1

Consumer Strategy
Shifting gears to Neutral
Economic cycle is unexciting

Neutral (Downgrade) Indonesia’s macro cycle is unexciting at this stage and based on our analysis of the
key components of the composite leading indicator (CLI), we see limited
Consumer Strategy probabilities of an imminent rebound. However, we also note that the CLI is an old
October 19, 2018 bear and we think we are closer to the end part of the bear cycle than the
beginning part of the cycle.
PT. Mirae Asset Sekuritas Indonesia Lowering expectations on pre-election year spending
Strategy We find little evidence of increased spending during pre-election years. However,
market participants seem to be excited about the vote buying practice and the
Taye Shim potential increase in subsidies ahead of the upcoming presidential election (April
+62-21-515-3281 2019). We believe consumers are unlikely to be encouraged by the one-off cash
taye.shim@miraeasset.com income, and also judge subsidies are allocated in good faith rather than covered up
Mimi Halimin in politics. We want to lower market expectations.
+62-21-515-1140 (ext.: 237)
mimi.halimin@miraeasset.co.id Consumption behavior is shifting
Christine Natasya We disagree with the notion that Indonesians are living day-by-day. Given the
+62-21-515-1140 (ext.: 233) continued improvement in the education level, we now believe Indonesians have
natasya@miraeasset.co.id better understanding of the economy and expect a shift towards prudent and
selective spending patterns. E-commerce penetration is gaining pace and we
Emma A. Fauni
+62-21-515-1140 (ext.: 141) expect to see gradual spillover of price decline in the offline retailer space. All in all,
emma.fauni@miraeasset.co.id consumers will be able to take advantage of the low-price environment.

We are turning Neutral on the consumer sector. We believe macro level
consumption remains firm and we expect to see stable trends going forward.
However, macro headwinds, lowering of expectations ahead of the presidential
election, inability of dinosaur consumer companies to quickly respond to the
changing consumer behavior are likely to keep revenue growth pressured. We
expect to see the sector trading within a boxed range given the lack of positive
catalysts. Under a challenging macro and business environments, we recommend
investors to stay selective. We prefer 1) pure defensive names, 2) industries/
companies with compelling turnaround story, and 3) the consumer staples sector
for its margin upside potential during the reflation cycle next year (2H19). Preferred
names are: GGRM (Buy), ICBP (Trading Buy), CPIN (Not Rated), HOKI (Buy), RALS
(Buy), and MAPI (Not Rated).
Where we are at the cycle

(pt) (pt)
Consumer index (L) OECD Leading Index, SA (R)
3,000 101
2,500
100
2,000
99
1,500
98
1,000
500 97
1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18
Source: OECD, Mirae Asset Sekuritas Indonesia Research
Analysts who prepared this report are registered as research analysts in Indonesia but not in any other jurisdiction, including the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
October 19, 2018 Consumer Strategy
C O N T E N T S
Executive summary 3
Balance of positives and negatives 3
Shifting Indonesia’s consumption behavior 3
Industry discussions 4
Valuations and recommendations 4
Key consumption drivers 6

It’s the economy that matters 6
Deeper dive into the composite leading indicator (CLI) 8
Does election have positive impact on consumption? 11
Impact of rising oil price on the economy 16
Smart spending 17
The impact of weaker rupiah on consumption 19
Industry view and discussions 22

Consumer (Neutral): Growing pain 22
Tobacco (Neutral): The expansion of SKM market share continues 23
Retailers (Overweight): Continued improvement 24
Poultry (Neutral): Better performance on margin recovery 25
Price, flows and valuations 26

Unprecedented price performance of consumers 26
Foreign fund flow analysis 27
Valuations: Trapped inside the box 28
Shifting gears to Neutral 30

We downgrade our consumer sector call to Neutral 30
Investment strategy: Stay selective 31
Key Recommendations 34
Ramayana Lestari Sentosa (RALS IJ) 36
Gudang Garam (GGRM IJ) 38
Mitra Adiperkasa (MAPI IJ) 40
Indofood CBP Sukses Makmur (ICBP IJ) 42
Charoen Pokphand Indonesia (CPIN IJ) 44
Buyung Poetra Sembada (HOKI IJ) 46
Mirae Asset Sekuritas Indonesia Research 2

Executive summary
Balance of positives and negatives
Economy is yet to turn the corner...
The consumer index embeds strong correlation with the composite leading
indicator (CLI) – which is currently positioned in the negative territory. However,
based on our assessment of the key components of the CLI, we are inclined to
believe that the economy is unexciting at this point and unlikely to exhibit an
imminent rebound from here.
…but at the same time, CLI seems like an old bear
The composite leading indicator is heading into its 12 consecutive month of decline.
Given the past 4 down cycles had an average duration of 10.5 months, we suspect
that the decline could be nearing its end. We see low probability of an immediate
trend reversal; however, we equally view current economic conditions worsening
further from here.
We are less excited about election spending…
Indonesia’s presidential election is just around the corner (April 2019) and market
participants seem to be excited about the nation’s consumption outlook. There are
two reasons behind the excitement – 1) vote buying practice and 2) increased
subsidies. However, we suspect that vote buying has limited impact on the mid-to-
long term spending intentions as they are considered unsustainable. Further,
increased subsidies are allocated in good faith, rather than covered up with politics,
in our view.
…but spending on essentials will keep macro-level growth stable
Despite the prolonged weakness to the local currency, we project consumption

growth to remain stable. We highlight the broken relationship between inflation
and FX rate, which we ascribe to the 1) increasing price control over agriculture
products by the government, 2) greater sacrifice from the SOE utility operators, and
3) higher import tariffs on consumption goods. We also underscore that 75% of
household spending is comprised of essential spending, hence, demand elasticity
remains low. All in all, we see limited chances of inflation pressures building for the
time being, which should strengthen our case for stable consumption growth,
going forward.
Shifting Indonesia’s consumption behavior
Consumers are now becoming smarter
We think Indonesian consumers are now smarter and we disagree with the notion
that Indonesians are living day-by-day. Given the continued improvement in the
education level, we now believe Indonesians have better understanding of the
economy and thus are able to plan out their long-term financial objectives. We
expect a shift in consumption towards prudent and selective spending patterns.

Widespread e-commerce penetration contribute to the smart spending

Fueled by the 1) rapid growth of smartphone penetration, 2) affordable cellular
data pricing, 3) wider payment options, 4) aggressive promotions and 5) attractive
pricing from online service providers, Indonesians are getting exposed to e-
commerce spending. We also believe the widespread e-commerce penetration is
pushing down the offline prices as the brick-and-mortar retailers attempt to
compete with online retailers. All in all, the e-commerce wind of change has
inevitably resulted in lower inflationary pressure for the economy. As long as the
fragmented e-commerce industry maintains its form, we believe consumers will be
able to take advantage of the low-price environment.
Industry discussions
Consumer (Neutral): Consumer players are experiencing slower growth driven by
1) slower recovery of consumers’ purchasing intention and 2) shifting consumers’
spending behavior (e.g., demand shift to non-FMCG products/ services such as
travelling, etc.). We are also witnessing higher competition within the consumption
space. We remain less excited about government’s increased budget on social
spending as it would place limited impact on the decision making of consumption.
We downgrade our recommendations on the consumer industry to Neutral.
Tobacco (Neutral): We expect sales volume growth of the cigarette industry to

remain unattractive in 2018F (-2% YoY). HMSP is expected to book -1.7% YoY growth
while GGRM is forecasted to deliver flat volume growth for 2018F. Based on our
observation, both companies under our coverage have sold more lower-priced
products in 1H18. We believe product preference shift toward lower ASP products is
likely to add pressure to HMSP and GGRM's margins. We downgrade our sector call
to Netural
Retailers (Overweight): Thanks to the lower-adjusted administered prices and

increased social spending from the government, most of the retailers under our
coverage have delivered stronger SSSGs. We expect low-balling inflation pressures
are likely to persist until the upcoming presidential election (2Q18), which should
preserve consumers’ appetite for discretionary spending. We see marginal impact
from increased import tax on large retailers with fat cash flow capacity. We see
continued earnings improvement for retailers.
Poultry (Neutral): We retain our Neutral call on the poultry sector as we see fair
balance of positives and negatives. We believe there may be pockets of further
improvement to chicken prices. However, risk factors including the prolonged
depreciation of the rupiah, rising interest rates, and slower-than-expected
purchasing intention recovery to act as stiff headwinds for the sector.
Valuations and recommendations

Despite the natural characteristics of the sector being defensive, price performance
of the consumer sector year-to-date has been disappointing (-14.0%). We ascribe
the weak price performance of the consumer sector to the continued selling
pressures by foreign investors. Year-to-date, most of the large cap consumer
staples names have saw sizeable foreign net selling driven by the unfavorable
macro and business environments, in our view. The Jakarta consumer index is
trading at 30.9x trailing P/E, representing 4.7%/9.4%/7.9% discount to 1-year/3-
year/5-year historical average. We expect to see the sector trading within a boxed
range given the lack of positive catalysts.
We are turning Neutral on the consumer sector. We believe macro level

consumption remains firm and we expect to see stable macro-level consumption
growth, going forward. However, we believe consumer companies are likely to
experience marginal volume growth as most of the consumption items are
comprised of essential spending (inelastic to the upside). We believe consumer
companies will have to innovate to move up the value chain and increase their
selling prices of their product offerings, in order to keep revenue growth on track.

Under a challenging macro and business environments, we recommend investors

to stay selective. We prefer 1) pure defensive names, 2) industries/companies with
compelling turnaround story, and 3) the consumer staples sector for its margin
upside potential during the reflation cycle next year (2H19). Our preferred
consumer companies are: GGRM (Buy/TP IDR89,000), ICBP (Trading Buy/ TP
IDR9,700), CPIN (Not Rated), and HOKI (Buy/TP IDR1,350), RALS (Buy/TP IDR1,610)
and MAPI (Not Rated).

Key consumption drivers
It’s the economy that matters
Consumer index vs. composite leading indicator
Among various macroeconomic indicators and/or market indicators, we find that

the consumer index embeds strong correlation with the composite leading
indicator. We believe the nature of Indonesia’s economy being predominantly
comprised of private consumption is the key factor behind the synchronized
movement. As a quick reference, Indonesia’s private consumption accounted for
54.3% of the nation’s economic output over the past 5 years (2013~ 2017).
Figure 1. Consumer index shows strong correlation with the composite leading indicator
(pt) (pt)
Consumer index (L) OECD Leading Index, SA (R)
3,000 101
2,500
100
2,000
99
1,500
98
1,000
500 97
1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18
Figure 2. Private consumption as a % of GDP
(IDRtr) (%)
Private consumption % of total GDP
5,600 100
5,400 90
80
5,200
70
5,000 60
4,800 54.3 54.3 50
54.2 54.3 54.3
4,600 40
30
4,400
20
4,200 10
4,000 0
2013 2014 2015 2016 2017
Source: BPS, Mirae Asset Sekuritas Indonesia Research
Where are we in the business cycle?
Over the past 7 consecutive months, Indonesia has been positioned in the lower
left quadrant in the business cycle exhibiting sluggish business growth trends.
What is notable to highlight is that the business cycle stepped into the upper left
quadrant (decreasing above average growth trend) on November 2017 and entered
the lower left quadrant (decreasing below average growth trend) in just 2 months.
This is in contrast to the favorable growth cycle (increasing above average growth
trend) that was sustained 9 months from February 2017 through November 2017.

Figure 3. Trailing 24 months business cycle clock
From February 2017 through November 2017, there were encouraging

developments in Indonesia. First, the tax amnesty program proved to be successful
(September 2016~ March 2017), which paved the way for higher tax collection for
the nation. Second, on May 2017, Indonesia’s sovereign rating was raised to
investment grade by S&P. In between November 2017 and January 2018, US began
to investigate imports of solar panels and washing machines. This led to US
President Trump imposing safeguard tariffs on the two items on January 22, 2018,
which marked the beginning of the trade war. Since the start of the New Year, trade
war began to worsen with extra import tariffs of USD50bn worth of imports for
both US and China kicking in on June 2018 and another USD200bn extra tariffs
imposed on September 2018.
The trade dispute between US and China has sparked concerns over the global
growth trajectory and investors began to de-risk their investment portfolios.
Emerging markets that are largely reliant on foreign capital (including Indonesia)
have seen their local currencies depreciate as foreign investors make their exit.
Figure 4. Foreign ownership of Figure 5. Foreign net purchase of

Figure 6. USD/IDR trajectory
Indonesian government bonds Indonesia equities
(IDRtr) Foreign ownership of gov. (%) (USDmn) (USD/IDR) (USD)
bonds (L) 5,000 15,500 105
1,000 45 USD/IDR (L)
Foreign ownership (R) 3,765
4,000 3,598 Dollar index (R) 103
900
40 3,000 15,000 101
800
700 2,000 99
35
600 1,000 14,500 97
500 30 0 95
400 -1,000 14,000 93

25 91
300 -2,000
-1,735 -1,798
200 -3,000 -2,270 13,500 89
20
100 -4,000 87
-4,121
0 15 -5,000 13,000 85
1/10 1/12 1/14 1/16 1/18 2003 2006 2009 2012 2015 2018 12/16 6/17 12/17 6/18
Source: Bloomberg, Mirae Asset Sekuritas Indonesia Source: Bloomberg, Mirae Asset Sekuritas Indonesia Source: Bloomberg, Mirae Asset Sekuritas Indonesia
Research Research Research

Deeper dive into the composite leading indicator (CLI)
The components in the CLI

According to OECD, “the CLI is designed to provide early signals of turning points in
business cycles showing fluctuation of the economic activity around its long term
potential level. CLIs show short-term economic movements in qualitative rather
than quantitative terms.” There are seven components that form the composite
leading indicator of Indonesia.
Table 1. CLI component series

Component series Source
Share prices: IDX composite index (2010=100) Jakarta Stock Exchange
Central Bank Discount rate (% p.a.) inverted Central Bank of Indonesia
IDR/USD exchange rate end period (%) inverted International Monetary Fund
Wholesale Price Index (2010=100) inverted Central Bank of Indonesia
Consumer - Confidence indicator (normal = 100) Central Bank of Indonesia
Production of paper and paper products sa (2010=100) National Bureau of Statistics
Tourist arrivals sa (number) National Bureau of Statistics
A sneak peek into the direction of the CLI

We took a look at the past 24 month movement of the CLI with the macro
indicators (excluding production of paper and paper products due to the
discontinuation of the series from 2011) to gain some sense of the direction of the
CLI, going forward. Our discussions are as follows:
 CLI vs. stock market (JCI): The two indicators exhibit synchronized trends with
a time lag of 5 months in between. Valuations have come down to attractive
levels (2.2x trailing P/B vs. 10-year historical average of 2.6x), however, we
believe there may be further downside until the index reaches trough valuation
level (2.0x P/B). We believe prevailing uncertainties related to the trade disputes
between US and China are unlikely to be resolved in the near horizon, hence, we
expect the stock market to trend sideways with a downward bias.
 CLI vs. policy rate (inverted): Bank Indonesia (BI) has strongly argued that
maintaining the stability of the local currency is a key priority. Given mounting
pressures on the rupiah on the back of gradual rate hikes by the Federal
Reserve, we expect the central bank of Indonesia to follow the Fed’s tightening
path. We project that policy rate trends will add downward pressures to the CLI.
 CLI vs. USD/IDR (inverted): The two key drivers that move the FX rates are GDP
growth gap and interest rate gap between the two nations. Notably, US is in its
expansionary cycle while Indonesia is on the opposite end. Further, policy rate
gap has been steadily narrowing as BI has been adopting expansionary
monetary policy settings over the past couple of years while US Fed has been
tightening. Although monetary policy settings are likely to be tightened for
Indonesia, going forward, we argue that the pace of tightening should not meet
expectations as we near the presidential election (April 2019). Further, we
believe foreign investment outflows are likely to add pressure to the FX rate for
time being. All in all, we expect to see continued pressure building on the CLI.
 CLI vs. wholesale price index (inverted): The wholesale price index is an
indicator that captures the amount of price changes on levels of major trading
price/ wholesale price of traded commodities (domestically produced, exported,
and imported) within the country. The index is segmented into 5 sectors,
namely 1) agriculture, 2) mining and quarrying, 3) industrial, 4) import and 5)
export. We suspect key drivers of the wholesale price index to be commodity
prices as well as FX rates. Given our commodity analyst’s bullish stance of crude
oil prices as well as continued weakness of the rupiah, we do not expect an
imminent reversal of the trend.

