Indonesia strategy! research

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UOBKAYHIAN INDONESIA STRATEGY INVESTMENT 2011

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Indonesia strategy! research

  1. 1. STRATEGYINDONESIAThe Spending Boom Looking forward to 2012. Jakarta Composite Index (JCI) has reached its historical high of 4,193 in Aug 11 on the back of strong 1H11 corporate results and robust economic growth. Thus, we raise our year-end 2011 estimate to 4,500 and introduce year-end 2012 target at 5,300, assuming the same forward PE of 15.0x. We foresee EPS of the Indonesian stock market growing 25% in 2011, 20% in 2012 and 17.5% in 2013, driven by strong consumer spending growth, turnaround companies and accelerated infrastructure development. On the verge of a spending boom. We pick the following investment themes for 2H11: a) riding the spending boom, b) benefitting from turnaround companies, c) benefitting from a stronger rupiah, and d) acceleration of infrastructure development propelled by the governments political will. Spending acceleration supported by structural improvement of economy. Indonesia is a domestic-driven economy but may develop its export capabilities in the future. With growing confidence in the country, cheap labour and improved infrastructure, there are opportunities for Indonesia to develop as a production base for multinational companies, so exports will likely become an important growth driver for the economy. Top stock picks. Strong growth in consumer spending has made a positive impact on industries, so we have seen a turnaround in companies from various sectors. Beneficiaries include Alam Sutera Realty, Astra International, Bank Mandiri, Indocement Tunggal Prakarsa, Kalbe Farma, Mitra Adiperkasa and United Tractors. TOP CALLS Share Target FY11 Share Target FY11 Ticker Price Price PE Ticker Price Price PE (Rp) (Rp) (x) (Rp) (Rp) (x)Top BUYs Kalbe Farma KLBF IJ 3,175 4,075 19.1Alam Sutera Realty ASRI IJ 390 500 13.6 Mitra Adiperkasa MAPI IJ 4,225 5,025 21.3Astra International ASII IJ 65,050 81,000 14.4 United Tractors UNTR IJ 23,950 32,000 17.4Bank Mandiri BMRI IJ 7,350 9,100 14.2 Top SELLIndocement TP INTP IJ 14,500 19,600 15.0 Bakrie Sumatera UNSP IJ 385 340 14.8Note: Closing prices as at 8 August 2011 August 2011Refer to last page for important disclosures.
  2. 2. ContentsExecutive Summary .................................................................................................. 1The Spending Boom .................................................................................................. 3Sector Review - Automobile: OVERWEIGHT ............................................................................... 28 - Banking: OVERWEIGHT .................................................................................... 32 - Cement: OVERWEIGHT .................................................................................... 37 - Consumer: OVERWEIGHT ................................................................................ 41 - Metal Mining: MARKET WEIGHT .................................................................... 49 - Plantation: UNDERWEIGHT .............................................................................. 57 - Property: OVERWEIGHT ................................................................................... 63Top Stock Picks - Alam Sutera Realty .............................................................................................. 68 - Astra International ................................................................................................ 70 - Bank Mandiri ....................................................................................................... 72 - Indocement Tunggal Prakarsa ............................................................................. 74 - Kalbe Farma ........................................................................................................ 76 - Mitra Adiperkasa ................................................................................................. 78 - United Tractors .................................................................................................... 80Corporate Statistics ................................................................................................. 82 This report uses the closing prices of 8 August 2011.
  3. 3. EXECUTIVE SUMMARYNew high with greater speed. We raise our year-end 2011 JCI estimate to 4,500, or15.0x 2012F PE (+1.1 SD 5 years average), and we believe JCI should be trading at5,300 at year-end 2012, assuming the same valuation of 15.0x 2013F PE. We believerising optimism on economic fundamentals, faster earnings growth, a stable politicalclimate, and declining risk aversion have driven the re-rating of the JCI to a new high.We set our new estimate based on EPS growth of 25% for 2011, 20% for 2012, and17.5% for 2013.The return of confidence. Indonesia’s GDP has surpassed the pre-Asian financialcrisis level in real terms, but spending only recovered last year as consumer confidencereturns. Consumer confidence has been low since the political turmoil in 1998-2002.Now, with smooth presidential and parliamentary elections in 2004 and 2009, confidencehas returned as shown by some AC Nielsen surveys. As a result, spending growth andcompanies’ strong revenue growth are likely to continue in the next 4-5 years. Weforecast 6.4% and 6.3% economic growth for 2011 and 2012 respectively. We believethe buoyant economy is driven by high optimism because the worst is over and Indonesiais moving into a new stage of economic development.Earnings growth momentum. As we had predicted, Indonesian companies reportedstrong 1H11 earnings growth on the back of robust domestic demand, low interest ratesand stable inflation. Companies under our coverage posted strong aggregate earningsgrowth of 35% yoy in 1H11, while the whole JCI posted 42% yoy aggregate earningsgrowth in the same period. We expect earnings growth to remain strong in 2H11 drivenby robust consumer demand from the festive seasons and government project spending.In the longer term, earnings growth momentum will continue on the back of higherconsumer confidence given the economic well-being and a stable political climate.Asset price reflation to continue. The return of consumer confidence, robust economicgrowth, and low interest rates have led to faster asset price reflation in the last twoyears, from land to stock prices. Rising land prices have created the wealth effect forproperty owners and new opportunities for developers as they can develop new suburbanareas in Greater Jakarta which have lower land prices (such as Serpong and Bekasi).Most importantly, we believe land prices are not bubbling at this level. If we compareland prices in strategic locations in Greater Jakarta that increased eightfold (1996-2011CAGR: 15%) with Big Mac prices that increased by 5.6 times (around 12% CAGR) in1996-2011, we think land prices have not been overvalued yet.Less affected by global economic slowdown. Worries over how intensifying Europeandebt problems and US economic woes could tip the global economy into a double diprecession have caused a sell-off in global financial markets. Meanwhile, Indonesia’seconomy is domestic-driven and its fundamentals are less affected by a global economicslowdown. During the 2009 global recession, Indonesia still managed to post a 4.5% yoyGDP growth. We believe the situation in Indonesia is very different from that in the US.While the US has suffered a rating downgrade with a negative outlook, Indonesia isexpecting a rating upgrade to investment grade. Indonesia has a budget deficit of lessthan 2% and a debt-to-GDP ratio of 24%.Indonesia Strategy – The Spending Boom 1
