Indonesia strategy! research

STRATEGY

INDONESIA

The 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
government's 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 19.1
Alam Sutera Realty ASRI IJ 390 500 13.6 Mitra Adiperkasa MAPI IJ 4,225 5,025 21.3
Astra International ASII IJ 65,050 81,000 14.4 United Tractors UNTR IJ 23,950 32,000 17.4
Bank Mandiri BMRI IJ 7,350 9,100 14.2 Top SELL
Indocement TP INTP IJ 14,500 19,600 15.0 Bakrie Sumatera UNSP IJ 385 340 14.8

Note: Closing prices as at 8 August 2011

August 2011
Refer to last page for important disclosures.

Contents
Executive Summary .................................................................................................. 1
The Spending Boom .................................................................................................. 3

Sector Review
- Automobile: OVERWEIGHT ............................................................................... 28
- Banking: OVERWEIGHT .................................................................................... 32
- Cement: OVERWEIGHT .................................................................................... 37
- Consumer: OVERWEIGHT ................................................................................ 41
- Metal Mining: MARKET WEIGHT .................................................................... 49
- Plantation: UNDERWEIGHT .............................................................................. 57
- Property: OVERWEIGHT ................................................................................... 63

Top Stock Picks
- Alam Sutera Realty .............................................................................................. 68
- Astra International ................................................................................................ 70
- Bank Mandiri ....................................................................................................... 72
- Indocement Tunggal Prakarsa ............................................................................. 74
- Kalbe Farma ........................................................................................................ 76
- Mitra Adiperkasa ................................................................................................. 78
- United Tractors .................................................................................................... 80

Corporate Statistics ................................................................................................. 82

This report uses the closing prices of 8 August 2011.

EXECUTIVE SUMMARY

New high with greater speed. We raise our year-end 2011 JCI estimate to 4,500, or
15.0x 2012F PE (+1.1 SD 5 years average), and we believe JCI should be trading at
5,300 at year-end 2012, assuming the same valuation of 15.0x 2013F PE. We believe
rising optimism on economic fundamentals, faster earnings growth, a stable political
climate, 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, and
17.5% for 2013.

The return of confidence. Indonesia’s GDP has surpassed the pre-Asian financial
crisis level in real terms, but spending only recovered last year as consumer confidence
returns. Consumer confidence has been low since the political turmoil in 1998-2002.
Now, with smooth presidential and parliamentary elections in 2004 and 2009, confidence
has returned as shown by some AC Nielsen surveys. As a result, spending growth and
companies’ strong revenue growth are likely to continue in the next 4-5 years. We
forecast 6.4% and 6.3% economic growth for 2011 and 2012 respectively. We believe
the buoyant economy is driven by high optimism because the worst is over and Indonesia
is moving into a new stage of economic development.

Earnings growth momentum. As we had predicted, Indonesian companies reported
strong 1H11 earnings growth on the back of robust domestic demand, low interest rates
and stable inflation. Companies under our coverage posted strong aggregate earnings
growth of 35% yoy in 1H11, while the whole JCI posted 42% yoy aggregate earnings
growth in the same period. We expect earnings growth to remain strong in 2H11 driven
by robust consumer demand from the festive seasons and government project spending.
In the longer term, earnings growth momentum will continue on the back of higher
consumer confidence given the economic well-being and a stable political climate.

Asset price reflation to continue. The return of consumer confidence, robust economic
growth, and low interest rates have led to faster asset price reflation in the last two
years, from land to stock prices. Rising land prices have created the wealth effect for
property owners and new opportunities for developers as they can develop new suburban
areas 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 compare
land prices in strategic locations in Greater Jakarta that increased eightfold (1996-2011
CAGR: 15%) with Big Mac prices that increased by 5.6 times (around 12% CAGR) in
1996-2011, we think land prices have not been overvalued yet.

Less affected by global economic slowdown. Worries over how intensifying European
debt problems and US economic woes could tip the global economy into a double dip
recession have caused a sell-off in global financial markets. Meanwhile, Indonesia’s
economy is domestic-driven and its fundamentals are less affected by a global economic
slowdown. During the 2009 global recession, Indonesia still managed to post a 4.5% yoy
GDP 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 is
expecting a rating upgrade to investment grade. Indonesia has a budget deficit of less
than 2% and a debt-to-GDP ratio of 24%.

