el nino impact_cimb.pdf

July 10, 2015

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

INDONESIA STRATEGY

When El Nio comes It is not an if but how strong El Nio will be when it hits in 2H15. Indonesia will be affected, but the adverse impact could be muted as it is now less reliant on the primary sector, and the price gap between domestic and international rice prices is huge.

Figure 1: El Nio hit the primary sector more than the secondary or tertiary sectors

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SOURCES: BPS, CEIC

In other words, a potential hit on GDP growth and inflation would be manageable. Impact on the equity market could hence be more positive, albeit slightly, rather than negative, stemming from the earnings boost on the plantation sector. Key beneficiaries are AALI and LSIP.

El Nio cometh The potential of El Nio occurring this year has continued to heighten over the past several months. Some has predicted that the upcoming El Nio has the potential to be as severe as the one in 1997/98. As there have been many false alarms in the past years, the consensus expects a moderate El Nino this time. In the past, El Nio brought significant decrease in rainfall through most of Indonesia, hitting food crop harvests, hiking food prices. Key commodities affected are rice, cooking oil and some spices.

Economic impact A recent study by the IMF forecasted that is the El Nio deviates by -1 s.d., Indonesias GDP growth could dip by 0.35% and its inflation rise by 0.25%. A severe El Nio is in the order of -5 to -6 s.d. The impact might be more

muted this time given: 1) the lower contribution of the primary sector such as agriculture, forestry, fishery and mining to the economy, at 19% vs. the pre-1998 average of 25%; 2) significant price gap between domestic and international rice prices, hence allowing for greater scope for inflation management; 3) a more assertive government in terms of staple food price stabilisation. In any case, we believe growth downside risk is keener in 2016, with inflation pressure likely to pick up by end-2015.

Market impact The moderate El Nio occurrences in the past had insignificant impact on the market. Based on its impact to growth as projected in IMF's working paper, we believe the market has not priced in the downside risk of the El Nino coming in at the 97/98 scale. Indonesia is more politically stable and the government has more financial heft than in 97/98 to manage the impact. If the inflation impact is manageable, impact on the market will be as muted, while the plantation sector will reap the windfall, regardless, in our view.

Lor Sources: CIMB. COMPANY REPORTS

Notes from the Field

Erwan TEGUH T (62) 21 30061720 E [email protected]

Peter P. SUTEDJA, CFA T (62) 21 30061726 E [email protected]

Show Style "View Doc Map"

Effects of the El Nio phenomenon are expected to be moderate. If we prepare well, we will not have to import food

Jusuf Kalla, Vice President of Republic of Indonesia

Highlighted Companies

Adaro Energy

ADROs strong track record in delivering efficiency measures offers investors comfort amid increasing margin pressure. Catalysts could come from progress in its power plant projects.

Astra Agro Lestari

AALI stands out among the Indonesian planters as a proxy for CPO prices due to its liquidity (the highest), palm oil estate size (the largest planted area) and its downstream exposure (beneficiary of the export levy).

London Sumatra

LSIPs current EV/ha of US$8.2k/ha is lagging behind its peers average of US$9.6k/ha following news of a possible severe El Nino. This should lend support to its share price.

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July 10, 2015

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KEY CHARTS

El Nio comes The Australian Bureau of Meteorology (BOM), together with other weather forecasters, have all but confirmed that the El Nio weather phenomena has occurred and may worsen over the next several months. Some areas have indeed recorded drought. If the weather pattern changes as predicted, a prolonged drought in the western Pacific may happen. Severe cases of El Nio in the past, back in 1997/98 and 1982/83, brought significant decrease in rainfall throughout the regions in Indonesia, resulting in bad harvest and spike in food prices.

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La Nia

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More resilient to growth risk Based on previous cases of El Nio, IMF calculated that Indonesias GDP growth will fall by 0.91% at the end of the second quarter after El Nio strikes. The growth impact is indeed large; however, this is because Indonesia was historically more economically dependent on the agriculture sector. With the primary sectors (agricultural and mining) contribution to real economy declining to 19% by 2014 (as opposed to 27% in 1998 and 44% in 1983), the adverse impact could be more diluted this time. The countrys better financial position, as well as higher income per capita and more stable politics provide scope to manage the risks better.

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Inflation pains more manageable The bigger risk to the economy would come from inflation spikes, given foods still-heavy weighting in Indonesias CPI basket. As such, spikes in food prices could adversely impact inflation. Among the key commodities that contribute to the CPI, rice is the most importance given its weight in CPI and its political repercussion. The big premium that Indonesian rice price fetches domestically over international price buffers the impact should a strong El Nio hit, as the government could allow imports to flow in, cushioning the domestic price spike. Additionally, the wider range of food staples placed under the responsibility of its national logistics agency Bulog, and the recent presidential decree to control staple food prices in unusual situations, provide more legal tools for the government to manage price volatilities.

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Market impact If a severe El Nio was to hit and the economic impact is as predicted by IMF, impact on the market could be severe, stemming from earnings risk. The mild El Nio episodes in 2002/03, 2006/07 and 2009-2010 had insignificant impact on market valuations. While the market is pricing in a bearish expectation, it has yet to factor in a strong El Nio outcome. In any case, the plantation sector is a hedge. The key risk to such play is regulation, such as if the government decides to impose higher export tax, as happened in 97/98.

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SOURCE: CIMB, COMPANY REPORTS

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July 10, 2015

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Figure 2: Thematic picks

Price Target Price

(local curr) (local curr) CY2015 CY2016 CY2015 CY2016 CY2014 CY2015 CY2016 CY2015 CY2016 CY2015 CY2016

El Nio plays

Astra Agro Lestari AALI IJ HOLD 25,500 26,000 3,012 22.7 15.5 -0.9% 3.30 2.89 23.2% 15.6% 19.9% na na 2.1% 1.6%

London Sumatra LSIP IJ HOLD 1,565 1,670 801 18.5 14.8 -5.8% 1.45 1.36 14.2% 8.2% 9.5% na na 2.0% 2.6%

Average 21.7 15.4 -2.0% 2.60 2.34 19.6% 12.8% 16.0% na na 55.6% 55.3%

Infrastructure plays

Indocement INTP IJ ADD 21,000 28,600 5,798 14.4 11.7 2.3% 2.89 2.60 22.2% 21.3% 23.3% 8.5 7.1 4.3% 4.6%

Pembangunan Perumahan PTPP IJ ADD 3,985 4,800 1,447 26.7 18.4 24.8% 6.44 4.96 25.4% 27.7% 30.5% 10.7 8.3 0.6% 0.8%