 CLI vs. Consumer confidence index: The consumer confidence index (CCI) is
the average of the current economic condition index (CECI) and the consumer
expectation index (CEI). CECI compiles survey results from 1) household income,
2) right time to buy durable goods and 3) unemployment, while CEI surveys 1)
household income, 2) overall economic condition, and 3) unemployment rate.
The CCI has been trading within a boxed range since mid-2017, which
somewhat coincides with the inflection point of the CLI (August 2017). Given the
key components of the CCI are household income (up), spending on durables
(flat), economy (flat), and unemployment rate (down), we expect CCI trend to
remain boxed, going forward.
 CLI vs. tourist arrivals: President Joko Widodo (Jokowi) carefully rolled out
reform policies to stimulate tourist visits to Indonesia. Among key policies, the
number of countries under the visa-free program was enlarged from 45 in 2014
to 169 in 2016, driving tourist inflows higher. Further, restrictions on foreign
ownerships in hotels and restaurants were also relaxed to stimulate the inflow.
However, natural disasters – which are beyond regulatory control – such as
continuous volcanic eruptions from Mt. Agung since September 2017, Lombok
earthquake (August 2018) have acted as challenges to reaching President
Jokowi’s tourism agenda.
Figure 7. CLI vs. stock market (JCI) Figure 8. CLS vs. policy rate (inverted)
(pt) (pt) (pt) (inverted, pt)

101 Composite leading indicator (L) 7,000 101 Composite leading indicator (L) 4.0
JCI (R) Policy rate (R) 4.2
101 6,500 101
4.4
4.6
100 6,000 100
4.8
100 5,500 100 5.0
5.2
99 5,000 99
5.4
5.6
99 4,500 99
5.8
98 4,000 98 6.0
1/16 7/16 1/17 7/17 1/18 7/18 1/16 7/16 1/17 7/17 1/18 7/18
Source: OECD, Mirae Asset Sekuritas Indonesia Research Source: OECD, BI, Mirae Asset Sekuritas Indonesia Research
Figure 9. CLI vs. USD/IDR Figure 10. CLI vs. wholesale price index (inverted)
(pt) (inverted, IDR) (pt) (inverted, pt)

101 Composite leading indicator (L) 12,500 101 Composite leading indicator (L) 145
USD/IDR (R) Wholesale price index (R)
101 13,000 101
150
100 13,500 100

155
100 14,000 100
160
99 14,500 99
165
99 15,000 99
98 15,500 98 170
1/16 7/16 1/17 7/17 1/18 7/18 1/16 7/16 1/17 7/17 1/18 7/18
Source: OECD, Mirae Asset Sekuritas Indonesia Research Source: OECD, BI, Mirae Asset Sekuritas Indonesia Research

Figure 11. CLI vs. consumer confidence index Figure 12. CLI vs. tourist arrivals
(pt) (pt) (pt) ('000 pax)

101 Composite leading indicator (L) 130 101 Composite leading indicator (L) 1,600
Thousands
Consumer confidence (R) Tourist arrivals (R) 1,500
101 101
125
1,400
100 100
120 1,300
100 100 1,200

115 1,100
99 99
1,000
110
99 99
900
98 105 98 800
1/16 7/16 1/17 7/17 1/18 7/18 1/16 7/16 1/17 7/17 1/18 7/18
Source: BI, Mirae Asset Sekuritas Indonesia Research Source: BPS, Mirae Asset Sekuritas Indonesia Research
We don’t expect an immediate reversal of the CLI…
As discussed earlier, we see low probabilities of the CLI turning the corner. In terms
of the direction of the economic cycle, we see greater chances of the CLI trending
sideways. That being said, we expect the consumer index to also follow the
footprints of the CLI.
Table 2. Summary of CLI components

Indicator Direction Comment
IDX Composite Flat Lack of positive catalysts, however, limited downside to valuations
BI discount rate (inverted) Down Trace the Fed's rate hike agenda
FX rate (inverted) Down Escalating global uncertainties to keep rupiah pressured
Wholesale price index (inverted) Down Weak FX rates, high crude oil prices
Consumer confidence index Flat Positive income growth, but soft sentiment on spending
Tourist arrivals Up Visa-free and removing hurdles on foreign investments
Source: Mirae Asset Sekuritas Indonesia Research
…however, we also see limited downside to the CLI
Over the past decade, there have been 4 downward economic cycles in Indonesia
(excluding the 2008 global financial crisis) with an average duration of 10.5 months.
If history is any indication, we suspect that the downward cycle could be nearing its
end. In addition to our view that the economic cycle is less likely to demonstrate an
immediate reversal, we equally see limited downward pressure to the CLI. All being
said, we expect to see flattish movement of the economic cycle, heading forward.
Figure 13. The CLI looks like an old bear
(pt)
101
101
100
100
99
99
7 months 11 months 12 months 13 months
98
1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18

As we are closer to the bottom, the only direction is upwards

Indonesia has been positioned in the lower left quadrant (decreasing below
average growth trend) in the business cycle for the past 7 months. Business
sentiment has remained weak, however, we argue that the business cycle has
reached rock bottom. Although business cycle may remain at the current quadrant
for an extended period of time, we stress that the only direction for the business
cycle is towards the lower right side of the quadrant (increasing below average
growth trend).
Does election have positive impact on consumption?
Excitement is in the air
Many market participants seem to be excited about Indonesia’s consumption

outlook as we head into the election season (presidential election is held on April
2019). Key reasons behind the excitement are 1) hard cash is distributed to the
voters during the campaign season by political parties, and 2) the government also
provides various subsidies for the people. All in all, positive market sentiment is
centered around the fact that cash disbursement and subsidy support are likely to
improve the disposable income of consumers, thus accelerating spending.
Figure 14. Voters will be going to the polls early next year
Source: Internet, Mirae Asset Sekuritas Indonesia Research
Why is vote buying so pervasive in Indonesia?
In his thesis titled “Buying votes in Indonesia: Partisans, personal networks, and
winning margins” and dated February 2018, Mr. Burhanuddin Muhtadi argues that
“vote buying has become central to electoral mobilization in Indonesia.” Muhtadi
argues that vote buying has inefficiencies due to the 1) misinterpretation that
personal connections equates to loyalty and 2) political brokers who use their
personal networks to identify voters may not necessarily be loyal to the candidate.
If payments are made to such crowd of uncommitted voters, why is vote buying so
pervasive in Indonesia? Indeed, Muhtadi provides evidence that “gifts of money
‘only’ influenced the vote choice of roughly 10 percent to 11 percent of the total
electorate.” However, he adds that “the average margin of victory for successful
candidates in legislative elections… was only 1.65 percent.” Given the low margin of
victory, Muhtadi concludes that politicians show high enthusiasm when it comes to
vote buying as it could be the winning strategy.

During the New Order regime, vote buying would have limited influence over the
voters as the government-backed Golkar Party would win over any challenges from
opponent political parties. Muhtadi adds “vote buying was almost unheard of in the
1999 election (fall of the New Order regime)”, as the competition was centered on
political parties rather than the candidates. He highlights that vote buying gained
traction in the 2009 presidential election when the government permitted “political
candidates to enter the political race.” The fact that candidates did not simply
fighting against peers from competitor parties, but also against candidates within
their own parties accelerated the vote buying practice. Indeed, we witnessed
synchronized M1 growth deceleration (i.e., money withdrawals) during pre-election
years since the 2009 presidential election.
Figure 15. M1 growth showed deceleration during pre-election years since 2009 election
(YoY, %)
30
25
20
15
10
0
1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18
Source: BI, Mirae Asset Sekuritas Indonesia Research
Targeted populism vs. coincidental populism
During the past two election years (2009 and 2014), we have witnessed government
allocating higher subsidies (in particular, oil subsidies – which is the largest
component in the central government subsidy program). While many argue that
this was largely a populist strategy in winning the votes, there may be some areas
of argument behind this interpretation. First of all, there was a gradual rise in crude
oil prices that drove the government’s urgency to preserve purchasing power of the
people. Second, president Susilo Bambang Yudhoyono (SBY)’s second term expired
in 2014 and his political party maintained its neutral stance at the 2014 election. We
argue that the increase oil subsidies were conducted in good faith rather than
covered up in political objectives.
Figure 16. Subsidies picked up during election years
(IDRtr) (USD/b)
600 Social subsidies (L) Oil subsidies (L) Non-oil subsidies (L) WTI (R) 120
500 100
400 80
300 60
200 40
100 20
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

President Jokowi’s populism strategy

Given subsidy spending is a government initiative, we would focus our discussions
on the on president Jokowi’s past accomplishments to gain hints to his populism
strategies ahead of the presidential election in 2019.
 During his tenure as the mayor of Surakarta (2005~ 2012), Mr. Jokowi
catapulted his hometown to the top ranks in various national surveys
including governance and business environment. His focus on social support
such as healthcare, education and infrastructure enabled him to gain national
recognition which took him to the Jakarta governor seat (2012) and later to
the presidential palace (2014).
 As the governor of Jakarta (2012~ 2014), Mr. Jokowi further built his reputation
through strategic focus on social assistance programs (such as the Jakarta
Health Card and Jakarta Smart Card), infrastructure (revamping of the water
channels, Jakarta MRT/LRT, etc.) and transparency.
 Since his inauguration as the president of the republic (2014~ present), Mr.
Jokowi surprised the market by removing fuel subsidies. His pragmatic
approach to reallocate idle spending into productive spending – such as
infrastructure and social developments – received much support from the
public.
Ever since his debut into the political scene in 2005, the backbone of president
Jokowi’s populism policy seems to be built on a pragmatic foundation which has a
strong focus on the development of the nation and its people. As noted earlier,
during the early days of his presidency president Jokowi focused much of his
attention to developing the much-needed infrastructure system that could cater
the nation’s growing economic activities. However, his populism strategy seems to
be shifting ahead of the 2019 election.
According to the latest draft of the state budget for 2019, key notables that we
would like to highlight are: 1) infrastructure spending is expected to grow a mere
2% YoY in 2019F, 2) oil subsidies are projected to jump 66% YoY to IDR156.5tr, 3)
social spending such as education (12% YoY) and health (14% YoY) are likely to
demonstrate double digit growths. Key highlights of the state budget draft for 2019
from the Ministry of Finance are summarized in the following table:
Table 3. Key highlights of the 2019 state budget

Item Detail
The government continues to make efforts to improve quality education services
that are evenly distributed to every citizen. The education budget allocated by the
Education Government with a portion of 20 percent of the state budget in accordance with
the mandate of the constitution needs to be followed by an increase in the quality
of education, which ultimately increases the quality of human resources.
Development in the health sector is one of the national development priorities in
the RPJMN 2015 - 2019. This is considering the importance of health in the effort to
realize the welfare of the people and in the framework of the formation of
Indonesian human resources as well as increasing the resilience and
Health
competitiveness of the nation for nation building. In the 2019 Draft State Budget,
the Government remains consistent in meeting the health budget of 5 percent of
the total APBN. The health budget allocation in the 2019 RAPBN is planned to
reach Rp.122.0 trillion.
Regarding the acceleration of infrastructure development in 2019, the
Government will continue the completion of infrastructure development targets in
various regions in the form of new national roads, toll roads, dams, and irrigation
Infrastructure networks, among others: Development / reconstruction / widening of roads 2,007
km, irrigation 162 thousand Ha, development 7,512 flats, 4 new airports, and 415.2
km’sp. The target, in addition to spending through state ministries / institutions, is
also fulfilled through PPP and PMN.
Allocation of Transfers to Regions and Village Funds in the amount of Rp.832.3
trillion in the 2019 Draft State Budget is directed at: 1. increasing equity of inter-
Regional transfer
regional financial capabilities; 2. improve quality and reduce inequality between
public areas; and 3. support efforts to accelerate poverty alleviation in the regions.
Source: MoF, Mirae Asset Sekuritas Indonesia Research

Figure 17. Infra spending Figure 18. Education spending Figure 19. Health spending
(IDRtr) Infra spending (L) (%) (IDRtr) Education spending (L) (%) (IDRtr) Health spending (L) (%)
450 Growth (YoY, R) 70 600 Growth (YoY, R) 14 140 Growth (YoY, R) 45
400 12 40
60 500 120
350 10 35
50 8 100
300 400 30
40 6 80
250 25
300 4
200 30 60 20
2
150 200 15
20 0 40
100 -2 10
10 100 20
50 -4 5
0 0 0 -6 0 0
Source: MoF, Mirae Asset Sekuritas Indonesia Source: MoF, Mirae Asset Sekuritas Indonesia Source: MoF, Mirae Asset Sekuritas Indonesia
Figure 20. Oil subsidies Figure 21. Non-oil subsidies Figure 22. Regional transfers et al.
(IDRtr) Oil subisidies (L) (%) (IDRtr) Non-oil subisidies (L) (%) (IDRtr) Regional transfers (L) (%)
400 Growth (YoY, R) 80 90 Growth (YoY, R) 40 900 Growth (YoY, R) 16
350 60 80 800 14
30
300 40 70 700 12
20
60 600
250 20 10
50 10 500
200 0 8
40 0 400
150 -20 6
30 300
-10
100 -40 20 200 4
50 -60 -20 2
10 100
0 -80 0 -30 0 0
Source: MoF, Mirae Asset Sekuritas Indonesia Source: MoF, Mirae Asset Sekuritas Indonesia Source: MoF, Mirae Asset Sekuritas Indonesia
In a nutshell, the strategy change of president Jokowi in the draft of the 2019 state
budget can be observed by the muted growth in infrastructure spending and a
sharp increase in oil subsidies. Meaningful funds that would have been otherwise
allocated to infrastructure spending seem to have been redirected to oil subsidies.
However, we would remain cautious in hastily assuming that such changes in the
government’s budget strategy are politically intended to enrich the pocket situation
of the people ahead of the presidential election. Our view is premised on the
following arguments: 1) We underscore that oil price jumped 69% since end-2015 at
a time when fuel subsidies no longer exist. The sharp rise in oil price is likely to add
burden to households’ disposable income, weakening the purchasing power of
consumers. That being said, the administration’s strategy to allocate more oil
subsidies is a natural response to the rising oil price, in our view. Indeed, 2019
budgeted oil subsidies of IDR156.5tr represent only 45.8% of that spent in 2014,
when oil price was at current level. 2) Indonesia’s government is currently running
on a tight budget. As of 2017, Indonesia’s budget deficit reached 2.9% of the
nation’s GDP, which is near the 3% legal threshold stipulated under the budget law.
Given prolonged pressures from rising oil price combined with weakening local
currency, we suspect that government will have limited capacity to spend
aggressively on subsidies.

