ciptadana outlook 2012

Market Outlook 2012December 15, 2011

CIPTADANA SECURITIES

MARKET OUTLOOK 2012THURSDAY 15 DECEMBER, 2011

http://www.ciptadana.com

2

The European FiascoThere is one question that lingers in almost every market participants mind : “ Will European crisis brings back to severe recession just like 2008 or worse ?”. The question cannot be answered easily but it is obvious that the crisis is not easy to tackle. A region with single monetary policy but no unity in fiscal policy will not handle debt crisis as prompt as one nation which has unity of both. Market participants are waiting for significant breakthrough in Europe such as bigger role of ECB or joint issue of Euro bond.

Indonesia in the middle of Euro CrisisNo countries in the world could escape from the impact of Euro Crisis but the question is how severe the impact for a given country, in this case Indonesia. One thing for certain that Indonesia will be relatively unscathed compare to other countries thanks to reliance on huge domestic consumption and conventional banking system. Economic consensus predicts that Indonesia will realize 6.4%YoY GDP growth in 2011, before gradually decreasing to 6.2%YoY in 2012. Those are high growth numbers in any standard.

Benign inflation, lower interest rateConsensus estimates Indonesian inflation will be at low level of 5.6% in 2011 and 5.7% in 2012. Bank Indonesia (BI) inflation estimates for 2011 is much lower level of 3.9%. With low inflation, Indonesians will be able to maintain the purchasing power and BI will be able to keep interest rate low thus stimulating economy through aggressive lending in 2012.

2012 target for JCITranslating current target price to market capitalization and index level, our fundamental target for JCI in 2012 is 4,520. Using Elliot Wave analysis, our technical desk target bullish scenario is much more optimistic, targeting 5,500 in 2012 (please note that our technical desk also prepare bearish scenario). We pick banking, property, construction, cement, heavy equipment and consumer as our favorite sectors in 2012 that we expect could outperform the market next year.

Please see analyst certifi cation and other important disclosures at the back of this reportPlease see analyst certifi cation and other important disclosures at the back of this report

In the middle of Euro Crisis

Ciptadana Research TeamT +62 21 2557 4800E [email protected]

JCI Index

3000

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JCI Index VOLUME

Source : BloombergSource : Bloomberg




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The European Fiasco The European Fiasco

European debt crisis has brought back memories and those memories are unpleasant ones. Investors around the world have been grappled with fear as the current European crisis has similarity with the subprime mortgage crisis three years ago where the US was the epicenter of the problem. Back in the 2008, inability of subprime mortgage lender to pay was the cause of the crisis and now the source of the problem is the danger of some European countries of defaulting their debt.

For so many years the European countries (western countries in general) have rely too much on debt to finance its growth. Greece, now the pariah of Europe in 2010 had amassed debt equals to 143% of its GDP. Portugal and Italy also share the same characteristic of being buried by debt.

Fig1. Countries Debt to GDP ratio 2010Fig1. Countries Debt to GDP ratio 2010

Fig2. Countries 10-year bond yield 2011 (%)Fig2. Countries 10-year bond yield 2011 (%)

Source : IMFSource : IMF

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Italy, the third biggest economy in Euro Zone, is now feared to become the next victim after Greece. Greece is unable to pay its sovereign debt without financial help from other Euro Zone countries. Unlike Greece, Italy is considered to be “too big to bailout”.

The fear of Italy’s potential inability to pay its obligation has made the 10-year bond yield of the country soared. Italy’s current yield of its 10-year bond yield is 6.3%, a very high level historically. Higher bond yield means higher refinancing cost. Italy’s lack of economic growth means the country has to do strict austerity measures to fulfill its obligation in the future.

There is an argument that the current Euro debt crisis will knock the whole banking system in Europe and put it in total chaos. Although it is very hard to predict when or will it happen the argument has a basis. Some of Europe’s biggest banks have fill their balance sheet with considerable amount of PIGS (Portugal, Ireland, Greece and Spain) sovereign bonds . Should the bonds price decrease significantly those banks will realize huge loss.

Fig3. Italy 10-year bond yield 2011 (%)Fig3. Italy 10-year bond yield 2011 (%)

Fig4. European banks exposure to PIGS debt (percentage of common equity) as of Fig4. European banks exposure to PIGS debt (percentage of common equity) as of July 2011July 2011

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Source : European Banking AuthoritySource : European Banking Authority


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e Bank

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No countries can be fully shielded by the negative of impact of Euro debt crisis as global financial market can be viewed as one gigantic network of countries dependent on each others. Despite the fact, one can argue that countries do not share the same degree of pain relating to Euro debt crisis impact on its financial market and economy.

Indonesia in the middle of Euro CrisisIndonesia in the middle of Euro Crisis

INDONESIA 10 Ye ars Go ve rnm e nt Bo nd Y ie ldINDONESIA 10 Ye ars Go ve rnm e nt Bo nd Y ie ld

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Fig5. Indonesia 10 years government bond yield (%)Fig5. Indonesia 10 years government bond yield (%)


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Fig6. IDR historical (Rp/USD)Fig6. IDR historical (Rp/USD)


Indonesia is one of those countries that are relatively resilient from negative impact of Euro debt crisis. Although JCI is relatively flat in 2011, it is much better if one compares it with developed countries stock index or emerging market stock index. In 2011, Indonesian 10 years government bond yield has been decreasing on a year on year basis. Thanks to Bank Indonesia intervention, rupiah is relatively stable, lingering at Rp9,000/USD.