Indonesia Strategy – The Spending Boom 1

Structural improvement of economy. Indonesia has a domestic-driven economy.
However, 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 factor for the
economy. The high growth in fixed capital formation in 1H11 was supported by strong
growth in foreign direct investment (FDI) and domestic direct investment (DDI) that
grew 24% yoy and 39% yoy respectively in 1H11 (31% yoy and 11% yoy in 2Q11). At
the same time, domestic spending will remain the main growth driver with the number of
middle-class households rising from 13m in 2010 to 27m in 2015, or from 22% to 45% of
total households.

On the verge of a spending boom. Indonesia has fully recovered from the 1998 Asian
financial crisis and survived the 2008 global financial crisis. Currently enjoying higher
purchasing power and confidence, Indonesia has become an attractive market. We pick
the following investment themes for 2H11: a) riding the spending boom as consumer
purchasing power will improve further, b) benefitting from turnaround companies that
are mostly under-covered and have shown strong earnings growth as demand for their
products has recovered and they have greater financial flexibility, c) benefitting from a
stronger rupiah, which has strengthened not only due to the weak US$ but also due to the
improvement in Indonesia’s economic structure, and d) acceleration of infrastructure
development propelled by the government’s political will.

Top stock picks. Strong growth in consumer spending has made a positive impact on
industries, and we have seen a turnaround in companies from various sectors. We believe
Indonesia is entering a consumer spending boom. Beneficiaries include Alam Sutera,
Astra International, Bank Mandiri, Indocement Tunggal Prakarsa, Kalbe Farma, Mitra
Adiperkasa and United Tractors. We have a SELL call on Bakrie Sumatra Plantation on
the back of an expected decline in CPO prices.

2 Indonesia Strategy – The Spending Boom

THE SPENDING BOOM

Outlook
ECONOMY, GDP

Understated optimism. Indonesia’s economy has been growing rapidly in the last one
year, driven by high optimism that the country’s economic growth is back on track in a
stable political climate. It is optimism, not only economic fundamentals, which determines
the pace of Indonesia’s economic growth. Economy-wise, Indonesia fully recovered
from 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 Asian
crisis in 2009 when the consumer index hovered consistently above the 100 level, which
was after the parliamentary election and ahead of the presidential election. Political
turmoil was the culprit behind Indonesia’s dented consumer confidence in 1998-2002, in
our 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 of
speech.

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, Bloomberg


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 11

Source: CEIC, Bloomberg

Figure 3: Indonesians World's 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
Philippines

Source: AC Nielsen

Figure 4: Expect Sovereign Rating Upgrade
Country S&P Moody's Fitch

Indonesia BB+ Ba1 BB+
Philippines BB+ Ba2 BBB-
Thailand A- Baa1 A-

Number of upgrades required for investment grade

S&P Moody's Fitch
Indonesia 1 1 1
Philippines 1 2 Inv.Grade
Thailand Inv.Grade Inv.Grade Inv.Grade
Source: Bloomberg, UOB Kay Hian


Burgeoning middle class. The huge proportion of the population with rising purchasing
power will become an engine for economic growth as we foresee acceleration in spending
growth, driven by the burgeoning middle-income population. The number of middle-class
households (defined as those with annual income exceeding US$5,000) is expected to
more 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 an
annual income of US$15,000 in Indonesia is expected to double in numbers in the next
five 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
Africa

Source: Boston Consulting Group

Figure 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 11

Source: CEIC


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 Jakarta

Source: Mitra Adiperkasa, Ramayana Lestari Sentosa, UOB Kay Hian

Asset price reflation to continue. The return of consumer confidence, robust economic
growth 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 property
owners and new opportunities for developers as they can develop new suburban areas
in Greater Jakarta which have lower land prices (such as Serpong and Bekasi). Land
prices in Jakarta increased around fourfold in eight years from 1996 to 2009, but doubled
in 2009-10.

However, we believe land prices in Indonesia are far from bubbling yet. If we compare
land prices in strategic locations in Greater Jakarta that increased eightfold (1996-2011
CAGR: 15%) with Big Mac prices that increased by 5.6 times (around 12% CAGR) in
1996-2011, we think land prices have not been overvalued yet. The larger increase in
land prices was due to the unique characteristic of property assets, expectations of
continuing robust growth and high confidence. On the other hand, Big Mac price hikes
resulted from stiffening competition. Meanwhile, the JCI index increased by 702% over
the same period.