Waskita Karya WSKT IJ ADD 1,770 2,100 1,857 25.5 18.4 39.5% 2.69 2.40 20.3% 14.3% 13.8% 8.0 5.6 0.6% 1.0%

Jasa Marga JSMR IJ ADD 5,700 6,800 2,907 22.8 18.7 18.5% 3.59 3.24 15.5% 16.6% 18.3% 12.3 11.4 2.0% 2.4%

Bank Mandiri BMRI IJ HOLD 9,900 11,700 17,324 11.5 9.9 3.7% 1.94 1.67 20.4% 18.4% 18.1% na na 2.2% 2.3%

Bank Negara Indonesia BBNI IJ ADD 5,350 7,700 7,482 9.0 7.9 5.9% 1.44 1.23 19.4% 17.7% 16.7% na na 2.7% 3.0%

Average 12.2 10.5 5.5% 2.06 1.78 20.2% 18.5% 18.3% 30.8 25.5 2.5% 2.7%

Long-term consumer plays

Gudang Garam GGRM IJ HOLD 45,625 54,600 6,584 16.2 14.9 3.2% 2.42 2.20 17.9% 15.9% 15.5% 9.6 9.0 2.5% 2.7%

Malindo Feedmill MAIN IJ ADD 1,570 1,850 211 25.9 11.2 -16.0% 2.32 1.97 -6.1% 9.4% 19.0% 11.1 7.5 0.0% 1.1%

Metropolitan Land MTLA IJ ADD 365.0 650.0 207 9.0 7.2 9.3% 1.26 1.10 15.4% 15.4% 16.3% 5.6 4.5 1.9% 2.2%

Nippon Indosari Corpindo ROTI IJ ADD 1,140 1,700 433 22.1 17.8 17.7% 4.92 4.03 22.2% 25.0% 24.8% 11.7 10.1 0.8% 1.1%

Surya Citra Media SCMA IJ ADD 2,970 3,700 3,257 27.7 22.9 5.5% 10.30 8.27 49.1% 41.9% 40.1% 17.9 15.1 1.8% 2.0%

Indofood Sukses Makmur INDF IJ ADD 6,600 7,900 4,346 13.2 11.7 5.9% 2.08 1.90 16.3% 16.9% 17.0% 8.2 7.6 3.4% 3.8%

Matahari Putra Prima MPPA IJ HOLD 2,860 4,350 1,154 26.4 21.3 24.1% 4.71 4.03 16.6% 19.7% 20.4% 12.5 10.5 1.1% 1.1%

Average 17.1 15.0 5.1% 2.83 2.54 18.4% 17.8% 17.9% 9.8 8.9 2.4% 2.7%

Property & Industrial plays

Bekasi Fajar BEST IJ ADD 428.0 800.0 310 7.6 5.3 -7.8% 1.24 1.03 15.6% 18.1% 21.1% 6.3 4.4 1.9% 2.7%

Bumi Serpong Damai BSDE IJ ADD 1,720 2,200 2,483 11.6 9.1 0.8% 1.82 1.56 21.6% 17.2% 18.4% 10.3 8.3 2.4% 1.7%

Pakuwon Jati PWON IJ ADD 400.0 625.0 1,445 10.7 8.7 12.6% 2.58 2.05 29.8% 27.3% 26.2% 7.5 6.3 2.6% 1.9%

Summarecon Agung SMRA IJ ADD 1,770 1,900 1,915 19.2 15.8 4.7% 3.99 3.35 29.4% 23.1% 23.0% 11.8 10.5 1.6% 1.6%

Surya Semesta Internusa SSIA IJ ADD 900.0 1,270 318 8.5 5.7 -1.3% 1.39 1.16 11.1% 18.0% 22.3% 5.0 4.1 2.0% 2.2%

Average 12.3 9.6 2.8% 2.25 1.88 23.0% 20.3% 21.4% 9.1 7.5 2.2% 1.8%

Average (all) 13.3 11.3 5.0% 2.25 1.95 20.0% 18.5% 18.5% 15.8 13.7 2.4% 2.6%

P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%)Company

Bloomberg

TickerRecom.

Market Cap

(US$ m)

Core P/E (x) 3-year EPS

CAGR (%)

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

Calculations are performed using EFA Monthly Interpolated Annualisation and Aggregation algorithms to December year ends

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Beating the heat 1. BACKGROUND

1.1 The El Nio phenomena

On 12 May 2015, the Bureau of Meteorology (BOM), Australia's national weather, climate and water agency, declared the El Nio status. El Nio episode is characterised by changes in the usual weather pattern, i.e. drought in the western Pacific, rains in the equatorial coast of South America, and convective storms and hurricanes in the central Pacific. These changes in weather patterns have significant effects on agriculture, fishing, and construction industries, as well as on national and global commodity prices.

Figure 3: Southern Oscillations the normal pattern Figure 4: El Nio condition

SOURCES: PIDWIRNY, M (2006) SOURCES: PIDWIRNY, M (2006)

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Figure 5: Global climatological effects of El Nio

SOURCES: NATIONAL ATMOSPHERIC AND OCEANIC ADMINISTRATIONS (NOAA) CLIMATE PREDICTION CENTER

One of the ways of measuring El Nio intensity is by using the Southern Oscillation index (SOI), which is issued by the BOM. Sustained negative SOI values below -8 indicate El Nio episodes, which typically occur at intervals of three to seven years and lasts about two years.

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July 10, 2015

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Figure 6: Southern Oscillation Index now entering El Nio episode

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El Nio

SOURCES: BOM Australia

The Indonesian Agency for Meteorological, Climatological and Geophysics (BMKG) predicts that the El Nio phenomenon this time would be classified as a moderate instance, as opposed to the strong instance observed during 1982/83 and 1997/98. The El Nio impact is not expected to change the rainfall pattern during Indonesias dry season in Jun-Nov, while stronger impact could be observed beyond Nov, which could result in the late start of the 2015/16 rainy seasons. The area affected, according to BMKG would include part of Sumatra island (South Sumatra and Lampung provinces), Java and Bali island, Nusa Tenggara area and part of Sulawesi island (South Sulawesi and Southeast Sulawesi provinces).

Figure 7: Areas potentially affected by El Nio

SOURCES: INDONESIAN AGENCY FOR METEOROLOGICAL, CLIMATOLOGICAL AND GEOPHYSICS

1.2 Prolonged drought hit harvest

The most severe El Nio cases observed in the past were in 1982-83 and 1997-98 it had large adverse macroeconomic effects in many regions of the world. In Indonesias case, both events resulted in significant decrease in rainfall, particularly during the dry season, which occurred from May to August (at that time). The decrease of rainfall observed back in 1982 was -17.3% and -44% for wet and dry seasons, respectively, in 1982; and -30.8% and -62.2% for wet and dry seasons in 1997. The negative SOI occurred for 13 and 14 months, respectively, during similar periods, i.e. from March/April until May/June, while the large negative SOI (which suggests the period of El Nio) lasted for 11 months. The other El Nio episodes were relatively moderate, as in the case of 1986-88, 1991-92, 1993, 1994-95, 2002-03, 2006-07, and 2009-10.

