"That is his pencil."
Translation:Itu pensil dia.
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Ah, thank you. After reading some other comments and thinking about this it's a bit clearer to me now. I (and I think some others) were confused by another example sentence 'That book is hers', which translates into 'Buku itu miliknya' because, as you state, in that case the focus of the sentence is the book and not the person where in this case it is the reverse.
If I was going to keep this in mind, Would this be the emphasis on pencil: "Pensil itu (miliknya)" --- that pencil(is hers/his)
Emphasis on her/him: "Itu pensil (dia)" --- that is a pencil (belonging to her) Is it the difference between him/her and his/hers that dictates the translation?
I have more comments to read, but it's making more sense if I can imagine a rule that is more consistent.