  4. 4. Structural improvement of economy. Indonesia has a domestic-driven economy.However, with growing confidence in the country, cheap labour and improvedinfrastructure, there are opportunities for Indonesia to develop as a production base formultinational companies, so exports will likely become an important growth factor for theeconomy. The high growth in fixed capital formation in 1H11 was supported by stronggrowth in foreign direct investment (FDI) and domestic direct investment (DDI) thatgrew 24% yoy and 39% yoy respectively in 1H11 (31% yoy and 11% yoy in 2Q11). Atthe same time, domestic spending will remain the main growth driver with the number ofmiddle-class households rising from 13m in 2010 to 27m in 2015, or from 22% to 45% oftotal households.On the verge of a spending boom. Indonesia has fully recovered from the 1998 Asianfinancial crisis and survived the 2008 global financial crisis. Currently enjoying higherpurchasing power and confidence, Indonesia has become an attractive market. We pickthe following investment themes for 2H11: a) riding the spending boom as consumerpurchasing power will improve further, b) benefitting from turnaround companies thatare mostly under-covered and have shown strong earnings growth as demand for theirproducts has recovered and they have greater financial flexibility, c) benefitting from astronger rupiah, which has strengthened not only due to the weak US$ but also due to theimprovement in Indonesia’s economic structure, and d) acceleration of infrastructuredevelopment propelled by the government’s political will.Top stock picks. Strong growth in consumer spending has made a positive impact onindustries, and we have seen a turnaround in companies from various sectors. We believeIndonesia is entering a consumer spending boom. Beneficiaries include Alam Sutera,Astra International, Bank Mandiri, Indocement Tunggal Prakarsa, Kalbe Farma, MitraAdiperkasa and United Tractors. We have a SELL call on Bakrie Sumatra Plantation onthe back of an expected decline in CPO prices.2 Indonesia Strategy – The Spending Boom
  5. 5. THE SPENDING BOOMOutlookECONOMY, GDPUnderstated optimism. Indonesia’s economy has been growing rapidly in the last oneyear, driven by high optimism that the country’s economic growth is back on track in astable political climate. It is optimism, not only economic fundamentals, which determinesthe pace of Indonesia’s economic growth. Economy-wise, Indonesia fully recoveredfrom the 1998 Asian economic crisis in 2003 when real GDP surpassed the 1997 level.However, in terms of consumer optimism, Indonesia only fully recovered from the Asiancrisis in 2009 when the consumer index hovered consistently above the 100 level, whichwas after the parliamentary election and ahead of the presidential election. Politicalturmoil was the culprit behind Indonesia’s dented consumer confidence in 1998-2002, inour view.We think the current situation is sustainable, as Indonesians have regained their confidence– Nielsen Indonesia’s surveys show that Indonesians are confident of financial well-being, backed by a stable political climate, smooth leadership transitions and freedom ofspeech.Figure 1: Indonesia Fully Recovered From 1998 Crisis (Rpt) (%) 2,400 10 2,200 5 2,000 1,800 - 1,600 (5) 1,400 (10) 1,200 1,000 (15) 1994 1996 1998 2000 2002 2004 2006 2008 2010 Real GDP (LHS) Growth, yoy (RHS)Source: CEIC, BloombergIndonesia Strategy – The Spending Boom 3
  6. 6. Figure 2: Consumer Confidence Sustainable Since 2009 (%) 130 120 110 100 90 80 70 60 Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11Source: CEIC, BloombergFigure 3: Indonesians Worlds Third Most Confident People 130 125 120 115 110 105 100 95 90 85 80 Global Avg Switzerland India Indonesia Arabia Hong Kong Saudi Malaysia China Australia Thailand PhilippinesSource: AC NielsenFigure 4: Expect Sovereign Rating Upgrade Country S&P Moodys Fitch Indonesia BB+ Ba1 BB+ Philippines BB+ Ba2 BBB- Thailand A- Baa1 A- Number of upgrades required for investment grade S&P Moodys Fitch Indonesia 1 1 1 Philippines 1 2 Inv.Grade Thailand Inv.Grade Inv.Grade Inv.GradeSource: Bloomberg, UOB Kay Hian4 Indonesia Strategy – The Spending Boom
  7. 7. Burgeoning middle class. The huge proportion of the population with rising purchasingpower will become an engine for economic growth as we foresee acceleration in spendinggrowth, driven by the burgeoning middle-income population. The number of middle-classhouseholds (defined as those with annual income exceeding US$5,000) is expected tomore than double from 13m in 2010 to 27m in 2015, or from 22% to 45% of total households.Meanwhile, AC Nielsen estimates the middle-income population of about 18m with anannual income of US$15,000 in Indonesia is expected to double in numbers in the nextfive years to 36m, or about 14% of the total population.Figure 5: Middle-class Households In Emerging Markets (m) 120 100 2010 2015 80 60 40 20 0 China India Russia Indonesia Brazil T urkey Mexico South AfricaSource: Boston Consulting GroupFigure 6: Rising Retail Sales Index Implies Stronger Spending (%) 310 50 Retail Sales Index % YoY (RHS) 40 260 % MoM (RHS) 30 210 20 10 160 - (10) 110 (20) 60 (30) May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11Source: CEICIndonesia Strategy – The Spending Boom 5
  8. 8. Figure 7: Indonesia On The Verge Of A Spending Boom Promotional events held at middle-up Debenhams department store in Jakarta The situation inside Debenhams Middle-low Ramayana department store in Cashier queues at sports retail outlet Samarinda, East Kalimantan Planet Sports in JakartaSource: Mitra Adiperkasa, Ramayana Lestari Sentosa, UOB Kay HianAsset price reflation to continue. The return of consumer confidence, robust economicgrowth and low interest rates have led to faster asset price reflation in the last two years,from land to stocks. Rising land prices have created the wealth effect for propertyowners and new opportunities for developers as they can develop new suburban areasin Greater Jakarta which have lower land prices (such as Serpong and Bekasi). Landprices in Jakarta increased around fourfold in eight years from 1996 to 2009, but doubledin 2009-10.However, we believe land prices in Indonesia are far from bubbling yet. If we compareland prices in strategic locations in Greater Jakarta that increased eightfold (1996-2011CAGR: 15%) with Big Mac prices that increased by 5.6 times (around 12% CAGR) in1996-2011, we think land prices have not been overvalued yet. The larger increase inland prices was due to the unique characteristic of property assets, expectations ofcontinuing robust growth and high confidence. On the other hand, Big Mac price hikesresulted from stiffening competition. Meanwhile, the JCI index increased by 702% overthe same period.6 Indonesia Strategy – The Spending Boom