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Figure 8: Rainfall drop in 1982 and 1997 compared with average rainfall 1970-1997 by season and by region (%)

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Sumatra -38.3 -46.4 -40.9 -18.8 -35.2 -24.0

Java -33.4 -76.8 -41.2 -11.9 -81.7 -24.4

Bali / Nusa Tenggara -26.5 -78.5 -32.0 -26.4 -90.8 -33.2

Kalimantan -32.5 -54.4 -39.9 -5.7 -37.8 -16.1

Sulawesi -30.7 -70.2 -40.9 -18.5 -24.4 -27.4

Indonesia -33.3 -56.2 -39.9 -17.2 -39.6 -23.7

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1997 1982

SOURCES: THE UNITED NATIONS

During the 1982 and 1997 episodes, the decrease in rainfall forced farmers to harvest their food crops earlier in order to avoid harvest failure from water insufficiency. The long dry season caused by El Nio, particularly in 1997, resulted in late harvest for the next seasons food crops, resulting in farmers harvesting food crops later than the normal harvest pattern in 1998. This strategy, however, resulted in lower yield and poor quality, which were reflected in less area harvested and poor yields during El Nio episodes.

Figure 9: Food crops area harvested in Indonesia during 1982-1983 and 1997-1998 El Nio, compared with 3-year moving average

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1982 -367 -82 -507 -91 -45 -27 -133 -1,254

1983 -308 -97 -72 -111 -40 -12 -81 -721

1997 -398 -82 -303 -113 -68 -16 -196 -721

1998 -305 -109 -54 -114 -57 -13 -142 -792

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1982 -4.5 -7.1 -22.0 -6.7 -9.0 -12.2 -18.3 -8.6

1983 -3.8 -8.4 -3.0 -8.5 -8.2 -5.7 -11.7 -5.0

1997 -4.0 -6.3 -8.6 -8.7 -10.1 -9.2 -15.3 -6.4

1998 -3.0 -8.7 -1.5 -8.9 -8.8 -7.3 -12.0 -4.3 SOURCES: CIMB, COMPANY REPORTS

In 1997/98, the longer dry season in 1997 coincided with the wet season in 1998, leading to a severe decrease in rice production. The government then intervened heavily by conducting an open market operation programme via rice imports. That the Asian Financial Crisis occurred simultaneously limited the governments ability to conduct price stability intervention. All this led to severe economic contraction and sharply higher poverty level. Java was worst hit as it accounts for the bulk of Indonesias rice production and also happens to be the area worst hit by any El Nio effect.

Figure 10: Supply-demand of domestic rice during 1997/98 El Nio notice the period of low domestic supply in end-97 and 98.

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July 10, 2015

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The drought also led to lower outputs by most of the other major crops. While CPO yield was also adversely affected in 1997/98, production continued to rise due to the aggressive palm oil planting programme supported by the government prior to that. Prior to 1997, the majority of the CPO produced in Indonesia was exported (given the 0% taxation at that time) and much lower domestic demand.

The sharp rupiah depreciation and the shortage of domestic cooking oil supply led to a sharp rise in cooking oil prices in rupiah terms. The government responded by enacting a 25% mandatory domestic sales obligation on CPO companies in 1997, which failed to resolve the surge in cooking oil prices and eventually passed a draconian act of banning CPO exports briefly from Jan-Apr 1998. This was also the period when the Indonesian government frequently changed the export tax regime and hence the plantation sector was perceived to be carrying high regulatory risks.

Figure 11: Plantation output by crop in Indonesia (in tonnes), 1995-2014

Dry rubber CPOPalm

KernelCocoa Coffee Tea Sugarcane 1) Tobacco 1)

1995 341 2,476 605 46 21 111 2,105 10

1996 335 2,570 627 47 27 132 2,160 7

1997 331 4,166 839 66 31 121 2,187 8

1998 333 4,586 917 61 29 133 1,929 8

1999 294 4,908 982 59 27 126 1,801 6

2000 376 5,095 1,019 58 28 123 1,780 6

2001 398 5,598 1,118 58 27 127 1,825 5

2002 404 6,196 1,210 48 27 120 1,901 5

2003 396 6,924 1,529 57 29 128 1,992 5

2004 404 8,479 1,862 55 29 126 2,052 3

2005 432 10,119 2,140 55 25 128 2,242 4

2006 555 10,962 2,363 67 29 115 2,307 4

2007 578 11,438 2,593 69 24 117 2,624 3

2008 586 12,478 2,829 63 28 113 2,668 3

2009 522 13,873 3,146 68 29 107 2,334 4

2010 541 14,038 3,183 65 29 100 2,289 3

2011 630 15,198 3,446 68 22 95 2,244 2

2012 583 16,818 3,364 53 29 92 2,593 2

2013 670 17,391 3,648 55 30 96 2,555 3

2014 533 18,401 5,088 47 44 77 1,784 3

1Q15 109 4,186 1,059 7 1 15 - 1

1) Including production from plasma estates SOURCES: CIMB, COMPANY REPORTS

Despite the production impact, there were hardly visible impacts of El Nio in the 2000s era, as only weak to moderate instances occurred. There were food inflation spikes in the 2002/03, though that could be a function of a series of fuel price adjustments during the period, as domestic rice prices were relatively stable, despite cooking oil prices increasing during the period (in tandem with oil price surges). Increase in food prices were observed in both 2006/07 and 2009/10 periods i.e. for rice prices, though that did not translate into a spike in food inflation given the high base effect from the previous years (2005 and 2008) fuel price hike.

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Figure 12: Muted inflation impact during several weak to moderate El Nio episodes in the 2000s, despite food being the major contributor to inflation during those

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Figure 13: Rice price some spikes observed during El Nio Figure 14: Cooking oil price spikes coincident with CPO and oil price spikes.

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SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

2. OUTLOOK

2.1 Growth impact downside risk if strong El Nio hits

The IMF in its 2015 Working Paper on the Macroeconomics Impact of El Nio quantified the macro impact of El Nio on countries. The study showed that an El Nio event had a statistically significant effect on real GDP growth and inflation for most of the countries in the sample. The median responses on impact as well as the cumulated effects for both macro indicators for Indonesia after the first, second, third, and fourth quarters are shown in Figure 14. Based on the study, the Indonesian GDP growth could fall by 0.91% at the end of the second quarter, about 1% cumulatively during the event. This is a large growth dent, in fact the worst among the countries under the study. In part, this was due to the higher share of primary sector (agricultural and mining) in the Indonesian GDP composition (c.25% average in 2004-2013), and that Indonesia is a net importer of most of key food stuff.