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Fig7. Selected ASEAN countries GDP growth estimate (%)Fig7. Selected ASEAN countries GDP growth estimate (%)

Source : Bloomberg, Bank of Thailand, Government of SingaporeSource : Bloomberg, Bank of Thailand, Government of Singapore


Current consensus of economic estimates of GDP growth give clear message that the impact from Euro debt crisis to South East Asian emerging market is not expected to be catastrophic. Philippines, Malaysia and Thailand are expected to realize higher growth in 2012, Singapore is expected to stay at same GDP growth level and Indonesia is expected to realize slightly lower GDP growth rate in 2012 compares to 2011 albeit at a still high level of 6.2%.

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Fig8. Indonesia historical GDP growth (%)Fig8. Indonesia historical GDP growth (%)

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2011 2012




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Benign inflation, lower interest rateBenign inflation, lower interest rateLow inflation helps consumers maintain purchasing power and enable real interest rate to stay positive. Indonesia has managed to decrease inflation numbers in the last five years. Inflation in 2011 is expected to be below 6%, a very low level from a historical context. Besides no wild fluctuations of commodity prices in 2011, the reality of higher GDP per capita also could help inflation stay at manageable level as pattern of consumption is slowly altered from basic necessities consumption (consists of commodities) to secondary/tertiary goods consumption (consists of value added goods that has relatively stable price).

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Fig9. Indonesia historical inflation (%)Fig9. Indonesia historical inflation (%)

As inflation is low, Bank Indonesia has ample room to keep BI rate at low level, currently stay at 6%, lowest in history. With lower BI rate, it is expected that cost of funds for Indonesian banking system to be lower thus stimulating lending to boost economic growth.

Fig10. Bank Indonesia (BI) reference rate (%)Fig10. Bank Indonesia (BI) reference rate (%)

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TARGET PRICE MARKET CAP (RP BN) TARGET MARKET CAP (RP BN)

ASII 77,302 289,660 312,947

BBCA 9,100 198,473 224,361

BBRI 8,600 166,517 212,155

BMRI 9,200 156,333 214,667

TLKM 9,000 146,160 181,440

UNVR 16,301 136,577 124,378

GGRM 64,672 125,643 124,435

UNTR 31,150 94,186 116,194

PGAS 3,709 76,361 89,923

BBNI 5,700 72,264 106,297

ADRO 2,500 63,012 79,965

BYAN 9,400 59,667 31,333

SMGR 10,593 57,239 62,835

INTP 17,974 56,691 66,166

ITMG 59,000 44,802 66,666

BUMI 3,050 43,624 63,367

INDF 5,899 42,585 51,791

BDMN 5,500 41,693 52,716

CPIN 2,637 40,236 43,301

Table1. 20 biggest market cap in JCITable1. 20 biggest market cap in JCI

Source : Ciptadana Estimate, BloombergSource : Ciptadana Estimate, Bloomberg

Translating JCI companies target price to market cap and summing all the results, we can derive target price for JCI in 2012. Using this method the fundamental target price for JCI in 2012 is 4,520. With current JCI (11/6/12) at 3,780 the target price implies 19.5% upside potential.

2012 target for JCI2012 target for JCI




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Sector Overview Sector Overview

Banking (Outperform)Banking (Outperform)Not more than six years ago, banking industry in Indonesia is worried by pundits because it was considered for not doing its role as financial intermediary. Loan to Deposit Ratio (LDR) was as low as 59.6% in 2005. Banks back then were more interested to put the bulk of its asset to risk free asset such as Bank of Indonesia certificate (SBI) than disburse it to loan.

In the Indonesia banking industry, things have proven to change very fast. LDR now stood at 81.4% in 2011 as banks now were lured by potentials of higher yield asset, namely loan. As Indonesia is gradually moving to 7% percent growth economy, demands for consumer financing, micro-lending financing and corporate financing are flourishing.

Fig11. Indonesia Banking Industry LDRFig11. Indonesia Banking Industry LDR

Fig12. Indonesia Banking Industry NPLFig12. Indonesia Banking Industry NPL

Source : Bank IndonesiaSource : Bank Indonesia

While LDR has been consistently increasing, NPL is consistently decreasing from as high as 14.8% in 2005 to 3.2% in third quarter of 2011. This is an encouraging fact as higher loan proportion from time to time is proven has not made Indonesian banking asset quality deteriorated. Despite our conviction that there will be no NPL blow out in the foreseeable future, there is a risk that NPL will be higher in 2012 compares to 2011 if situation in Europe is getting worse. Higher NPL in 2012 could come from export related loan as export will surely hit should recession in Europe occurs.

Source : Bank IndonesiaSource : Bank Indonesia

59.661.6

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Fig13. Indonesia Banking Industry CARFig13. Indonesia Banking Industry CAR

Unlike its European peers, Indonesian banking industry capital adequacy is the last thing to worry about. Although Capital Adequacy Ratio (CAR) has been gradually decreasing in the last three years from 17.4% in 2009 to 16.6% in third quarter of 2011, CAR is still comfortably much higher than Basel requirement of 8%. We applaud BI actions to help bank for preserving their capital adequacy such as recent act of Bank Indonesia to decrease mortgage loan weight in risk weighted asset. Going forward to 2012, there is risk for Indonesian banks to refinance its subdebt loan in terms of higher pricing should the European debt crisis takes global financial market down.

source : Bank Indonesiasource : Bank Indonesia

Fig14. Indonesia Banking Industry NIMFig14. Indonesia Banking Industry NIM

Continue decrease of BI rate gives some implications to banking industry. Lower reference rate means lower yield from risk free asset such as SBI and government bonds and in the other hand also means lower cost of funds to preserve NIM. In the last three years NIM is gradually increasing from 5.6% in 2009 to 5.9% in third quarter of 2011. Despite BI attempts to curb lending rate for the sake of economic growth, Indonesian banking industry oligopoly structure tends to make lending rate sticky. We do not see that BI latest effort to influence bank for lowering its lending rate through RBB reviewing bank’s annual plan will significantly reduce bank net interest margin in 2012 as big banks still have room to decrease its deposit rate thus maintaining NIM.