  9. 9. Figure 8: Low Interest Rate Environment (%) 20 18 Inflation, yoy BI Rate 16 14 12 10 8 6 4 2 - Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov Mar Jul Nov Mar Jul 05 06 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11Source: CEICFigure 9: Big Mac Price vs JCI (1995 = 100) 800 700 Bic Mac Price JCI 600 500 400 300 200 100 - 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8 Aug 11Source: BloombergFigure 10: Land Prices In Strategic Location (Estimated) (Rpm/m²) 1996 2011 15-year CAGR ASRI 0.6 5.5 17% SMRA 0.5 4.0 15% BSDE 0.5 4.0 15%Source: Respective companiesIndonesia Strategy – The Spending Boom 7
  10. 10. Earnings growth momentum. As we have predicted, Indonesian companies reportedstrong 1H11 earnings growth on the back of strong domestic demand, low interest ratesand stable inflation. Companies under our coverage posted strong aggregate earningsgrowth of 35% yoy in 1H11, while the whole JCI posted 42% yoy aggregate earningsgrowth in the same period. Furthermore, some companies showed a turnaround as demandrecovered. Thus, they can enjoy improved economies of scale. We believe earningsgrowth momentum will continue on the back of higher consumer confidence given thecountry’s economic well-being and stable political climate.Figure 11: Earnings Growth By Sector UOB Coverage Sector Aggregate Earnings Growth 2Q11 qoq (%) 2Q11 yoy (%) 1H11 yoy (%) Automobile (0.4) 25.1 33.4 Banking (0.1) 37.6 39.4 Cement 8.5 13.4 11.0 Consumer 32.2 26.1 25.7 Heavy Equipment (4.2) 26.7 34.6 Metal Mining 9.0 (16.6) 3.7 Plantation 0.8 78.3 110.6 Property 41.9 99.3 82.3 Total UOB Coverage 2.3 29.8 34.9 Total JCI Market 0.7 43.2 42.2Notes: 2Q11 and 1H11 figures exclude companies that have not announced their resultsSource: Bloomberg, UOB Kay HianStructural improvement of economy. Indonesia has a domestic-driven economy, butexports reached a historical high in Jun 11 with 6M11 exports growing 33% yoy. Although38% of the exports are commodities (15% oil and gas, 13.1% soft commodities and9.6% rubber and its derivatives), industrial goods grew robustly by 33% yoy. We thinkexports will improve on the back of strong fixed capital formation growth such as in1H11 when it grew 8.3% yoy, higher than GDP growth of 6.5% yoy. The high growth infixed capital formation was supported by strong growth in FDI and DDI of 24% yoyand 39% yoy respectively in 1H11 (31% yoy and 11% yoy in 2Q11). Thus, we think FDIin Indonesia will not only target the domestic market, but will also use Indonesia as theproduction base.Figure 12: GDP By Expenditure -------------------- yoy % chg------------------ qoq % chg GDP Growth by Expenditure 2008 2009 2010 1H11 2Q11 2Q11 Private consumption 5.3 4.9 4.6 4.5 4.6 1.3 Government consumption 10.4 15.7 0.3 3.9 4.6 25.7 Gross domestic capital formation 11.9 3.3 8.5 8.3 9.2 3.9 Exports 9.5 (9.7) 14.9 14.9 17.4 7.4 Imports 10.0 (15.0) 17.3 15.8 16.0 6.0 Total 6.0 4.6 6.1 6.5 6.5 2.9Source: Central Statistics Agency, CEIC8 Indonesia Strategy – The Spending Boom
  11. 11. Figure 13: Robust Exports And Imports (US$m) (US$m) 60,000 10,000 50,000 8,000 40,000 6,000 30,000 4,000 20,000 10,000 2,000 0 0 Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Export (LHS) Import (LHS) Net export (RHS)Source:CEICFigure 14: One Of The Lowest Average Monthly Factory Wages (2010) (US$) 350 300 250 200 150 100 50 0 China T hailand Philippines Cambodia Indonesia VietnamSource: Japan External Trade Organization (JETRO), ReutersFigure 15: FDI And DDI Growth Shows Rising Confidence In Indonesia (US$m) (units) (Rpb) (units) 9,000 450 25,000 160 8,000 400 140 7,000 350 20,000 120 6,000 300 100 15,000 5,000 250 80 4,000 200 10,000 60 3,000 150 40 2,000 100 5,000 20 1,000 50 - - - - 1Q054Q053Q062Q071Q084Q083Q092Q101Q11 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 DDI (LHS) Units (RHS) FDI (LHS) Units (RHS)Source: Indonesia Investment Coordinating BoardIndonesia Strategy – The Spending Boom 9
  12. 12. Figure 16: New Investments In Indonesia Investment Company Industry (US$m) Stage Remarks Anhui Conch Cement Cement 2,350 Planning 4 new plants in South Kalimantan, East (Preliminary) Kalimantan, West Kalimantan, and West Papua BMW Indonesia Automobile 12 Committed Expansion in the next two years to increase production capacity Caterpillar Heavy Equipment 300-500 Planning To build new heavy machinery factory (Preliminary) China Railway Engineering Corp Infrastructure 1,300 Planning To build and operate Sumatra Coal Railway (Preliminary) China Triumph Cement 350 Committed To build cement factory in Grobogan, Central Java, with a capacity of 2m-3m tonnes per year, in cooperation with Semen Grobogan Coca Cola Consumer 500 In-progress Daihatsu Automobile 200-300 In-progress To build factories with a capacity of 100,000 units per year in East Karawang, West Java; expect to start operating by end-12 General Electric Various 1,200 In-progress To expand outside Java with a new office in Balikpapan Hangzhou Cement Cement 700 Planning To relocate its factory with capacity of 2m tons from (Preliminary) Zhejiang, China to Banten Hankook Tires Automobile 353 In-progress To build tire plant in Bekasi with initial investment of US$353m commencing in 3Q11; plans to join hands with local partner Banten Global Dvelopment Indias Essar Group Mining 5,000 Planning To build power plants, steel factories and trains (Preliminary) Indias GVK and GMR Infrastructure 5,000 Planning To invest in airports, power plants, railroads (Preliminary) Lafarge Cement 350-550 Planning To build cement plant in Langkat, North Sumatera, with a (Preliminary) capacity of 1.5m tons per year Loreal Consumer 100 In-progress To build new factory Lotte Consumer 5,000-6,000 Planning To expand its retail businesses and currently (Preliminary) exploring other sectors Metro AG Consumer 430 Planning To join forces with Sintesa Group to expand its wholesale (Preliminary) centres Nestle Consumer 200 In-progress To build new milk factory and to increase production at its milk processing factory in Kejayan, East Java Nissan Automobile 313 In-progress To expand its existing factory Procter & Gamble Consumer 100 Planning To build new factory (Preliminary) Reliance ADA Group 5,000-10,000 Planning To invest in coal sector, power plants and infrastructure (Preliminary) Siam Cement Cement 219 Planning To invest in ceramic and construction materials (Preliminary) Unilever Consumer 300 In-progress To expand production capacitySource: Various news, Indonesia Investment Coordinating BoardBI is right this time. Bank Indonesia (BI) is right to have increased BI rate by 25bp inFeb 11 and then maintain it until now. This dragged down inflation to 5.98%, 5.54% and4.61% yoy in May, Jun and Jul 11 respectively. Declines in oil and other commodityprices have eased inflationary pressures. This year, UOB Economic and TreasuryResearch (ETR) expects inflation to reach 5.7% in 2011 and 5.6% in 2012, as comparedwith BI’s and the government’s target of 6% in 2011. High oil and commodity prices,such as those seen in 1Q11, are detrimental to investors’ confidence, but Indonesia’scurrent economic fundamentals are more resilient and resistant to those factors.10 Indonesia Strategy – The Spending Boom
