INDONESIA

Indonesia Strategy
2017 Infrastructure and Commodities
Conference Highlights
Event
 Macquarie hosted its fourth Indonesia Infrastructure and Commodities
conference this week. The event included a strong line-up of keynote
presentations and panellists from Gov't, state-owned corporations and banks,
private investors, infrastructure operators, and legal and technical advisors.
 Public sector and SOEs dominate infra investment, but the Gov’t and related
agencies continue working to increase private sector involvement. Having ‘as
many as possible’ priority projects signed off and under construction by 2019
is amongst the highest priorities of the current Gov’t as it seeks re-election.

Impact
 Some bright spots in toll roads. Indonesia’s first Availability Payments
scheme backed toll road is about to be tendered for a concession in Banten in
Indonesia model portfolio
Share Target
3Q17. This development has been anticipated by private sector investors as a
Mkt cap price Rec price PER (x) key element for PPPs to work. Securitisation of Jasa Marga’s first operating
Ticker US$m Rp/sh Rp/sh 17e
toll road (the company has a further 12 operating) had strong demand,
BBCA 34,991 18,950 O-PF 20,400 20.0
BBNI 10,370 7,425 O-PF 7,900 10.4
according to the company’s CFO. Further asset recycling in the sector would
UNTR 8,513 30,475 O-PF 34,000 14.9 be a positive. Planning and traffic surveys were identified as major homework
INTP 5,431 19,700 O-PF 18,800 22.1
ADRO 4,707 1,965 O-PF 1,800 9.1
areas for policy makers.
BDMN 3,930 5,475 O-PF 6,000 11.9
EXCL 2,810 3,510 O-PF 4,400 43.3  Power getting incrementally tougher. Prolific regulation is stifling the sector
LPPF 2,382 10,900 O-PF 15,500 14.2 making conditions tougher than last year’s event. Even brownfield expansions
ITMG 1,711 20,225 O-PF 23,000 5.8
PTPP * 1,296 2,790 N-R - 12.3 are being held up on environmental permits, we learned. The key positive is
* Denotes consensus estimates. Priced at close 24 Aug the regulator is willing to make revisions based on industry feedback. Slower-
Source: FactSet, Macquarie Research, August 2017 than-expected power demand growth of +3% Cagr vs projections of +8.7%
Cagr was seen as one reason the regulator may be looking to slow the sector.
 Policy also a focus in mining. Mining sector presenters expect a resolution
to ongoing Freeport contract extension negotiations by year end with a
balance between minority share ownership and operatorship needing to be
struck. Executives from both Vale and Antam lamented recent awarding of
8mtpa raw nickel exports though forward demand in the sector looks bright as
a deficit widens in FY18e and electric vehicle battery demand accelerates.

Outlook
 Across our coverage, cement and coal miners are most impacted by
infrastructure progress through volume demand and power investment
respectively. Top buy ideas in these sectors are Indocement and ITM.
 We also hosted the CFO of Jasa Marga at the event (Indonesia’s major toll
Analyst(s) road owner and operator). Positive momentum on asset securitisation was a
Jayden Vantarakis
+62 21259 88310 jayden.vantarakis@macquarie.com key takeaway from the event. Jasa Marga is completing its first ever
Nathania Nurhalim securitisation and reported strong investor demand.
+62 212 598 8365 nathania.nurhalim@macquarie.com
Ricky Tjandra  We have Indocement and PTPP in our Indonesia model portfolio alongside
+62 21 25988382 ricky.tjandra@macquarie.com BNI for exposure to rising public sector spend (expected +13% y/y in 2H17).
25 August 2017
PT Macquarie Sekuritas Indonesia

Please refer to page 9 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.

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4th Macquarie Indonesia Infrastructure and Commodities Conference

 Macquarie hosted its 4th annual Indonesia Infrastructure and Commodities Conference in Jakarta
this week. The one day event featured 22 industry experts sharing views on the latest
developments across infrastructure finance, toll roads, power and coal/nickel mining. There was a
solid line-up of panelists and presenters with representation from Gov’t (regulators,
development/planning and financier), state-owned corporations and banks, private investors,
private sector operators, and legal and technical advisors.