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Fig15. Indonesia Banking Industry ROAFig15. Indonesia Banking Industry ROA

Combinations of sticky lending rate, lower reference rate and relatively untapped consumer and micro lending market are perfect for having good return. In the last four years Indonesian banking industry ROA has been consistently increasing from 2.3% in 2008 to 3.1% in third quarter of 2011. We do not see the reason why this trend should reverse in the foreseeable future.


Company Target Price P/B 2012 P/E 2012Market Cap

(Rp Bn)Result 3Q11

(Rp Bn)

BMRI 9,200 2.3 12

154,000

9,173

BBRI 8,600 2.8 9.4

164,050

10,436

BBCA 9,100 4.1 21.2

194,775

7,655

BDMN 5,500 1.6 9.7

41,693

2,538

BBNI 5,700 1.1 9.3

71,331

4,059

Table2. Selected JCI listed banksTable2. Selected JCI listed banks

We select BMRI and BBRI as our top picks for banking industry. Despite BMRI and BMRI have potential to grow its loan book further thanks to its robust asset and wide network, the valuation of those banks are relatively undemanding with BMRI P/B 2012 at 2.3x and BBRI P/B 2012 at 2.8x , especially if one compares to BBCA with high P/B 2012 of 4.1x.

Key points for BMRI :Key points for BMRI :

• Comfortable level of CAR at 16% means ample room to grow its loan book

• Higher LDR (we expect the LDR to reach 75% in 2013) in the future means higher asset yield and higher NIM

• Second most profitable bank in Indonesia, but only third place in terms of market cap

• Bank with biggest asset in Indonesia, but only third place in terms of market cap

Key points for BBRI :

• Bank with highest NIM in our banking universe.

• Unmatched and will still be unmatched in terms of micro lending for long term (thanks to already strong network in rural area)

• Most profitable bank in Indonesia but only second place in terms of market cap

2.52.6

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2.9

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2005 2006 2007 2008 2009 2010 Sep-11

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Coal (Neutral)Coal (Neutral)2011 has not been an excellent year for coal sector. The benchmark coal index, Newcastle spot had been down 13% year to date (as of 12/12/2011) . The underperformance of the coal price closely followed the oil price (although somewhat lagging).

Currently oil price had been increasing 29% from the bottom of 2011. Should previous pattern repeats, there is a probability that coal price will begin to increase early next year. Risk to the scenario is the likelihood of Europe deteriorating condition in 2012.

On long term perspective, coal demand is still expected to increase considerably for the foreseeable future. Global coal consumption will reach 4,411 million tonnes oil equivalent (mtoe) in 2030 or increases 26% for 2010 where the world consume 3,496 mtoe of coal. Despite the seemingly impressive numbers one should note that in terms of 5-year growth, the growth of coal consumption has peaked in 2000-2005 where during the period global coal consumption increased 24%. During the period of 2010-2015 global coal consumption is expected to increase 15%, before the rate significantly decreases to 6% (2015-2020), 3% (2020-2025) and 0.5% (2025-2030).

Fig16. Coal price 2011 (USD/tonne)Fig16. Coal price 2011 (USD/tonne)

Fig17. Oil price 2011 (USD/Barrel)Fig17. Oil price 2011 (USD/Barrel)

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Fig18. Coal consumption 1990 - 2030Fig18. Coal consumption 1990 - 2030

Fig19. Asia pacific coal consumption to total consumptionFig19. Asia pacific coal consumption to total consumption

Source : BP Outlook 2030Source : BP Outlook 2030

Source : BP Outlook 2030Source : BP Outlook 2030

One of the most interesting facts in coal sector is the increase of Asia Pacific market share that has been going steadily and is still expected continue. In 1990, Asia Pacific only accounted for 37% of global coal consumption. In 2010, Asia Pacific global coal consumption accounted for 66% of global coal consumption. It is expected that the share of Asia Pacific will reach 76% in 2030. Concluding from the estimate, we expect that in the future the dynamics of the coal market will depends almost solely from Asian emerging market countries economic condition.

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Total Coal Production Growth

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1990 1995 2000 2005 2010 2015 2020 2025 2030

Asia Pacific coal consumption to total




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Fig20. Projected Indonesian Coal Supply and Demand (MT)Fig20. Projected Indonesian Coal Supply and Demand (MT)

Source : PT Bukit Asam TbkSource : PT Bukit Asam Tbk

Source : PT Bukit Asam TbkSource : PT Bukit Asam Tbk

It is widely known, that Indonesia is a number one exporter of thermal coal and two giant emerging markets, namely China and India are major coal importers in Asia. Indonesia exports 70% of its coal and retain only 30% for the domestic market. Things will change in the future as Indonesia domestic market will be gaining bigger share in terms of absorbing coal production. In 2015, it is expected that 40% of Indonesia coal production will be absorbed by domestic market and in 2025 domestic consumption will exceed export.

