, asreflected in the delayed Danamon merger with DBS, export restrictions on raw metals,renegotiations on the export gas price, and the negative investment list. A closer look atthe facts, however, reveals a different picture.

More restrictive bankingThe central bank has learnt lessons from the banking crisis back in 1997/98. As such, it takesa prudent stance in regard to how the banking industry should be managed. Adoption ofBasel standards is a clear indication that the central bank wants the implementation of bestpractices in the banking industry. The recent move to increase the LTV for purchases ofmotorcycles, cars and homes was a preventive action intended to quell any speculativeactivities in such sectors. Nonetheless, a more restrictive industry will provide less room forearnings surprises as everything has its measure.

At the same time, the banking industry is also expected to become more capital intensive.We think that the central bank’s intention is to consolidate the banking industry. This isbecause there are too many small banks that might need to be consolidated. Increasing thecapital requirements will force smaller banks to consolidate by merging with each otheror joining up with the larger banks. We might see more complexity as the oversight is carriedout by Otoritas Jasa Keuangan (OJK/ Financial Service Authority). This new body will governand monitor financial services (banks, insurance, the capital market, and other non-bankfinancial services).

The protracted merger of Bank Danamon and DBS reflects the rapid acquisition of banksmade by foreign investors. Before the financial crisis of 1997/98, foreign banks had relativelylittle business in Indonesia - either on the consumer or corporate sides. The national banks- either state-owned or private - were basically the main players in the banking industry.The list below shows that almost every major private bank recapitalized by the governmenthas been sold to foreign investors. Even smaller healthy banks like NISP and Bank Ekonomihave been acquired by foreign names. This demonstrates that Indonesia is a very friendlyplace for foreign investors. By contrast, Indonesian banks have very little presence in theregion since they do not enjoy the freedom and flexibility to invest in the region’s financialsector. In short, the central bank is asking for reciprocal treatment before allowing furtherexpansion by foreign investors in the country.

Exhibit 27. Pre and Post crisis 1997/1998 ownership in medium sizes banks

Banks Previous Owner Current owner Note

Bank Danamon Usman Admadjaja TemasekBank Lippo Mochtar Riyadi Khazanah Merged to CIMB NiagaBank Niaga Julius TahijaBank Bali Jaya Ramli Standard Chartered & Jardine Changed to Bank PermataBCA Sudono Salim Farallon Linked to Djarum GroupBII Eka Tjipta Widjaja MaybankBDNI Samsul Nursalim ClosedNISP Partawidjaja OCBCBank Summa William Soeryadjaya ClosedBank Buana UOBBank Ekonomi Katuari family HSBC

Source: Danareksa Sekurias

23

9 January 2013

Capturing more value-addedUnder regulation No.7/2012 dated February 6, 2012 issued by the Minister of Energy andMineral Resources, mining companies which hold IUP Operation and Production licensesand/or Contracts of Work are prohibited from exporting unprocessed mineral ore. The newregulation standardizes the minimum content for each mineral which can be exported.

There have been some discussions concerning an export tax on coal. However, implementationof a new ruling would prove to be difficult since most of the major coal mining contractsare under the CCOW first generation which would offer protection from such changes.

It is clear that the government is keen to protect non-renewable resources - especially thosethat are being exported in unprocessed form. We believe that the government wants tocapture more value-added from non-renewable resources. This is why the governmentbanned exports of unprocessed minerals and why it seeks to increase export taxes on coalexports. In the long term, these policies should be beneficial for the economy since they willcreate more value-added, boosting employment opportunities and raising purchasingpower. However, the short-term consequences are less positive, creating negative sentimenttowards certain sectors and companies. This kind of policymaking generates uncertainty andvolatility in the mineral sector.

Minimum wagesToward the end of 2012, regional governments approved significant hikes in minimumregional wages. The highest adjustment was made by East Kalimantan, a resource-richprovince which approved a minimum wage increase of 49.7% and Jakarta, a services andmanufacturing city, which approved a minimum wage hike of 43.9%. Overall, minimum wageincreases varied from 6.5% in West Sulawesi to 49.7% in East Kalimantan. The average increasewas around 20.2%, a significant figure compared to previous years.

There is an ongoing debate as to whether the overall impact of higher minimum wages willbenefit or adversely impact the economy. As many factors are involved - demand elasticity,flexibility of the labor market (to hire/fire workers), monopsony power of the employer etc– this is not an easy matter. However, we can deduce the following:

1) Higher minimum wages will translate into higher purchasing power. So basic consumerand retail companies could be beneficiaries.