  13. 13. Figure 17: Inflation, BI Rate And Oil Price (%) (%) 120 20 100 18 80 16 60 14 40 12 20 10 0 8 -20 6 -40 4 -60 2 -80 0 Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 05 06 06 07 07 08 08 09 09 10 10 11 11 Crude Oil Price, yoy (LHS) Inflation, yoy (RHS) BI Rate (RHS)Source: BloombergLow interest rate stimulates further spending growth. Given expectation of moderateinflation, BI has been able to maintain the BI rate at a low 6.75% after raising the policyrate by 25bp in Feb 11, in line with the central bank’s tendency to be dovish on economicgrowth and financial markets. The current situation spurs robust consumer, automobileand property sales. Meanwhile, despite strong domestic demand that may push inflationup next year, we think Indonesia’s economy still requires a low interest rate environmentto boost economic growth in order to lower unemployment further and elevate the low-income segment’s purchasing power.Figure 18: GDP And Loan Growth (%) 40 8 35 7 30 6 25 5 20 4 15 3 10 2 5 Loan growth GDP growth 1 0 0 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11Source: Bank IndonesiaIndonesia Strategy – The Spending Boom 11
  14. 14. Protect popularity first, increase subsidy later. With GDP per capita exceedingUS$3,000 and confidence level rising, we believe the improvements in spending patternswill continue even if the government increases fuel prices or phases out fuel subsidiesfor private car users. However, the government may not undertake either measure thisyear given its declining popularity (see our report released in Jun 11: Looks pricey butattractive). Furthermore, the government has just raised its oil price assumption to US$95/bbl from US$80/bbl under the revised state budget, which leads to a Rp30t (US$3.4b)increase in the 2011 subsidy budget. With this decision, the country’s deficit may reacharound 2.1% of the total GDP from the previous target of 1.8%.Nevertheless, if the government gives the green light to the fuel subsidy phase-out forprivate car users, the savings will be less than the budget increase. According to theCentral Statistics Agency and Bank Indonesia, every Rp500 hike in fuel prices willcontribute 1% to headline inflation and the fuel subsidy phase-out will generate an evensmaller inflationary effect.Figure 19: Government Macroeconomics Assumptions 2010 2010 2011 2011 Budget Realisation Budget Revised Budget Economic growth (%) 5.8 6.1 6.4 6.5 Inflation (%) 5.3 7.0 5.3 6.0 3-month T-bill (%) 6.5 6.6 6.5 5.6 Exchange rate (Rp/US$) 9,200 9,087 9,250 8,800 Oil price (US$/bbl) 80 79 80 95 Oil lifting (000 bbl per day) 965 954 970 945Source: Ministry of FinanceFigure 20: Satisfaction Survey On President SBYs Performance Post-09 Election (%) 100.0 90.0 90.4 80.0 85.0 70.0 63.0 60.0 50.0 50.0 40.0 30.0 Indo Barometer Lembaga Survei Indonesia (LSI) 20.0 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11Source: Indo Barometer, Lembaga Survei Indonesia (LSI)12 Indonesia Strategy – The Spending Boom
  15. 15. Next election: Long way to go. The political climate in Indonesia may have heated upwith an impending battle between political parties. However, we believe the country’sdemocratic system and press freedom should smoothen the election process as seen inthe last two parliamentary and presidential elections. Similar to the situation back in2004, there has been no clear picture on the next presidential candidacy and coalitions.The incumbent Democrat Party has not announced its presidential candidate for the2014 election even though this term will be SBY’s last. No party candidate has beenannounced yet, as parties tend to wait and see to find the right coalition partnersopportunistically.Indonesia Strategy – The Spending Boom 13
  16. 16. Investment ThemesOur investment themes are: a) riding the spending boom, b) benefitting from turnaroundcompanies, c) benefitting from a stronger rupiah, and d) acceleration in infrastructuredevelopment. Indonesia is at the early stage of long-term growth, and with GDP percapita exceeding US$3,000, it is entering a new stage of growth in which spending willaccelerate. At the same time, many companies will benefit from recovering demand andthus turn around.Last year, one of our themes was companies with strong pricing power. For the currentperiod, although we believe the industry’s structure will remain oligopolistic, competitionwill intensify as companies are more concerned about market shares than defendingmargins, as seen in a low-demand situation. In our view, the oligopolistic structure willremain in place until Indonesia adopts a better approach to regulating competition, suchas with a strong competition watchdog, law enforcement or an anti-corruption committee.In this report, we highlight, expand on and update our themes.Riding the spending boom. We believe rising consumer spending will remain on thelist of investment themes for Indonesia until the next five years. We should see not onlya larger consumer base, but also higher quality of spending in the future. With GDP percapita exceeding US$3,000, Indonesia is entering a new growth stage in which spendingwill accelerate toward higher value and quality products, and purchasing power will bemore resilient against economic volatility. Thus, we should see a growing consumermarket with 18m middle-income consumers earning US$15,000/year, which is expectedto double within the next five years.Some companies are also preparing to tap the rising purchasing power by launchingproducts for the booming middle class. For instance, Daihatsu and Nissan launchedDaihatsu Xenia and Nissan March (priced around Rp130m) in a move to grab first carbuyers. The beneficiaries of this spending boom are the consumer, banking, automobileand property sectors.Figure 21: GDP Per Capita Exceeding US$3,000(US$) (%)3,500 603,000 402,500 202,000 -1,500 (20)1,000 (40) 500 (60) 0 (80) 1993199419951996 199719981999200020012002200320042005 20062007200820092010 Per Capita GDP (LHS) Growth, yoy (RHS)Source: CEIC14 Indonesia Strategy – The Spending Boom