Fig 1 Conference keynote presenter and panelist summary

Organisation Area of interest Capacity

Adaro Power Power Investor

Aneka Tambang Nickel, bauxite and gold Miner
Asia Power Development Platform Power Investor
Baker McKenzie Legal Power Legal consultant
Bank Negara Indonesia Power Financier
Christian Teo and Partners Mining Legal consultant
Cipta Olam Lestari Coal mining Miner
Cirebon Electric Power Power Developer and operator
Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) Sector Gov't Agency
Indonesia Infrastructure Finance (IIF) Sector Govt-Private Sector-Aid agency partnership
Indonesia Power Association Power Industry Association
Indonesia Toll Road Authority (BPJT) Roads Gov't Regulator
Jasa Marga Toll roads Developer and operator
Macquarie Capital Sector Investor
Macquarie Infrastructure and Real Assets Sector Investor
Macquarie Research Commodities Commodities Strategy
Mott MacDonald Roads Technical Consultant
Nusantara Infrastructure Roads Developer and operator
PriceWaterhouseCoopers Roads Consultant
Tigris Infrastructure Partners Water Investor
Vale Indonesia Nickel mining Miner
World Bank Sector Development Bank, Consultant
Source: Macquarie Research, August 2017

 Indonesia will go to the general Parliamentaty and Presidential elections in 1H19 so having as many
infrastructure projects signed off and under construction as possible by that time is a key priority.
 The Government’s Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) has
expanded its National Strategic Projects list to 247 from 225 at least year’s event. The three
sectors with the highest investment value are Energy, Electrity and Roads. 37 projects are on the
priority list (US$150b in value).
 57% of the funding for the National Strategic projects is expected from the private sector, 13%
state budget and 30% from state-owned enterprises. 5 projects in the list have been completed.

Fig 2 Anticipated funding source for Indonesia’s Fig 3 5 projects are complete with a further 130 in
National Strategic infrastructure projects construction

State
budget, Completed
US$40b, 2%
13%

Preparation
Private
40%
incl PPP, SOEs,
US$186b, US$97b, Construction
57% 30% 53%

Transaction
5%

Source: KPPIP, Macquarie Research, August 2017 Source: KPPIP, Macquarie Research, August 2017

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 Despite the high investment target, private sector involvement remains largely confined to power
generation. The executive branch of Gov’t, especially the President, are very aware of the need to
increase private sector participation given financial limitations.
 Efforts are being made to engage the private sector first for new projects, according to KPPIP,
particularly as some of the major SOEs in the sector refocus on obtaining further financing for
existing concessions they’ve been awarded.

Fig 4 Key achievements highlighted by KPPIP during 1H17 on Infrastructure Projects

Source: KPPIP, Macquarie Research, August 2017

 In terms of issues facing developments and being managed through the KPPIP process:

 Land acquisition issues fell to 30% of total issues from 43% a year ago for the infra projects
thanks to a speed up in approval process and availability of land purchase funds. Some
panelists did express a view that local landowner minority ownership in projects has worked in
other countries to solve these issues, however this doesn’t appear a likely strategy from
policymakers.
 Planning and preparation for transportation connectivity and design were also issues
raised.Unavailability of data was a key highlighted for road developments in the bidding
phase. There are no comprehensive demand studies leading bidders to place a 20-30%
haircut or more on Gov’t supplied traffic estimates.
 Financial intermediation remains a bottleneck. The amount of funds available domestically
does not corroborate the 35% savings rate reported by the World Bank. The view is too much
relative funds are tied up in real estate rather than infrastructure. Foreign direct investors
generally like to see strong local investor participation and there is more debt appetite than
equity, except for operating assets.