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Figure 15: The effects of an El Nio shock on Indonesia real GDP growth

1 quarter 2 quarter 3 quarter 4 quarter

Argentina -0.08 0.03 0.29 0.64 1.08

Australia -0.03 -0.18 -0.30 -0.37 -0.41

Brazil -0.06 0.04 0.20 0.42 -0.68

Canada 0.00 0.13 0.33 0.58 0.85

China -0.01 0.03 0.16 0.36 0.56

Chile -0.19 -0.10 0.16 0.42 0.70

Europe 0.02 0.09 0.27 0.49 0.69

India -0.03 -0.15 -0.23 -0.25 -0.25

Indonesia -0.35 -0.61 -0.91 -1.02 -1.01

Japan -0.10 -0.12 0.01 0.20 0.37

Korea 0.11 0.29 0.44 0.58 0.67

Malaysia 0.08 0.06 0.13 0.27 0.43

Mexico 0.03 0.37 0.71 1.12 1.57

New Zealand -0.16 -0.29 -0.37 -0.42 -0.43

Peru -0.07 -0.28 -0.35 -0.34 -0.33

Philippines 0.06 0.09 0.11 0.17 0.21

South Africa -0.11 -0.24 -0.47 -0.63 -0.72

Saudi Arabia -0.09 -0.17 -0.14 0.00 0.18

Singapore 0.09 0.28 0.54 0.87 1.18

Thailand 0.47 0.78 1.11 1.49 1.81

USA 0.05 0.10 0.23 0.39 0.55

Cummulated responses after

Note: Figures are median impulse responses to a one standard deviation reduction in SOI anomalies.

ImpactCountry

SOURCES: IMF

The table above calculated the impact to the economy for every 1 s.d. reduction in SOI anomalies, which was defined as the deviation of the SOI index from its historical average, divided by its historical standard deviation (s.d.). Using the same study, the most severe cases of El Nio observed a 4 to 6 s.d. below SOI anomalies, while the mild to moderate El Nio historically has SOI anomalies index of -1 to -2s.d. If the El Nio episode this time is moderate, the initial GDP impact on Indonesia could range between 0.35% and 0.70%, assuming all else being equal.

Figure 16: Historical SOI anomalies index

SOURCES: IMF WORKING PAPER

In the case of a severe El Nio, the growth impact could be damaging. Based on the IMFs working paper, GDP growth could be hit by 1.4-2.1%, which was seen in 1982/83 and 1997/98, as the primary sectors growth dipped into negative territory in both years, dragging down the overall GDP. The impact in the 1997/98 case was exacerbated by the Asian Financial Crisis.

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Figure 17: The El Nio shock dragged down primary industry growth into contraction in both 1982/83 and 1997/98; however, the impact in the latter case was

worsened by the Asian Financial Crisis.

Title:

Source:


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Primary Secondary Tertiary GDP growth

Real GDP growth by industry

SOURCES: CEIC, GDP

On a more positive note, the share of the primary industry, in recent years, has declined, contributing only 19% to the real economy in 2014, from 44% in 1983 and 27% in 1998, as contributions from secondary (manufacturing) and tertiary (services sector) picked up. Also, GDP per capita has risen from US$622-1,079 in 82/97 to US$3,515 as of 2014, suggesting reduced reliance on food staples and hence more resilience to food price shocks. Combined with the indication so far that the El Nio this time would be less severe than in 1983 and 1998, the logical deduction is that its impact on economic growth this time around could be smaller. This is supported by the insignificant impact to growth during the moderate El Nio episodes over the past decade.

Adjusting to the lower primary sector exposure, the initial impact on economic growth could be in the range of 0.5-1.3%, i.e. from moderate to severe El Nino outcomes.

Figure 18: The contribution of primary industry has declined over time, therefore this time the impact on agriculture slowdown in times of El Nio shock should be diluted

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Primary Secondary Tertiary

Real GDP contributor by industry

SOURCES: CEIC, BPS

2.2 Inflation risk more manageable

The IMF working paper also computed the inflationary effect of El Nio shocks to countries. It found that for most countries in its sample, there existed statistically-significant upward pressure on inflation, due to higher fuel as well

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as non-fuel commodity prices, and also the result of government policies (including buffer stock releases), inflation expectations, as well as aggregate demand-side pressures for countries that experience a growth pick-up following an El Nio episode. Indonesia was predicted to see one of the highest jumps in inflation, in fact highest among Asian countries. This was due to the higher weight placed on food in Indonesias CPI basket. In case of a moderate El Nio, the study showed that it could contribute an additional 0.25-0.50% yoy to inflation. Under the worst case, should a strong El Nio occur, it could bump inflation up by 1-1.5% yoy.

Figure 19: The effects of an El Nio shock on Indonesias inflation


Argentina 0.51 0.79 0.57 0.92 0.64

Australia -0.01 0.02 0.02 0.01 0.00

Brazil -0.30 -0.21 1.01 1.49 0.97

Canada -0.05 -0.10 -0.08 -0.07 -0.07

China 0.00 -0.02 0.00 0.06 0.11

Chile 0.14 0.14 0.29 0.32 0.39

Europe 0.00 0.00 0.02 0.06 0.09

India 0.15 0.16 0.42 0.56 0.60

Indonesia 0.25 0.61 0.87 0.95 0.91

Japan 0.03 0.05 0.04 0.06 0.10

korea 0.01 0.12 0.22 0.34 0.44

Malaysia 0.05 0.09 0.16 0.23 0.28

Mexico 0.22 0.60 1.01 1.12 1.04

New Zealand -0.06 -0.23 -0.39 -0.55 -0.61

Peru -0.06 -0.73 -0.48 -0.38 0.65

Philippines 0.11 0.06 0.19 0.22 0.27

South Africa 0.10 -0.01 0.02 0.06 0.09

Saudi Arabia 0.01 -0.03 -0.02 -0.01 -0.02

Singapore -0.07 -0.06 -0.06 -0.06 -0.06

Thailand 0.01 0.21 0.35 0.46 0.55

USA 0.01 0.02 0.10 0.14 0.15


Note: Figures are median impulse responses to a one standard deviation reduction in SOI anomalies.

ImpactSeries

SOURCES: IMF

In Indonesia, food inflation (both raw and processed food) accounted for 36% of the CPI basket over the past five years vs. more than 44% previously. This renders the headline inflation vulnerable to shocks in food prices, which historically was either triggered by 1) transmission effect from subsidised fuel price cut, and/or 2) bad harvest, as in the case of the food inflation in 2010.

