FROM EQUITY RESEARCH DESK

IDEA OF THE DAY

Digital Banks: Still Robust Earnings Growth Potentials Despite Increasing Competition (OVERWEIGHT)

• Despite heightened competition from new players, we expect Seabank and ARTO to retain their dominance in the digital banking space.
• We expect digital banks’ NP growth to outpace that of conventional banks amid improving market trends and better asset quality coverage.
• We maintain our Overweight rating on the digital banking sector on intact NP growth potential; ARTO is our top pick.

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RESEARCH COMMENTARY.

BANK Jul24 Results

• BANK recorded a 41% yoy decline in Net loss to Rp66.5bn in 7M24, mainly attributed to a significant improvement in CIR to 132.6% in 7M24 from 186.8% in 7M23, further driven by provisions reversal of Rp3.9bn.
• However, as customer deposits grew by 234% Yoy, outpacing loan growth of 89% Yoy, LDR declined to 84.4% in 7M24 from 149.4% in 7M23. This resulted in a 234bps Yoy decline in NIM to 5.0%, despite an 11bps Yoy improvement in CoF and a 10bps Yoy higher EA yield. Nevertheless, NII still grew by 23% Yoy.
• In Jul24, BANK returned to recording a net loss of Rp8.9bn after reporting a monthly net profit of Rp3.6bn in the previous month, though this was still lower than the net loss of Rp17.2bn in Jul23.
• On a monthly basis, the net loss in Jul24 was due to a notable mom increase in CIR to 113.8% (+1,238bps mom) and a 31bps mom decline in NIM to 5.2%, despite a 50bps mom increase in EA yield, as CoF rose to 7.4% (+96bps Mom).
• In Jul24, Loans and customer deposits reached Rp4.1tr (+3% mom, +89% yoy) and Rp4.9tr (+4% mom, +234% yoy), respectively, resulting in an LDR of 84.4% (-106bps mom, -6,495bps yoy). CASA ratio was reported at 12.2% (-150bps mom, -614bps yoy).
• The mom rise in CIR was primarily attributed to a 14% decline in other operating income, as fee income fell from the previous month’s historical high of Rp16.2bn to Rp9.4bn in Jul24.
• Additionally, BANK recorded provisions of Rp3.5bn in Jul24, after having recorded a Rp2.1bn provisions reversal in Jun24.
• However, BANK's bottom line improved in Jul24 compared to Jul23, despite recording an 81bps higher CoC of 1.0% in Jul24, as it managed to lower its CIR from 186.4% in Jul23 to 113.8% in Jul24.
• Compared to FY23, NIM was 189bps lower in 7M24 due to a flat EA yield and a 32bps higher CoF. However, CIR improved significantly to 132.6% in Jul24 from 191.1% in FY23.
• In our view, BANK has consistently reduced its net loss on an annual basis by significantly lowering its CIR. However, there remains a risk regarding the bank’s ability to maintain its NIM and to keep CoF at a sustainable level. (Victor Stefano & Naura Reyhan Muchlis – BRIDS)

BBCA Jul24 Bank Only Results

7M24 insight:

• BBCA booked 7M24 NP of Rp31.3tr (+12% yoy), forming 59% and 58% of our and consensus' FY24 forecasts, i.e., in line.
• Supported by its 14% yoy loan growth (15% in 1H24) and a flattish NIM of 6.1% in 7M24, BBCA booked 9% NII growth, the highest among its peers. CIR was 201bps lower yoy in 7M24, due to flattish opex (+1% yoy).
• Despite higher loans, provision expenses declined by 27% yoy, resulting in a CoC of 0.2% (-14bps yoy) in 7M24.