Fig 5 Proportion of issues dealt with by KPPIP over past 12 months

Land procurement Acquisition process, land location discrepancy 30%
Planning and preparation Planning, design, connectivity, regulatory changes 27%
Financing Sponsor and asset ownership, guarantee provision, financing structure 25%
Permits Licensing application process, environmental permits 10%
Construction Human resources capacity, technology, construction completion 8%
Source: KPPIP, Macquarie Research, August 2017

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Some bright spots on toll roads this year

 Availability Payments and Asset Recycling were two key themes introduced at last year’s
conference and both appear closer to realisation.
 Indonesia’s Toll Road Authority (BPJT) is about to tender the first Availability Payments
concession in 3Q17 in Banten (Western tip of Java) which will be a model PPP in the sector.
More are expected to follow.
Availability payments essentially transfer traffic ramp-risk to the Gov’t potentially at the
expense of longer term mature asset returns. The regulator is very keen to have more private
sector investors in toll roads and stated there is no preference given the SOEs in tendering.
 Jasa Marga has seen strong interest in its maiden securitisation of the Jagorawi toll road
(Indonesia’s first toll road completed in the late 1970s). It has a total of 13 operating assets it
plans to sequentially undertake similar transactions in.
The company’s CFO reported investor demand has been strong (the transaction is closing
over the next week) across private asset managers, state pension funds and banks with
demand for larger deals in the future.
 Waskita is currently in negotiations to sell a stake in its toll roads subsidiary and use the
proceeds to fund more construction (its core business). Due to ongoing commercial
negotiations, Waskita wasn’t present at the event.
 A complete link from Jakarta-Surabaya under the TransJava projects is expected to be operational
by end-2018.
 The major concerns raised were on planning with the need highlighted again for a second
expressway across Java and more traffic surveying to attract more bids.

Fig 7 Traffic modelling from INDII shows 2 Trans-Java

Fig 6 A total 208.7km to be complete by Sept 2017 expressways are required by 2035

Source: BPJT, Macquarie Research, August 2017 Source: BPJT, INDII, Macquarie Research, August 2017

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A pick-up in regulatory intensity making power investment tougher

 The Ministry of Energy and Mineral Resources has been prolific this past year on issuing
regulations publishing 66 on the power sector vs 120 over the past 5 years. In focus has been
power tariffs with some inconsistencies on an 85% average regional tariff vs negotiations per
region as well as changes to Build-Own-Operate-Transfer. Regulation has generally been well
intentioned but not well thought out and industry participants did praise the regulator’s willingness
to make revisions where necessary.
 On tariffs, any region above the national average (7.39c/kWh) must have the 85% max regional
average observed. This appears to place most disadvantage on South Sumatera given it falls just
above the cut-off and thus beating a ~6c/kWh on new projects is very difficult.
 The regulatory environment hasn’t just affected new entrants into the sector but also existing
power investors. Cirebon Electric, which was one of the first IPPs tendered and completed post
2000, noted the time taken for brownfield appointment appears to be four years (equal to the initial
tender to financial close, ie 2006-2010) with issues of obstruction on environmental permits.
 It was suggested that potentially the pickup in regulatory change and some project cancellation
(including the Java-Sumatra high voltage connection) are due to lower expected capacity needs
with Java demand growth during 1H17 0-1% y/y and nation-wide 2%. Generally power
consumption is expected at 1.5x GDP. The past 3 years cumulative demand has been +3% Cagr
vs expectations of +8.7%.
 Under the Gov’t’s flagship 35GW program, 2% is operational and 41% under construction.

Fig 8 A total 758MW of the 35GW program are

operational, 41% (14.6GW) are under construction Fig 9 Regulation publication and revisions in 2017

Operational
2%

Planning
19%

Construction
Procurement 41%
15%

Signed Power
purchase
agreement
23%

Macquarie estimates 11.5GW completion under the program by end FY19

Source: KPPIP, Macquarie Research, August 2017 Source: Baker & McKenzie, Macquarie Research, August 2017

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Mining: Freeport and Nickel exports in focus