2) High capital intensive companies might have a higher portion of skilled labor. Therefore,they will be less impacted by the new minimum wage.

3) Companies that are engaged in contract manufacturing will be hit the most. Exportmanufacturers of shoes and garments have no bargaining power to pass on theincreasing costs by raising product prices. Higher product prices would lead to lowerorders or simply no orders and production may be moved to other countries in theregion.

4) Companies that manufacture high-end products might need to raise selling prices.Hence, higher purchasing power will be partly negated by higher prices.

5) Retailers that have limited pricing power may be forced to reduce operational hours aslabor is a significant component of operating costs.

6) Higher labor costs will reduce the internal rate of return on investment. Therefore, itmight slow down investment in general and create higher unemployment as theeconomy is not able to create more jobs.

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In short, consumer companies should benefit and capital intensive companies will be leastaffected. Other companies potentially face a neutral to slightly negative impact, whilecontract manufacturers will be negatively impacted.

Exhibit 28. Minimum regional wage in each province

FY12 FY 13 %

1 Aceh 1,400 1,550 10.72 Sumatera Utara 1,200 1,305 8.73 Sumatera Barat 1,150 1,350 17.44 Riau 1,238 1,400 13.15 Kepulauan Riau 1,015 1,365 34.56 Jambi 1,143 1,300 13.77 Sumatera Selatan 1,195 1,350 13.08 Kepulauan Bangka Belitung 1,110 1,265 14.09 Bengkulu 930 1,200 29.010 Lampung 975 1,150 17.911 Jawa Barat 1,492 2,100 40.812 Jakarta 1,529 2,200 43.913 Banten 1,529 2,203 44.114 Jawa Tengah 992 1,209 21.915 DI Yogyakarta 893 1,065 19.316 Jawa Timur 1,257 1,740 38.417 Bali 968 1,181 22.018 NTB 1,000 1,100 10.019 NTT 925 1,010 9.220 Kalimantan Barat 900 1,060 17.821 Kalimantan Selatan 1,225 1,338 9.222 Kalimantan Tengah 1,327 1,553 17.023 Kalimantan Timur 1,177 1,762 49.724 Maluku 975 1,275 30.825 Maluku Utara 96026 Gorontalo 838 1,175 40.227 Sulawesi Utara 1,250 1,550 24.028 Sulawesi Tenggara 1,032 1,125 9.029 Sulawesi Tengah 885 995 12.430 Sulawesi Selatan 1,200 1,440 20.031 Sulawesi Barat 1,127 1,200 6.532 Papua 1,585 1,710 7.933 Papua Barat 1,450 1,720 18.6

Average 21.4

Source: Various News Research

Election year: always something good!We are one year away from the elections in 2014. As of the present time, there is no clearfavorite, unlike in 2009 when SBY was hotly tipped to win a second term in office. Since SBYhas already been elected twice, his party, Partai Demokrat, will need to nominate a newcandidate for the presidency. We think that swing voters will be the deciding factor in thiselection. Loyalty towards political parties remains low. This was proven in the regionalelection for the Jakarta Governor. Although the incumbent had support from the majorparties, the candidate supported by PDI-P and Gerinda (the opposition) won the election.This owed simply to the charisma and popular appeal of Jokowi and his partner Basuki(Ahok).

Against this backdrop, the government is likely to favor populist policies. Hence, subsidizedfuel price hikes are unlikely. All in all, the incumbent government will need to make pro-people policies, although this may not be easy as the current coalition is still quite shaky.Nonetheless, good things tend to happen in election years. For instance, back in 2004, theJCI soared 44.6%, supported by relatively benign inflation of 6.4% and record high GDP (post2000) of 7.2%. In 2009, the index surged 87.0%, underpinned by record low inflation of 2.78%and moderate GDP growth of 5.6%.

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Exhibit 29. Election time in numbers, always something good

Snapshot stats 2004 2009

JCI increase, % 44.6 87.0Inflation, % 6.4 2.78GDP growth, %’ 7.2 5.6

Source: Bloomberg

Target Index of 5,040To reach our target index we apply three valuation methods: 1) bottom up approach,plugging in all our target prices of individual stocks to reach our target index, 2) PER multiplebased on EPS market 3) % market capitalization of GDP - a more macro approach since thestock market should also reflect economic growth. Using the simple average of these threeapproaches, we arrive at our target index of 5,040 for 2013, translating into PER FY13 of 15.9x,offering upside potential of 16.3%.