 

Jul24 insight:

• In Jul24, BBCA reported NP of Rp4.9tr (+1% mom, +17% yoy), with PPOP growing to Rp6.1tr (+12% mom, +21% yoy), which was partly offset by higher provisions (from reversal in both mom and yoy comparisons).
• NIM improved to 6.3% in Jul24 from 6.1% in Jun24, on the back of a higher LDR (+89bps mom) and higher EA yield (+24bps mom), which was more than enough to offset the slightly higher CoF (+7bps mom). Compared to last year, NIM also improved due to the higher LDR, higher EA yield, and lower CoF.
• LDR rose to 75.6% in 7M24 from 68.5% in 7M23, as customer deposits only grew to Rp1,101tr (+0% mom, +4% yoy) while loans increased to Rp832tr (+1% mom, +14% yoy). This aligns with the bank’s strategy to contain its CoF. As a result, the CASA ratio stood at 82.2% (flat mom, +100bps yoy) in Jul24.

 

Summary:

• In our view, the bank delivered good results in Jul24, as it reported a higher NIM, robust loan growth, and low CoC, which justifies its high valuations. (Victor Stefano & Naura Reyhan Muchlis – BRIDS)

BBHI Jul24 Results

• In 7M24, BBHI reported a 10% yoy decline in NP to Rp230.8bn due to a 29% increase in opex, with other expenses and promotion expenses rising by 46.3% yoy and 15.1% yoy, respectively, resulting in a 679bps yoy surge in CIR to 52.7%.
• Furthermore, CoC increased to 1.0% (+56bps yoy) in 7M24 from 0.4% in 7M23, as provisions rose to Rp41.2bn (+139% yoy).
• On the other hand, NII grew 8% to Rp623.6bn in 7M24, as NIM improved by 12bps to 9.1%, despite a 71bps yoy increase in CoF to 6.7%, with EA yield rising 21bps yoy to 12.0%.
• Loans and customer deposits reached Rp8.3tr (+4% mom, +13% yoy) and Rp4.7tr (+2% mom, +5% yoy), respectively, leading to an LDR of 177.6% (+255bps mom, +1,283bps yoy).
• On the other hand, the CASA ratio remained stable mom at 14.8% in Jul24, while improving from 10.4% in Jul23.
• In Jul24, BBHI’s NP reached Rp30.2bn (-23% yoy), due to a higher CIR of 57.1% (+1,216bps yoy), a lower NIM of 9.1% (-18bps yoy), and a CoC of 1.5% (+143bps yoy).
• We believe that the yoy lower NIM was primarily due to a significant rise in CoF to 8.6% in Jul24 from 6.1% in Jul23 as competition among digital banks heightened.
• On a monthly basis, NIM rose 16bps Mom in Jul24, despite the 176bps higher CoF, as EA yield increased by 61bps mom. Furthermore, CIR rose by 355bps mom due to a 10% mom decline in other operating income and a 10% mom rise in opex. However, monthly CoC improved by 92bps from 2.4% in Jun24 to 1.5% in Jul24.
• Compared to FY23, NIM was 23bps lower in 7M24, as CoF was 80bps higher and EA yield was 6bps lower. Furthermore, CoC was 31bps higher in 7M24.
• In our view, BBHI was affected by heightened competition, as reflected by the rise in CIR and CoF. Additionally, its high LDR poses a risk to the bank’s performance going forward, as the normalization of LDR could make the high NIM unsustainable. (Victor Stefano & Naura Reyhan Muchlis – BRIDS)