Figure 20: Top 10 inflation contributors El Nio observed in 2006/07 notice that rice tops the inflation contributors during those years

Items (% yoy) 2005 Items (% yoy) 2006 Items (% yoy) 2007 Items (% yoy) 2008

1 Inner-city transport fares 2.79 Rice 1.63 Rice 0.52 Household fuel 1.16

2 Gasoline 2.61 Contract housing 0.42 Cooking oil 0.49 Inner-city transport fares 0.69

3 Kerosene 1.61 House rental 0.22 Shallot 0.47 Fish 0.68

4 Rice 1.24 Cooked rice with side dish 0.22 Gold jewellery 0.33 Gasoline 0.57

5 Contract housing 0.51 Gold jewellery 0.19 Contract housing 0.30 Cooked rice with side dish 0.36

6 Cooked rice with side dish 0.45 Fish 0.19 Clove cigarette - with filter 0.24 Rice 0.31

7 Red chilli 0.40 Academy/University tuition fee 0.16 Academy/University tuition fee 0.17 Gold jewellery 0.30

8 Inter-city transport fares 0.27 Clove cigarette - with filter 0.16 Chicken meat 0.16 Chicken meat 0.28

9 Clove cigarette - with filter 0.26 Red chilli 0.15 Water utilities cost 0.15 Noodle 0.26

10 Mason fee 0.24 Chicken meat 0.15 Chicken eggs 0.13 Tempeh 0.25

Top 10 inflation contribution (% yoy) 10.38 3.49 2.96 4.86

Headline inflation (% yoy) 17.11 6.60 6.59 11.06 SOURCES: BPS

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Figure 21: Top 10 inflation contributors 2009/10 was the year where El Nio was observed, food tops the inflation contributor

Items (% yoy) 2009 Items (% yoy) 2010 Items (% yoy) 2011 Items (% yoy) 2012

1 Sugar 0.32 Rice 1.29 Rice 0.54 Rice 0.30

2 Gold jewellery 0.28 Electricity 0.36 Gold jewellery 0.34 Fish 0.22

3 Rice 0.27 Red Chilli 0.32 Clove cigarette - with filter 0.22 Clove cigarette - with filter 0.20

4 Garlic 0.18 Gold jewellery 0.27 House rental 0.21 Gold jewellery 0.19

5 Clove cigarette - with filter 0.14 Shallot 0.25 Air transport fee 0.19 Air transport fee 0.19

6 Cooked rice with side dish 0.14 Rice with cooked food 0.24 Fish 0.18 Meat 0.17

7 Contract housing 0.13 Chili - small variety 0.22 High school fee 0.10 Sugar 0.15

8 House rental 0.13 Road tax renewal fee 0.22 Contract housing 0.09 House rental 0.15

9 Air transport fee 0.11 Clove cigarette - with filter 0.16 Cooked rice with side dish 0.08 White onion 0.14

10 Noodle 0.09 Chicken meat 0.15 Chicken eggs 0.07 House rental 0.13

Top 10 inflation contribution (% yoy) 1.79 3.48 2.02 1.84

Headline inflation (% yoy) 2.78 6.96 3.79 4.30 SOURCES: BPS

Figure 22: Top 10 inflation contributors in 2013 and 2014

Items (% yoy) 2013 Items (% yoy) 2014

1 Gasoline 1.17 Gasoline 1.04

2 Inner-city transport fares 0.75 Electricity 0.64

3 Red Onion 0.38 Inner-city transport fares 0.63

4 Electricity 0.38 Red chilli 0.43

5 Red Chilli 0.31 Rice 0.38

6 Fish 0.30 Household fuel 0.37

7 Rice 0.20 Air transport fee 0.22

8 Cooked rice with side dish 0.20 Chili - small variety 0.19

9 Contract housing 0.20 Cooked rice with side dish 0.18

10 Clove cigarette - with filter 0.19 Clove cigarette - with filter 0.15

Top 10 inflation contribution (% yoy) 4.08 4.23

Headline inflation (% yoy) 8.38 8.36 SOURCES: BPS

Given that rice is widely consumed across Indonesia and carried significant weight in the CPI (cereals has over 20% weight in the unprocessed food basket), it has consistently become one of the key contributors to the CPI. As such, it would be crucial for the government to ensure the stability of rice supply. The task is made easier given the fact that Indonesian rice price commands premium over international rice price (currently at 140% premium to Thailand rice price), meaning that the government can contain rice price spike effectively by importing rice during times of domestic supply shortfall, ensuring that demand could be met and preventing food inflation spike.

2.3 Commodities price impact higher

Prolonged droughts lead to bad harvests, pushing up the prices of coffee, cocoa, and palm oil, among other commodities. Not helping is that some mines in Indonesia (particularly INCO) rely heavily on hydropower; resulting in less nickel output due to power shortage. Subsequently, certain metal prices were affected due to supply hit. In the IMF study, the hit on Indonesias GDP growth of -0.91% at the end of the second quarter after El Nino hit was a large part due to the higher share of the primary sector (agricultural and mining), at around 25% of total GDP.

Prolonged drought could also lead to higher demand for coal and crude oil as lower electricity output is generated from hydropower. In addition, the agriculture sector might extract more water which would further increase the fuel demand for power generation. The IMF study in fact confirmed that crude oil prices (as a proxy for fuel prices) also sustained a statistically significant and positive change following an El Nio shock.

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Figure 23: The effects of an El Nio shock on real commodity prices (in %)


Non-fuel commodity prices 0.42 0.77 1.97 3.75 5.31

Oil prices 1.20 4.23 7.80 11.09 13.87


Series Impact

SOURCES: IMF

CPO is among the key beneficiary commodities as its production, mainly in Indonesia and Malaysia, would be adversely affected, while its use as both food and biodiesel might see higher demand. Such demand-supply imbalances push up CPO prices. CIMBs plantation analyst forecast price spikes of c.20-25% under a moderate El Nino episode, after taking into account the higher inventory, relatively robust harvest of other edible oils and lower crude oil prices. She forecasts FY15-16 CPO prices of RM2,230-2,450/tonne, which has already assumed a moderate El Nio event but her rough estimates reveal that in the event of a more severe El Nio, CPO prices could rise by 20% to peak at RM2,700/tonne.

The CPO price normally strengthened at the end of El Nio, as the reduced production starts being felt. The future prices of the commodities have already moved ahead, as shown in Fig.23.