Figure 23. Oil subsidies and crude oil price

(IDRtr) (USD/b)
400 120
Oil subisidies (L)
350 WTI (R)
100
300
80
250
200 60
150
40
100
20
50
0 0
2004 2006 2008 2010 2012 2014 2016 2018F
Source: MoF, Bloomberg, Mirae Asset Sekuritas Indonesia Research
Figure 24. Government revenue vs. expenditure Figure 25. Budget balance as % of GDP
(IDRtr) 0.0
3,000
Revenue
-0.5
2,500 Spending
-1.0
2,000
-1.5
1,500
-2.0
1,000
-2.5
500
-3.0 -2.92
0
-3.5
(%) 2004 2006 2008 2010 2012 2014 2016
Source: MoF, Bloomberg, Mirae Asset Sekuritas Indonesia Research Source: MoF, Bloomberg, Mirae Asset Sekuritas Indonesia Research
Weak evidence of increased consumer spending during election years
Despite the cash disbursements and increased subsidies during pre-election years,
we find little evidence of meaningful improvement to consumption. We suspect
that consumers consider benefits during pre-election years to be a one-off event
and unsustainable. As such, temporary benefits are less likely to have profound
impact on the overall consumption behavior.
Figure 26. Consumer confidence index Figure 27. Retail sales growth
(pt) (YoY, %)
130 30
120 25
20
110
15
100
10
90
5
80
0
70 -5
60 -10
12/02 12/04 12/06 12/08 12/10 12/12 12/14 12/16 1/11 1/12 1/13 1/14 1/15 1/16 1/17 1/18
Source: BI, Mirae Asset Sekuritas Indonesia Research Source: BI, Mirae Asset Sekuritas Indonesia Research

Impact of rising oil price on the economy
Indonesia is a net importer of oil…

In May 2008, Indonesia decided to withdraw its membership in OPEC (which it has
been maintaining since 1962) citing its status as a net importer of oil and being
unable to comply with the OPEC’s production quota. Indonesia rejoined the cartel in
January 2016, but once again decided to temporarily freeze its membership status
in December 2016 as the oil importing country disagreed with the 5% production
cut. Indonesia has been a net oil importer since 2004 driven by stagnant production
growth combined with steady increase in consumption.
Table 4. Indonesia’s annual oil production and consumption gap (mn tons)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Production 47.8 49.4 48.4 48.6 46.3 44.6 42.7 41.2 40.7 43.0 46.4
Consumption 64.2 62.6 63.3 67.4 76.0 78.2 78.9 79.4 73.5 74.2 77.3
Gap -16.4 -13.2 -14.9 -18.8 -29.7 -33.6 -36.2 -38.2 -32.8 -31.2 -30.9
Source: BP Statistical Review, Mirae Asset Sekuritas Indonesia Research
Assuming 1 ton of oil equivalent equates to 7.142857 barrel of oil equivalent,

Indonesia’s 2017 annual oil production – consumption gap (30.9mn tons) would
imply 220.7mn barrels of theoretical net oil imports. That being said, for every
USD1 movement of crude oil, Indonesia will record USD220.7mn net current
account surplus/deficit. Our sensitivity analysis is as follows:
Table 5. Oil price sensitivity to Indonesia's economic fundamentals

Unit +USD1/b +USD5/b +USD10/b +USD15/b +USD20/b
Net impact on current account USDmn -220.7 -1,103.6 -2,207.1 -3,310.7 -4,414.3
As a % of GDP % 0.02 0.11 0.22 0.33 0.43
Source: BP, World Bank, Mirae Asset Sekuritas Indonesia Research estimates
…Rising oil prices are likely to offset the positive subsidies impact
According to the draft of the 2019 state budget, oil subsidies are expected to
increase 65.6% YoY to IDR156.5tr (net increment of IDR62.0tr). The 2019 budgeted
fuel subsidies net increment in USD terms (USD4.08bn as of October 12, 2018
exchange rate) would only be enough to buffer USD20/b increase in oil prices.
Furthermore, we also note that further depreciation of the rupiah will also lead to a
reduction in the oil subsidies buffer.
Figure 28. Net oil subsidies increment would have no impact if oil prices rises >USD20/b
(USDbn)
5.0
4.1
4.0
3.0
2.0
1.0
0.0
-1.0 -0.2
-1.1
-2.0
-3.0 -2.2
-4.0 -3.3
-5.0 -4.4
Net increment to Oil price increase Oil price increase Oil price increase Oil price increase Oil price increase
2019 state budget USD1/b USD5/b USD10/b USD15/b USD20/b
Source: BP, Bloomberg, Mirae Asset Sekuritas Indonesia Research estimates

Note: FX rate to convert net increment to 2019 state budget @ IDR15,197 as of October 12, 2018)

Smart spending
We believe consumers have become smarter in their consumption behavior. We
ascribe this changing trend to 2 social factors: 1) higher education level and 2)
aggressive online penetration.
People are now becoming smarter

Over the past 7 years, average minimum wage in Indonesia jumped 129%, which
lead us to conclude that the average pocket situation (improved purchasing power)
of Indonesians have much improved. However, over the same time frame, we
underscore that the education level of Indonesians have improved. While many still
argue that Indonesians are living day-by-day, we disagree and stress that an
average Indonesians will now have better understanding of the economy and thus
are able to plan out their long-term financial objectives (shift in purchasing
intention).
Figure 29. Minimum wage trend (nationwide average) Figure 30. Education level has meaningfully improved
(IDRmn) (%) Elementary Middle school

2,500 High school University
Nationwide average minimum wage 100 99
Thousands
2,266 98 95
2,300
90 94
2,074
2,100 85
1,917 80
1,900 70 71
1,702 72
1,700 1,506
60
1,500 50 55
1,288
1,300 40
1,119 45
1,100 989 30
900 25
20
700 10 13
13
500 0
2011 2012 2013 2014 2015 2016 2017 2018 1994 1998 2002 2006 2010 2014
Source: Gajimu, Mirae Asset Sekuritas Indonesia Research Source: BPS, Mirae Asset Sekuritas Indonesia Research
Widespread e-commerce penetration contribute to the smart spending
Fueled by the 1) rapid growth of smartphone penetration, 2) affordable cellular

data pricing, 3) wider payment options, 4) aggressive promotions/ price cuts and 5)
attractive pricing from online service providers, Indonesians are becoming smarter
in their spending habits. We also believe the widespread e-commerce penetration
is pushing down the offline prices as the brick-and-mortar retailers attempt to
compete with online retailers.
Given the cut-throat competition within the online retail space, we suspect that
most e-commerce players are sacrificing their profitability in the process of
securing market share. Most of the large e-commerce players, such as Lazada
(Alibaba), Tokopedia (Alibaba, Softbank), JD.id (JD.com), Shopee (Sea/Tencent), etc.
have solid financial backings from global investment firms, which lead us to believe
that the fight for market share may not be over in the near horizon.
All in all, the e-commerce wind of change has inevitably resulted in lower
inflationary pressure for the economy. As long as the fragmented e-commerce
industry maintains its form, we believe consumers will be able to take advantage of
the low-price environment.

Figure 31. Online retail sector value forecast Figure 32. Smart phone price remains low
(USDbn) (USD) (%)

300 ASP of low-tier smartphones (L) 2.0
9
Cost as a % of GDP per capita (R)
7.8
8
7.1
7 1.5
200
6 5.5
5 1.0
4.4
4
3.2 100
3 0.5
2.3
2 1.7
1.3
0.9
1 0.6 0 0.0
0
2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F
Source: Marketline, Mirae Asset Sekuritas Indonesia Research Source: Mirae Asset Sekuritas Indonesia Research
Figure 33. Smartphone penetration and cellular data pricing Figure 34. Diverse payment options
(%) (IDR/MB)
80 Industry's data penetration (LHS) 200

Industry's average data yield (RHS)
60 150
40 100
20 50
0 0
FY13 FY14 FY15 FY16 FY17
Source: Company data, Mirae Asset Sekuritas Indonesia Research

Source: Lazada, Mirae Asset Sekuritas Indonesia Research
Note: Data aggregation of top 3 telecommunication operators
Figure 35. Aggressive promotions Figure 36. Offline vs. online price comparison
Source: Lazada, Mirae Asset Sekuritas Indonesia Research Source: Pricebook, Mirae Asset Sekuritas Indonesia Research

The impact of weaker rupiah on consumption
All quiet on the inflation front

Conventional economics would expect a rise in inflation when the local currency
weakens as more nominal value of the rupiah is needed when purchasing the same
amount of goods priced in US dollars. However, recent inflation data releases show
that Indonesia’s inflation is trending below historical average despite prolonged
weakness of the rupiah. All in all, given the broken relationship between FX rate
and CPI over the past couple of years, we believe that the purchasing power of
people (i.e., consumption) is likely to be well preserved.
Figure 37. Divergence of CPI and USD/IDR trend
(YoY, %) (IDR)
CPI (L) USD/IDR (R)
20 17,000
15,000
15
13,000
10
11,000
5
9,000
0
7,000
-5 5,000
1/00 1/02 1/04 1/06 1/08 1/10 1/12 1/14 1/16 1/18
We attribute the divergence of the CPI and USD/IDR trend to the following points:
1) We suspect that there has been increasing price control by the government over
agriculture products– which is a component in the inflation basket (19.2% weight to
the total basket), 2) greater sacrifice in preserving the purchasing power of the
nation by state-owned-enterprises (in particular, utility prices), and 3) higher import
tariffs which limited the appetite for imports. In short, we believe the government is
scrutinizing the overall inflation basket to identify and target areas where it can
squeeze inflation. We also suspect that businesses that are exposed to the items
that form the inflation basket may feel the squeeze in their operating margins.
Figure 38. Yearly price change of inflation components Figure 39. Wholesale agriculture prices reveal similar trend
(YoY, %) 12/14 12/15 12/16 12/17 9/18 (YoY, %) CPI Wholesale price
12 80 Wholesale (imports) Wholesale (agriculture)
10 70
8 60
50
6
40
4
30
2
20
0
10
0
-10
12/13 12/14 12/15 12/16 12/17

Figure 40. The fight against food cartels Figure 41. Administered prices under control
Source: Google search, Mirae Asset Sekuritas Indonesia Research Source: The Jakarta Post, Mirae Asset Sekuritas Indonesia Research
No disruptions to private consumption growth
Despite USD/IDR’s continued march higher we highlight that consumption growth

is broadly stable trending within a range bound (4.9% to 5.5%). Indeed, during the
double digit depreciation of the rupiah from 2013~ 2015, we underscore that
private consumption growth came in at an average pace of 5.2% YoY.
The modest growth pace of consumption is due to the inelastic nature of the
demand. If we breakdown the private consumption components, we can see that
majority of the household spending is essential spending (food/drinks excluding
restaurants, housing, and communication/transport comprise 74.9% of total
consumption as of 2017). Further, we suspect that most of the components are
either domestically sourced and/or intervened by the government (when
necessary) to preserve the purchasing power of the nation. We expect such trend
to continue heading into the election year in 2019, which should keep consumption
growth stable despite further weakness to the rupiah.
Table 6. Private consumption growth and FX rates

Item 2011 2012 2013 2014 2015 2016 2017 2018F
Real value (IDRtr)
Food and Drink, excluding Restaurant 1,489.5 1,545.6 1,612.8 1,684.2 1,776.3 1,871.2 1,969.2 2,071.9
Apparel, Footwear and Maintenance Services 162.4 172.9 182.0 190.3 198.3 205.3 211.6 218.8
Housing and Household Equipment 543.2 575.0 608.4 636.1 667.4 697.5 727.2 758.9
Health and Education 268.8 284.5 300.8 319.3 336.1 353.4 373.1 396.1
Transportation and Communications 953.7 1,018.1 1,085.3 1,148.2 1,202.2 1,267.2 1,334.3 1,406.8
Restaurant and Hotel 355.9 381.4 403.3 430.9 451.8 476.2 502.5 530.7
Others 203.8 218.3 230.7 242.5 249.7 255.3 261.5 268.5
Total consumption 3,977.3 4,195.8 4,423.4 4,651.5 4,881.9 5,126.0 5,379.5 5,651.6
Growth (YoY, %)
Food and Drink, excluding Restaurant 2.2 3.8 4.3 4.4 5.5 5.3 5.2 5.2
Apparel, Footwear and Maintenance Services 5.3 6.5 5.3 4.5 4.3 3.5 3.1 3.4
Housing and Household Equipment 5.2 5.9 5.8 4.5 4.9 4.5 4.3 4.4
Health and Education 5.3 5.8 5.7 6.2 5.3 5.1 5.6 6.1
Transportation and Communications 6.6 6.8 6.6 5.8 4.7 5.4 5.3 5.4
Restaurant and Hotel 5.5 7.2 5.8 6.8 4.9 5.4 5.5 5.6
Others 19.5 7.1 5.7 5.1 2.9 2.3 2.4 2.7
Total consumption 5.1 5.5 5.4 5.2 5.0 5.0 4.9 5.1
USD/IDR (average for the year) 8,771.5 9,386.2 10,449.9 11,866.8 13,390.1 13,307.4 13,382.4 14,046.1
Change (YoY, %) -3.4 7.0 11.3 13.6 12.8 -0.6 0.6 5.0
Note: USD/IDR for 2018 represents year-to-date average

Increased import tariffs on 1,147 imported goods

In an attempt to defend the nation’s current account deficit, Indonesian
government decided to raise import tariffs (import value tax of Article 22) on 1,147
imported goods to 7.5%~ 10.0% from 2.5%~ 10.0%. Consumer goods that are
subject to the increased import tariffs include perfume/deodorant, swimsuits,
yachts, grand piano, carpets, motorcycles, video games, and others. Indonesia’s
finance minister Sri Muryani Indrawati stated that she will scrutinize the availability
of the product within the domestic industry and “take very strict steps to control the
import of these consumer goods.”
The overall impact should have limited contribution in lowering the headline
inflation as we suspect that most of the items that are subject to the additional
tariffs are excluded from the inflation basket. Furthermore, imports of consumption
goods only comprise 9% of the total import value. However, we suspect that
government’s move would contribute to slowing down imports of non-essential
goods (i.e., luxury goods), thus gradually improving the nation’s current account
balance.
Figure 42. Import value by types Figure 43. Import portion by types (2017)
(USDbn) (%)
200
Thousands
180
9.0
160 16.0
140 Capital goods Consumption goods
120
Raw materials/
Raw materials/
100 Auxiliary
Auxiliary
Consumption goods
80 Capital goods
60
40 75.1
20
0
2011 2012 2013 2014 2015 2016 2017
Figure 44. Current account balance of Indonesia
(USDbn) Secondary income (%)

50 Primary income 1.0
40 Services 0.5
Goods
30 0.0
Currnet account as a % of GDP (R)
20
-0.5
10
-1.0
0
-1.5
-10
-2.0
-20
-30 -2.5
-40 -3.0
-50 -3.5
2010 2011 2012 2013 2014 2015 2016 2017 1H18