Exhibit 30. Summary of target index

Bottom up Target PER % of GDP Simple 16x 46% average

Target Index 5,021 5,056 5,043 5,040

Source: Danareksa estimates, DRI, Bloomberg and BPS

A focus on domestic-oriented sectorsBased on our top-down approach, we see consistent performance from domestic-basedactivities. This simply means that the consumer, manufacturing, property, and trade andservices sectors should outperform. Stronger growth is, however, contingent on betterinfrastructure and the provision of financial services. Unless significant investment is madein infrastructure, growth may be curtailed. Concerns remain on the ability of thegovernment to increase infrastructure development and, more specifically, on the thornyissue of land acquisition. These two issues remain as homework for the government andit is difficult to see any significant acceleration in infrastructure development in the nearfuture.

Exhibit 31. % market cap to GDP nominal

GDP Nominal % Mkt Cap of GDP Index

2002 1,863.27 11.7 4252003 2,045.85 20.3 6922004 2,295.83 29.5 1,0002005 2,774.28 26.9 1,1632006 3,339.22 34.4 1,8062007 3,950.89 48.5 2,7462008 4,948.69 20.7 1,3552009 5,603.87 34.7 2,5342010 6,422.92 48.5 3,7032011 7,427.10 44.8 3,8082012 8,488.00 45.2 4,3172013 9,740.00 46.0 5,043

Source: DRI, BPS and Bloomberg

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Exhibit 32. Historical PER 2003-2012

2003-2012 PeriodPERAvrage 15.0High 23.7Low 7.6Median 15.3

Source: Bloomberg

Top PicksIn our universe of stocks, our top picks are BBRI, BMRI, GIAA, ICBP, JSMR, KLBF, MAPI, and SMGR.Among the smaller market cap stocks we like BSDE, ASRI, GJTL, HEXA, and WINS. The outlookfor commodity stocks hinges on global economic recovery. Our picks are plantations firmsBWPT and LSIP.

Exhibit 33. Rolling PER of the JCI

Source: Danareksa estimates

Exhibit 34. Top picks

Share Mkt cap PER EV/EBITDA TP Potentialprice Rp bn FY13F FY14F FY13F FY14F Rp/share upside

Rp x x x x %

GIAA 650 14,717 11.5 8.2 4.6 3.7 940 44.6ICBP 8,000 46,648 18.3 16.6 12.3 11.2 8,900 11.3JSMR 5,600 38,080 30.6 19.9 15.0 12.2 7,100 26.8KLBF 1,040 52,811 25.5 20.7 19.1 15.5 1,300 25.0SMGR 15,750 93,421 14.7 13.8 10.3 9.6 18,650 18.4

BSDE 1,160 20,297 15.5 12.7 13.8 11.5 1,580 36.2GJTL 2,225 7,754 8.0 7.2 5.0 4.5 3,075 38.2HEXA 8,750 7,350 10.1 8.8 7.2 6.2 10,000 14.3WINS 450 1,624 6.6 5.0 5.5 4.3 650 44.4ASRI 630 12,379 9.8 7.7 5.2 4.1 760 20.6MAPI 6,550 10,873 19.9 15.9 9.7 8.0 7,900 20.6

PER PBVBanks FY13F FY14F FY13F FY14FBMRI 8,250 190,575 10.6 9.4 2.3 2.0 9,900 20.0BBRI 7,350 179,505 10.2 9.4 2.3 1.9 8,600 17.0

Source: Danareksa Sekuritas and Bloomberg (as of January 4, 2013)

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21.38

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DISCLAIMERThe information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Danareksa Sekuritas and/or its affiliated companies and/ortheir respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy orcompleteness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remainingunchanged after the issue thereof.We expressly disclaim any responsibility or liability (express or implied) of P.T. Danareksa Sekuritas, its affiliated companies and their respective employees and agents whatsoeverand howsoever arising (including, without limitation for any claims, proceedings, action , suits, losses, expenses, damages or costs) which may be brought against or suffered byany person as a results of acting in reliance upon the whole or any part of the contents of this report and neither P.T. Danareksa Sekuritas, its affiliated companies or their respectiveemployees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracytherein or omission therefrom which might otherwise arise is hereby expresses disclaimed.The information contained in this report is not be taken as any recommendation made by P.T. Danareksa Sekuritas or any other person to enter into any agreement with regard toany investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. Inconsidering any investments you should make your own independent assessment and seek your own professional financial and legal advice.