CLSA INDO: Panin Bank downgrade, higher NPL risks

Good Morning. It's been less than a month when we talked about howunpopular we, stock brokers, have been. How even property brokers ignore usand many people feel sorry for us at gatherings (Cocktail party theory ofPeter Lynch). Some even thought we are the mastermind behind this globalbust. "All guilty", that is everyone in finance. Then we saw our majorcompetitors in the broking community has just dramatically scaled down theiroperation in Indonesia and even rating agency Moody's decided to shut downtheir Indonesia office (feels like Phase 5 of the emerging markets cycle asnoted by Marc Faber in Tomorrow's Gold). Seeing all the evidence that themarket had reached max pessimism, we at the sales desk turned more positive.

However, what caught us by surprise is how fast and strong this market hasrebounded (The Rp is now the best performing Asian currency YTD) and howsentiment took a 180 degree turn just like that. Yesterday, my salescolleagues Eugene and Daniel went to a popular bar for happy hour, andamazingly, they are popular once again. Friends and acquaintances startedasking them what stocks to buy. Talk about from hero to zero to hero again.Very scary indeed. Resembles the ultra high volatility global markets wesaw in the 1970s when inflation raged.

Amazingly enough, CLSA's Feng Shui Index predicted the current rally..lookat month by month predictions. April 5 to May 5 - the return of the Dragonpromises wealth for the watchful and the fleet of foot, so jump back in andfill your boots.....5th May - 4th June - Beware the Slippery Snake..but lookforward to 7 August - 6th Sept - Watch this cheeky Monkey scamper high abovethe earth, carrying a pouch of metal money on his back...this month holdsgreat promise for those who have been carefully and cleverly building solidpositions... (ask me if you want to copy again but who needs Feng Shui nowwhen everyone could be a stock picking genius)

While we are wildly bullish on the longer term outlook for commodities hencethis market, it would be sometime until we see actual data pointing toinflation from deflation. As such, we will be a little more cautious in theshort term.

Research Today: Panin Bank downgrade, higher NPL risks

Nico Oentung downgrades Panin Bank (PNBN IJ) from BUY to SELL. New TP isRp450 (from Rp800). Nico also downgrades PNBN's earnings by 5-26% reflectingweaker revenue dynamics (slower loan growth, thus lower NIM) and higher NPL.

One of the main reasons to buy PNBN is the M&A catalyst. As global bankscontinue to de-leverage and focus on the domestic market, M&A catalyst isunlikely to return in the near future. Key points from the report:Higher NPL risk due to aggressive loan growth.

* PNBN has almost doubled its loan book in the last two years vs. 65%for banking sector. * New loans now account for 50% of its total loan portfolio vs. 39%for the sector. * Sharp pick-up of NPL and special mention loans in 4Q08. . Weak revenue dynamics + higher volatility: expect NIM to be underpressure as loan growth continues to slow from tightening of underwriting. . PNBN has the lowest provisions in the sector at 79%. We expectprovisions to almost double in 09. . Valuation not attractive. PNBN trades at 1.5x P/B and ROAE about8% (due to weak revenue dynamics + rising provisions). As a comparison, BankDanamon (BDMN IJ) also trades at 1.5x P/B but ROE is higher at mid-teenpercentage.

News Headlines/Others: Mandiri (BMRI IJ) is proposing 7% divestment. Local press reported thatMandiri intend to capture 5% tax benefit resulting from having 40% freefloat. Currently, free float for the bank is 33%. Comment: We estimate a 5%reduction in tax rates will add about Rp400bn to net profit or 7%additionalearnings growth and 110bp boost to ROE. However, Mandiri will needgovernment approval for the divestment which could take some time given thecurrent election process. We continue to maintain U-PF on Mandiri due to itshigher risk loan portfolio, especially large exposure to corporate segment,under current economic downturn.New margin and short selling regulation will go in effect May 2009. The newregulation puts a limit of 1:1 margin (the margin facility can only be aslarge as the customer deposit). Also, the ban on short selling will remainin place.

