Indonesia Strategy (Overweight): Quick Count Show Uncertainties

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Indonesia Strategy (Overweight):

Quick Count Show Uncertainties

Quick count results indicate that the PDIP may not hit the minimum threshold needed to register its President and VP candidates. The numbers show: i) political uncertainties remain - the PDIP has to form a coalition, ii) Jokowi's one-round election win chances are narrowing, and iii) his VP's identity remains uncertain. We maintain our base case, a Jokowi win. Any correction is an opportunity to enter Indonesia. OVERWEIGHT.

¨       The Indonesian Democratic Party of Struggle (PDIP) may not pass the necessary threshold. The quick count done by some sources indicate that the party may not reach the minimum threshold needed to register its President and Vice President (VP) candidates, ie 20% of seats or 25% of the votes. So far, the PDIP has only reached 18.9%, followed by Golkar (14.7%) and Gerindra (11.9%). The results, although not conclusive, still show that the PDIP is getting slightly lower than the expected numbers vis-à-vis pre-election surveys.

¨       Uncertainties remain. The results show that political uncertainties still remain, with the PDIP having to form coalition with other parties. So far, there is no indication which parties are willing to co-operate with the PDIP, as other large parties like Golkar and Gerindra want to nominate their own presidential candidate. Meanwhile, the smaller parties may not give a boost to the PDIP’s nominated President during the election and his administration – if elected – when dealing with Parliament.

¨       Joko Widodo (Jokowi) nomination does not give a boost to the PDIP’s electability. Jokowi’s chances of winning the election in one round are still questionable. However, comparisons with various Parliament election surveys show that the PDIP getting 21% of the votes on average are quite accurate, in our view. Note too that some of these surveys were done after taking into account for Jokowi’s nomination. As he is estimated to get around 30% of the votes in these surveys, far above his peers, we think the Presidential Election will reflect similar results. However, if Jokowi runs with the right candidate, he may get more than what the surveys have indicated.

¨       Who will run with Jokowi? The good news is that the election results also showed that chances for the PDIP to nominate Puan Maharani, the daughter of PDIP chairwoman as VP candidate, have gone. Street expects Jokowi to run with Jusuf Kalla. However, some newspapers – citing PDIP sources – have reported that the party is scrapping this idea and is considering several ex-army generals to be Jokowi’s VP – an old Indonesian mentality. In our view, looking at the election results, the PDIP may have to lower its requirements in forming a coalition.

¨       Maintain OVERWEIGHT. While still uncertain, we think the chances of Jokowi winning the election remains the same. At the same time, the downside to whoever wins the election is limited, as all candidates have similar economic platforms. Currently, at 15.4x forward P/E, the JCI is trading at slightly above its 3-year average. Jokowi’s victory may drive it up further. But, the combination of better earnings growth and limited valuation re-rating will still give some attractive potential returns in FY14.  We still like the banking, consumer, construction and cement sectors.

Best regards,

RHB OSK Indonesia Research Institute