  17. 17. Figure 22: Average Monthly Wage vs Inflation (Rpm) (%) 1,400 70.0 1,200 60.0 1,000 50.0 800 40.0 600 30.0 400 20.0 200 10.0 0 - 1996 1998 2000 2002 2004 2006 2008 2010 Average Wage (LHS) Inflation, yoy (RHS)Source: CEICBenefitting from turnaround companies. We identify some companies that haveturned around and have started to grow faster on the back of recovering demand andhigher financial flexibility. Many companies that were hit by the 1998 Asian financialcrisis are now recovering from the long hibernation phase as either demand for theirproducts has shown robust growth, or they have started to refinance their restructureddebts. Thus, they are able to distribute dividends and expand capacities or reopenmothballed plants.Sectors where there are many companies turning around include automobile, consumer,indusrial estate, manufacturing (such as tire, cable and petrochemical producers) andproperty. The impact of the turnaround is not only positive for the companies, but also forbanking, construction and, more importantly, the overall economy as it will also reduceunemployment.Companies that are in the turnaround stage include Alam Sutera, Charoen Pokphand,Eterindo, Indomobil, Indorama, Intraco Penta, Jababeka, Japfa Comfeed, Lippo Cikarang,Malindo Feedmill, Polychem Indonesia and Surya Semesta. Figure 24: JCIs Declining Net Gearing SignallingFigure 23: JCIs Net Income Indicates Recovery Turnaround (Rpb) (%) 200,000 600 150,000 500 100,000 400 50,000 PRESENTASI - 300 PIE (50,000) 200 (100,000) 100 (150,000) (200,000) 0 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 2010Source: Bloomberg Source: BloombergIndonesia Strategy – The Spending Boom 15
  18. 18. Figure 25: JCIs Capex/Sales Shows Expansion Figure 26: JCIs Rising Dividend PayoutMode (%) (%)10.0 35.0 9.0 30.0 8.0 25.0 PRESENTASI 7.0 PIE 20.0 6.0 5.0 15.0 4.0 10.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010Note: Exclude agri, cement, energy, financials, mining, property, telco Source: BloombergsectorsSource: BloombergFigure 27: Strong Car Sales Figure 28: Robust Motorcyle Sales (units) (units) 90,000 100% 800,000 80% 80,000 80% 700,000 70,000 60% 60% 600,000 60,000 40% 500,000 50,000 40% 400,000 PRESENTASI 20% 40,000 20% 300,000 PIE 30,000 0% 0% 20,000 200,000 -20% 100,000 -20% 10,000 0 -40% 0 -40% Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jun Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jun 09 09 09 09 10 10 10 10 11 11 11 09 09 09 09 10 10 10 10 11 11 11 T otal Car Sales (LHS) YoY Car Sales (RHS) To tal Moto rcycle Sales (LHS) Yo Y Motorcycle Sales (RHS)Source: Astra International Source: Astra InternationalFigure 29: Solid Retail Sales Growth (%) 310 50 Retail Sales Index % YoY (RHS) % MoM (RHS) 40 260 30 210 20 10 160 - (10) 110 (20) 60 (30) May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11Source: CEIC16 Indonesia Strategy – The Spending Boom
  19. 19. Figure 30: Under-covered Indonesian Companies That Are Turning Around 1H11 Net Profit Sector Companies Ticker yoy % Chg Automobile Indomobil Sukses Internasional IMAS 128.9 Gajah Tunggal GJTL 1.7 Multistrada Arah Sarana MASA 36.2 Selamat Sempurna SMSM 35.3 Property Kawasan Industri Jababeka KIJA 7.7 Lippo Cikarang LPCK 194.3 Surya Semesta Internusa SSIA n.a.* Manufacturing Ekadharma International EKAD 25.6 Eterindo Wahanatama ETWA 2,731.1 Colorpak Indonesia CLPI 69.6 Indo-Rama Synthetics INDR 412.7 Jembo Cable Company JECC 574.0 Polychem Indonesia ADMG 449.7 Consumer Charoen Pokphand Indonesia CPIN 33.0 Japfa Comfeed Indonesia JPFA 58.1** Malindo Feedmill MAIN 59.2 Others Intraco Penta INTA 136.8* Has not released 1H11 results (posted losses in 1Q10, 1Q11s net profit Rp127.7b)** 1Q11 net profit change yoySource: BloombergIndonesia Strategy – The Spending Boom 17
  20. 20. Go with stronger rupiah beneficiaries. A stronger rupiah benefits producers andconsumers in Indonesia as around 80% of input materials in Indonesia are imported. Atthe same, a stronger rupiah helps reduce the inflationary impact of high commodity andoil prices, as seen in 1Q11. The rupiah has appreciated by 5.0% ytd and 4.6% yoy. UOBETR predicts the rupiah will strengthen to Rp8,400 as at end-3Q11 and 8,350 as at end-4Q11, or a 2.4% appreciation for the next five months. We believe the strong rupiah isdriven by an expected upgrade of sovereign rating, robust economic growth and liquidityin the global financial sector, as M1 and M2 growth suggests. Nevertheless, we expectthe situation to continue for some time. Companies whose costs are strongly linked to theUS$ and those that have high US$ debts, such as telecommunications players, will benefit,while commodity and export-oriented sectors will not benefit.Figure 31: Beneficiaries Of Stronger Rupiah Under Our Coverage Company Ticker Description Bakrie Sumatra UNSP Has US$710m debts Holcim Indonesia SMCB Has US$120m loan from its parent Indofood SM INDF Materials costs are denominated in US$, 29% of total debts (Rp4.2t or US$488m) in US$ Japfa Comfeed JPFA About 70% raw materials are denominated in US$ Kalbe Farma KLBF About 90% of raw material denominated in US$ Mitra Adi Perkasa MAPI Almost all materials are imported and bought in US$ from the principalSource: Respective companies, UOB Kay HianFigure 32: M1 And M2 Growth (%) 90 80 M2 YoY M1 YoY 70 60 50 40 30 20 10 - (10) May May May May May May May May May May May May May May May 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Source: Bank Indonesia18 Indonesia Strategy – The Spending Boom
  21. 21. Accelerated infrastructure development. Regardless of the issuance of the landclearance bill, we believe the government should be able to speed up infrastructureprojects given its strong political will to improve the project tender to financing process.The government’s proposed land clearance bills that are expected to be approved by theHouse of Representatives should also accelerate infrastructure project development,particularly for toll roads. However, we believe there are problems not only with landclearance, but also project bidding, such as when projects are awarded to the wrongbidder, which was what happened with the monorail project. The beneficiaries ofaccelerating infrastructure development are the cement, cable and construction sectors.Figure 33: Potential PPP Infrastructure Projects Sector Qty Project Qty Project Qty Project Cost (US$m) Cost (US$m) Cost (US$m) Air Transport 1 214 - 7 1,973 Land Transport 0 - 0 - 2 274 Marine Transport 2 1,199 0 - 4 2,860 Railways 0 - 0 - 3 4,385 Toll Road 2 25,670 17 8,221 3 1,811 Water Resources 0 - 0 - 0 - Water Supply 6 311 0 - 18 1,364 Solid Waste and Sanitation 2 130 2 120 4 50 Telecommunication 0 - 0 - 0 - Power 0 - 2 2,040 4 2,786 Oil and Gas 0 - 0 - 0 - 13 27,524 21 10,381 45 15,503Source: Ministry of National Development Planning/National Development Planning AgencyFigure 34: Toll Road Investments In Indonesia Status No. of link Length (km) Investment (Rpb) In Operation 28 741.9 Concession Agreement Signed 20 735.7 63,504.5 Concession Agreement Preparation 4 154.2 10,267.2 Built by Government 4 78.0 8,068.1 Tender Preparation 31 1,375.8 146,089.7 Total 87 3,085.7 227,929.4Source: Ministry of Public Works, Indonesian Toll Road AuthorityIndonesia Strategy – The Spending Boom 19