Figure 24: CPO vs. soybean oil futures prices

Title:

Source:


0

10

20

30

40

50

60

70

80

0

500

1,000

1,500

2,000

2,500

3,000

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5,000

Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

CPO (LHS) Soybean oil (RHS)(RM/tonne) (US cent/lb)

El Nino:May'97 - Apr'98

El Nino:May'02 - Feb'03

El Nino:Jul'04 - Jan'05

El Nino:Sep'06 - Jan'07

El Nino:Jul'09 - Apr'10

SOURCES: CIMB, BLOOMBERG

Figure 25: Price changes during ENSO cycle

Type Period Intensity % chg in CPO price* % chg in soy oil price*

El Nino May 97 - Apr 98 Strong 23.1% 22.4%

La Nina Jul 98 - Mar 01 Strong -61.6% -46.2%

El Nino May 02 - Feb 03 Moderate 25.2% 31.2%

El Nino Jul 04 - Jan 05 Weak -5.6% -12.7%

La Nina Nov 05 - Mar06 Weak -0.9% -3.8%

El Nino Sep 06 - Jan 07 Weak 20.5% 15.8%

La Nina Aug 07 - Jun 08 Moderate 47.7% 69.1%

La Nina Dec 08 - Mar 09 Weak 18.9% -1.5%

El Nino Jul 09 - Apr 10 Moderate 29.9% 7.9%

La Nina Jul 10 - Apr 11 Strong 42.4% 44.9%

La Nina Sep 11 - Mar 12 Moderate 7.9% -1.7%

* Changes are calculated using prices at the end of ENSO cycle and prices at the beginning of ENSO cycle SOURCES: CIMB, COMPANY REPORTS

Similar impacts were also observed for both oil and coal prices, though the positive impact on oil prices was generally less (average price gains of only 6% yoy during the year of the El Nio episode) than the impact seen on CPO and coal prices (average price gains of 25% during year of the El Nio episode).

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Figure 26: Historical average yearly Brent oil price, US$/bbl generally positive impact but at a smaller magnitude

Figure 27: Historical average yearly Newcastle coal price, US$/tonne generally positive impact from El Nio

Title:

Source:


-

20

40

60

80

100

120

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

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2005

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2008

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2014

Average Brent Oil price, US$/bbl

Title:

Source:


0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Newcastle coal price, US$/tonne

SOURCES: BLOOMBERG SOURCES: BLOOMBERG

2.4 The government is in better shape than 97/98

When Mother Nature strikes and bad harvest comes, it is up to the big brother to save the day. Compared with the last severe case in 1997/98, the current government is in a better shape to prop up the market effectively when such time comes.

Firstly, the political environment is more stable. The Asian Financial Crisis era which coincided with El Nio back in 1997/98 severely affected domestic stability, with dissatisfaction against the government mounting and ultimately leading to the fall of the New Order regime in July 1998. Since then, Indonesias democracy has matured significantly, with more than four smooth general elections. The government is elected directly by the people and President Jokowi has a strong mandate though his popularity is tested as he undertakes the tough reform of eliminating fuel subsidy.

Figure 28: The opposition turned out to be friendlier than initially expected...

Figure 29: however, declining approval rating is something more pressing, as Jokowis support comes from the voters

Title:

Source:


PDI-P, 19.5%

Nasdem, 6.3%

PKB, 8.4%

Hanura, 2.9%

Gerindra, 13.0%

PKS, 7.1%

Golkar, 16.3%

PAN, 8.8%

PPP, 7.0%

Demokrat, 10.9%

0%

20%

40%

60%

80%

100%

PDIP-led coalition Gerindra-led coalition

PDI-P Nasdem PKB Hanura Gerindra PKS Golkar PAN PPP Demokrat

Title:

Source:


89.9%

65.2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

3 Month 6 Month

SOURCES: GENERAL ELECTION COMMISSION SOURCES: KOMPAS

The government now has more financial means to support price stability. The leverage on both the government and the private sectors in 97/98 were much higher compared with the current level. In fact, Indonesias external debt to

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GDP exceeded 100% during the Asian Financial crisis, vs. no more than 35% presently.

Figure 30: Indonesias external debt better positioned this time and still able to increase leverage if needed

Title:

Source:


0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

LT debt - public sector LT debt - private sector

Short-term debt Interest on long-term debt

External debt to GDP (RHS)

US$ mn

SOURCES: BI, WB

Secondly, the food security and resilience is one of the governments cornerstone projects. It budgeted Rp25tr this year to support food security, including the building of new irrigation systems, procurement of seeds and fertilisers, as well as building technology parks and science parks. It also budgeted Rp9.2tr (c.US$722m) in equity injection, to be injected into the SOEs, in order to further advance food security.

Figure 31: Equity injections to SOEs to establish food security, in Rp bn

Title:

Source:


PTPN III, Rp3,150

PTPN VII, Rp18

PTPN IX, Rp100

PTPN X, Rp98

PTPN XI, Rp65

PTPN XII, Rp70

PT Permodalan Nasional Madani, Rp1,000

PT Garam, Rp300

Perum Bulog, Rp3,000

PT Pertani, Rp470

PT Sang Hyang Seri, Rp400

PT Perikanan Nusantara, Rp200

Perum Perikanan Indonesia, Rp300

SOURCES: CIMB, COMPANY REPORTS

Indeed, one of the biggest receivers of equity injection is the State Logistics Agency (Bulog), which has been tasked to stabilise domestic food prices. The government earlier this year increased the number of food categories that Bulog has to oversee into seven, namely rice, corns, soybeans, sugar, onions, chili and beef. Extra scrutiny seems to be put on this agency, as its president director was recently removed after holding the position for merely six months. This was preceded by the failure of Bulog to control rice prices, which spiked earlier in the year. The agency underperformed its target to absorb 4 million tons of rice produced by local farmers this year, which led to its helplessness in the wake of the rice price spike. Indeed, in the brink of an El Nio shock, the agencys role in stabilising foods prices has become more important than ever.

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Thirdly, the president issued Decree No. 71 year 2015 recently. This allows the government to cap prices of staple foods and other basic goods during peak demand periods on/after religious holidays or during periods of price volatility. One of the provisions within the regulation prohibits hoarding of staple or important goods at the warehouse during times of goods shortage, volatile prices and supply disruptions. This provides the legal framework for the government to arrest price speculators, against whom it was helpless in the past.

3. VALUATION AND RECOMMENDATIONS

3.1 Market bearish mood

There is a lack of observable adverse impact from El Nio episodes to JCI valuations. In fact, the three episodes of weak to moderate El Nio episodes over the past decade or so did not seem to adversely impact JCI valuations. Direct impact on earnings was also relatively mild, except for the positive impact on the plantation sector. Production shortfall was more than offset by higher prices.