In conclusion, there are two reasons why we believe that coal price will keep increasing in near future (albeit at a slower pace) : 1) Giant emerging markets reliance (China and India) on coal to fuel its economic growth ; 2) Indonesia will be harder to rely as coal source in the future as domestic consumption for coal will be increasing.

Fig21. Estimated coal consumption for PLN (MT)Fig21. Estimated coal consumption for PLN (MT)

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Domestic Export Production

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Company Target Price P/E 2012 P/B 2012Market Cap

(Rp Bn)Result 3Q11

(Rp Bn)

HRUM 11,600 7.3 3.5 19,440 1,310

PTBA 22,092 9.6 3.7 39,631 2,323

BUMI 3,055 7.9 2.4 45,701 556

ADRO 2,500 9.8 2.3 61,733 376

ITMG 59,000 8.5 4.0 42,994 361

BYAN 9,400 19.9 12.7 60,000 1,336

INDY 3,556 5.6 1.5 11,202 774

Table3. Selected JCI Coal CompaniesTable3. Selected JCI Coal Companies

We select HRUM as our top picks for coal industry. HRUM has the second lowest 2012 PE of 7.3x and strong growth profile where we expect HRUM net income could grow more than 50% in 2012. HRUM has 60% of its contracts adjusted quarterly thus an increase of coal price will impact HRUM earning significantly.

Key points for HRUM :

• Second lowest 2012 PE of 7.3x albeit strong growth profile.

• Relatively short term adjusted contracts can lift earnings significantly should coal price increases in 2012.

• High quality of coal (CV more than 5,700 kcal/kg) is assuring HRUM for being able to export all of its coal in 2014.

• As corporate governance has been an issue in some of mining companies, HRUM is one of the coal companies with good corporate governance in our view.




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Resilience displayed by Indonesia’s macroeconomic performance, supported by large do-mestic consumption fi gure, refl ects the strength and persistence of the consumer sector. In the last fi ve years, the total returns from the sector has proven to be more resilient during the 2008 – 2009 downturn, and has provided an overall better return in comparison to the JCI index.

Indonesians never have as much money at their discretion as compared to recently, or at present. It has increased at 11% CAGR from 2001 to 2005, and at 13% CAGR from 2006 to 2010.

Consumer (Outperform)

Built on top of strong macro fundamentals

Sector Overview

Fig22. Consumer sector index against JCI indexFig22. Consumer sector index against JCI index


Source : CEIC (2011)Source : CEIC (2011)

Fig23. Stable growth of disposable incomeFig23. Stable growth of disposable income

Jakarta Consumer Index vs JCI Index

2005 = 100

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Disposable Income per Capita - IndonesiaDisposable Income per Capita - Indonesia

$696$696$819$819

$962$962$1,041$1,041

$1,173$1,173

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In tandem with income growth, household expense figure has also experienced stable growth over the past five years; resembling Indonesia’s GDP structure. It continues to account for a large chunk of income, and has displayed resilience in the face of global uncertainties such as the 2008 – 2009 Lehman crisis.

On top of the solid fundamentals, as reflected by Bank Indonesia’s retail sales index, the sector has maintained a stable performance. With an even more, solid macro fun-damentals at present, the sector has shown a positive trend and can be expected to maintain a substantial growth pace in the foreseeable future; further, recent consumer confidence index has also displayed a maintained general optimism.

Fig24. More spending on top of figure incomeFig24. More spending on top of figure income

Fig25. Historically high retail index resilient on 2008 and 2009Fig25. Historically high retail index resilient on 2008 and 2009

Source : World Bank (2011)Source : World Bank (2011)

Source : CEIC (2011), Bank Indonesia (2011)Source : CEIC (2011), Bank Indonesia (2011)

Hous ehold E xpens e per C apita vs G NI per C apita

$1,370

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B I R etail S ales Index

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Y early average, 2000 = 100

*Averaged 10 months figure*Averaged 10 months figure




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Fig26. The ordinary Indonesians remain optimisticFig26. The ordinary Indonesians remain optimistic

Source : CEIC (2011), Bank Indonesia (2011)Source : CEIC (2011), Bank Indonesia (2011)

In line with increasing household expense, aggregate average monthly spending has experienced solid growth in the past years. Historically, spending on foods displayed a relatively stable double digits growth, and has accounted for the largest chunk of expenditure figures. As Indonesia is still developing, this spending composition can be expected to remain relatively unchanged; providing stable top line growth potential for companies operating in the consumer foods segment.

On the other hand, spending on durable goods and other non-foods item displayed more volatile figures; with durable spending being the more volatile out of the two. The recent trends support a bullish outlook for these two segments; especially due to the rising, more urban, richer middle class Indonesians. Supposed that growth and performance are maintained, or accelerate, in the next couple of years, the two segments can be ex-pected to outperform the food segment. However do note that, in the very broad view, both durables and other non-foods segments will have more downside risk in compari-son to the consumer foods segment; in the scenario that sentiments become pessimis-tic or if there are other adverse changes.