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 11

Source: CEIC

Figure 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 11

Source: Bloomberg

Figure 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 companies


Earnings growth momentum. As we have predicted, Indonesian companies reported
strong 1H11 earnings growth on the back of strong domestic demand, low interest rates
and stable inflation. Companies under our coverage posted strong aggregate earnings
growth of 35% yoy in 1H11, while the whole JCI posted 42% yoy aggregate earnings
growth in the same period. Furthermore, some companies showed a turnaround as demand
recovered. Thus, they can enjoy improved economies of scale. We believe earnings
growth momentum will continue on the back of higher consumer confidence given the
country’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 42.2
Notes: 2Q11 and 1H11 figures exclude companies that have not announced their results

Structural improvement of economy. Indonesia has a domestic-driven economy, but
exports reached a historical high in Jun 11 with 6M11 exports growing 33% yoy. Although
38% of the exports are commodities (15% oil and gas, 13.1% soft commodities and
9.6% rubber and its derivatives), industrial goods grew robustly by 33% yoy. We think
exports will improve on the back of strong fixed capital formation growth such as in
1H11 when it grew 8.3% yoy, higher than GDP growth of 6.5% yoy. The high growth in
fixed capital formation was supported by strong growth in FDI and DDI of 24% yoy
and 39% yoy respectively in 1H11 (31% yoy and 11% yoy in 2Q11). Thus, we think FDI
in Indonesia will not only target the domestic market, but will also use Indonesia as the
production 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 2.9
Source: Central Statistics Agency, CEIC


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:CEIC

Figure 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 Vietnam

Source: Japan External Trade Organization (JETRO), Reuters

Figure 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 Board


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 capacity
Source: Various news, Indonesia Investment Coordinating Board

BI is right this time. Bank Indonesia (BI) is right to have increased BI rate by 25bp in
Feb 11 and then maintain it until now. This dragged down inflation to 5.98%, 5.54% and
4.61% yoy in May, Jun and Jul 11 respectively. Declines in oil and other commodity
prices have eased inflationary pressures. This year, UOB Economic and Treasury
Research (ETR) expects inflation to reach 5.7% in 2011 and 5.6% in 2012, as compared
with 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’s
current economic fundamentals are more resilient and resistant to those factors.


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: Bloomberg

Low interest rate stimulates further spending growth. Given expectation of moderate
inflation, BI has been able to maintain the BI rate at a low 6.75% after raising the policy
rate by 25bp in Feb 11, in line with the central bank’s tendency to be dovish on economic
growth and financial markets. The current situation spurs robust consumer, automobile
and property sales. Meanwhile, despite strong domestic demand that may push inflation
up next year, we think Indonesia’s economy still requires a low interest rate environment
to 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 11

Source: Bank Indonesia


Protect popularity first, increase subsidy later. With GDP per capita exceeding
US$3,000 and confidence level rising, we believe the improvements in spending patterns
will continue even if the government increases fuel prices or phases out fuel subsidies
for private car users. However, the government may not undertake either measure this
year given its declining popularity (see our report released in Jun 11: Looks pricey but
attractive). 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 reach
around 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 for
private car users, the savings will be less than the budget increase. According to the
Central Statistics Agency and Bank Indonesia, every Rp500 hike in fuel prices will
contribute 1% to headline inflation and the fuel subsidy phase-out will generate an even
smaller 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) 965 954 970 945

Source: Ministry of Finance

Figure 20: Satisfaction Survey On President SBY's 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 11

Source: Indo Barometer, Lembaga Survei Indonesia (LSI)


Next election: Long way to go. The political climate in Indonesia may have heated up
with an impending battle between political parties. However, we believe the country’s
democratic system and press freedom should smoothen the election process as seen in
the last two parliamentary and presidential elections. Similar to the situation back in
2004, there has been no clear picture on the next presidential candidacy and coalitions.
The incumbent Democrat Party has not announced its presidential candidate for the
2014 election even though this term will be SBY’s last. No party candidate has been
announced yet, as parties tend to wait and see to find the right coalition partners
opportunistically.