  22. 22. Figure 35: Ongoing Toll And Non-Toll Road Projects In Indonesia Projects Length (km) Investment (Rp b) Progress Toll Road Projects (CA Signed) Surabaya - Mojokerto 34.1 2,952.5 Land acquisition, construction Bogor Ring Road Section II&III 7.2 1,233.0 Land acquisition, construction Cinere - Cimanggis 14.7 1,867.1 Land acquisition, construction Kertosono - Mojokerto 41.7 2,211.7 Land acquisition, construction Semarang - Solo 75.7 6,135.0 Land acquisition, construction Gempol - Pasuruan 33.8 1,800.0 Land acquisition Gempol - Pandaan 13.6 826.0 Land acquisition Depok - Antasari 21.6 2,515.9 Land acquisition Bekasi - Cawang - Kampung Melayu 21.0 6,185.0 Land acquisition Cikampek - Palimanan 116.0 5,906.3 Land acquisition Cibitung - Cilincing 34.5 2,358.0 Detailed Engineering Design (DED), Land acquisition preparation Pejagan - Pemalang 57.5 3,235.8 DED, Land acquisition Pemalang - Batang 30.0 2,292.9 DED, Land acquisition Semarang - Batang 75.0 3,634.6 DED, Land acquisition JORR W2 North 7.0 1,411.0 Land acquisition Ciawi - Sukabumi 54.0 4,923.7 DED, Land acquisition Waru Wonokromo - Tj. Perak 17.7 6,491.3 DED, Land acquisition preparation Pasuruan Probolinggo 45.3 3,314.6 DED, Land acquisition preparation Kunciran - Serpong 11.2 1,847.0 Land acquisition Cengkareng - Batu Ceper - Kunciran 15.2 2,363.0 DED, Land acquisition preparation Toll Road Projects (CA Preparation) Cimanggis - Cibitung 25.4 3,131.8 CA Preparation Serpong - Cinere 10.1 1,717.5 CA Preparation Solo - Ngawi 69.2 3,216.8 CA Preparation Ngawi - Kertosono 49.5 2,201.1 CA Preparation Toll Road Projects (Built by Government) Serangan - Tanjung Benoa 7.5 1,489.4 Preparation for Bidding Process Akses Tanjung Priok 12.1 3,900.0 Construction Tender, Land acquisition Solo - Ngawi 20.9 1,430.6 Land acquisition, construction Ngawi - Kertosono 37.5 1,248.1 Land acquisition Non-Toll Road Projects Antasari - Blok M 5.0 1,280.0 Construction (Expected Completion in 2012-13) Kampung Melayu - Tanah Abang 5.0 739.0 Construction (Expected Completion in 2012-13)Note: CA stands for Concession AgreementSource: Ministry of Public Works, Indonesian Toll Road AuthorityFigure 36: Expansion Of PLN Capacity And Transmission Shows InfrastructureDevelopment 50,000 45,000 T ransmission length (Kms) Installed Capacity (MW) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: PLN20 Indonesia Strategy – The Spending Boom
  23. 23. ValuationNew high on stronger growth. We expect JCI to end 2011 at 4,500, or 15.0x 2012FPE (+1.1SD 5-year average), and believe JCI should be trading at 5,300 as at end-12,assuming the same valuation at 15.0x 2013F PE. We believe rising optimism on economicfundamentals, faster earnings growth, stable political climate and declining risk aversionhave driven the re-rating of the JCI to a new high. We set our new estimates for EPSgrowth at 25.0% yoy for 2011, 20.0% yoy for 2012, and 17.5% yoy for 2013.Figure 37: PE Band 4,500 4,000 15.0x 3,500 3,000 10.0x 2,500 2,000 1,500 5.0x 1,000 500 2.5x - Aug 04 Aug 05 Aug 06 Aug 07 Aug 08 Aug 09 Aug 10 Aug 11Source: BloombergFund flow reversal will give an opportunity to add weighting on Indonesia. Thereis some anxiety about a sudden reversal in market liquidity, such as the recent correctiondue to Europe’s deepening debt crisis and US’s potential double dip recession and recentrating downgrade. We believe Indonesia’s solid economic growth should provideassurance that Indonesia’s financial market will remain attractive. Currently, foreignownership in the Indonesian equity market is about 50%. In our view, the high valuationof JCI is backed by the fact that Indonesian companies can deliver robust growth andshould be able to maintain strong growth in the next 2-3 years. This also explains whythe Indonesian market is so buoyant and liquidity is very high.Indonesia Strategy – The Spending Boom 21
  24. 24. Figure 38: Monthly Foreign Trading Flow (Rpb) (Rpb) 60,000 20,000 50,000 15,000 40,000 10,000 30,000 5,000 20,000 - 10,000 (5,000) - (10,000) Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Foreign Buy (LHS) Foreign Sell (LHS) Net Foreign Flow (RHS)Source: BloombergUPCOMING IPOsTime for fund-raising, IPO and rights issue. The expected initial public offerings(IPO) in the pipeline will raise Rp8.7t (US$1.0b) as companies use the current opportunityto raise funds or do rights issues. One of the biggest IPOs this year was that of state-owned airline Garuda Indonesia (GIAA), which is not performing well due to companyproblems. Nevertheless, we remain optimistic on the remaining IPO activities.Figure 39: Upcoming IPOs Company Sector Time Estimated Estimation Proceeds Bank Nagari Banking 3Q11 Rp200b Visi Media Asia Media 3Q11 Rp640b Minna Padi Investama Securities Brokerage 3Q11 Rp100b Bank Pembangunan Daerah Sulawesi Utara Banking 3Q/4Q11 Rp300b Cipaganti Citra Graha Transport 3Q/4Q11 Rp500b-Rp1t Aditec Cakrawiyasa Manufacturing (Stove) 3Q/4Q11 Rp500b MNC Sky Vision Media 3Q/4Q11 US$64m Supra Boga Lestari Retailer (Ranch Market) 3Q/4Q11 Rp200b-300b AirAsia Indonesia Airline 4Q11 US$150-200m Bank Pembangunan Daerah Jawa Timur Banking 4Q11 Rp500b-Rp1t Golden Mines Energy Coal Mining 4Q11 Rp1t Telesindo Shop Cellphone Distributor 4Q11 Rp300b Eka Sari Lorena Transport Transport 4Q11 Rp150b Semen Baturaja Cement 4Q11/1H12 Rp1t Bakrie Toll Road Infrastructure 4Q11/2012 n.a.Source: Various news media, UOB Kay Hian22 Indonesia Strategy – The Spending Boom
  25. 25. CatalystsAcceleration of government spending on projects in 2H11. This should be fullyreflected in 4Q11. The multiplier effect will have a positive impact on many sectors,from construction and cement to consumer. The government plans to spend Rp137t oninfrastructure projects in 2011. Our view is that most projects will likely take place in2H11, based on the revenues and orderbook patterns of state-owned constructioncompanies, with most of the targets to be achieved in 2H11.Realisation of infrastructure development. We still think the realisation ofinfrastructure development is still the most important factor for boosting economic growthas Indonesia lacks the proper infrastructure for achieving optimal economic growth.Meanwhile, infrastructure development will speed up economic development. The long-awaited regulation on the land acquisition bill for infrastructure projects is expected to beapproved by parliament by end-11. Thus, by 2H11, we expect some toll road projects tocommence. The government is serious about developing infrastructure, as can be seenfrom the increased allocation of the government budget for infrastructure.Sovereign rating upgrade. We believe Indonesia’s sovereign rating will be upgradedto investment grade soon and will draw more investments into the country in the form ofFDI and through the stock market. Despite solid economic fundamentals with a debt toGDP ratio of 24%, Indonesia is still one notch below sovereign grade level. With strongeconomic fundamentals, a healthy government budget and a stable political climate, arating upgrade is highly possible.Indonesia Strategy – The Spending Boom 23