Industry view and discussions
Consumer (Neutral): Growing pain
Decelerating growth in FMCG industry due to shifting consumer behavior
Indonesia’s fast moving consumer goods (FMCG) industry is facing decelerating

growth during the recent years. In 2017, the industry only registered 2.7% growth
vs. 11% CAGR in 2003-2017. During 1H18, UNVR booked -0.4% YoY revenue growth
(vs. CAGR 2012-2017: 8.6%), while ICBP booked +5.4% YoY (vs. CAGR 2012-2017:
10.4%), and KLBF only booked +3.1% YoY (vs. CAGR 2012-2017: 8.2%). We suspect
that the decelerating growth was chiefly due to 1) slower-than-expected recovery of
consumers’ purchasing intention and 2) shifting consumers’ spending behavior
(e.g., demand shift to non-FMCG products/ services such as travelling, etc.).
Competition is boiling
With competition heating up combined with selective purchasing intention, we

believe consumer companies need to become more innovative. Notably, consumer
companies under our coverage are engaging in strategies such as 1) improving
product mix, 2) introducing smaller packages with lower ASPs, and 3) launching
new products to grab new market. However, we estimate that it will take time until
these efforts bear fruit. Not to mention, the higher advertising and promotion costs
in launching their new products.
Too early to get excited
The social ministry's budget leaped 43.4% to IDR58.9tr in the latest state budget.
However, we are siding with the view that the budget would only add minimal
impact at the macro consumption (1.0% of 2018F total private consumption).
Further, given rising education level of consumers, unfavorable macro backdrop is
likely to put spending on conservative mode. We are inclined to keep our
excitement on hold, for now.
Downgrade from Overweight to Neutral on stiff headwinds
We downgrade our call on consumers to Neutral. We believe challenging macro

backdrop (high rates, high oil and high rupiah) is unlikely to subside in the near
horizon, which should pressure to their revenue growth. In addition, consumer
companies will need time to adjust to the shift in consumer behavior. Competition
within the sector is heating and should weigh on sales and costs from the relatively
mature companies like UNVR, ICBP, and KLBF.
Figure 45. Combined revenue from UNVR, ICBP, and KLBF Figure 46. A&P costs to pick up as competition rises
(IDRbn) (YoY, %) (IDRbn) (YoY, %)

adv & promotion expenses - LHS growth - RHS
120,000 Revenue - LHS growth - RHS 20.0% 8,000 10.0%
90,000 15.0% 6,000

5.0%
60,000 10.0% 4,000
0.0%
30,000 5.0% 2,000
0 0.0% 0 -5.0%
2012 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Company data (UNVR, ICBP, and KLBF combined), Mirae Asset Sekuritas
Indonesia Research

Tobacco (Neutral): The expansion of SKM market share continues
A mix bag for volume growth of the two biggest players

We expect sales volume growth of the cigarette industry to remain unattractive in
2018F (-2% YoY). According to PMI, the industry’s sales volume declined by 1.5% YoY
to 144.5bn sticks during 1H18. The largest market share holder of the industry,
HMSP, booked slightly negative sales volume at -0.44% YoY in 1H18. However,
HMSP’s sales volume improved during the quarter (2Q18; +0.7% YoY). We estimate
the company’s sales volume to book -1.7% for 2018F, in line with the company’s
sluggish industry guidance. On the contrary, we estimate GGRM sales volume
growth to remain flat in 2018F, despite the expected increase in its selling prices in
2H18. From our recent discussion with the management, the company seems to
have booked positive volume growth of 5% YoY in 1H18. In addition, GGRM has
sustained positive volume growth through September, in contrast to the negative
volume growth seen over the past three years. We believe GGRM’s cigarette sales
volume growth was boosted, in part, by consumers’ continued shift in preference
from SKT to SKM (GGRM is the pioneer in Indonesia’s favorite SKM Full-flavor). In
contrast, despite a higher sales volume of SKM in 1H18 (+5.4%), HMSP’s much
declined in sales volume for the SPM (-26.4% oY) and SKT (-4% YoY) segments have
led to the company’s lower sales volume growth in 1H18.
Lower-priced products are selling better
Based on our observation, both companies under our coverage have sold more
lower-priced products in 1H18. GGRM claims to see better sales volume growth
from lower volume per pack of Surya 12 due to its lower price per stick (c.IDR1,300)
despite the same products with Surya 16 (IDR1,450). Its Surya Professional 16,
which has a price per stick of only around IDR1,020, has also seen a rise in sales
volume. Meanwhile, the company’s flagship brands Surya 16 and GG international
have seen growth stagnate. For HMSP, gross margin has contracted due to the
faster growth of lower-margin products (e.g., Magnum Mild).
Downgrade to Neutral
We downgrade our call on the sector to Neutral due to 1) unattractive industry

sales volume growth and 2) consumer preference shift towards economical
products which could lead to limited margin improvement. Nonetheless, we are still
upbeat on SKM cigarette sales volume, rather than the other two segments (SKT
and SPM). Therefore, our preference still lies with GGRM due to 1) it is the leading
producer of SKM FF cigarettes in the market; 90% of GGRM’s sales come from SKM
(vs. 67% at HMSP), 2) our EPS growth forecast for 2018 for GGRM is higher than
HMSP (10% vs 4% YoY), 3) attractive valuation.
Figure 47. Industry cigarette sales volume (bn sticks) Figure 48. Industry segments market share
SPM SKT SKM
(bn sticks)
100.0%
5.1%
350
90.0%
18.7% 18.2% 17.0%
300 80.0%
70.0%
250
60.0%
200
50.0%
146.7 144.5
150 40.0% 76.7%
30.0%
100
20.0%
50
10.0%
0 0.0%
1Q15 FY15 9M16 1H17 1Q18 2Q15 1Q16 4Q16 3Q17 2Q18
Source: PMI, Mirae Asset Sekuritas Indonesia research Source: PMI, Mirae Asset Sekuritas Indonesia research

Retailers (Overweight): Continued improvement
Administered price adjustments matter for consumers

In the first two quarters of 2018, most of the retailers under our coverage delivered
slightly better SSSG compared to the FY17. We ascribe this to the lower-adjusted
administered price. We suspect consumers have deeper pockets to spend on
discretionary items. Moreover, the government is likely to keep fuel (Premium and
Pertalite) and electricity prices frozen until the upcoming presidential election (at
least). Although the government finally raised the price of Pertamax (from IDR9,500
to IDR10,400 per liter), we argue that Premium and Pertalite are consumed more,
together accounting for 81.2% of total fuel consumption. Hence, the price increase
of Pertamax should have marginal impact on consumers’ spending behavior.
Increased social budget will support low-income consumers
In the RAPBN 2019, the government’s total budget for social spending stands at
IDR58.9tr, an increase of 43.4% YoY. On top of that, the government stated its
intention to increase the amount of conditional cash transfers by 100%. With the
total number of household recipients to stay unchanged at 10mn, we expect the
amount of conditional cash transfers to double for each household. Although gross
impact may prove to be marginal at the macro level, we firmly believe that the
social budget will have profound impact on the low-income households. All in all,
we anticipate social aid spending by the government to support low-income
consumer demand in the retail sector.
Latest PPh22 (import tax) increase to have minimal impact on retailers

The government has raised the PPh22 (import tax) on 1,147 selected imported
consumer goods to up to 10%. The fundamental impact should be more
pronounced for smaller players. For bigger players (which have large cash flow
capacity), we judge the impact to be minimal, as it only affects working capital. In
addition, importers could treat PPh22 as a prepaid tax when paying corporate
income taxes. Furthermore, we note that the import tax scheme is not something
new for retailers, as the government has applied this scheme since 2014.
Improvement to continue
We believe moderate improvement will continue throughout at least 1H19. We

retain our Overweight stance, with RALS as our top pick. The company’s target
market is the main beneficiary of the government’s social aid programs.
Figure 49. Utilities vs. headline inflation Figure 50. Recipients of conditional cash transfers
(%) (mn household)

9
Housing, water, electricity, gas and fuel 12.0
8 Headline inflation 10.0 10.0
10.0
7
6 8.0
6.0 6.2
5
6.0
4
4.0 3.5
3 2.88 2.8
2.3
2 2.11 2.0
1
-
0 2013 2014 2015 2016 2017 Outlook RAPBN
1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 2018 2019
Source: BI, Mirae Asset Sekuritas Indonesia Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia

Poultry (Neutral): Better performance on margin recovery
Relatively strong live bird and DOC prices

This year is a recovery year for the poultry sector thanks to higher local corn supply
and the rebound of live bird and day-old chick (DOC) prices. We attribute the
resilience of DOC prices to a confluence of positives, including last year’s
government-led supply adjustment and lower industry productivity stemming from
the restrictions on use of AGP (antibiotic growth promoter), which came into effect
earlier this year. As a result, margins of poultry companies showed a significant YoY
increase in 1H18 (notably, MAIN booked 349.7% YoY net profit jump in 1H18). We
see limited increase in live bird and DOC prices in 2H18 due to the low seasonal
demand. Furthermore, at this supply and demand dynamics, we don't think the
government-led culling initiative will repeat next year (i.e., normalization of chicken
price).
Active government support should stabilize volatile prices
We note that the government is putting hard efforts to stabilize the nation’s
inflation, including managing broiler prices. The Ministry of Trade recently issued a
new set of regulation concerning the purchasing reference price at the farm level
and selling reference price at the consumer level (effective as of October 1). Under
the new regulation, broiler chicken egg and meat prices are set at between
IDR18,000/kg (lower limit) and IDR20,000/kg (upper limit) at the farm gate level (vs.
IDR17,000/kg – IDR19,000/kg in the previous regulation). Meanwhile, the selling
reference price at the consumer level was set between IDR34,000/kg (vs.
IDR32,000/kg previously) for chicken meat and IDR23,000/kg (vs. IDR22,000/kg
previously) for broiler eggs. We believe the government's active intervention will
stabilize the movement of broiler prices, which we view as a neutral event.
Neutral call for Poultry sector as risk factors remain

We retain our Neutral call on the poultry sector as we see fair balance of positives
and negatives. We believe there may be pockets of further improvement to chicken
prices. However, risk factors including the prolonged depreciation of the rupiah,
rising interest rates, and slower-than-expected purchasing intention recovery to act
as stiff headwinds for the sector. Considering recent sharp weakness of the FX rate,
some poultry companies will likely book inflated F/X losses in 2H18. Moreover, high
interest rate environment could also pose risk to poultry companies’ earnings,
given their sizeable debt. As of 2Q18, JPFA’s debt-to-equity ratio (DER) stood at 0.7x,
while MAIN’s DER stood at 0.9x.
Figure 51. Market survey on avg. live bird prices (West Java) Figure 52. Market survey on avg. DOC prices (West Java)
(IDR/kg) (IDR)
24,000 7,000
22,000 6,000
5,000
20,000
4,000
18,000
3,000
16,000
2,000
14,000 1,000
12,000 0
01/14 07/14 01/15 07/15 01/16 07/16 01/17 07/17 01/18 07/18 01/14 07/14 01/15 07/15 01/16 07/16 01/17 07/17 01/18 07/18
Source: Company data, Mirae Asset Sekuritas Indonesia research Source: Company data, Mirae Asset Sekuritas Indonesia research

Price, flows and valuations
Unprecedented price performance of consumers
A bad surprise
The Jakarta consumer index is down 14.0% year-to-date, underperforming the

broader benchmark (JCI) by 5.6%p. Note that this is 1) the first time that the Jakarta
consumer index is posting double digit negative returns over the past 10 years, 2)
the second time the Jakarta consumer index posted negative returns over the past
decade, and 3) the third time, during our observation period, that the consumer
index is underperforming the JCI. All in all, we suspect that investors would feel
puzzled by the meaningful underperformance of the consumer index – which is one
of the most defensive sectors within the JCI.
Table 7. Price performance of JCI and consumer index (YoY, %, %p)

Jakarta composite index Jakarta consumer index Performance gap
2009 87.0 105.4 18.4
2010 46.1 63.1 16.9
2011 3.2 20.2 17.0
2012 12.9 19.0 6.0
2013 -1.0 13.8 14.8
2014 22.3 22.2 -0.1
2015 -12.1 -5.2 6.9
2016 15.3 12.6 -2.8
2017 20.0 23.1 3.1
2018 (YTD) -8.4 -14.0 -5.6
Note: Year-to-date as of October 10, 2018
Macro aside, we see high correlation between consumer index and yields
We note that the consumer index displays strong inverse correlation with market
yields. Given our expectation that Bank Indonesia is likely to mirror US Federal
Reserve’s rate hike path, we see further upside risk to the government bond yields.
From a simple correlation perspective, we expect the price performance of
consumers to bear greater downside risk from here.
Figure 53. Consumers vs. FX rate Figure 54. Consumers vs. yield Figure 55. Consumers vs. commodity
(12/16=100) (12/16=100) (12/16=100)

140 Consumer index Consumer index Consumer index
135 USD/IDR 135 Gov. bond yield (10yr) 135 Commodity index
130
125
125
125
120 115
115
115
105
110
105
105 95
100 95
85
95
90 75 85
12/16 6/17 12/17 6/18 12/16 6/17 12/17 6/18 12/16 6/17 12/17 6/18
Source: Bloomberg, Mirae Asset Securitas Indonesia Source: Bloomberg, Mirae Asset Securitas Indonesia Source: Bloomberg, Mirae Asset Securitas Indonesia

Foreign fund flow analysis
Foreigners seem to prefer mid-to-small cap discretionary names…

According to our foreign fund flow analysis, foreigners seem to prefer discretionary
names as fund flows were concentrated towards mid-to-small cap retailers
(highlighted in gray). Among the 4 preferred discretionary names, we highlight that
1H18 revenue and net profit growths for Ace Hardware (ACES/Trading Buy/TP
IDR1,540), Mitra Adiperkasa (MAPI/Not Rated) were above industry average.
However, Matahari Department Store (LPPF/Trading Buy/TP IDR9,300) exhibited
sub-par revenue and net profit growths, while Ramayana Lestari Sentosa
(RALS/Buy/TP IDR1,610) delivered robust net profit growth only, which makes it
seemingly difficult to justify the preference from an earnings angle. In addition, if
we broaden our scope within the discretionary space, we notice that Astra
International (ASII/Not Rated) outperformed the industry average with its above
average revenue growth while Sumber Alfaria Trijaya (AMRT/Not Rated) delivered
exceptional net profit growth. Unfortunately, the bigger discretionary names such
as ASII and AMRT remain heavily sold off by foreign investors, year-to-date.
…which remain outside the LQ45 index

Although we may not be able to find one single argument to justify the appetite of
foreign investors, we underscore that there is one common trait of the 4 preferred
discretionary names – ACES, MAPI, LPPF and RALS are commonly outside the LQ45
index. We have continuously argued that foreign investment flows have been
largely driven by passive (index) funds, and that lower weight adjustments of
Indonesian assets are likely to amplify the selling pressure. Given a large portion of
Indonesian equity market is comprised of consumers (21% to total composite as of
3Q18), we believe mid-to-small cap discretionary names were insulated from the
selloff, in our view.
Table 8. Cumulative foreign net purchase for the period (IDRbn)

Staples Discretionary
HMSP UNVR GGRM ICBP INDF KLBF CPIN JPFA MAIN MYOR HOKI ASII AMRT ACES MAPI LPPF RALS
YTD -1,959.0 -2,675.0 -874.1 -130.9 -1,597.1 -116.4 437.3 -11.2 -58.1 -96.3 58.0 -4,706.2 -536.2 176.9 292.8 38.7 114.6
6M -567.0 -552.7 -486.1 -156.3 -893.9 -176.3 311.0 -9.9 -40.5 -69.5 55.8 -555.8 -532.9 243.6 41.1 134.1 85.2
3M 290.1 346.0 108.1 73.8 -245.4 69.1 583.4 8.4 -28.3 -24.7 44.7 376.8 -157.1 228.4 9.2 264.5 130.9
1M 21.6 109.8 93.4 59.3 -236.5 62.0 125.9 -17.1 3.5 -2.4 -2.5 -99.7 -17.3 141.9 19.6 102.5 4.0
1W -31.2 -136.2 -80.8 -10.2 -78.3 -30.7 -23.7 10.8 -1.8 -0.5 -1.1 -124.5 -0.7 29.8 -1.5 -14.9 -0.0
Note: As of October 10, 2018
Figure 56. Revenue growth comparison (1H17 vs. 1H18) Figure 57. Net profit growth comparison (1H17 vs. 1H18)
(YoY, %) (YoY, %)
25 250
22.6 225.5
20 18.0 200
14.8
15 150
10 9.0 100
7.5
65.0
5 3.1 50 29.2 31.8