Investment Themes
Our investment themes are: a) riding the spending boom, b) benefitting from turnaround
companies, c) benefitting from a stronger rupiah, and d) acceleration in infrastructure
development. Indonesia is at the early stage of long-term growth, and with GDP per
capita exceeding US$3,000, it is entering a new stage of growth in which spending will
accelerate. At the same time, many companies will benefit from recovering demand and
thus turn around.

Last year, one of our themes was companies with strong pricing power. For the current
period, although we believe the industry’s structure will remain oligopolistic, competition
will intensify as companies are more concerned about market shares than defending
margins, as seen in a low-demand situation. In our view, the oligopolistic structure will
remain in place until Indonesia adopts a better approach to regulating competition, such
as 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 the
list of investment themes for Indonesia until the next five years. We should see not only
a larger consumer base, but also higher quality of spending in the future. With GDP per
capita exceeding US$3,000, Indonesia is entering a new growth stage in which spending
will accelerate toward higher value and quality products, and purchasing power will be
more resilient against economic volatility. Thus, we should see a growing consumer
market with 18m middle-income consumers earning US$15,000/year, which is expected
to double within the next five years.

Some companies are also preparing to tap the rising purchasing power by launching
products for the booming middle class. For instance, Daihatsu and Nissan launched
Daihatsu Xenia and Nissan March (priced around Rp130m) in a move to grab first car
buyers. The beneficiaries of this spending boom are the consumer, banking, automobile
and property sectors.

Figure 21: GDP Per Capita Exceeding US$3,000
(US$) (%)
3,500 60
3,000 40
2,500 20
2,000 -
1,500 (20)
1,000 (40)
500 (60)
0 (80)
1993199419951996 199719981999200020012002200320042005 20062007200820092010

Per Capita GDP (LHS) Growth, yoy (RHS)

Source: CEIC


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: CEIC

Benefitting from turnaround companies. We identify some companies that have
turned around and have started to grow faster on the back of recovering demand and
higher financial flexibility. Many companies that were hit by the 1998 Asian financial
crisis are now recovering from the long hibernation phase as either demand for their
products has shown robust growth, or they have started to refinance their restructured
debts. Thus, they are able to distribute dividends and expand capacities or reopen
mothballed plants.

Sectors where there are many companies turning around include automobile, consumer,
indusrial estate, manufacturing (such as tire, cable and petrochemical producers) and
property. The impact of the turnaround is not only positive for the companies, but also for
banking, construction and, more importantly, the overall economy as it will also reduce
unemployment.

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: JCI's Declining Net Gearing Signalling
Figure 23: JCI's 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 2010

Source: Bloomberg Source: Bloomberg


Figure 25: JCI's Capex/Sales Shows Expansion Figure 26: JCI's Rising Dividend Payout
Mode
(%) (%)
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 2010

Note: Exclude agri, cement, energy, financials, mining, property, telco Source: Bloomberg
sectors
Source: Bloomberg

Figure 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 International

Figure 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 11

Source: CEIC


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, 1Q11's net profit Rp127.7b)
** 1Q11 net profit change yoy
Source: Bloomberg


Go with stronger rupiah beneficiaries. A stronger rupiah benefits producers and
consumers in Indonesia as around 80% of input materials in Indonesia are imported. At
the same, a stronger rupiah helps reduce the inflationary impact of high commodity and
oil prices, as seen in 1Q11. The rupiah has appreciated by 5.0% ytd and 4.6% yoy. UOB
ETR 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 is
driven by an expected upgrade of sovereign rating, robust economic growth and liquidity
in the global financial sector, as M1 and M2 growth suggests. Nevertheless, we expect
the situation to continue for some time. Companies whose costs are strongly linked to the
US$ 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 principal
Source: Respective companies, UOB Kay Hian

Figure 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 11

Source: Bank Indonesia


Accelerated infrastructure development. Regardless of the issuance of the land
clearance bill, we believe the government should be able to speed up infrastructure
projects 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 the
House of Representatives should also accelerate infrastructure project development,
particularly for toll roads. However, we believe there are problems not only with land
clearance, but also project bidding, such as when projects are awarded to the wrong
bidder, which was what happened with the monorail project. The beneficiaries of
accelerating 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 15,503

Source: Ministry of National Development Planning/National Development Planning Agency