 We hosted three mining executives across coal and nickel producers (privately owned PT COAL,
Vale and Antam), a mining law legal expert and our commodities strategist, Lynn Zhao, for a
discussion on supply-demand and associated regulatory issues in the sector.
 Panellists on the mining panel expressed a view that the Freeport negotiations would
conclude by year-end and that there exists flexibility with share ownership at 49% and
operational control.
 A sale of the shares to the Gov’t, or perhaps Inalum which is meant to be appointed as the
state mining holding company, appeared a more likely outcome rather than a stock exchange
listing.
 Both Nickel producers appeared unhappy with Gov’t policy moves to open up to ore exports
for different reasons; Vale urged consistency to ensure investment and maximum value from
the commodity whilst Antam lamented smaller producers and only affiliates (not direct
owners) of smelting projects being awarded export permits (so far 8mtpa is awarded equal to
80kt contained nickel and Macquarie is forecasting 10mt ore exports in FY18).
 Broadly, the mining executives believed the resource endowment in Indonesia outweighed the
regulatory risk, and foreign investors are likely to account for uncertainty with higher project
IRRs applied to investment.
 Nickel have been supported by supply cuts from elsewhere and harsh rhetoric from the Philippines
on mine closures alongside positive forward demand expectations as the market anticipates
electric vehicle battery demand becoming a driver. Macquarie expects c. 15% of the nickel market
demand from batteries by 2025 with c. 1%pa demand addition between now and 2021.
 Thermal coal has been supported by stronger than expected IPP restocking over the summer
leading to market tightness in China. Our team continues to expect a cooling Chinese property
market and measures to curb industrial output during the upcoming winter to lead to a decline in
spot prices with China’s NDRC targeting Rmb 470/t to Rmb 600/t.

Fig 10 Coal-fired power generation taking share for Fig 11 Macquarie expects the Nickel market to remain
the first time since 2012 in China in deficit out to FY22e
Chinese electricity generation and modelled coal consumption in
'000t supply/demand
YoY power sector balance
30%
200 25
161

LME/prducers stocks in week's use

25% 23
150
121 116 21
102101
20% 90
100 19
15% 43 34 17
50 29 31
2 15
10% 0 13
-1
5% -50 -31 -21 11
-36 -43-41
-52 -62 9
0% -100 -72
-92 -96 7
-5% -150 5
2020f
2017f
2018f
2019f

2021f
2022f
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

6mma electricity generation

-10%
6mma coal cons in power
-15%
2009 2010 2011 2012 2013 2014 2015 2016 2017 Balance (LHS) Stocks in weeks of use (RHS)

Source: SXCoal, Macquarie Research, August 2017 Source: CRU, INSG, Macquarie Research, August 2017

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Stock impacts
 In cement, Nathania believes the cement sector is a beneficiary of the Govt’s persistent push on
infrastructure and indeed we had several cement company executives attending the event. Semen
Indonesia and Indocement are the main suppliers of bulk cement for the large infra projects,
especially in Java where most of their plants are located.
 Separately we are seeing a pick-up not only in bulk but also bag retail demand at a pace
faster than expected by the market. With utilization rates bottoming and the brunt of the
oversupply now in the past, we believe that the sector’s fundamentals should improve over
the next 12mo as ASP turns from its trough.
 We prefer Indocement over Semen Indonesia due to its bigger exposure proportion into
Java, the market that we believe should bottom out first given that there are still some
incremental supplies coming in to ex-Java over the next 6 months.
 Two coal miners under coverage are investing in power, namely Adaro and Bukit Asam. Both
companies derive c. 20% of their estimated NAV from their power projects
 We have an overweight view on the sector given undemanding valuations with Bukit Asam
trading at 6x/8x FY17e/FY18e PER for instance. Our top pick is ITM for strong dividend yields
>10% over the next 12 months on the back of stronger than anticipated coal prices and a high
payout ratio of 85%.
 We also hosted the CFO of Jasa Marga at the event (Indonesia’s major toll road owner and
operator). Positive momentum on asset securitisation was a key takeaway from the event. Jasa
Marga is completing its first ever securitisation and reported strong investor demand.
 We have Indocement and PTPP in our Indonesia model portfolio alongside BNI for exposure to
rising public sector spend (expected +13% y/y in 2H17).