0.9 9.9 10.7
1.4
0 0
ASII AMRT ACES MAPI LPPF RALS Consumer ASII AMRT ACES MAPI LPPF RALS Consumer
average average
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research
Note: Consumer average includes revenue aggregation of the companies Note: Consumer average includes net profit aggregation of the companies
mentioned in this report mentioned in this report

Valuations: Trapped inside the box
Value emerging…
The Jakarta consumer index is trading at 30.9x trailing P/E. Since April of this year,
the consumer index has been trading within a boxed range of -1STD~ -2STD. The
index is trading at a 4.7%/9.4%/7.9% discount to 1-year/3-year/5-year average
historical trends, which lead us to believe that sector valuations are compelling with
limited downside. Indeed, over the past 5 years, the index was able to keep –2STD
level as a strong supporting level.
…but investors seem to be sitting on the fences

Based on our earlier discussions in this report, we conclude that macro and
business environments remain un-conducive for the sector players. In addition, we
believe market will have to adjust lower the expectations on pre-election
consumption recovery. Given lack of positive catalysts, we expect valuations to
remain boxed.
Figure 58. Trailing P/E of Jakarta consumer index

(x)
40
+2STD
+1STD
35
AVG
-1STD
30
-2STD
25
12/13 4/14 8/14 12/14 4/15 8/15 12/15 4/16 8/16 12/16 4/17 8/17 12/17 4/18 8/18
Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research
Figure 59. Trailing P/E of LQ45 index

(x)
24
22 +2STD
20 +1STD
AVG
18
-1STD
16
-2STD
14
12
12/13 4/14 8/14 12/14 4/15 8/15 12/15 4/16 8/16 12/16 4/17 8/17 12/17 4/18 8/18

Unexciting earnings growth outlook

According to Bloomberg consensus estimates, the consumer index RoE is projected
to trend flat at 21.3% (2018F) vs. 22.1% (2017). On the revenue side, consumer
companies are likely to post sub-average growth (8.6% YoY in 2018F and 8.8% YoY
in 2019F) compared to historical average of 11.2% YoY (2011~ 2017). This brings to
our conclusion that consumer companies are squeezing their costs to maintain
their bottom line earnings.
Figure 60. Jakarta consumer index: Valuations vs. RoE
(x) Trailing P/E (L) ROE (R) (%)
40 30
35 25
30 20
25 15
12/13 6/14 12/14 6/15 12/15 6/16 12/16 6/17 12/17 6/18
Table 9. Revenue trends and forecasts for key consumer companies (IDRbn)
2018F/ 2019F/ 2011~2017
2011 2012 2013 2014 2015 2016 2017 2018F 2019F
2017 2018F Avg. growth
HMSP 52,856.7 66,626.1 75,025.2 80,690.1 89,069.3 95,466.7 99,091.5 106,178.9 114,788.1 7.2% 8.1% 12.8%
UNVR 23,469.2 27,303.2 30,757.4 34,511.5 36,484.0 40,053.7 41,204.5 43,484.6 46,724.2 5.5% 7.4% 11.3%
GGRM 41,884.4 49,028.7 55,437.0 65,185.9 70,365.6 76,274.1 83,305.9 92,091.1 101,761.0 10.5% 10.5% 12.1%
ICBP 19,367.2 21,716.9 25,094.7 30,022.5 31,741.1 34,375.2 35,606.6 38,517.2 41,409.7 8.2% 7.5% 10.4%
INDF 45,768.1 50,201.5 55,623.7 63,594.5 64,061.9 66,659.5 70,186.6 74,118.5 79,360.5 5.6% 7.1% 9.2%
KLBF 10,911.9 13,636.4 16,002.1 17,368.5 17,887.5 19,374.2 20,182.1 21,299.5 22,901.3 5.5% 7.5% 10.4%
CPIN 17,958.0 21,310.9 25,663.0 29,150.3 29,920.6 38,256.9 49,367.4 53,499.6 58,211.7 8.4% 8.8% 18.8%
JPFA 15,633.1 17,832.7 21,412.1 24,458.9 25,022.9 27,063.3 29,602.7 33,880.8 36,911.6 14.5% 8.9% 11.5%
MAIN 2,634.5 3,349.6 4,193.1 4,502.1 4,775.0 5,237.7 5,441.4 6,219.0 6,709.6 14.3% 7.9% 15.5%
MYOR 9,453.9 10,510.6 12,017.8 14,169.1 14,818.7 18,350.0 20,816.7 23,537.5 26,781.5 13.1% 13.8% 16.6%
HOKI N/A N/A N/A 518.3 658.3 1,146.9 1,209.2 1,477.4 1,971.7 22.2% 33.5% 35.6%
ASII 162,564.0 188,053.0 193,880.0 201,701.0 184,196.0 181,084.0 206,057.0 222,104.0 240,150.5 7.8% 8.1% 7.5%
AMRT 18,227.0 27,177.0 34,897.3 41,495.7 48,265.5 56,107.1 61,464.9 68,112.2 75,048.0 10.8% 10.2% 24.0%
MAPI 5,889.8 7,585.1 9,734.2 11,822.1 12,832.8 14,149.6 16,305.7 18,762.5 21,242.9 15.1% 13.2% 19.7%
LPPF 4,700.7 5,616.9 6,754.3 7,925.5 9,006.9 9,897.0 10,024.0 10,547.3 11,598.7 5.2% 10.0% 13.8%
RALS 5,086.2 5,699.7 6,000.8 5,861.3 5,533.0 5,857.0 5,622.7 6,277.8 7,104.8 11.7% 13.2% 2.5%
Total 436,404.5 515,648.4 572,492.7 632,977.3 644,639.1 689,353.0 755,488.9 820,107.9 892,675.8 8.6% 8.8% 11.2%
Source: Bloomberg consensus estimates, Mirae Asset Sekuritas Indonesia Research

We downgrade our consumer sector call to Neutral
Economy is yet to turn the corner...
The consumer index embeds strong correlation with the composite leading
indicator (CLI) – which is currently positioned in the negative territory. However,
based on our assessment of the key components of the CLI, we are inclined to
believe that the economy is unexciting at this point and unlikely to exhibit an
imminent rebound from here.
…but at the same time, CLI seems like an old bear
The composite leading indicator is heading into its 12 consecutive month of decline.
Given the past 4 down cycles had an average duration of 10.5 months, we suspect
that the decline could be nearing its end. We see low probability of an immediate
trend reversal, however, we equally view current economic conditions worsening
further from here.
We are less excited about election spending…
Indonesia’s presidential election is just around the corner (April 2019) and market
participants seem to be excited about the nation’s consumption outlook. There are
two reasons behind the excitement – 1) vote buying and 2) increased subsidies.
However, we suspect that vote buying has limited impact on the mid-to-long term
spending intentions as they are considered unsustainable. Further, increased
subsidies are conducted in good faith, rather than covered up with politics, in our
view.
…but spending on essentials will keep macro-level growth stable
Despite the prolonged weakness to the local currency, we project consumption

growth to remain stable. We highlight the broken relationship between inflation
and FX rate, which we ascribe to the 1) increasing price control over agriculture
products by the government, 2) greater sacrifice from the SOE utility operators, and
3) higher import tariffs on consumption goods. We also underscore that 75% of
household spending is comprised of essential spending, hence, demand elasticity
remains low. All in all, we see limited chances of inflation pressures building for the
time being, which should strengthen our case for stable consumption growth,
going forward.
Stuck in limbo, we downgrade sector call to Neutral
Indonesian consumer story is stuck in limbo with very limited upside catalysts.
Furthermore, news headlines continue to feed markets with negative
developments, which have dented the consumption sentiment. However, we view
downside risk to be equally limited as we consider limited downside to Indonesia’s
economic cycle as well as spending profile concentrated on essential spending.
Similar story applies to valuations as consumer index is trading at a 12M trailing P/E
of 30.9x (7.9% discount to 5-year historical average). Current market landscape has
too many moving parts to the equation which are mostly unpredictable. We
recommend investors to take conservative stance on the consumer sector. We
downgrade our sector call from Overweight to Neutral.

Investment strategy: Stay selective

Market is becoming increasingly tricky and we see no signs of early resolution of
the long list of uncertainties. In addition to the challenging macro backdrop, we
stress the continued selling pressures from foreigners who are rushing to reduce
risks off their balance sheet. All in all, we find it tough to call a bottom on
valuations. We are turning defensive and presenting selective ideas to call our
consumer recommendations:
1) Stick with the pure defensives
While consumer names are – by the nature of their business – defensive, we would
like to take a further look into the debt side of the consumer companies’ balance
sheets. We believe the market is trending on the weak side of the credit cycle and
hence, rising interest rates and further weakening of the rupiah (if a company is
exposed to USD debt) may end up compressing margins further.
Table 10. Profitability and debt profile of consumer companies vs. LQ45 (FY2017)
ROE Total debt to Debt to equity
vs. LQ45 vs. LQ45 vs. LQ45
(%) EBITDA (x) (%)
HMSP 37.1 HIGH 0.0 LOW 0.3 LOW
UNVR 141.8 HIGH 0.3 LOW 66.7 HIGH
GGRM 19.0 HIGH 1.5 LOW 48.8 HIGH
ICBP 20.5 HIGH 0.4 LOW 11.6 LOW
INDF 13.9 LOW 2.3 HIGH 52.0 HIGH
KLBF 19.1 HIGH 0.1 LOW 2.3 LOW
CPIN 16.8 HIGH 1.3 LOW 37.5 LOW
JPFA 11.0 LOW 2.0 HIGH 62.0 HIGH
MAIN 2.8 LOW 5.1 HIGH 108.3 HIGH
MYOR 24.0 HIGH 1.5 LOW 60.6 HIGH
HOKI 13.8 LOW 0.9 LOW 15.3 LOW
ASII 16.0 LOW 2.7 HIGH 48.0 LOW
AMRT 5.9 LOW 2.2 HIGH 149.7 HIGH
MAPI 9.2 LOW 2.0 HIGH 83.3 HIGH
LPPF 91.2 HIGH 0.0 LOW 0.0 LOW
RALS 11.9 LOW 0.0 LOW 0.0 LOW
LQ45 16.3 1.8 47.2
Narrowing our discussions to debt side only, we highlight the following consumer
names with low debt to EBITDA and low debt to equity against the LQ45: HMSP,
ICBP, KLBF, CPIN, HOKI, LPPF, and RALS. Further trimming down the list with
relatively higher profitability profile, we select HMSP, UNVR, ICBP, KLBF, CPIN, and
LPPF as our preferred names within the defensive theme.
2) Idiosyncratic turnaround
Given on the unfavorable macro outlook and changing consumer behavior, we

believe consumer companies are facing difficulties in expanding their margins.
Rising oil prices, trade frictions between US and China, and escalating geopolitical
risks are variables that are difficult to contain with limited domestic measures (e.g.,
tightening monetary policy, market intervention, etc.). However, we are
encouraged to find several consumer companies have successfully delivered above
average margin improvements (as a quick reminder, we are looking at a YoY
comparison in order to strip away the Eid al-Fitr impact). We notice meaningful
margin improvements from the poultry industry (CPIN, JPFA, and MAIN) and
several discretionary names such as ASII, MAPI, and RALS.

Table 11. Operating margin trends (%, %p)

2Q17 3Q17 4Q17 1Q18 2Q18 QoQ YoY
HMSP 18.5 14.3 16.3 16.0 16.3 0.3 -2.1
UNVR 24.5 21.5 22.0 24.1 23.4 -0.8 -1.2
GGRM 8.9 15.4 15.5 12.4 9.8 -2.6 0.9
ICBP 14.1 15.4 12.3 16.8 15.1 -1.8 1.0
INDF 10.8 12.5 10.2 13.6 10.1 -3.5 -0.6
KLBF 15.8 14.9 16.4 15.1 14.9 -0.2 -0.9
CPIN 9.6 5.6 7.8 11.8 14.9 3.1 5.3
JPFA 8.8 8.4 7.8 10.6 15.1 4.6 6.3
MAIN 2.9 0.8 1.8 6.2 8.0 1.8 5.1
MYOR 7.6 11.1 15.2 11.2 7.4 -3.7 -0.1
HOKI 9.2 -5.2 5.1 9.7 9.2 -0.5 0.1
ASII 8.6 10.7 9.8 10.8 11.4 0.6 2.8
AMRT 1.0 1.3 2.8 2.0 1.5 -0.5 0.5
MAPI 8.9 5.9 7.3 5.8 10.7 4.9 1.7
LPPF 35.4 11.3 20.1 15.4 35.0 19.6 -0.4
RALS 18.2 -5.2 0.8 -0.9 24.2 25.1 6.0
LQ45 20.2 20.4 26.2 25.7 21.1 -4.6 0.9
Source: Company data, Mirae Asset Sekuritas Indonesia Research
We believe there are industry-specific issues that are driving margins higher. Given
the broad-based negative sentiment hanging over the market, profitability drivers
are likely to grab investors’ attention. We quickly discuss the following industry and
company specific issues:
 Poultry (Neutral): The government-led culling initiative and regulatory ban

on antibiotic use in poultry feed have collectively led to a meaningful supply
disruption, thus driving DOC and live bird prices higher. Furthermore, price
declines in local corn and soybean meal have placed positive impact on cost
pressures.
 ASII (Not Rated): We suspect ASII’s margin recovery was chiefly driven by its
tight control over its operating expenses. According to Bloomberg consensus
estimates, ASII is expected to deliver revenue and gross profit growths of
7.8% and 8.4% YoY, respectively in 2018F. However, the diversified
conglomerate is likely to deliver 15.5% YoY growth in its operating profit for
2018F, largely driven by the muted growth in its operating expenses (1.9%
YoY).
 MAPI (Not rated): We believe MAPI is well-positioned to benefit from the

changing lifestyle of Indonesia’s urban population. The company made
strategic and prudent decisions to shut down Debenhams and Lotus
department stores (2017) and focus on capturing the lifestyle needs of
consumers (specialty stores and F&B).
 RALS (Buy/TP IDR1,610): At the annual meeting of shareholders (May 2018),

RALS appointed Ms. Jane Tumewu (daughter of founder Mr. Paulus Tumewu)
as the vice president of the retailer. The new vice president has been
aggressive in the transformation of the retailer and focusing on key growth
opportunities such as consignment sales.

3) When inflation turns the corner…

We do not expect an imminent recovery of inflation, given government’s price
controls and subsidy supports. We believe the low inflationary environment is likely
to remain intact (at least) until the next presidential election (April 2019) However,
we may be able to see faster-than-expected rise in inflation during 2H19 as price
control and subsidies are gradually removed.
Consumer staples companies have delivered lackluster revenue growth as

softening price pressures limited their ASP expansions. In addition, given the
nature of staples being necessities spending, volume (sales quantity) is unlikely to
pick up substantially (unless product innovation kicks in). Hence, we firmly believe
inflation turnaround to be a key revenue growth driver for consumer staples
names.
We want to play on the defense

Factoring in the three investment approaches and our industry analyst insights, we
present the following names as our preferred consumer names. Within the
consumer space, we like ICBP, GGRM, CPIN and HOKI. Among the discretionary
names, we prefer MAPI and RALS.