Unequal performance within the sector – stable foods, volatile durables and other non-foods

Fig27. Growing average expendinture - large chunk of which is for foodsFig27. Growing average expendinture - large chunk of which is for foods

Source : CEIC (2011), BPS (2011)Source : CEIC (2011), BPS (2011)

BI Consumer Confidence Index

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8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

IDCCI Index

OPTIMISTIC

PESSIMISTIC

Average Monthly SpendingAverage Monthly Spending

51.37% 53.01% 49.24% 50.17%50.62%

51.43%

44.11% 44.00%

44.29%43.46%

43.49%

43.42%

4.52% 2.98%

6.47%

6.38%

5.88%

5.14%

IDR -

IDR 100

IDR 200

IDR 300

IDR 400

IDR 500

IDR 600

2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010

Th

ou

sa

nd

s o

f ID

RT

ho

us

an

ds

of

IDR

FoodFood Other non-foodOther non-food DurablesDurables

IDR 430IDR 430

IDR 386IDR 386

IDR 353IDR 353

IDR 293IDR 293IDR 286IDR 286

IDR 494IDR 494




19


Fig28. Varying volatilityFig28. Varying volatilityAverage Monthly Expenditure - % Change

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

2006 2007 2008 2009 2010

Food 5.47% 12.01% 11.38% 12.33% 16.90%

Durables -32.59% 161.74% 7.71% 2.73% 0.58%

Other non-food 1.97% 21.37% 7.27% 11.39% 14.88%

2006 2007 2008 2009 2010

Source : CEIC (2011), BPS (2011)Source : CEIC (2011), BPS (2011)

Company Target Price P/B 2012 P/E 2012 Market Cap (Rp Bn)

Result 3Q11 (Rp Bn)

ICBP 6,150 2.3 16.8 29,009 1,522

GGRM* 65,695 4.3 20.4 119,294 3,787

UNVR* 16,301 24.3 29.2 131,999 3,387

KLBF* 3,558 4.6 18.1 34,784 1,065

INDF* 5,850 2 11.2 40,609 2,324

Table4. Peers comparisonTable4. Peers comparison

*Target price is based on Bloomberg’s consensus*Target price is based on Bloomberg’s consensusSource : Bloomberg (2011), Ciptadana estimatesSource : Bloomberg (2011), Ciptadana estimates

Our pick for the sector is PT Indofood CBP Sukses Makmur Tbk (ICBP). Here are sev-eral factors that explain our preference for the company:

• Bullish dairy, snacks, and food seasonings segments on the back of; higher spending power, increasing urban population, and current low level of consump-tion

• Maintained growth for its noodle division; supported by healthy top line potential• Solvent and solid financial position, relative to its peers




20


Sector Overview

Heavy Equipment (Outperform)We have an Overweight view on heavy equipment sector due to our expectation that de-mand will remain strong next year from mining, agri, and construction sector. We expect domestic heavy equipment sales to reach 18,960 units next year (+16% yoy) and 21,890 units (+15%) for FY13F supported by demand from mining, agri, and construction sector. We see an unexciting demand prospect from the forestry sector.

Mining sector has been the biggest contributor to domestic heavy equipment sales, av-eraging 43.5% in the last five years. Demand for this sector came from the increasing mining activities especially coal mining in an effort by coal mining companies to raise their production level. Next year, Indonesia Coal Mining Association (APBI) estimates In-donesia coal production to reach 370mn tons, an increase by 8.8% from FY11 production estimates of 340mn tons. With the increasing coal production target, we believe mining activities will remain sturdy next year.

Fig29. Domestic Heavy Equipment SalesFig29. Domestic Heavy Equipment Sales

Fig30. Indonesia Coal ProductionFig30. Indonesia Coal Production

-

5,000

10,000

15,000

20,000

25,000

2005 2006 2007 2008 2009 2010 2011F 2012F 2013F

UnitsUnits

Source : Company and Ciptadana estimatesSource : Company and Ciptadana estimates


-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2004 2005 2006 2007 2008 2009 2010 2011F 2012F

mn tonsmn tons




21


For agri sector, heavy equipment demand is mainly driven by palm oil denoted by the growing of its plantation area (5.3% FY00-11 CAGR), compared to other commodities plantation area that experienced a flat or negative growth. During 2010, Indonesia CPO production reached 23.6mn tons per year, yielding from approximately 5mn ha of plan-tation area. The government even has set the target of 40mn tons of CPO production by 2020. This would need another 4mn ha of new area to be exploited in order to achieve the target (under 4 tons/ha CPO yield assumption) – representing promising demand for heavy equipment from land-cultivation activities.

From construction sector, we expect more demand will emerge next year as govern-ment has been putting serious effort in the infrastructure development. Government’s capital spending realization has been growing at 10% FY06-10 CAGR and budgets at Rp140 trillion and Rp168 trillion for FY11 and FY12. Government has also indicated up to Rp1,774 trillion (around 389 projects) on investment needed for infrastructure de-velopment in Indonesia from 2011-2014 as stated in MP3EI (Masterplan of acceleration and expansion of Indonesia’s economy development). The approval of long-awaited land acquisition bill will also be another positive catalyst for infrastructure development.

Fig31. Indonesia CPO Production vs Palm Oil Plantation AreaFig31. Indonesia CPO Production vs Palm Oil Plantation Area

Fig32. Government’s Capital Spending Realization and BudgetFig32. Government’s Capital Spending Realization and Budget

Source : Bloomberg & National Bureau of StatisticsSource : Bloomberg & National Bureau of Statistics

Source : National Bureau of Statistics & CEICSource : National Bureau of Statistics & CEIC

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2006 2007 2008 2009 2010 2011

Budget

2012

Budget

Rp bn

10% FY06-10 CAGR

-

5.0

10.0

15.0

20.0

25.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

mn tons

-

1,000

2,000

3,000

4,000

5,000

6,000000 ha

Indonesia CPO Production (LHS) - mn tons

Palm oil plantation area (RHS) - 000 ha




22


We continue to like UNTR and have BUY recommendation with a target price of Rp31,150, implying 16.6X FY12F PE and 13.6X FY13F PE.