An El Nio event would plausibly affect earnings meaningfully and hence valuations given the potential severity of the impact on economic growth and inflation, if not handled carefully. The 1997/98 case could not be used as a comparison as the impact of the Asian Financial Crisis was overwhelming given the debt burden and defaults, massive exchange rate depreciation (by more than threefold) and huge capital outflows. The 1982 episode could not be used as the JCI was then at its infancy.

Figure 32: JCI historical monthly P/E - no observable adverse impact to JCI valuations during El Nio episodes

Title:

Source:


-

50

100

150

200

250

300

350

400

0x

5x

10x

15x

20x

25x

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

JCI P/E JCI EPS (RHS)

El Nino period

SOURCES: CEIC, IDX, BLOOMBERG

Current JCI valuations seem to have priced in a bearish growth scenario. It has fallen 8% YTD, dropping sharply in 2Q following lower-than-expected GDP growth, with 14.4x forward P/E (1.8 s.d. below 3-yr mean) and 2.4x forward P/BV (2.5 s.d. below 3-yr mean). It is at valuations similar to the 2013 sell-off.

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Figure 33: JCIs 12-month forward P/E Figure 34: JCIs 12-month forward P/BV

Title:

Source:


10x

11.5x

13x

14.5x

16x

17.5x

JCI Rolling forward P/E

3yr MA

Title:

Source:


2x

2.25x

2.5x

2.75x

3x

3.25x

3.5x

3.75x

4x

JCI Rolling forward P/BV

3yr MA

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

Using the IMF working paper sensitivity and adjusting for lower primary sector contribution to GDP, a moderate El Nio could result in GDP growth decreasing by 0.5% in FY15 and another 1.0% in FY16. This could translate into earnings downside of 2.1% pts in FY15 and 3.9% in FY16, going by the historical multiplier between JCI earnings growth and real GDP of 3x. In such a case, earnings growth over FY15-16, currently expected at 7-16%, will be reduced to 4-14%. Such scenario would bump up the JCIs forward P/E to 15.0x, about 1.1 s.d. below its 3-yr mean, which is about the level of the bottom seen during 2013 sell-offs.

In the case of a strong El Nio, adjusted GDP growth downside could be 1.3% in FY15 and 2.5% in FY16. This is severe. The earnings risk could lead to cuts of 3.9% in FY15 and 7.5% in FY16, or flat yoy growth in FY15 and 9% yoy in FY16. In that case, the JCI forward P/E would rise to 16.0x, about 0.1 s.d. above 3-yr mean.

Figure 35: The index valuations appear to have already priced in a moderate El Nio scenario, but definitely not expecting a strong El Nio scenario.

Title:

Source:


13

14

15

16

17

18

19

20

JCI forward P/E (base case)

moderate El Nino

base case

strongEl Nino

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

On a P/E basis, the market appears to have priced in a moderate case of El Nino, also judging from the relatively robust rallies among CPO names. However, it has yet to price in a severe El Nino. In that case, assuming P/E drops to 1 s.d. below 3-yr mean, JCI downside is c.7% from the current level.

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3.2 Winner and losers

CPO players are the clear winners, given that its prices historically correlate positively with El Nio events. Planters that experience less production impact would reap double the benefit. These could be those with more estates in less affected regions such as north Sumatera or Kalimantan. AALI and LSIP provide the best proxy for El Nino play. Along with CPO players, coal and O&G companies could also benefit given the historical positive impact on both commodities. ADRO and upstream O&G operator MEDC could benefit.

Conversely, companies that have high commodities input costs, i.e. consumer staples companies such as MYOR and UNVR could be at risk as their production costs could increase sharply while the weaker purchasing power might limit their ability to pass on the cost spikes. Historically, a dry weather hurt INCOs earnings as the lower hydro power plant output force it to resort to higher-cost oil fuel.

Figure 36: AALIs core EPS and forward P/E Figure 37: AALIs share price tracks CPO price closely, diverging lately due to incentive given to downstream industry

Title:

Source:


0x

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45x

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AALI core EPS AALI forward P/E (RHS)

Title:

Source:


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/2011

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/2011

9/1

/2012

6/1

/2013

3/1

/2014

12/1

/2014

CPO price AALI share price

(US$/tonne) (Rp/share)

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: BLOOMBERG

Figure 38: LSIPs core EPS and forward P/E Figure 39: LSIPs share price tracks CPO price closely

Title:

Source:


0x

5x

10x

15x

20x

25x

30x

-400

-300

-200

-100

0

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200

300

400

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LSIP core EPS LSIP forward P/E (RHS)

Title:

Source:


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400

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/2003

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12/1

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12/1

/2011

9/1

/2012

6/1

/2013

3/1

/2014

12/1

/2014

CPO price LSIP share price

(US$/tonne) (Rp/share)

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: BLOOMBERG

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DISCLAIMER #03

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The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the issuers or securities analysed in this report and were prepared independently and autonomously. No part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. CIMB prohibits the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for, or view of, a particular company. Information barriers and other arrangements may be established where necessary to prevent conflicts of interests arising. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request.

Reports relating to a specific geographical area are produced by the corresponding CIMB entity as listed in the table below. The term CIMB shall denote, where appropriate, the relevant entity distributing or disseminating the report in the particular jurisdiction referenced below, or, in every other case, CIMB Group Holdings Berhad ("CIMBGH") and its affiliates, subsidiaries and related companies.

Country CIMB Entity Regulated by

Hong Kong CIMB Securities Limited Securities and Futures Commission Hong Kong Indonesia PT CIMB Securities Indonesia Financial Services Authority of Indonesia India CIMB Securities (India) Private Limited Securities and Exchange Board of India (SEBI) Malaysia CIMB Investment Bank Berhad Securities Commission Malaysia Singapore CIMB Research Pte. Ltd. Monetary Authority of Singapore South Korea CIMB Securities Limited, Korea Branch Financial Services Commission and Financial Supervisory Service Taiwan CIMB Securities Limited, Taiwan Branch Financial Supervisory Commission

Thailand CIMB Securities (Thailand) Co. Ltd. Securities and Exchange Commission Thailand

(i) As of July 9, 2015, CIMB has a proprietary position in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) Bank Mandiri

(ii) As of July 10, 2015, the analyst(s) who prepared this report, and the associate(s), has / have an interest in the securities (which may include but not limited to shares, warrants, call warrants and/or any other derivatives) in the following company or companies covered or recommended in this report:

(a) -

The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report.

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CIMB may or may not issue regular reports on the subject matter of this report at any frequency and may cease to do so or change the periodicity of reports at any time. CIMB is under no obligation to update this report in the event of a material change to the information contained in this report. This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affiliates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report. Neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments thereof.

Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.

France: Only qualified investors within the meaning of French law shall have access to this report. This report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial instruments and it is not intended as a solicitation for the purchase of any financial instrument.

Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (CHK) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CHK. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CHK. Unless permitted to do so by the securities laws of Hong Kong, no person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the securities covered in this report, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong).

CIMB Securities Limited does not make a market on the securities mentioned in the report.

India: This report is issued and distributed in India by CIMB Securities (India) Private Limited (CIMB India) which is registered with SEBI as a stock-broker under the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 and in accordance with the provisions of Regulation 4 (g) of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013, CIMB India is not required to seek registration with SEBI as an Investment Adviser.

The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.

Indonesia: This report is issued and distributed by PT CIMB Securities Indonesia (CIMBI). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBI has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMBI. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBI. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesia residents except in compliance with applicable Indonesian capital market laws and regulations.

Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (CIMB). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMB. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.

New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978.

Singapore: This report is issued and distributed by CIMB Research Pte Ltd (CIMBR). Recipients of this report are to contact CIMBR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as

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of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBR has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential . No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBR.

As of July 9, 2015, CIMBR does not have a proprietary position in the recommended securities in this report.

CIMB Securities Singapore Pte Ltd and/or CIMB Bank does not make a market on the securities mentioned in the report.

South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch ("CIMB Korea") which is licensed as a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea.

The views and opinions in this research report are our own as of the date hereof and are subject to change, and this report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial investment instruments and it is not intended as a solicitation for the purchase of any financial investment instrument.

This publication is strictly confidential and is for private circulation only, and no part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB Korea.

Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden.

Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China.

Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (CIMBS). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBS has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CIMBS. This publication is being supplied to you strict ly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMBS.

CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker and issuer including offering of Derivative Warrants Underlying securities of the following securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AIT, AMATA, ANAN, AOT, AP, ASP, BANPU, BAY, BBL, BCH, BCP, BEC, BECL, BGH, BH, BIGC, BJC, BJCHI, BLAND, BMCL, BTS, CENTEL, CK, CPALL, CPF, CPN, DELTA, DEMCO, DTAC, EARTH, EGCO, ERW, GFPT, GLOBAL, GLOW, GUNKUL, HANA, HEMRAJ, HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, KTIS, LH, LOXLEY, LPN, M, MAJOR, MC, MEGA, MINT, NOK, PS, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, RML, ROBINS, SAMART, SAWAD, SCB, SCC, SCCC, SF, SGP, SIM, SIRI, SPALI, SPCG, SRICHA, STA, STEC, STPI, SVI, TCAP, THAI, THCOM, THREL, TICON, TISCO, TMB, TOP, TPIPL, TTA, TTCL, TTW, TUF, UV, VGI, TRUE.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (IOD) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK)

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Limited (CIMB UK). CIMB UK is authorised and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the Order); (c) are persons falling within Article 49 (2) (a) to (d) (high net worth companies, unincorporated associations etc) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as relevant persons). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investment research" under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (Australia) Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as "U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Rating Distribution (%) Investment Banking clients (%)

Add 56.5% 6.7%

Hold 30.7% 4.5%

Reduce 12.6% 1.7%

Distribution of stock ratings and investment banking clients for quarter ended on 30 June 2015

1508 companies under coverage for quarter ended on 30 June 2015

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014. AAV Very Good, ADVANC Very Good, AEONTS not available, AMATA - Good, ANAN Very Good, AOT Very Good, AP - Good, ASK Very Good, ASP Very Good, BANPU Very Good , BAY Very Good , BBL Very Good, BCH not available, BCP - Excellent, BEAUTY Good, BEC - Good, BECL Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC Good, BLA Very Good, BMCL - Very Good, BTS - Excellent, CCET Good, CENTEL Very Good, CHG not available, CK Very Good, CPALL not available, CPF Very Good, CPN - Excellent, DELTA - Very Good, DEMCO Good, DTAC Very Good, EA - Good, ECL not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA - Excellent, HEMRAJ Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD Good, IVL - Excellent, JAS not available, JUBILE not available, KAMART not available, KBANK - Excellent, KCE - Very Good, KGI Good, KKP Excellent, KTB - Excellent, KTC Good, LH - Very Good, LPN Very Good, M - not available, MAJOR - Good, MAKRO Good, MBKET Good, MC Very Good, MCOT Very Good, MEGA Good, MINT - Excellent, OFM Very Good, OISHI Good, PS Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH Very Good, RATCH Very Good, ROBINS Very Good, RS Very Good, SAMART - Excellent, SAPPE - not available, SAT Excellent, SAWAD not available, SC Excellent, SCB - Excellent, SCBLIF Good, SCC Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA Very Good, STEC - Good, SVI Very Good, TASCO Good, TCAP Very Good, THAI Very Good, THANI Very Good, THCOM Very Good, THRE not available, THREL Good, TICON Good, TISCO - Excellent, TK Very Good, TMB - Excellent, TOP - Excellent, TRUE Very Good, TTW Very Good, TUF - Good, VGI Very Good, WORK not available.

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CIMB Recommendation Framework

Stock Ratings Definition:

Add The stocks total return is expected to exceed 10% over the next 12 months.

Hold The stocks total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stocks total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand, Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were based on a stocks total return relative to the relevant benchmarks total return. Outperform: expected to exceed by 5% or more over the next 12 months. Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy: expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed on Korea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% or more over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative total returns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expected negative total returns of 10% or more over the next 3 months.

Page 1Highlighted CompaniesOverviewGraphics Title: Figure 1: El Nio hit the primary sector more than the secondary or tertiary sectorsEl Nio comethEconomic impactMarket impact

Page 2KEY CHARTSEl Nio comesMore resilient to growth riskInflation pains more manageableMarket impactGraphics Title: Performance AnalysisGraphics Title: Real GDP contributor by industryGraphics Title: yoy inflation

Page 3Table Title: Figure 2: Thematic picks

Page 4Beating the heat1. BACKGROUND1.1 The El Nio phenomenaGraphics Title: Figure 3: Southern Oscillations the normal patternGraphics Title: Figure 4: El Nio condition

Page 5Graphics Title: Figure 5: Global climatological effects of El Nio1.1 The El Nio phenomena (CONT)

Page 6Graphics Title: Figure 6: Southern Oscillation Index now entering El Nio episode1.1 The El Nio phenomena (CONT)Graphics Title: Figure 7: Areas potentially affected by El Nio1.2 Prolonged drought hit harvest

Page 71.2 Prolonged drought hit harvest (CONT)Table Title: Figure 8: Rainfall drop in 1982 and 1997 compared with average rain

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