Fig 12 Model portfolio valuations

Market cap Share price Rating Target price PER (x) EPS growth (%) ROE (%) PBV (x) Div yield (%)
Ticker US$m Rp/sh Rp/sh 17e 18e 17e 17e 17e 17e

BBCA 34,991 18,950 O-PF 20,400 20.0 17.7 13.3 19.2 3.6 1.1
BBNI 10,370 7,425 O-PF 7,900 10.4 9.0 18.0 14.5 1.4 2.9
UNTR 8,513 30,475 O-PF 34,000 14.9 14.1 44.9 17.6 2.5 2.7
INTP 5,431 19,700 O-PF 18,800 22.1 19.3 (15.4) 12.1 2.6 1.6
ADRO 4,707 1,965 O-PF 1,800 9.1 10.7 49.0 15.6 1.4 4.4
BDMN 3,930 5,475 O-PF 6,000 11.9 9.5 65.8 11.9 1.4 3.0
EXCL 2,810 3,510 O-PF 4,400 43.3 20.4 nmf 4.0 1.7 0.9
LPPF 2,382 10,900 O-PF 15,500 14.2 13.0 11.1 98.7 11.9 4.4
ITMG 1,711 20,225 O-PF 23,000 5.8 8.0 119.0 29.7 1.6 10.5
PTPP * 1,296 2,790 N-R - 12.3 9.5 22.6 13.9 1.7 1.8
* Denotes stocks for which consensus estimates are used. Priced at close 24 Aug 2017
Source: FactSet, Macquarie Research, August 2017

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Prior strategy reports on Indonesia

Indonesia Strategy - 2Q17 scorecard: Fewer beats
Indonesia Strategy - Model portfolio rotations
Indonesia Strategy - Pump-priming into 2018
Indonesia Strategy - Split views
Indonesia Strategy - S&P upgrade to investment grade is better late than never
Indonesia Strategy - Basking in the commodity after-glow
Indonesia Strategy - Banking data opened to tax authorities
Indonesia Strategy - Ahok jail sentence a set-back
Indonesia Strategy - 1Q17: cyclical beats in commodities
Indonesia Strategy - FinTech rising, e-commerce cooling
Indonesia Strategy - 4Q16 earnings scorecard
Indonesia Strategy - Economy over politics
Indonesia Strategy - Better budget times ahead
Indonesia Strategy - Key themes for 2017
Indonesia Strategy - Asia marketing feedback
Indonesia Strategy - Rupiah gets Trumped
Indonesia Strategy - Jakarta protests turn ugly
Indonesia Strategy - 3Q16 earnings scorecard
Indonesia Strategy - Mining and energy policy updates
Indonesia Strategy - Amnesty surprise softens fiscal blow
Indonesia Strategy - Raising cash from SOEs
Indonesia Strategy - Ripe for further rate cuts
Indonesia Strategy - Fiscal crunch looming
Indonesia Strategy - Infra Conference 2016 highlights

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 Macquarie Research
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand
Outperform – return >3% in excess of benchmark return
Neutral – return within 3% of benchmark return
Underperform – return >3% below benchmark return
Benchmark return is determined by long term nominal
GDP growth plus 12 month forward market dividend
yield
Macquarie – Asia/Europe
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie – South Africa
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return >5% below benchmark return
Macquarie - USA
Outperform (Buy) – return >5% in excess of Russell
3000 index return
Neutral (Hold) – return within 5% of Russell 3000 index
return
Underperform (Sell)– return >5% below Russell 3000
index return
Volatility index definition*
This is calculated from the volatility of historical
price movements.
Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year
– investors should be aware this stock is highly
speculative.
High – stock should be expected to move up or
down at least 40–60% in a year – investors should
be aware this stock could be speculative.
Medium – stock should be expected to move up
or down at least 30–40% in a year.
Low–medium – stock should be expected to
move up or down at least 25–30% in a year.
Low – stock should be expected to move up or
down at least 15–25% in a year.
* Applicable to Asia/Australian/NZ/Canada stocks
only
Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Indonesia Strategy
Financial definitions
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging,
IFRS impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests
EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average
number of shares
All Reported numbers for Australian/NZ listed stocks
are modelled under IFRS (International Financial
Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2017

AU/NZ Asia RSA USA CA EUR
Outperform 52.01% 55.36% 42.05% 46.38% 66.67% 43.60% (for global coverage by Macquarie, 2.98% of stocks followed are investment banking clients )
Neutral 37.73% 29.86% 42.05% 47.88% 27.91% 40.14% (for global coverage by Macquarie, 2.33% of stocks followed are investment banking clients)
Underperform 10.26% 14.78% 15.91% 5.74% 5.43% 16.26% (for global coverage by Macquarie, 1.15% of stocks followed are investment banking clients )

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