Key Recommendations
Ramayana Lestari Sentosa (RALS IJ/Buy/TP IDR1,610)

 RALS is moving away from loss-making business to profitable ones (consignment and DP fashion business)
 Purchasing power of the middle to lower income consumer remains intact
Gudang Garam (GGRM IJ /Buy/TP IDR89,000)

 The leading producer of SKM full-flavor kretek cigarettes
 GGRM’s lower valuation relative to HMSP is unjustified in light of its growing market share (22% as of 1Q18 vs.
21.1% in 1Q17) and strong track record in SKM full-flavor cigarettes, which is the new trend in Indonesia
Mitra Adiperkasa (MAPI IJ/Not rated)

 Unproductive stores have been shut down
 Specialty stores sales productivity is improving
 Strong top line and bottom line growth in 2018
Indofood CBP Sukses Makmur (ICBP IJ/Trading Buy/TP IDR9,700)

 Market leader in the instant noodles segment with around 70% market share
 Noodles division (63.6% contribution to 1H18 total net sales) booked higher EBIT margin in 1H18 (20.5%, vs.
19.6% in 1H17)
 ICBP’s continuing efforts to develop products and innovate could boost volume growth
Charoen Pokphand Indonesia (CPIN IJ/Not rated)

 Positive industry sentiment from chicken price rebound
 In term of feed and DOC production capacity shares, CPIN holds the biggest capacity shares with estimated
35% and 38% capacity share, respectively
 In line with industry performance, CPIN booked 1H18 net profit of IDR2.4tr, surging 59.7% YoY on the back of
margin improvement.
Buyung Poetra Sembada (HOKI IJ/Buy/TP IDR1,350)

 King of rice distribution in modern channels (35.0% market share)
 Key drivers: Narrowing price gap, new modern distribution channel
 Earnings to grow six times faster than Indonesia’s economy (2016-2020F)

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Ramayana Lestari Sentosa (RALS IJ)

Retail fashionista
Retail Big changes - Closing down unprofitable supermarkets
In 2017, RALS has closed down 16 unprofitable supermarkets (11 stores through
(Maintain) Buy
9M17) due to poor management that has led to slow supermarket traffic. At the
beginning of 2017, management had expected to convert 25 supermarkets into
Target Price (12M, IDR) 1,610 SPAR stores and increase fresh food products’ contribution to supermarket revenue
to around 22-23%. As it turned out, the company had to cancel the supermarkets’
Share Price (10/12/18, IDR) 1,190 conversion, and instead opened up one SPAR supermarket next to one of its
fashion department stores. Meanwhile, fresh food products’ contribution to overall
Expected Return 35.3% supermarket revenue is still far below the goal, hovering around 15-16%. In our
view, closing down unprofitable supermarkets and renting out the space to other
OP (18F, IDRbn) 554.5 vendors is a prudent strategy to mitigate further losses.
Consensus OP (18F, IDRbn) 502.2
Paying closer attention to fashion operations
EPS Growth (18F, %) 36.8
Market EPS Growth (18F, %) 19.7 Following the supermarket closures, management is paying closer attention to its
P/E (18F, x) 16.4 fashion operations, although the company has also closed down three department
Industry P/E (18F, x) 47.2 stores in 2017. Notably, some of the closed supermarket spaces are now being
Benchmark P/E (18F, x) 15.3 used for fashion consignment items. Management sees more opportunities from
expanding the fashion business than from keeping supermarkets running.
Market Cap (IDRbn) 8,444.2
Shares Outstanding (mn) 7,096.0 Strong consignment sales throughout 2018
Free Float (%) 36.6
Foreign Ownership (%) 67.8 Department store fashion sales saw robust growth, mainly supported by
Beta (12M) 0.9 consignment sales. This is consistent with the company’s aim to increase
52-Week Low 865 consignment sales, which have better margins than direct purchase. Consignment
52-Week High 1,555 sales showed the fastest growth in 1H18 (+18.7% YoY), followed by department
stores (+8.6% YoY). Meanwhile, supermarket sales fell 20% YoY in 1H18, mainly due
(%) 1M 6M 12M
to the closures of 18 unprofitable supermarkets since last year.
Absolute -7.0 -16.8 24.0
Relative -6.3 -8.6 26.8 SSSG has turned positive in 2018
(D-1yr=100)
JCI RALS RALS’ same-store sales growth (SSSG) as of June was just 1.9% YTD. For 2018, the
160
company is targeting blended SSSG of 1.5-3%, with fashion SSSG expected to come
in between 5-8% and supermarket SSSG to remain negative (around -10% to -15%).
140
120
We take a conservative approach in our model by adopting the lower band of the
100 company’s guidance in our SSSG assumption.
Retaining Buy recommendation

80
10/17 12/17 2/18 4/18 6/18 8/18 10/18
We reiterate Buy on RALS, as we think the recovery of purchasing power of the

lower income class remains intact. RALS is currently trading at a 2018F P/E of 16.4x
(0.5 standard deviation from its five-year mean P/E).
FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F

Revenue 7,941.7 7,786.2 8,234.6 8,145.9 8,585.1 8,861.8
Gross Profit 2,047.8 1,996.0 2,202.5 2,212.3 2,521.6 2,600.6
Operating Profit 294.3 233.5 357.4 356.4 554.5 554.3
Net profit 355.7 336.1 408.5 406.6 550.3 591.7
EPS (IDR) 50 47 58 57 78 83
BPS (IDR) 469 470 470 492 529 558
ROE (%) 10.9 10.1 12.2 11.9 15.2 15.3
ROA (%) 7.9 7.4 8.9 8.5 11.0 11.2
Note: All figures are based on consolidated IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates

Ramayana Lestari Sentosa (RALS IJ/TP: IDR1,610)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)

(IDRbn) 2016 2017 2018F 2019F Year end Dec 31 (IDRbn) 2016 2017 2018F 2019F
Gross Revenue 8,235 8,146 8,585 8,862 Assets
Net Revenue 5,857 5,623 5,898 6,000 Cash and equivalents 604 752 1,072 799
COGS -3,655 -3,410 -3,377 -3,400 Receivables 52 57 52 53
Gross Profit 2,202 2,212 2,522 2,601 Inventories 834 741 768 773
Opex -1,845 -1,856 -1,967 -2,046 Others 1,341 1,543 1,490 2,054
Operating Profit 357 356 554 554 Total current assets 2,831 3,093 3,382 3,679
Other income/(expenses) 11 20 -9 14 Fixed assets - net 1,279 1,235 1,188 1,119
Profit before income tax 368 377 545 568 Advances 455 452 481 491
Income tax expenses -57 -60 -81 -87 Others 82 111 103 108
Minority interest 0 0 0 0 Total non-current assets 1,816 1,798 1,772 1,719
Net profit 408 407 550 592 Total assets 4,647 4,892 5,154 5,398
EBITDA 544 540 747 750 Liabilities and equity
ST bank loans & CM - - - -
Growth & margins 2016 2017 2018F 2019F Trade payables 904 956 924 932
Net Revenue 5.9% -4.0% 4.9% 1.7% Others current liabilities 105 92 109 114
EBITDA 29.8% -0.7% 38.3% 0.4% Total current liabilities 1,009 1,049 1,033 1,046
Net profit 21.6% -0.5% 35.4% 7.5% Long term debt - - - -
Others 301 349 364 394
Gross margin 26.7% 27.2% 29.4% 29.3% Total non-current liabilities 301 349 364 394
Operating margin 4.3% 4.4% 6.5% 6.3% Total liabilities 1,310 1,398 1,397 1,440
EBITDA margin 6.6% 6.6% 8.7% 8.5% Minority interests - - - -
Shareholders' equity 3,337 3,494 3,757 3,958
Cash Flows (Summarized) Forecasts/Valuations (Summarized)

2016 2017 2018F 2019F Year end Dec 31 2016 2017 2018F 2019F
CF from operation P/E ratio (x) 22.1 22.3 16.4 15.3
Net profit 408 407 550 592 P/BV ratio (x) 2.7 2.6 2.4 2.3
Depreciation/amortization 170 179 182 189 EV/EBITDA (x) 15.5 15.6 11.3 11.3
Change in working capitals -14 148 -61 3
Others -6 -102 76 -15 Current ratio 2.8 3.0 3.3 3.5
CF from operation 558 631 748 769 Quick ratio 2.0 2.2 2.5 2.8
CF from Investments Debt to equity 0.0 0.0 0.0 1.0
Net capex -116 -135 -136 -120 Net debt to equity -0.2 -0.2 -0.3 -0.2
Others -298 -147 -20 -560 Interest coverage -15.6 -18.1 -23.6 -25.2
CF from investments -414 -282 -155 -680
CF from financing activity
Increase/(decrease) in debt 0 0 0 0
Increase/(decrease) in equity 15 0 0 0
Dividend payments -207 -242 -285 -385
Others -193 41 13 24
CF from financing activity -384 -201 -272 -361
Net changes in cash -241 148 320 -273
Beg cash balance 844 604 752 1,072
Non-cash adjustment 0 0 0 0
Ending balance 604 752 1,072 799
Source: Company data, Mirae Asset Sekuritas Research estimates

Gudang Garam (GGRM IJ)

Growing popularity of SKM full-flavor supports sales
volume growth
Cigarettes Growing popularity of SKM full-flavor supports sales volume

Before SKM LTN (mild machine-made cigarettes) were introduced to the market,
(Maintain) Buy people smoked SKT (hand-rolled cigarettes) more than SKM FF (full-flavor machine
made cigarettes), as they were more affordable and better captured the kretek
Target Price (12M, IDR) 89,000 flavor favored by Indonesians. Now there is a rising trend toward SKM FF, which
GGRM attributes to consumers’ deeper pockets. Consumers are also shifting from
SKT to SKM FF because the flavor is not much different than SKT; the growing
Share Price (10/12/18, IDR) 74,275
popularity of SKM FF has much to do with taste and GGRM’s pioneering in this
segment.
Expected Return 19.8%
GGRM’s SKM portion to total revenue grew 82 bps QoQ and 122 bps YoY to 90.7% in
OP (18F, IDRbn) 12,091 2Q18 (vs. 89.9% in 1Q18 and 89.5% in 2Q17). Meanwhile, SKT’s portion to total
Consensus OP (18F, IDRbn) 12,148 revenue dropped 77 bps QoQ and 137 bps YoY to 7.7% in 2Q18 (vs. 8.4% in 1Q18
and 9% in 2Q17). We expect SKM FF to remain GGRM’s driver of sales volume.
Consensus EPS Growth (18F, %) 8.4 FCF to remain solid
P/E (18F, x) 16.6
Industry P/E (18F, x) 27.8 We expect GGRM’s free cash flow to remain solid, despite capex for Kediri airport.
Benchmark P/E (18F, x) 15.3 The company expects to pay a lower payout ratio of 65% in 2018F compared to 76%
in 2017. It has not decided on the amount to put toward the airport, and hence only
guided IDR1-10tr capex for the airport in its latest public release. Regardless, we
Shares Outstanding (mn) 1,924.1
expect the capex to be amortized over several years. We assume the capex-to-sales
Free Float (%) 23.7
ratio for 2018F onwards to be 3.3%, with capex amounting to at least IDR3tr.
Foreign Ownership (%) 82.0
Assuming that airport construction is divided over five years, the airport capex will
Beta (12M) 1.3
be around IDR2tr. We believe this is still manageable, compared to the company’s
52-Week Low 61,925
high capex cycle during 2013-15.
52-Week High 86,400
(%) 1M 6M 12M GGRM’s lower valuation relative to HMSP is unjustified

Absolute 0.4 -2.3 13.2 We believe the company’s lower valuation relative to HMSP is unjustified in light of
Relative 1.1 5.9 16.1
its growing market share (22% as of 1Q18 vs. 21.1% in 1Q17) and strong track
(D-1yr=100)
record in SKM full-flavor cigarettes, which are preferred in the Indonesian mass
JCI GGRM
160 market nowadays. We reiterate Buy on GGRM with a target price of IDR89,000,
140 which implies a 2018F P/E of 20.2x. Our target price was derived using a blended
120
target price of DCF with a 7-year life span and target multiple of 19x (+1Std
Deviation). The company is currently trading at 16.6x 2018F P/E, just at its 5-year
100
average P/E.
80
10/17 12/17 2/18 4/18 6/18 8/18 10/18
FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F

Revenue 65,186 70,365 76,274 83,306 91,463 100,428
Gross Profit 13,380 15,485 16,617 18,222 19,930 21,808
Operating Profit 8,525 9,906 9,972 11,119 12,091 13,223
Net profit 5,369 6,426 6,677 7,754 8,483 9,282
EPS (IDR) 2,790 3,340 3,470 4,030 4,409 4,824
BPS (IDR) 17,151 19,698 20,522 21,917 23,707 25,665
ROE (%) 16.3 17.0 16.9 18.4 18.6 18.8
ROA (%) 9.2 10.1 10.6 11.6 12.2 12.4

Gudang Garam (GGRM IJ/Buy/ TP: IDR89,000)

(IDRbn) 2016 2017 2018F 2019F Year end Dec 31 (IDRbn) 2016 2017 2018F 2019F
Revenue 76,274 83,306 91,463 100,428 Assets
COGS 59,657 65,084 71,534 78,620 Cash and equivalents 1,595 2,329 3,056 6,118
Gross Profit 16,617 18,222 19,930 21,808 Receivables 2,090 3,079 3,380 3,711
Opex 6,644 7,103 7,839 8,585 Inventories 37,545 37,920 38,804 39,725
Operating Profit 9,972 11,119 12,091 13,223 Others 703 1,251 1,353 1,472
Other income/(expenses) 109 45 128 72 Total current assets 41,933 44,579 46,593 51,026
Interest income 41 73 70 61 Fixed assets - net 20,499 21,409 22,015 22,717
Interest expense -1,191 -801 -995 -982 Others 520 772 791 818
Profit before income tax 8,931 10,437 11,294 12,374 Total non-current assets 21,018 22,181 22,805 23,535
Income tax expenses -2,258 -2,681 -2,856 -3,129 Total assets 62,952 66,760 69,399 74,561
Minority interest 4 -2 45 37 Liabilities and equity
Net profit 6,677 7,754 8,483 9,282 ST bank loans and current maturities 19,753 20,600 19,207 20,086
EBITDA 12,058 13,363 14,503 15,834 Accounts payables 1,118 1,214 1,391 1,529
Others current liabilities 767 797 1,011 1,148
Total current liabilities 21,639 22,611 21,609 22,763
Growth & margins 2016 2017 2018F 2019F Deferred tax liabilities 371 384 454 497
Growth (%) Others 1,377 1,578 1,660 1,820
Revenue 8.4 9.2 9.8 9.8 Non-current liabilities 1,749 1,961 2,114 2,317
EBITDA 3.5 10.8 8.5 9.2 Total liabilities 23,387 24,572 23,723 25,080
Net profit 3.9 16.1 9.4 9.4 Minority interests 77 17 62 99
Profitability (%) Shareholders' equity 39,487 42,171 45,614 49,382
Gross margin 21.8 21.9 21.8 21.7
Operating margin 13.1 13.3 13.2 13.2
EBITDA margin 15.8 15.6 15.9 15.8
Cash Flows (Summarized) Forecasts/Valuations (Summarized)

2016 2017 2018F 2019F Year end Dec 31 2016 2017 2018F 2019F
CF from operation P/E ratio (x) 21.0 18.1 16.6 15.1
Net profit 6,677 7,754 8,483 9,282 P/BV ratio (x) 3.6 3.3 3.1 2.8
Depreciation/amortization 2,063 1,870 2,412 2,612 EV/EBITDA (x) 1.5 1.4 1.1 0.9
Change in working capitals -1,488 -2,058 -1,110 -1,242
Others 56 205 325 295 Current ratio 1.9 1.9 2.1 2.1
CF from operation 7,308 7,771 10,110 10,946 Quick ratio 0.2 0.3 0.3 0.4
Debt to equity 0.6 0.6 0.5 0.5
CF from Investments Net debt to equity 0.6 0.5 0.5 0.4
Net capex -2,455 -2,780 -3,018 -3,314 Interest coverage -0.1 -0.1 -0.2 -0.1
LT investments 0 0 0 0
CF from investments -2,455 -2,780 -3,018 -3,314
CF from financing activity