  26. 26. Figure 40: 1H11 Macro Review And 2011 Outlook 1H11 REVIEW GDP growth Indonesia posted 1H11 GDP growth of 6.5% yoy, with fixed capital formation and exports showing a convincing growth of 8.3% yoy and 14.9% yoy respectively. Exports Exports reached a historical high in Jun 11 with 6M11 exports growing 33% yoy, where 38% of the exports were commodities (15.0% oil and gas, 13.1% soft commodities and 9.6% are rubber and its derivatives). Private Consumption Rising consumer confidence has boosted consumer spending, with GDP per capita exceeding US$3,000. Private consumption grew 4.5% yoy in 1H11. Private investment Robust economic fundamentals continued to draw more direct investments with FDI and DDI growing 24% and 39% yoy respectively in 1H11. Sentiment and confidence Consumer confidence is recovering with the consumer confidence index rising 5.8% ytd. Interest rate With the expected moderate inflation, BI has been able to maintain BI rate at a low of 6.75% after raising BI rate once by 25bp in Feb 11, in line with the central banks tendency to be dovish on economic growth and financial markets. Unemployment The unemployment rate is recovering from 7.9% in 2009 to 7.1% in 2010. Inflation Declines in oil and other commodity prices eased inflationary pressures to 5.98%, 5.54% and 4.61% yoy in May, Jun and Jul 11 respectively. Foreign exchange The rupiah has appreciated by 5.9% ytd and 5.4% yoy to Rp8,478, which will benefit producers and consumers in Indonesia as around 80% of input materials in Indonesia are imported materials. 2011 OUTLOOK GDP growth We believe growth momentum remains intact. With higher income and investment demand, we expect Indonesias GDP to grow 6.4% yoy in 2011 and 6.3% yoy in 2012. Exports Our economist expects Indonesias exports to grow 9.7% and 7.5% yoy in 2011 and 2012 respectively. Subtracting an 11.2% and 7.8% yoy growth in imports, we expect net exports to grow 4.6% and 6.4% yoy in 2011 and 2012 respectively. Private Consumption Acceleration in spending remains intact, in our view. Supported by rising confidence, we expect an acceleration in private consumption growth from 4.6% yoy in 2010 to 5.0% yoy in 2011 and 5.3% yoy in 2012. Private investment Robust economic fundamentals continued to invite more direct investment with FDI growing 31% yoy in 2Q11 and 17% yoy in 1Q11, while DDI grew 11% yoy in 2Q11 and 110% yoy in 1Q11. Sentiment and confidence We believe consumer optimism will be sustainable going forward, supported by the robust economic outlook. Interest rate UOB ETR expects another 25bp rate hike in BI rate to 7.0% as at end-11. By end-12, the figure is expected to reach 7.5%. Unemployment With a growing economy, unemployment rate is expected to decline further to 6.9% in 2011 and 6.8% in 2012. Inflation Inflation slowed down moderately to 4.6% yoy in Jul 11. Our economist expects the full-year headline figure to arrive at 5.7% in 2011 and 5.6% in 2012. Foreign exchange UOB ETR expects Rp/US$ to strengthen to Rp8,400 as at end-3Q11, Rp8,350 as at end-4Q11 and Rp8,250 as at end-12. Appreciating Rupiah/US$ is another monetary tool for BI to control inflation.Source: UOB Economic-Treasury Research, UOB Kay Hian24 Indonesia Strategy – The Spending Boom
  27. 27. Risk FactorsIncome gap disparity may create social tension if it is not addressed by the governmentby protecting workers’ rights and making companies improve the work environment.The main problem faced by Indonesia is the widening gap between the rich and the poorand this situation may worsen if the income of the middle-up income segment rises veryfast. The rising social tension may affect risk premium, slow down growth, and result ina less effective government administration such as that seen in year 2000.Figure 41: Indonesias Gini Index 0.40 0.39 0.38 0.37 0.36 0.35 0.34 0.33 2005 2006 2007 2008 2009Source: Bloomberg, Central Intelligence AgencySlow education quality reform may dampen sustainable economic growth. Thequality of Indonesian workers can be considered low due to their low education level.Based on data from UNICEF, the number of high school graduates fell behind that ofother ASEAN countries such as Thailand and Malaysia. According to research resultsof SCImago Journal and Country Ranking, Indonesia ranks 65, behind Thailand andMalaysia, and only better than the Philippines. This also explains why average monthlywages in Indonesia are lower than that of those countries, even the Philippines.Rising inflation. This will pressurise purchasing power and drive BI to raise interestrate, which may depress the banking sector’s net interest margin (NIM) and dampenloan demand. In addition, it may drag down the strong automobile and mortgage loans.Nevertheless, we believe inflationary pressure arising from fuel price hikes will onlyhave a temporary impact on the economy.Global economic crisis. The accumulated effects of the global economic crisis wouldcertainly take its toll on the Indonesian economy, which could affect exports and liquidityin the system, resulting in high interest rates. The slowdown in exports may have anegative impact on other sectors such as banking, commodity and consumer.Indonesia Strategy – The Spending Boom 25
  28. 28. StrategyTop stock picks. Strong growth in consumer spending has made a positive impact onindustries, leading to a turnaround in companies from various sectors. We believe Indonesiais entering a consumer spending boom. Companies under our coverage that will benefitfrom this situation include Alam Sutera, Astra International, Bank Mandiri, IndocementTunggal Prakarsa, Kalbe Farma, Mitra Adiperkasa and United Tractors Our SELL callis Bakrie Sumatra on the back of an expected decline in CPO prices.Figure 42: Stock Picks Company Rec 8 Aug 11 Target PE (x) P/B (x) Yield Remarks Price (Rp) Price (Rp) 2011F 2011F (%) Alam Sutera Realty BUY 390 500 13.6 2.6 1.5 Prominent developer in Serpong area with easy access to toll roads. Focuses on 250ha landbank in Serpong for commercial developments and another 300ha in Pasar Kemis for housing developments. Astra International BUY 65,050 81,000 14.4 4.2 2.0 Strong growth. Dominates automobile sector. Dominates almost all businesses it engages in. Bank Mandiri BUY 7,350 9,100 14.2 2.8 1.9 Benefits from strong growth in consumer loans and recovery in corporate loans. Indocement TP BUY 14,500 19,600 15.0 3.4 1.8 A market leader in most developed provinces (eg West Java, Jakarta and Banten). Clean balance sheet. Capacity to be topped up to 23mt in 2014. Kalbe Farma BUY 3,175 4,075 19.1 4.7 2.2 Largest pharmaceutical company. We expect stronger growth in 2012. Additional catalyst may come from M&A potential in 2H11. Mitra Adiperkasa BUY 4,225 5,025 21.3 4.0 0.6 Largest lifestyle retailer with strong potential earnings growth of 36.8% p.a. Has strong middle-class exposure. United Tractors BUY 23,950 32,000 17.4 3.5 2.3 A subsidiary of Astra International with a strong presence in heavy equipment and mining contracting in Indonesia. TOP SELL Bakrie Sumatera Plantation SELL 385 340 14.8 0.6 1.0 A subsidiary of Bakrie Group with main business in plantation and oleochemical. The acquisition of Domba Mas Group may increase earnings volatility due to higher interest expenses.Source: Bloomberg, UOB Kay Hian26 Indonesia Strategy – The Spending Boom