Figure 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 3,085.7 227,929.4

Source: Ministry of Public Works, Indonesian Toll Road Authority


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 Agreement
Source: Ministry of Public Works, Indonesian Toll Road Authority

Figure 36: Expansion Of PLN Capacity And Transmission Shows Infrastructure
Development

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 2010

Source: PLN


Valuation
New high on stronger growth. We expect JCI to end 2011 at 4,500, or 15.0x 2012F
PE (+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 economic
fundamentals, faster earnings growth, stable political climate and declining risk aversion
have driven the re-rating of the JCI to a new high. We set our new estimates for EPS
growth 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 11

Source: Bloomberg

Fund flow reversal will give an opportunity to add weighting on Indonesia. There
is some anxiety about a sudden reversal in market liquidity, such as the recent correction
due to Europe’s deepening debt crisis and US’s potential double dip recession and recent
rating downgrade. We believe Indonesia’s solid economic growth should provide
assurance that Indonesia’s financial market will remain attractive. Currently, foreign
ownership in the Indonesian equity market is about 50%. In our view, the high valuation
of JCI is backed by the fact that Indonesian companies can deliver robust growth and
should be able to maintain strong growth in the next 2-3 years. This also explains why
the Indonesian market is so buoyant and liquidity is very high.


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: Bloomberg

UPCOMING IPOs

Time 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 opportunity
to 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 company
problems. 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 Hian


Catalysts
Acceleration of government spending on projects in 2H11. This should be fully
reflected 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 on
infrastructure projects in 2011. Our view is that most projects will likely take place in
2H11, based on the revenues and orderbook patterns of state-owned construction
companies, with most of the targets to be achieved in 2H11.

Realisation of infrastructure development. We still think the realisation of
infrastructure development is still the most important factor for boosting economic growth
as 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 be
approved by parliament by end-11. Thus, by 2H11, we expect some toll road projects to
commence. The government is serious about developing infrastructure, as can be seen
from the increased allocation of the government budget for infrastructure.

Sovereign rating upgrade. We believe Indonesia’s sovereign rating will be upgraded
to investment grade soon and will draw more investments into the country in the form of
FDI and through the stock market. Despite solid economic fundamentals with a debt to
GDP ratio of 24%, Indonesia is still one notch below sovereign grade level. With strong
economic fundamentals, a healthy government budget and a stable political climate, a
rating upgrade is highly possible.


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 bank's 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 Indonesia's
GDP to grow 6.4% yoy in 2011 and 6.3% yoy in 2012.
Exports Our economist expects Indonesia's 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 Hian


Risk Factors
Income gap disparity may create social tension if it is not addressed by the government
by 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 poor
and this situation may worsen if the income of the middle-up income segment rises very
fast. The rising social tension may affect risk premium, slow down growth, and result in
a less effective government administration such as that seen in year 2000.

Figure 41: Indonesia's Gini Index
0.40

0.39

0.38

0.37

0.36

0.35

0.34

0.33
2005 2006 2007 2008 2009

Source: Bloomberg, Central Intelligence Agency

Slow education quality reform may dampen sustainable economic growth. The
quality 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 of
other ASEAN countries such as Thailand and Malaysia. According to research results
of SCImago Journal and Country Ranking, Indonesia ranks 65, behind Thailand and
Malaysia, and only better than the Philippines. This also explains why average monthly
wages in Indonesia are lower than that of those countries, even the Philippines.

Rising inflation. This will pressurise purchasing power and drive BI to raise interest
rate, which may depress the banking sector’s net interest margin (NIM) and dampen
loan demand. In addition, it may drag down the strong automobile and mortgage loans.
Nevertheless, we believe inflationary pressure arising from fuel price hikes will only
have a temporary impact on the economy.

Global economic crisis. The accumulated effects of the global economic crisis would
certainly take its toll on the Indonesian economy, which could affect exports and liquidity
in the system, resulting in high interest rates. The slowdown in exports may have a
negative impact on other sectors such as banking, commodity and consumer.


Strategy
Top stock picks. Strong growth in consumer spending has made a positive impact on
industries, leading to a turnaround in companies from various sectors. We believe Indonesia
is entering a consumer spending boom. Companies under our coverage that will benefit
from this situation include Alam Sutera, Astra International, Bank Mandiri, Indocement
Tunggal Prakarsa, Kalbe Farma, Mitra Adiperkasa and United Tractors Our SELL call
is 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.