Increase/(decrease) in debt -808 847 -1,393 878
Increase/(decrease) in equity 0 0 0 0
Dividend payments -5,003 -5,049 -5,040 -5,514
Others -173 -55 68 65
CF from financing activity -5,984 -4,257 -6,365 -4,570
Increase (Decrease) in Cash -1,131 734 727 3,062
Beginning balance 2,726 1,595 2,329 3,056
Ending balance 1,595 2,329 3,056 6,118

Mitra Adiperkasa (MAPI IJ)

Strong sales growth continues
Retail Non-productive stores have been closed down

From 2014 to 2017, Mitra Adiperkasa (MAPI) shut down nonproductive stores,
Not Rated especially in the department store division. Indeed, in 2017, MAPI’s department
store area was significantly reduced owing to unprofitability. Also, MAPI’s store
Target Price (12M, IDR) N/A openings have been non-aggressive, resulting in a current store area of 747,000m2
(around 2.8% CAGR since 2014), including department stores, specialty stores, and
F&B.
Share Price (10/12/18, IDR) 790
Specialty store sales productivity is improving
Expected Return N/A
Specialty stores contribute the most to MAPI’s revenue (73% contribution) and
bottom line (72%). In 1H18, specialty stores’ same-store sales growth (SSSG)
OP (18F, IDRbn) N/A
improved to 10% (from 8% in 1H17). We believe the SSSG improvement was mainly
Consensus OP (18F, IDRbn) 1,389
supported by Active stores; MAPI opened 26 new Active stores in 1H18.
EPS Growth (18F, %) N/A
Consensus EPS Growth (18F, %) 92.6 According to our calculation, MAPI’s total specialty store space grew at a CAGR of
P/E (18F, x) N/A 5.5% from 2014 to 2017, representing more conservative expansion compared to
Industry P/E (18F, x) 27.8 the F&B division (+13.7% CAGR), but still faster than the department store division (-
Benchmark P/E (18F, x) 15.3 1.5% CAGR). What’s more notable is that specialty stores’ overall sales productivity
is improving at a much faster rate compared to the other two divisions; specialty
store productivity has grown at a CAGR of 8.9% from 2014 to 2017, compared to
Shares Outstanding (mn) 16,600.0
6.8% growth for F&B. Despite the rising e-commerce threat toward specialty store
Free Float (%) 49.0
products, MAPI has managed to establish an online presence with the website
MAPEMALL.com, catering to the online shopping trend. Given the company’s brand
Beta (12M) 1.0
exclusivity, we believe the website offers MAPI a competitive advantage over other
52-Week Low 595
online marketplaces.
52-Week High 945
(%) 1M 6M 12M F&B business is still growing

Absolute -1.3 -4.8 14.5 As Indonesia’s Starbucks operator, MAPI faces competition from local cheaper
Relative -0.5 3.4 17.4
coffee, which has mushroomed throughout Indonesia (especially in the Greater
(D-1yr=100)
Jakarta area) amid the still-limited penetration of Starbucks in the country. This
JCI MAPI
160 explains why F&B SSSG dropped to 0% in 2017. Nonetheless, the company is still on
140 track with its expansion plan, given the under-penetration of the F&B business,
120
especially outside Java. Coming off a low base in 2017, F&B SSSG came in at 6% in
1H18 (vs. 1% in 1H17).
100
80 Despite threat from rupiah, we are positive on MAPI’s business

10/17 12/17 2/18 4/18 6/18 8/18 10/18
MAPI has USD risk exposure, as 18% of its COGS is in USD. Nonetheless, we think it
will be able to sustain profitability going forward, given the SSSG recovery across all
of its divisions and the strength of specialty store sales.
FY (Dec.) 12/12 12/13 12/14 12/15 12/16 12/17

Revenue (IDRbn) 7,585 9,734 11,814 12,825 14,142 16,301
OP (IDRbn) 761 751 531 523 888 1,121
OP Margin (%) 10.0 7.7 4.5 4.1 6.3 6.9
NP (IDRbn) 433 328 79 37 208 335
EPS (IDRbn) 26.07 19.75 4.8 2.3 12.6 20.2
ROE (%) 21.8 14.3 3.2 1.4 6.7 9.2
P/E (x) 22.5 27.9 105.7 165.0 42.9 30.7
P/B (x) 5.1 3.8 3.4 2.1 2.8 2.5

Figure 61. Total additions to MAPI’s store space Figure 62. Department store space additions
(Sqm) (Sqm)
Dept store
120,000 MAPI 40,000
30,000
100,000
20,000
80,000
10,000
60,000 0
-10,000
40,000
-20,000
20,000
-30,000
0 -40,000
2010 2011 2012 2013 2014 2015 2016 2017 1H18 2013 2014 2015 2016 2017 1H18
Figure 63. Specialty store net space additions Figure 64. Specialty store sales productivity
(Sqm) (IDRmn/sqm) Specialty store (IDRmn/Sqm)

Specialty stores
45,000 40.0
40,000
35.0
35,000
30.0
30,000
25.0
25,000
20.0
20,000
15,000 15.0
10,000 10.0
5,000 5.0
0
-
2013 2014 2015 2016 2017 1H18
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Figure 65. MAPI revenue breakdown Figure 66. F&B division store count
(storecount)
500
13% 15% 450
400
350
Dept store
300
Specialty stores
250
Food & Beverage
200
Others
150
100
50
72% 0
2012 2013 2014 2015 2016 2017 1H18

Indofood CBP Sukses Makmur (ICBP IJ)

A proxy for instant food products
Consumer ICBP at a glance
Given Indonesia’s healthy consumption demand (owing to its demographic bonus)

(Maintain) Trading Buy and ICBP’s domination (especially in the instant noodles segment, with around 70%
market share), we believe ICBP’s products still have ample room for future growth.
Target Price (12M, IDR) 9,700 Established in 2009, Indofood CBP Sukses Makmur provides a wide range of food
products. ICBP divides its business activities into six divisions: 1) noodles (c.64% of
Share Price (10/12/18, IDR) 8,725 1H18 sales contribution), 2) dairy (c.19%), 3) food seasonings (c.4%), 4) snack foods
(c.7%), 5) nutrition and special foods (c.2%), and 6) beverages (c.5%).
Expected Return 11.2% Noodles remain the growth driver
OP (18F, IDRbn) 5,529 ICBP’s 1H18 revenue grew 5.4% YoY to IDR19.5tr, with most of ICBP’s divisions
Consensus OP (18F, IDRbn) 5,677 booked positive YoY sales growth: noodles (+7.1% YoY, driven by both volume and
ASP growth), dairy (+5.4% YoY, driven by both volume and ASP growth), nutrition
and special foods (+20.5% YoY, driven by volume growth), and beverages (+5.8%
Consensus EPS Growth (18F, %) 10.7
YoY, driven by ASP growth). However, food seasonings booked negative YoY growth
P/E (18F, x) 23.1
(-21.1% YoY), while snack foods booked flat YoY growth. As for margins, noodles
Industry P/E (18F, x) 27.8
Benchmark P/E (18F, x) 15.4
(63.6% contribution to 1H18 total net sales) booked better EBIT margin in 1H18
(20.5%, vs. 19.6% in 1H17). With domination in noodles market (including its strong
Market Cap (IDRbn) 101,750.2 brand image), coupled with continuous innovation to create new flavors, we believe
Shares Outstanding (mn) 11,661.9 ICBP could maintain its domination in noodles segment in the future. Not to
Free Float (%) 19.5 mention, ICBP is one of the world’s largest instant noodle manufacturers.
Beta (12M) 1.1 More and more new products in 2018
52-Week Low 7,900
52-Week High 9,275 We believe that consumer companies are facing tighter competition in the market,
especially in the midst of still-weak purchasing intention. Consumers have an
(%) 1M 6M 12M abundance of choices, especially with the rising penetration of online shopping
Absolute -1.7 4.5 0.3 recently. However, we still believe ICBP can retain its leading position in the market.
Relative -1.0 12.7 3.2
The company’s continuing efforts to develop products and innovate could boost
(D-1yr=100)
volume growth, in our view.
JCI ICBP
120
110
Maintain Trading Buy and TP of IDR9,700
100 We maintain our forecast revenue growth of 10.8% YoY and net profit growth of
90 15.9% YoY for FY18. We retain our Trading Buy recommendation on ICBP with a
80
target price of IDR9,700. Risks to our call include intensified competition, a slower-
10/17 12/17 2/18 4/18 6/18 8/18 10/18
than-expected recovery in purchasing intention, and higher-than-expected
USD/IDR volatility and raw material prices, all of which could hamper ICBP’s
profitability.
FY (Dec.) 12/15 12/16 12/17 12/18F 20/19F

Revenue (IDRbn) 31,741 34,375 35,607 39,459 44,161
OP (IDRbn) 3,908 4,936 5,378 5,529 6,217
OP Margin (%) 12.3 14.4 15.1 14.0 14.1
NP (IDRbn) 3,001 3,600 3,797 4,400 4,959
EPS (IDR) 257 309 326 377 425
ROE (%) 19.4% 20.5% 19.4% 19.9% 19.9%
P/E (x) 33.9 28.3 26.8 23.1 20.5
P/B (x) 6.6 5.8 5.2 4.6 4.1

Indofood CBP Sukses Makmur (ICBP IJ/Trading Buy/ TP: IDR9,700)
Statement of Financial Condition

Income Statement (Summarized)
(Summarized)
(IDRbn) 12/16 12/17 12/18F 12/19F (IDRbn) 12/16 12/17 12/18F 12/19F
Revenue 34,375 35,607 39,459 44,161 Cash 8,372 8,797 10,936 11,650
Cost of Goods Sold 23,607 24,548 27,108 30,382 Trade Receivables 3,721 3,871 4,649 5,686
Gross Profit 10,768 11,059 12,351 13,778 Inventories 3,110 3,262 3,639 4,328
Operating Expenses -5,832 -5,681 -6,822 -7,561 Other CA 368 650 592 662
Operating Profit 4,936 5,378 5,529 6,217 PPE 7,114 8,120 8,591 9,475
Pretax Profit 4,989 5,207 5,680 6,447 Other Non-CA 6,216 6,920 6,984 7,816
Income Tax -1,358 -1,663 -1,534 -1,741 Total Assets 28,902 31,620 35,392 39,618
Non-Controlling Interest 31 -253 -253 -253 Trade Payables 2,692 2,904 2,793 3,130
Net Profit 3,600 3,797 4,400 4,959 ST loans + CPLTD 1,168 1,400 1,967 2,098
Total CL 6,470 6,828 7,916 8,761
Profitability ratio Long-term debt 877 957 1,168 1,289
Gross Profit Margin 31.3% 31.1% 31.3% 31.2% Total Liabilities 10,401 11,295 12,557 13,935
Operating Profit Margin 14.4% 15.1% 14.0% 14.1% Common Stock 583 583 583 583
Net Profit Margin 10.5% 10.7% 11.2% 11.2% Paid in Capital 5,985 5,985 5,985 5,985
Return on Equity 20.5% 19.4% 19.9% 19.9% Retained Earnings 10,979 12,799 15,310 18,157
Return on Asset 12.5% 12.0% 12.4% 12.5% Non-Controlling interest 937 761 761 761
Equity (ex minority) 17,564 19,564 22,074 24,922
Forecasts/ Valuations
Cash Flow (Summarized) (Summarized)
(IDRbn) 12/16 12/17 12/18F 12/19F 12/16 12/17 12/18F 12/19F
Operating Cash Flow P/E (x) 28.3 26.8 23.1 20.5
Net income 3,600 3,797 4,400 4,959 P/B (x) 5.8 5.2 4.6 4.1
Depreciation 511 582 641 717 EV/EBITDA (x) 17.5 16.0 15.2 13.5
Changes in operating accounts EPS (IDR) 309 326 377 425
∆ in trade receivables 523 150 777 1,038 BPS (IDR) 1,506 1,678 1,893 2,137
∆ in inventories 563 152 378 689 DPS (IDR) 154 162 181 204
∆ in others CA -191 281 -58 71 Payout ratio (%) 49.9% 49.8% 48.0% 48.0%
∆ in trade payable 502 212 -112 337 Dividend Yield (%) 1.8% 1.9% 2.1% 2.3%
∆ in short term debt -269 232 567 131 Revenue growth (%) 8.3% 3.6% 10.8% 11.9%
∆ in accrued expense 154 -260 501 235 GP growth (%) 11.9% 2.7% 11.7% 11.6%
∆ in others CL 81 174 133 141 OP growth (%) 26.3% 8.9% 2.8% 12.4%
CFO 3,683 4,153 5,033 4,723 EBITDA growth (%) 24.3% 9.4% 3.5% 12.4%
Investing Cash Flow NP growth (%) 20.0% 5.4% 15.9% 12.7%
∆ in PPE 1,069 1,588 1,112 1,600 AR turnover (x) 9.9 9.4 8.5 7.8
Others 173 704 64 832 Invt. turnover (x) 8.3 7.7 7.4 7.0
CFI -1,242 -2,291 -1,177 -2,432 AP turnover (x) 7.3 6.5 7.8 7.8
Financing Cash Flow ROA (%) 12.5% 12.0% 12.4% 12.5%
∆ in other liability 315 456 -38 414 ROE (%) 20.5% 19.4% 19.9% 19.9%
∆ in equity 1,491 1,797 1,889 2,112 Gearing
∆ in minority interest 5 -176 0 0 Total debt (IDRbn) 2,045 2,357 3,135 3,387
CFF -1,726 -1,437 -1,716 -1,578 Debt/equity (%) 11.6% 12.0% 14.2% 13.6%
Net cash 714 425 2,140 713 Net cash (IDRbn) 6,327 6,440 7,801 8,263
beginning balance 7,658 8,372 8,797 10,936 Net debt/equity (%) Net cash Net cash Net cash Net cash
ending balance 8,372 8,797 10,936 11,650
Source: Company, Mirae Asset Sekuritas Indonesia Research estimates

Charoen Pokphand Indonesia (CPIN IJ)

Size does matter
Poultry Positive industry sentiment from chicken prices rebound
This year is a recovery year for poultry companies supported by higher local corn
Not Rated supply and the rebound of live bird and day-old chick (DOC) prices. We attribute the
resilience of DOC prices this year to a combination of factors, including last year’s
Target Price (12M, IDR) N/A supply adjustment and lower industry productivity due to restrictions on the use of
AGP (antibiotic growth promoter), which went into effect January 1st, 2018. As a
Share Price (10/12/18, IDR) 4,990 result, the margins of poultry companies showed a significant YoY increase in
6M18, boosting their net profits. One of the poultry companies that enjoy the better
margin this year is Charoen Pokphand Indonesia (CPIN IJ/ Not rated).
Expected Return N/A
CPIN at a glance
OP (18F, IDRbn) N/A
Consensus OP (18F, IDRbn) 5,878 Established in 1972, CPIN was established under the name of PT Charoen
Pokphand Indonesia Animal Feedmill Co. Limited. CPIN has an integrated poultry
EPS Growth (18F, %) N/A
business from upstream to downstream, which make CPIN’s business more
Market EPS Growth (18F, %) 69.5
efficient. CPIN divides its business into five segments, namely: feed (c.54%
P/E (18F, x) N/A
contribution to its 1H18 total sales), broiler (24%), Day-Old Chicks (DOC, 12%),
Benchmark P/E (18F, x) 15.4
processed chicken (6%), and others (4%). In term of feed and DOC production
capacity shares, CPIN holds the biggest capacity shares with estimated 35% and
Market Cap (IDRbn) 81,826.0 38% capacity share, respectively (source: Malindo Feedmill presentation). As a
Shares Outstanding (mn) 16,398.0 livestock related company, CPIN’s business has a cyclical, influenced by supply and
Free Float (%) 44.5 demand in the market.
Beta (12M) 1.0 Exceptional net profit growth in 1H18 on the back of margin recovery
52-Week Low 2,820
52-Week High 5,450 In line with industry performance, CPIN booked 1H18 net profit of IDR2.4tr, surging
59.7% YoY on the back of margin improvement. CPIN’s profit margin on gross,
(%) 1M 6M 12M operating, and net level improved in 1H18 to 18.4%, 13.2%, and 9.5%, respectively
Absolute 0.2 32.7 61.5 (vs. 13.0%, 8.5%, and 6.1%, respectively in 1H17).
Relative 0.9 40.9 64.4
There is still ample room to grow in the future
(D-1yr=100)
JCI CPIN
We believe that poultry industry in Indonesia still has ample room to grow due to:
180
1) relatively low meat consumption per capita in Indonesia, compared to neighbor