  29. 29. OVERWEIGHT the consumer, retail, banking, cement, automobile, and property sectors.We believe these sectors are good proxies to the spending boom and acceleration ofinfrastructure development. We expect consumer spending to increase further in 2H11,driven by positive economic factors such as acceleration of infrastructure projects.Maintain MARKET WEIGHT on the coal, metal mining, oil & gas and telecommunicationssectors. Metal commodity (nickel and tins) prices are expected to be weak in 2H11.We UNDERWEIGHT plantation as our plantation analyst expects CPO prices tomoderate. Agus Pramono, CFA (6221) 2993 3845 aguspramono@uobkayhian.comIndonesia Strategy – The Spending Boom 27
  30. 30. AUTOMOBILE OVERWEIGHTWhy We Are Overweight What To Watch Out For In 2H11 Production has recovered from impact of Japan Fuel subsidy phase-out. earthquake. Changes in laws and regulations. Strong automobile demand to continue to be driven by Availability of financing. growing per capita income. Current low penetration rates. Concentrated industry.OutlookFigure 43: Astras Performance vs Market (End Dec 10=100) 150 140 JCI Index ASII 130 120 110 100 90 80 70 60 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11Source: BloombergCar sales have shown an earlier-than-expected recovery in production followingthe Japan earthquake. Domestic car sales in Apr 11 dropped by 26.0% mom (-6.9%yoy) because of disruption to the supply of some components imported from Japan.However, the supply problem has been resolved. Domestic car sales grew 11.3% mom(-3.4% yoy) in Jun 11, showing signs of an early recovery from the supply disruption.Meanwhile, Car Producer Association (Gaikindo) expects higher car sales in 2H11 withthe launch of new models at the Indonesian International Motor Show (IIMS) this month.Very minimum impact from minimum down payment for auto loan. We expect carsales to grow faster in 2H11 on the back of: a) a recovery in car production in the wakeof the Japan earthquake, b) high liquidity in the financial system, and c) higher purchasingpower in Indonesia. Meanwhile, despite Bank Indonesia’s (BI) announcement of itsdecision to slow down growth in automobile loans by setting a minimum down paymentof 30% for auto loans, we think raising down payment by 10% will not significantlyaffect the growth of motorcycle and car sales as the rule will not affect multifinancecompanies.28 Indonesia Strategy – The Spending Boom
  31. 31. Expect short-term impact from fuel price hike or subsidy phase-out. We thinkcar sales will see only a short-term impact from the government’s plan to curb fuelsubsidies for gasoline and diesel. The government has not given a clear signal when itwill exercise the plan, but it increased fuel subsidy in Jul 11. If the government exercisesfuel subsidy phase-out next year, the low-priced car segment, including players such asDaihatsu Xenia and Toyota Avanza, will be affected. Nevertheless, with rising purchasingpower and strong consumer confidence, the impact should be temporary.Figure 44: Automobile Sales and Astra’s Market Share (units) (units) 95,000 65% 810,000 60% 85,000 60% 710,000 55% 75,000 55% 610,000 65,000 50% 510,000 50% 55,000 45% 410,000 45% 45,000 40% 35,000 35% 310,000 40% 25,000 30% 210,000 15,000 25% 110,000 35% 5,000 20% 10,000 30% Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun 08 08 08 09 09 09 09 10 10 10 10 11 11 08 08 09 09 09 10 10 10 11 11 T otal Car Sales (LHS) Astra Market Shares (RHS) T otal Motorcycle Sales (LHS) Astra Market Shares (RHS)Source: Astra InternationalAutomobile sales continue to grow. We are still upbeat on automobile sales in Indonesiaand expect car and motorcycle sales to reach 1m and 10m respectively in 2013, so moreautomobile producers are likely to relocate their production facilities to Indonesia. Thiswill benefit not only the existing automobile industry, but also the entire Indonesian economy.We foresee car and motorcycle sales volume to grow 12.5-15.0% in 2011-12 as financingshould still be in abundance and economic growth still robust.Indonesia Strategy – The Spending Boom 29
  32. 32. StrategyMaintain OVERWEIGHT. We remain OVERWEIGHT on the Indonesian automobilesector on expectations of: a) continued strong automobile demand, b) short-term impactfrom the fuel subsidy phase-out for private cars, c) huge domestic market potential, andd) robust automobile sales due to availability of financing and improving disposable income.We like Astra, but there is another option in the sector – Indomobil (IMAS) pulled off aturnaround with Nissan successully establishing a strong market position in Indonesia.IMAS’s net earnings and EBITDA achieved a CAGR of 360% and 13% respectively in2008-10.Astra is sector leader and best reflection of Indonesia. We reiterate our BUY callon Astra with a target price of Rp81,000 based on sum-of-the-parts valuation, implying15.4x 2012F PE. We view Astra as a good proxy to Indonesia’s growth story on the backof its wide range of businesses, strong fundamentals, market dominance and goodcorporate governance. Furthermore, the market believes Astra boasts better corporategovernance than its peers. Moreover, with its consistently high dividend payouts of around40%, Astra should trade at least on a par with the JCI. Agus Pramono, CFA (6221) 2993 3845 aguspramono@uobkayhian.com30 Indonesia Strategy – The Spending Boom
  33. 33. Sector At A GlanceFigure 45: Penetration Rates For Cars AndMotorcycles Figure 46: Car And Motorcycle Sales R 2 = 0.5934 (units) (units)100% 90,000 800,000 90% Ita ly US A 80,000 700,000 80% M a la ys ia UK 70,000 600,000 70% 60,000 60% Aus tra lia 50,000 500,000 50% 40,000 400,000 40% J ap 30,000 300,000 R us s ia Turke y 30% 20,000 200,000 20% Tha ila nd Indo ne s i Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun 10% 08 08 09 09 09 10 10 10 11 11 0% - 10,000 20,000 30,000 40,000 50,000 T otal Car Sales (LHS) T otal Motorcycle Sales (RHS)Source: TGS Survey, UOB Kay Hian Source: Astra InternationalFigure 47: Car Sales By Brand (1H11) Figure 48: Motorcycle Sales By Brand (1H11) Others Daihatsu Kawasaki Isuzu 1.2% Others 13.4% 14.9% Suzuki Suzuki 3.1% 0.1% 6.3% 10.5% Nissan Diesel 0.3% Misubishi Yamaha 16.1% T oyota 40.6% Honda 36.5% Astra 5.2% 51.8%Source: Astra International Source: Astra International Figure 50: Mining Contracting Sales By CompanyFigure 49: Heavy Equipment Sales By Brand (1H11) (2009) Delta Dunia PAMA Others T hiess 16.7% 32.2% Kobelco 7% 13.2% 9% Komatsu 51% Hitachi 14% SIS 8.8% Others Caterpillar CK 5.3% 20.7% 19% Darma Henwa 3.1%Source: United Tractors Source: Delta Dunia MakmurIndonesia Strategy – The Spending Boom 31

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