Key points for UNTR :

• Market leader in heavy equipment industry.• Strong earnings growth (25% and 22% for FY12-13F).• Excellent corporate governance and solid management execution.

Company P/B 2012(X)

P/E 2012(X)

Market Cap(RP BN)

Net Income 9M11(RP BN)

Hexindo Adiperkasa* N/A 10.4 7,224 277

Intraco Penta* 2.2 6.9 1,296 78

United Tractors 3.0 13.2 92,694 4,349

Table5. Peers ComparisonTable5. Peers Comparison

* target price is based on Bloomberg’s consensus* target price is based on Bloomberg’s consensusSource: Bloomberg & Ciptadana estimatesSource: Bloomberg & Ciptadana estimates




23


Metal Mining (Neutral)Metal Mining (Neutral)We have Neutral view on metal mining sector on the back of unfavorable price outlook due to the prolonged European debt crisis which could hinder the demand growth in commodities. Down-trending commodities price has been starting since the beginning of 2Q11 and we ex-pect the metal commodities price to remain wearisome next year. We see less downside risk for tin price due to the tin export suspension initiated by the Indonesia tin producer.

During 2011, the LME nickel inventory level was averaging at 110,300 tones. Although 2011’s level was 20% lower as compared to 2010’s level when the average nickel inventory stayed at 137,412 tones, we believe this is still relatively high which may cap the nickel price going forward (average FY03-07 nickel inventory level was at 17,413 tones).

During FY05-10, refined nickel world consumption has grown at 2.8% FY05-10 CAGR supported by growth in the global stainless steel production that grew at 2% FY05-10 CAGR. However, the refined nickel production grew at a higher rate at 3.2% same period CAGR, surpassing the global nickel demand. Going forward, we expect nickel demand to moderate next year from the global economy uncertainties that would put more pres-sure on nickel price.

Fig33. LME Nickel Price - InventoryFig33. LME Nickel Price - Inventory

Fig34. Refined Nickel World Production vs ConsumptionFig34. Refined Nickel World Production vs Consumption

Source: BloombergSource: Bloomberg

Source : Bloomberg & World Bureau of Metal StatisticsSource : Bloomberg & World Bureau of Metal Statistics

1,150,000

1,200,000

1,250,000

1,300,000

1,350,000

1,400,000

1,450,000

1,500,000

1,550,000

2005 2006 2007 2008 2009 2010

MT

Production Consumption

3.2% CAGR

2.8% CAGR

0

10,000

20,000

30,000

40,000

50,000

60,000

Dec -02 Dec -03 Dec -04 Dec -05 Dec -06 Dec -07 Dec -08 Dec -09 Dec -10 Dec -11

US D/MT

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

tonnes

Nic kel Inventory (RHS ) Nic kel Pric e (L HS )




24


Meanwhile, for tin commodities, global consumption growth (1.9% FY06-10 CAGR) has been surpassing the global production (1% FY06-10 CAGR) over the last six years as a result of declining supply. This lack of supply situation has brought tin price to another record high in the first quarter of 2011. However, due to negative sentiment from the global economy, tin price was constantly decreasing from its record high.

With the unattractive tin price, Indonesia tin producer started to halt selling their prod-ucts to the export market until the tin price starts to rebound. We believe the tin export suspension will make impact to the global price as Indonesia is the largest tin exporter in the world. As such, we expect it will provide a support for tin price from further fall.

Fig35. Refined Tin World Production vs ConsumptionFig35. Refined Tin World Production vs Consumption

Fig33. Refined Nickel World Production vs ConsumptionFig33. Refined Nickel World Production vs Consumption

Source : Bloomberg Source : Bloomberg

Source : Bloomberg Source : Bloomberg

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

USD/MT

Fig36. Tin PriceFig36. Tin Price

300,000

310,000

320,000

330,000

340,000

350,000

360,000

370,000

380,000

2005 2006 2007 2008 2009 2010

MT

Tin Produc tion Tin Cons umption

1.0% CAGR

1.9% CAGR




25


Telecommunication (Underperform) Telecommunication (Underperform)

As the SIM card penetration rate reached 100% by the end of 2011, the growth of cel-lular subscriber is set to lower gear. The incumbents in this industry admitted that they are now playing a “zero-sum-game” which means that when one of the operators tries to boost its subscriber basis, the competitor loses, and vice versa. During 2005 to 2007 the combined revenue of the “big three” (Telkomsel, Indosat and XL Axiata) experienced a 7.1% compounded quarterly growth. However, after intense price war and rapid sub-scriber growth, from 2009 till now, the revenue of the “big three” only grew by 2.6% quarterly. All the aforementioned facts are the traits of a saturating market. Thus, we reiterate underperform view on the sector.

We believe the tariff war would not be as aggressive as in 2007 – 2008 period given the fact that voice tariffs has reached rock bottom at US$2cents, one of the cheapest in South East Asia region and considerably the lowest level where operators can squeeze out profit. A hefty cut in tariff now could attract subscriber temporarily, but could also sacrificing profitability and network quality. Eventually, the aggressive operator will have to withdraw its lower tariff plan as its networks congest and require additional capacity upgrade. In essence, operators have to to keep their profitability at a level which allows them to serve its expenses, fund their expansion and accumulate profit simultaneously.

To face the competition, operators need to add their network capacity before expanding their subscriber base. Rapid subscriber acquisition could clog networks, which in turns can decrease service quality and lead to high churn rate. Therefore, we believe that network quality is one of the consumers’ important consideration when choosing their operator, aside coverage.