160
140
countries such as Thailand, Philippines, and Vietnam, 2) chicken is one of the most
120
100
affordable (in term of prices) protein sources in Indonesia. Not to mention, our
80
huge population with potential growing middle-income households also provide
10/17 12/17 2/18 4/18 6/18 8/18 10/18
ample room for poultry industry to grow further in the future. However, we also
noticed that several risk factors remain, including rupiah depreciation, higher
interest rates, seasonally lower consumption in the second half of the year, and
negative sentiment from global factors.
FY (Dec.) 12/12 12/13 12/14 12/15 12/16 12/17

Revenue (IDRbn) 21,311 25,663 29,150 29,921 38,257 49,367
OP (IDRbn) 3,502 3,578 2,638 3,392 4,417 3,716
OP Margin (%) 16.4 13.9 9.1 11.3 11.5 7.5
NP (IDRbn) 2,684 2,531 1,746 1,837 2,221 2,498
EPS (IDRbn) 164 154 107 112 135 152
ROE (%) 37.5 28.0 16.7 15.5 16.5 16.8
P/E (x) 22.3 21.9 35.3 24.5 22.6 19.7
P/B (x) 7.3 5.6 5.6 3.3 3.6 3.1

Figure 67. Revenue trend Figure 68. Net profit trend
(IDRbn) Revenue (L) Growth (R) (%) (IDRbn) Net profit (L) Growth (R) (%)
90,000 35 3,000 80
29.0 30
75,000 27.9 60
2,500
25
60,000 20.4 20 40
18.7
2,000
15
45,000 13.6 20.9 20
10 14.0 12.5
1,500
5.2
30,000 5 0
2.6 -5.7
0 1,000
15,000 -20
-5
-31.0
0 -10 500 -40
2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017
Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research
Figure 69. Gross profit margin trend Figure 70. Current ratio vs. quick ratio
(IDRbn) Gross profit (L) GPM (R) (%) (x) Current ratio (L) Quick Ratio (R) (x)
10,000 24 4.0 2.0
21.1 3.5 1.8

20.1 20
8,000 3.0
1.6
1.6
17.1 17.0
16 2.5
1.4
6,000 14.2 2.0
1.3
12.7 1.2
12
1.5
1.0
4,000 1.0
8 0.9 0.9
0.8 0.8 0.8
0.5
2,000 4 0.0 0.6

2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017
Figure 71. Leverage and debt-to-equity ratio Figure 72. P/E and PB
(x) Debt-equity ratio (L) Financial leverage (R) (x) (x) P/E P/B
0.8 2.2 50
0.8
2.0
0.7
0.7 1.8 40
0.6
0.6 1.6
0.5
1.4 30
0.5
0.4 1.2
0.4
1.0 20
0.3
0.3 0.8
0.2
0.2 0.6 10
0.1
0.4
0.1
0.0 0.2 0
6/12 3/13 12/13 9/14 6/15 3/16 12/16 9/17 6/18 5/11 5/12 5/13 5/14 5/15 5/16 5/17 5/18

Buyung Poetra Sembada (HOKI IJ)

A premium rice player
HOKI is a premium rice producer that controls a market share of around 35.0% in
modern channels. With a strong brand image and rice business-focused strategy,
Consumer HOKI enjoys a competitive advantage from its well-known products and strong
distribution channel. Notably, the company is a beneficiary of recent changes in the
(Maintain) Buy rice industry’s competitive landscape following the implementation of the price
ceiling (Harga Eceran Tertinggi/HET) regulation.
Target Price (12M, IDR) 1,350 35.0% market share with strong modern distribution channels
Before the HET implementation, HOKI’s market share in modern channels stood at
Share Price (10/12/18, IDR) 820
35.0%; we believe its market share is poised to rise further with the regulation’s
implementation. For the private label segment, HOKI produces the Indomaret-
Expected Return 64.6% labeled brand, which is distributed in Indomaret stores. Currently, HOKI is in the
process of rolling out a new Alfamart private label brand (having obtained a license
OP (18F, IDRbn) 138.8 from the government in August), which will be distributed in 2,400 Alfamart stores
Consensus OP (18F, IDRbn) 132.7 in Sumatra. Alfamart and Indomaret are the two modern channels with the most
outlets throughout Indonesia (accounting for 29,048 of the total 32,151 outlets).
Consensus EPS Growth (18F, %) 64.3
Thus, strengthening the modern channel is a competitive advantage for HOKI.
P/E (18F, x) 20.6 Key drivers: Narrowing price gap, new modern distribution channel
Benchmark P/E (18F, x) 15.4 The price gap between modern and traditional channels is narrowing post-HET
implementation, leading to a change in the industry landscape. Customers are
Market Cap (IDRbn) 1,947.4 incentivized to buy more from the modern market than from the traditional one.
Shares Outstanding (mn) 2,374.8 Indonesians’ preferences also have been shifting from hyper/supermarts to
Free Float (%) 28.2 minimarts, which are more widely distributed in residential areas. Rising GDP per
Foreign Ownership (%) 1.4 capita has also fueled the shift in customer preference toward branded packaged
Beta (12M) N/A rice and away from bulk unbranded rice. Given easing competition in the modern
52-Week Low 298 market rice industry, the company will upgrade the capacity of its rice mill (located
52-Week High 1,015 in Subang) to 50 tonnes/hour in late 2018 (from 30 tonnes/hour).
(%) 1M 6M 12M Earnings to grow six times faster than Indonesia’s economy (‘16-‘20F)
Absolute -8.4 53.3 159.5
Relative -7.7 61.5 162.4 Factoring in all of our assumptions, we project HOKI’s net profit to reach IDR93.5bn
in 2020, representing 2016-20 CAGR of +31.1%—six times faster than Indonesia’s
(D-1yr=100)
JCI HOKI economy. (We assume GDP growth to be around 5.0%/year.) Furthermore, we
believe HOKI’s margins will expand further (2020F net margin: 7.3%, vs. 4.0% in
360
320
280 2017).
240
200
160
Reiterate Buy call with TP of IDR1,350
120
80 We reiterate our Buy call on HOKI with a target price of IDR1,350, implying 64.6%
upside potential. It is currently trading at a 2018F P/E of 20.6x. We are positive on
10/17 12/17 2/18 4/18 6/18 8/18 10/18
HOKI’s market development and production capacity expansion. Risks to our call
include regulatory changes and delays to the production capacity upgrade.
FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F

Revenue (IDRbn) 518.3 658.3 1146.9 1209.2 1539.7 2156.0
OP (IDRbn) 25.5 37.8 72.2 72.9 138.8 222.4
OP Margin (%) 4.9 5.7 6.3 6.0 9.0 10.3
NP (IDRbn) 13.9 53.3 43.8 48.0 93.5 155.7
EPS (IDR) 5.9 22.7 18.6 20.4 39.8 66.3
ROE (%) 67.0 54.2 22.1 13.8 18.4 26.1
P/E (x) 138.2 36.2 44.0 40.2 20.6 12.4
P/B (x) 92.6 11.0 8.8 4.0 3.6 3.0

Buyung Poetra Sembada (HOKI IJ/Buy/TP: 1,350)

(IDRbn) 12/17 12/18F 12/19F 12/20F (IDRbn) 12/17 12/18F 12/19F 12/20F
Revenue 1,209 1,540 2,156 2,329 Current Assets
Cost of Sales 1,044 1,279 1,763 1,906 Cash and Cash Equivalent 36 20 36 86
Gross Profit 165 260 393 424 AR & Other Receivables 252 276 334 361
SG&A Expenses 92 122 170 184 Inventories 72 88 97 104
EBIT 73 139 222 240 Other Current Assets 43 7 8 8
EBITDA 75 145 230 247 Non-Current Assets
Net Interest Income (Exp.) -10 -17 -16 -15 Investments in Associates - 1 2 3
Forex Gain (Loss) 0 1 2 3 Property, Plant and Equipment 170 342 389 418
Others 1 3 1 2 Intangible/Other Assets 5 8 12 13
Net Gain from Inv. In Associates 0 1 2 3 Total Assets 577 741 875 990
Pretax Profit 64 125 208 226 Current Liabilities
Income Tax -16 -31 -52 -57 AP & Other Payables 6 9 12 13
Minority Interest 0 0 0 0 Short-Term Financial Liabilities 73 152 152 142
Net Profit 48 93 156 170 Other Current Liabilities 9 23 37 40
Non-Current Liabilities
Margin Long-Term Financial Liabilities 0.0 0 0 0
12/17 12/18F 12/19F 12/20F Other Non-Current Liabilities 13 16 23 25
Gross Margin (%) 13.6 16.9 18.2 18.2 Total Liabilities 101 200 225 221
EBITDA Margin (%) 6.2 9.4 10.7 10.6 Controlling Interests
Operating Margin (%) 6.0 9.0 10.3 10.3 Capital Stock 235 235 235 235
Net Margin (%) 4.0 6.1 7.2 7.3 Additional Paid in Capital 140 140 140 140
Retained Earnings 101 166 275 394
Other Equity Component 0 1 2 3
Non-Controlling Interests 0 0 0 0
Stockholders' Equity 476 542 652 772
Forecasts/Valuations (Summarized)
12/17 12/18F 12/19F 12/20F
P/E (x) 40.2 20.6 12.4 11.4
P/B (x) 4.0 3.6 3.0 2.5
Cash Flows (Summarized) EV/EBITDA (x) 26.7 14.4 9.1 8.4
(IDRbn) 12/17 12/18F 12/19F 12/20F EPS (IDR) 20 40 66 72
Cash Flows from Op Activities -132 132.7 139 170 BPS (DR) 203 230 277 327
Net Profit 48 93 156 170 DPS (IDR) 0 12 20 22
Depreciation 9 27 33 32 Payout Ratio (%) 0.0 30.0 30.0 30.0
Change in Working Cap -146 -37 -63 -34 Dividend Yield (%) 0.0 1.5 2.4 2.6
Others -43 49 13 3 Revenue Growth (%) 5.4 27.3 40.0 8.0
Cash Flows from Inv. Activities -1 -203 -84 -61 EBITDA Growth (%) 1.3 93.5 58.7 7.4
Capex 0 -200 -80 -60 Operating Profit Growth (%) 1.0 90.2 60.3 7.8
Others -1 -3 -4 -1 EPS Growth (%) 9.5 94.9 66.5 8.9
Cash Flows from Fin. Activities 167 54 -39 -59 Accounts Receivable Turnover (x) 4.8 5.6 6.5 6.5
Change in Financial Liabilities -45 79 1 -10 Inventory Turnover (x) 14.5 14.6 18.3 18.3
Change in Equity 209 0 0 0 Accounts Payable Turnover (x) 303.6 214.7 214.7 214.7
Dividends Paid 0 -28 -47 -51 ROA (%) 10.1 14.2 19.3 18.2
Others 3 3 7 2 ROE (%) 13.8 18.4 26.1 23.9
Increase (Decrease) in Cash 34 -16 15 50 Current Ratio (%) 4.6 2.1 2.4 2.9
Beginning Balance 2 36 20 36 Net Debt to Equity Ratio (x) 0.2 0.3 0.2 0.2
Ending Balance 36 20 36 86 Interest Coverage Ratio (x) 7.3 7.6 12.2 14.0

APPENDIX 1
Important Disclosures & Disclaimers
Disclosures
As of the publication date, Mirae Asset Sekuritas Indonesia. and/or its affiliates own 1% or more of HOKI`s shares outstanding.
Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving
Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes
Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening
Sell Relative performance of -10%
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Mirae Asset Sekuritas Indonesia, we may call a trading opportunity in case there is a technical or
short-term material development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s
estimate of future earnings.
The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and
economic conditions.
Analyst Certification
Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily
responsible for this report. PT. Mirae Asset Seukritas Indonesia (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their
households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or
advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any
other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of
the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report
but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes
revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the
time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or
Mirae Asset Daewoo except as otherwise stated herein.
Disclaimers
This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Stock
Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such
information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as
to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the
Indonesian language. In case of an English translation of a report prepared in the Indonesian language, the original Indonesian language report
may have been made available to investors in advance of this report.
The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment,
its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or
subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof.
This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect
transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall
not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment
objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent
judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of
the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on
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Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use
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Consumer Strategy

Shifting gears to Neutral

Economic cycle is unexciting

Shifting gears to Neutral

Where we are at the cycle

Source: OECD, Mirae Asset Sekuritas Indonesia Research

Key consumption drivers 6

Industry view and discussions 22

Price, flows and valuations 26

Shifting gears to Neutral 30

Mirae Asset Sekuritas Indonesia Research 2

Balance of positives and negatives

Economy is yet to turn the corner...

…but at the same time, CLI seems like an old bear

We are less excited about election spending…

…but spending on essentials will keep macro-level growth stable

Despite the prolonged weakness to the local currency, we project consumption

Shifting Indonesia’s consumption behavior

Consumers are now becoming smarter

Mirae Asset Sekuritas Indonesia Research 3

Widespread e-commerce penetration contribute to the smart spending

Tobacco (Neutral): We expect sales volume growth of the cigarette industry to

Retailers (Overweight): Thanks to the lower-adjusted administered prices and

Valuations and recommendations

We are turning Neutral on the consumer sector. We believe macro level

Mirae Asset Sekuritas Indonesia Research 4

Under a challenging macro and business environments, we recommend investors

Mirae Asset Sekuritas Indonesia Research 5

Key consumption drivers

It’s the economy that matters

Consumer index vs. composite leading indicator

Among various macroeconomic indicators and/or market indicators, we find that

Source: OECD, Mirae Asset Sekuritas Indonesia Research

Figure 2. Private consumption as a % of GDP

Source: BPS, Mirae Asset Sekuritas Indonesia Research

Where are we in the business cycle?

Mirae Asset Sekuritas Indonesia Research 6

Figure 3. Trailing 24 months business cycle clock

Source: OECD, Mirae Asset Sekuritas Indonesia Research

From February 2017 through November 2017, there were encouraging

Figure 4. Foreign ownership of Figure 5. Foreign net purchase of

400 -1,000 14,000 93

Mirae Asset Sekuritas Indonesia Research 7

Deeper dive into the composite leading indicator (CLI)

The components in the CLI

Table 1. CLI component series

A sneak peek into the direction of the CLI

Mirae Asset Sekuritas Indonesia Research 8

(pt) (pt) (pt) (inverted, pt)

(pt) (inverted, IDR) (pt) (inverted, pt)

100 13,500 100

Mirae Asset Sekuritas Indonesia Research 9

(pt) (pt) (pt) ('000 pax)

100 100 1,200

We don’t expect an immediate reversal of the CLI…

Table 2. Summary of CLI components

…however, we also see limited downside to the CLI

Figure 13. The CLI looks like an old bear

Source: OECD, Mirae Asset Sekuritas Indonesia Research

Mirae Asset Sekuritas Indonesia Research 10

As we are closer to the bottom, the only direction is upwards

Does election have positive impact on consumption?

Excitement is in the air