Elnusa (ELSA IJ) stake for sale? Tri Daya intends to sell its 37% stake inthe oil services company Elnusa. The stake is valued around Rp1tn. SOEPertamina controls 41.1% of ELSA. Local media reports that Pertamina,Malyasian Petronas, and Northstar Pacific are interested bidders.SOE miners Antam (ANTM IJ), Timah (TINS IJ), and Bukit Asam (PTBA IJ) to getnew BOD? Local media reports that the SOE Ministry is in the process ofchanging the BOD.President SBY's running mate cannot be a political party chairman. TheDemocrats, buoyed by last week's election have decided that party chairmanwill not be eligible to be running mates of President SBY. This means thatcurrent VP Kalla would have to relinquish his chairmanship of the Golkarparty. Separately, the Democrats have commented that a presidential ticketof SBY-Kalla is still very possible. The VP candidate will be announcedthis month on April 25 during the Democrats national meeting.

International Airport Terminal 3 launched yesterday. Currently, theremaining work is in finishing several supporting facilities such as parkinglot, ticket booths, and shopping arcades. This new terminal is designed tobe an environmentally friendly and energy-saving building, and expected toaccommodate as many as 4m passengers each year for two airlines. Reclamation project to be constructed this year. This project whichreclaims the North Jakarta coastal area and is planned to prevent flood inJakarta due to low land location. The area will include industrial zones,tourist sites, offices, business districts, transportation facilities, andresidential areas. Arpeni Pratama (APOL IJ) to discontinue derivative transaction contract.Due to losses in derivatives transactions (Rp361.58bn in 2008), APOL has nowdecided not to extend its derivatives contracts and start to operatebusiness conservatively

Chart of the Day:Thermal coal price FOB Newcastle and Richard BaySome supportive data for thermal coal from Europe and China, and this mightindicate that downside risk on spot thermal coal price in Asia and Australia(Newcastle Spot) is somewhat limited. We have assumed contract price of US$72/t for FY09 while Newcastle spotprice currently hovered around US$63/t. Note that since average FOB cashcost for thermal coal from Indonesia and Australia hover around US$45/t toUS$50/t, there had been concern that spot thermal coal price could dipcloser to this level. Thermal coal future in Europe (API4, the blue line) bounced strongly fromits low in the last 4 weeks, massively outperforming spot thermal coal pricein Newcastle, Australia (CLSPAUNE, the red line).

Our sources in the industry mentioned that thermal coal fundamentals inEurope remain weak as port and power station stockpiles are still at highlevel, seasonally coal burn is falling due to milder weather, and gas pricesare declining. There are, though, some positives that supported Europeanthermal coal price, including
. Russians suppliers pulling out from the market as they have thehighest cash costs, around US$65/t, . No supply from the US for the same reason as the Russian, . South African supply remains tight because of inland transportconstraints.
. Colombia has endured a series of strikes for about 3-4 weeks,affecting many producers.

Worth highlighting that the US export was quite strong, up by 38% YoY inFY08, but no official data is available of export during 1Q09. Key Indicators: JCI:1,593.66 +23.40 (+1.49%), T/O USD 418.61 mil, YTD: +17.58%ADR: TLKM US$27.57 = IDR7,489ISAT US$25.95 = IDR5,639

The market is set to continue its recent run. Sentiment is running high aswe have seen both local and foreigners moving back into the market. Foreignfocus on the big caps, and local focus on miners,plantations, property names.- RUPIAH: very strong this week (post-parliamentary elections) and up 6%now. Asset reflation plays, like banks and property, have been strong intandem, and the currency has helped overall sentiment tremendously.As of this morning, we are 2x better buyer.Did You Know That?

Java and the Madura islands are no longer separated. A new 5,438-metre- longbridge that connects the city of Surabaya in Java and the island of bullracing Madura is now almost fully completed. The bridge is designed to lastfor 100 years and the construction work began in 2002. It is funded bysoft loans from the Chinese govt and employed 3,500 workers from Indonesiaand China. Total cost is around Rp4tn (US$368mn). The bridge used up 28ktons of steel and 600 tons of steel mixture. But the construction processwas not all plain sailing. Last month, 4 fishermen were arrested for allegedsteel theft at the bridge construction site. The men stole the material over3 months using magnets and managed to collect about 3 tons of steel rods!!

Best regards,Wuddy Warsono, CFACLSA Indonesia Head of SalesPhone: (62-21) 573 9460Toll Free - HK: 800 938 000Toll Free - SIN: 800 621 1104Toll Free - US: 800 460 2581