KTA Meeting with ERAA

• SSSG Growth: ERAA achieved mid-single-digit SSSG (3-5%) in 1H24, with the lifestyle segment (including Garmin, JD Sport, Asic, Urban Republic etc) posting high single-digit SSSG, outperforming 1Q24’s range of 5-7%Contribution from Outer Island also increased slightly to 24% in 1H24 (vs. 23% in 1H23).
• Store Expansion: ERAA opened 123 new stores in 1H24, from total FY24 target of 200 stores. The new openings included Digital segment (+81 stores), Active lifestyle (+25 stores), International business (Malaysia and Singapore +9 stores), and Food & nourishment (+8 stores).
• Product mix and ASP: ERAA’s focus on expanding its portfolio with more affordable products (under Rp3 million, i.e., Infinix and Techno – Chinese brands) has led to a lower ASP. These affordable products have shown stronger growth compared to premium offerings. The company is also expanding its private label, "Immersive Tech", which specializes in accessories with a higher gross margin of 40-50%. Although ERAA’s private brands are largest contributor to the Active Lifestyle segment’s profit, this segment only accounts for 5-7% of the company’s total revenue.
• Outlook for 3Q24: Management expects a typical softening trend in 3Q24 but anticipates better performance compared to the previous year.
• Eraablue performance: Eraablue reported a Rp20bn loss in 1H24, showing improvement compared Rp13 billion loss in 1H23 when it operated only 5 stores. As of 1H24, Erablue has expanded to 61 stores.
• FY25 Guidance: ERAA has not provided guidance for FY25 yet. However, the company is focused on developing other vertical businesses. Management mentioned plans to expand further into the fashion/lifestyle segment. (Natalia Sutanto & Sabela Nur Amalina – BRIDS)

 

TLKM IJ (BUY: TP: 4,250) - Building an APAC Giant: Taking connectivity to the next level

Expected near term impact and share price catalysts

1. Valuation upside: Competitive positioning in APAC region’s value to be unlocked when announcing the new DC partner.
2. Mobile: Sustaining mobile market share with FMC will improve investor sentiment and recoup lost share price value.
3. Fiber assets: Fiber assets unlock potential to drive share price value in both Telkom and Mitratel.

 

KTA and View after meeting with Telkom mgmt:

LKM creates long-term value through connectivity with TDE (DCs) and Telin (international/local cables):

1. Data Centers Expansion: Telkom is poised to capitalize on the burgeoning data center trend in Indonesia, which is expected to experience a 5yr CAGR of 38%. The company aims to build a 500MW capacity by 2030, currently running 42MW. Planned developments include:

• Batam: 18MW, scalable to 100MW across 3 campuses.
• Cikarang: 21MW, scalable to 120MW across 3 campuses.
• Manado: A new data center to enhance redundancy, to land in a new DC that is not located in Malacca strait.

2. International Connectivity: Local and global connectivity are bolstered by Telin's 27 subsea cables, totaling approximately 250,000km. Capacity extensions and new ICE cables will position Telin as the third-largest player in APAC. Additionally, Telin is finalizing negotiations with META for a consortium to build another new cable.

 

Strategic DC Considerations:

• Prudent Telkom-TDE strategy in GPUs: Telkom/TDE is not currently involved in GPUaaS (e.g., LLM training, inferencing) but may explore it in 1-3 years down the road. For now, they plan to enter a consortium where TDE will host GPUaaS providers as a colocation partner, a strategy with its own merits, we reckon.
• DC Partnership Goals: Telkom aims to secure a partner by the end of the year to enhance TDE’s market position. The partner should: 1) Provide funding, 2) Offer specialized skills and knowledge to reduce MW capex from USD 10-11 million to the benchmark of USD 7-8 million, 3) Bring clientele to secure hyperscalers.
• Telkom's DC partnership may lead to a 50:50 joint venture. It is not yet clear if this will result in an IPO. The partner can be a regional DC player or a hyperscaler itself.

 

Mobile & FMC strategy:

• Indihome Developments: Efforts to optimize convergence products are ongoing. Expect more tangible results in 4Q24 with potential new billing systems. Previously, the service was limited to one technician per Indihome connection per day; this is being improved.
• Telkomsel’s conduct to avoid price wars: Their KPI focuses on maintaining topline growth, while providing steady dividends. Capex will still flow into mobile, as there is data/digital growth and the offering of 5G in certain areas. Concerns exist over SIM pre-activations by competitors, which can complicate user identification.