OVERWEIGHT the consumer, retail, banking, cement, automobile, and property sectors.
We believe these sectors are good proxies to the spending boom and acceleration of
infrastructure 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 telecommunications
sectors. Metal commodity (nickel and tins) prices are expected to be weak in 2H11.

We UNDERWEIGHT plantation as our plantation analyst expects CPO prices to
moderate.

Agus Pramono, CFA (6221) 2993 3845
aguspramono@uobkayhian.com


AUTOMOBILE OVERWEIGHT

Why 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.

Outlook
Figure 43: Astra's 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 11

Source: Bloomberg

Car sales have shown an earlier-than-expected recovery in production following
the 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 with
the 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 car
sales to grow faster in 2H11 on the back of: a) a recovery in car production in the wake
of the Japan earthquake, b) high liquidity in the financial system, and c) higher purchasing
power in Indonesia. Meanwhile, despite Bank Indonesia’s (BI) announcement of its
decision to slow down growth in automobile loans by setting a minimum down payment
of 30% for auto loans, we think raising down payment by 10% will not significantly
affect the growth of motorcycle and car sales as the rule will not affect multifinance
companies.


Expect short-term impact from fuel price hike or subsidy phase-out. We think
car sales will see only a short-term impact from the government’s plan to curb fuel
subsidies for gasoline and diesel. The government has not given a clear signal when it
will exercise the plan, but it increased fuel subsidy in Jul 11. If the government exercises
fuel subsidy phase-out next year, the low-priced car segment, including players such as
Daihatsu Xenia and Toyota Avanza, will be affected. Nevertheless, with rising purchasing
power 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 International

Automobile sales continue to grow. We are still upbeat on automobile sales in Indonesia
and expect car and motorcycle sales to reach 1m and 10m respectively in 2013, so more
automobile producers are likely to relocate their production facilities to Indonesia. This
will 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 financing
should still be in abundance and economic growth still robust.


Strategy
Maintain OVERWEIGHT. We remain OVERWEIGHT on the Indonesian automobile
sector on expectations of: a) continued strong automobile demand, b) short-term impact
from the fuel subsidy phase-out for private cars, c) huge domestic market potential, and
d) 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 a
turnaround with Nissan successully establishing a strong market position in Indonesia.
IMAS’s net earnings and EBITDA achieved a CAGR of 360% and 13% respectively in
2008-10.

Astra is sector leader and best reflection of Indonesia. We reiterate our BUY call
on Astra with a target price of Rp81,000 based on sum-of-the-parts valuation, implying
15.4x 2012F PE. We view Astra as a good proxy to Indonesia’s growth story on the back
of its wide range of businesses, strong fundamentals, market dominance and good
corporate governance. Furthermore, the market believes Astra boasts better corporate
governance than its peers. Moreover, with its consistently high dividend payouts of around
40%, Astra should trade at least on a par with the JCI.

Agus Pramono, CFA (6221) 2993 3845
aguspramono@uobkayhian.com


Sector At A Glance

Figure 45: Penetration Rates For Cars And
Motorcycles 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 International

Figure 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 Company
Figure 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 Makmur


BANKING OVERWEIGHT

Why We Are Overweight What To Watch Out For In 2H11
Strong loan growth from consumer and corporate Potential global recession may affect sector NPL.
segment.
Tougher competition.
ROE to stabilise at a higher level.
Unfavourable regulation.
Improving asset quality.

Outlook
Figure 51: Banking Sector's Performance
(End Dec 10=100)

130
JCI Index Banking Index
120

110

100

90

80

70
Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11

Source: Bloomberg

Supporting macro factors. We believe the banking sector will continue to enjoy strong
performance in 2H11 with robust growth in the consumer and corporate loan segments.
Inflation rate continued to ease to 4.61% yoy in Jul 11, the lowest level since Jun 10. The
central bank has also maintained the Bank Indonesia (BI) rate at 6.75% since Feb 11,
creating a favourable low interest rate environment for the banking industry. With inflation
rate decreasing, we believe the interest rate hike will be modest in 2H11 and will not
greatly affect loan demand and liquidity in the banking system.


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