Source : CompanySource : Company

Fig37. Quarterly Subscriber Addition TrendFig37. Quarterly Subscriber Addition Trend

Quarterly Subscriber Addition

-2

-1

0

1

2

3

4

5

6

7

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Telkomsel Indosat XL Axiata(mn subs)




26


Average Voice Rev./ Minute

0

200

400

600

800

1,000

1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11

Telkomsel Indosat XL Axiata(Rp)

Fig38. Tariff Has Been Stabilizing Fig38. Tariff Has Been Stabilizing

Fig39. Stabilizing MarginsFig39. Stabilizing Margins



After intense price war in 2007, the telco operators’ margin has been slashed to a new level. Telkomsel (TLKM’s subsidiary), which enjoyed a 72.6% EBITDA margin in 1Q’05, now have to be satisfied with 58% in 3Q’11. Meanwhile, ISAT also experienced the same thing with 57% EBITDA margin in 1Q’05 which in 3Q’11 pinned at 49.7%. EXCL booked an EBITDA margin of 61.7% in 1Q’05, which declined to its lowest level at 33% in 3Q’08 amid intense competition before rebounding back to 46.8% in 3Q’11.

Telco operator has been enjoying a pleasant growth period pre-2007 price war, when subscriber penetration rate is still low. During 2005 to 2007, the combined revenue of the “big three” (TLKM, ISAT and EXCL) enjoyed a 7.1% compounded quarterly growth. However, after intense price war and rapid subscriber growth, from 2009 till now, the revenue of “big three” only grew by 2.4% quarterly. This implies that the telco market is maturing.

Quarterly EBITDA Margin

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Q1'07 Q3'07 Q1'08 Q3'08 Q1'09 Q3'09 Q1'10 Q3'10 Q1'11 Q3'11

Telkomsel Indosat XL Axiata




27


Fig40. Growth Has Switched To Lower GearFig40. Growth Has Switched To Lower Gear


The low internet penetration rate in Indonesia could give telco companies an opportu-nity to expand further in internet business. Compared to other countries in South East Asia, Indonesia has the lowest internet user per population rate. The rise of social net-working platform such as Facebook and Twitter will also play an important role to push the demand higher for internet usage further in Indonesia.

More specifically, Indonesia has one of the lowest penetrated wireline broadband mar-ket in the Asia-Pacific region, with only 2.3% population penetration rate at the end of 2010, due to the more favorable economics of mobile broadband access. Because of its archipelagic geography, wireless broadband is more practical to implement in Indone-sia. The Indonesian market had a wireless broadband penetration rate of 12.2% at the end of 2010, above its Asian emerging market peers including the Philippines, Thailand and Vietnam. This is a result of 3G services being introduced in Indonesia in 2006, which is relatively early compared to other Asian emerging markets. Competitive pric-ing plans for 3G services and attractive smartphone promotions, have also contributed to this relatively higher penetration rate. Going forward we see that wireless broad-band demand will remain strong in Indonesia due to low wireline uptake, the declining cost of 3G handsets and modems as well as declining tariffs and increasing coverage.

Fig41. Indonesia’s Low Internet Penetration Fig41. Indonesia’s Low Internet Penetration

Source : ITUSource : ITU

Internet User/ PopulationInternet User/ Population

9.1%

21.2%25.0%

55.3%

70.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Indonesia Thailand Philippines Malaysia Singapore

Quarterly RevenueQuarterly Revenue

0

2000

4000

6000

8000

10000

12000

14000

16000

Q1'05 Q4'05 Q3'06 Q2'07 Q1'08 Q4'08 Q3'09 Q2'10 Q1'11

Telkomsel Indosat XL Axiata(Rp bn)




28


Broadband Penetration RateBroadband Penetration Rate

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Japan

South

Korea

Singapore

Australia

Taiwan

Hong Kong

New Zealand

Malaysia

Indonesia

Vietnam

Philippines

China

Thailand

India

��

Fig42. Still Low Broadband PenetrationFig42. Still Low Broadband Penetration

Against the backdrop of saturated telco industry, we still like TLKM as our top pick as we see that TLKM still possess a strong defensive characteristic due to: 1. its dominant position in cellular market, 2. strong financial firepower, 3. its up-trending data and internet revenue, 4. and the potential upside from unlocking its tower assets value through IPO. Maintain Buy call on TLKM with target price of Rp 9,000/share.

Source: Frost & SullivanSource: Frost & Sullivan

2012F

Current Price (Rp)

Target Price (Rp)

Mkt Cap (Rp bn)

P/EEV/

EBITDADividend

YieldROE

Telkom 7,250 9,000 142,603 10.7 4.1 5.2 24.7

Indosat * 5,600 6,000 30,430 18.6 4.6 2.5 8.6

XL Axiata * 4,550 6,100 38,759 10.6 4.4 3.3 24.6

average : 13.3 4.4 3.7 19.3

Table6. Valuation ComparisonTable6. Valuation Comparison





29


Cement (Overweight)Cement (Overweight)

We have an Overweight view on the cement sector, due to our expectation that the de-mand will remain strong in the future. The increasing demand of cement is supported by potential increase in government infrastructure spending and increasing property development activity backed by low mortgage rate.