 

Unveiling Infraco assets may lead to Mitratel upside:

• The TIF Infraco has already begun operations. Fiber asset transfer from Telkom to TIF is expected next year, with RUPS approval anticipated in 2025. Our discussion with management suggests that the FTTT segment will be transferred to Mitratel (MTEL). However, several scenarios are being considered, one of which allows MTEL to expand its scope into FTTH, with TIF owning a stake in MTEL. (Niko Margaronis – BRIDS)

MARKET NEWS

MACROECONOMY

China’s Industry Remains Solid with 5.1% yoy growthin Jul24

China’s industry remains solid with 5.1% yoy growth in Jul24. Housing continues to weaken, with house prices falling by 4.9% yoy in Jul24 and investment in real estate contracting by 10.2% yoy in 7M24. (Bloomberg)

 

Indonesia Trade Balance Surplus Significantly Narrowed to US$470mn in Jul24

July's Trade Balance surplus significantly narrowed to US$470mn. The decline in surplus came from a surge in imports, especially in raw materials.

• Exports grew 6.5% yoy to US$22.2bn, with growth coming from all export categories.
• Imports grew 11.1% yoy to US$21.7bn, fueled by a 15.2% yoy (+US$2.1bn) increase in raw material imports. (BPS)

 

US Retail Sales Grew 1% mom in Jul24

US Retail Sales grew 1% mom in Jul24, soothing recession fears. The annual growth reaches 2.7%, way above the consensus of 1.8%. (CNBC)

 

SECTOR

The Indonesian Government Set the Reference Coal and Metal Prices for Aug24

The Minister of Energy and Mineral Resources has set the reference prices for mineral and coal for Aug-24. The reference coal price for Aug for coal with a cv of 5,300 kcal/kg GAR is set around US$86,2/t, and coal with a cv 4,100 kcal/kg GAR is set around US$ 54,6/ton. Nickel price is set at US$16,812/dmt, Cobalts’ price at US$ 26,628/dmt, Gold at US$ 2.373/Oz t, and Copper at US$ 9.579/dmt. (Kontan)

 

CORPORATE

KLBF Builds Medical Equipment Factory for Cancer Detection

KLBF, through its subsidiary PT Global Onkolab Farma (GOF), has initiated the groundbreaking for a production facility for radioisotopes and radiopharmaceuticals, specifically Fluorodeoxyglucose (FDG), aimed at early cancer detection. According to KLBF, the construction of this facility in Surabaya is the second one. The facility is planned to be operational by 2025. Previously, KLBF established a similar facility in Jakarta on February 1, 2024. (Kontan)

 

PGAS: Secured Additional Gas Supply of 19,000 BBTU; Will Supply 18 BBTUD of Natural Gas to XSI

PGAS has signed a gas sale agreement with Pertamina EP Cepu for the Cepu Block and amended the Gas Purchase Agreement with Saka Energi Muriah Ltd for the Muriah Block. With the PJBG from the Cepu Block, PGN will continue managing the Lamongan household gas network with a supply of 0.2 MMscfd until 2029 or the end of production from the JTB Field. Additionally, the PJBG amendment for the Muriah Block increases the contract volume by 5,000 BBTU from the Kepodang Field, bringing the total contract volume to 19,000 BBTU. (Bisnis)

 

In other news, PGAS will supply 18 BBTUD of natural gas to PT Xinyi Solar Indonesia (XSI). PGAS has signed a supplier integrity agreement with XSI and transferred the natural gas purchase agreement contract to XSI. (Kontan)

 

TLKM Partners with Palo Alto Networks to Strengthen Cybersecurity

TLKM and Palo Alto Networks have signed a Memorandum of Understanding (MoU) to provide cybersecurity and other digital solutions for companies in Indonesia. The collaboration aims to offer comprehensive and integrated cybersecurity solutions to secure data, applications, and infrastructure across on-premises, cloud, and hybrid environments. (Kontan)