The key issue here is land reform bill, which after it is passed by the parliament, could boost cement demand through rising construction activity. We estimate cement sales to grow by 13% this year, then 10% next year due to rising property development and infrastructure expansion backed by the implementation of government’s ‘Master Plan for Acceleration and Expansion on Indonesia’s Economic Development’ (MP3EI). Cement sales is mostly attributed to infrastructure (70%), while only a relatively smaller portion is attributable to property (30%).

Fig43. Strong Domestic Cement Sales in 2011Fig43. Strong Domestic Cement Sales in 2011

Source: Indonesia Cement Association Source: Indonesia Cement Association

With its oligopoly market structure, the cement industry landscape has not changed since 2001, where the top three producers hold more than 87% of domestic market share. SMGR remains as the market leader with 40.9% market share, but its capacity constraints limits its potential growth. While INTP and SMCB are still in a strong posi-tion with 31.3% and 15.6% of market share respectively.

Fig44. Market Share of The Top Three Cement ProducerFig44. Market Share of The Top Three Cement Producer

Source: Indonesia Cement Association & Ciptadana estimatesSource: Indonesia Cement Association & Ciptadana estimates

Domestic Cement SalesDomestic Cement Sales

2000

2500

3000

3500

4000

4500

5000

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

('000 tons) 2008 2009 2010 2011

40.9%

31.3%

15.6%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan

-05

Jun

-05

No

v-0

5

Ap

r-0

6

Se

p-0

6

Fe

b-0

7

Jul-

07

De

c-0

7

Ma

y-0

8

Oct

-08

Ma

r-0

9

Au

g-0

9

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Se

p-1

1

SMGR INTP SMCB




30


SMCB’s move in mid 2011 to gain market share by increasing its prices moderately in comparison to its competitors, has made SMCB’s sales price to be slightly more attrac-tive than its peers. The other two leading producer (SMGR and INTP) give no more clue on whether they will make higher price increases. Therefore, we believe the increase in domestic cement demand will not be followed by higher prices.

We choose INTP as our top pick due to: 1. cost efficiency (proven by its highest EBITDA margin) 2. has ample capacity and expansion plan to meet future demand, 3. has greatest exposure in Java where 55% of domestic cement market is located.

Maintain Buy INTP with TP of Rp 19,000

Fig45. Improving Profitability Margin TrendsFig45. Improving Profitability Margin Trends

Source: Companies & Ciptadana estimatesSource: Companies & Ciptadana estimates



Quarterly EBITDA Margin

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Q1'05 Q3'05 Q1'06 Q3'06 Q1'07 Q3'07 Q1'08 Q3'08 Q1'09 Q3'09 Q1'10 Q3'10 Q1'11 Q3'11

Indocement Semen Gresik Holcim

2012F

Current Price (Rp)

Target Price (Rp)

Mkt Cap (Rp bn)

P/EEV/

EBITDADividend

YieldROE

Indocement 15,500 19,000 57,059 13.7 8.1 2.1 23.6

Semen Gresik 9,900 11,000 58,722 13.0 8.9 3.4 28.8

Holcim * 2,175 2,320 16,667 14.9 7.7 1.5 13.7

avg. Indonesia: 13.9 8.3 2.3 22.0




31


The lack of infrastructure progress in Indonesia has put Indonesia on a setback as its roads and railroads are generally in poor condition, and the capacity of its seaports is limited. The limited electricity supply has been a major concern as manufacturing activ-ity pick up. We believe that adequate infrastructure is vital to enhance growth prospect of a country’s economy.

Media reported that the land acquisition reform bill is scheduled to be approved by Dec 15, 2011, denoting a positive step on de-bottlenecking the process of infrastructure projects. In this new bill, the land owner is obliged to release his/her entitlement on the land for the government approved public interest. The highlight on this new bill is the shorter timeline for landowner to make an appeal up to the Supreme Court (MA) when-ever a dispute occurs, which is capped at 74 days. The implementation regulation (PP) of the land acquisition reform bill has to be set, at the latest, one year after the approval of the bill. If this bill passes on time, it will drive infrastructure spending, which in turn will benefit several sectors such as construction, cement, property and banks.

Even though the government increased budget allocation for Ministry of Public Works to Rp 61.2 trillion in 2012 from Rp 56.5 trillion in 2011, it still conservatively assumes a 6.5% growth in construction sector for 2012. On the other hand, the Indonesia Contrac-tor Association (AKI) has a different view. AKI expects the construction sector growth could reach 8% in 2012, driven by development of commercial properties, housings, malls, and offices. While there are plenty of opportunities in the sector, we deem that government’s endorsement will still be needed to support privately funded construc-tion project.

Construction (Overweight)Construction (Overweight)

Fig46. Slowing Growth of Infrastructure Related Government SpendingFig46. Slowing Growth of Infrastructure Related Government Spending

Source: Ministry of FinanceSource: Ministry of Finance

Government's Department SpendingGovernment's Department Spending

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011F 2012F

Dept. Energy & Minerals Dept. Transportation

Dept. Public Works(Rp tn)

Fig47. Yet, the government expenditure on construction is keep on risingFig47. Yet, the government expenditure on construction is keep on rising

Source: Ministry of FinanceSource: Ministry of Finance

Central Government Expenditure - Industry and ConstructionCentral Government Expenditure - Industry and Construction

1.11941.27

1.4328 1.4257 1.5263

2.30122.4175

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010 2011F 2012F

(Rp tn)




32


Indonesia’s construction sector is highly fragmented with intense competition, and low margin. As there are more than 150,000 contractors in operation in Indonesia at the end of 2010, stiff competition cannot be avoided. Severe rivalry has been one of the reasons the construction business generates low margin. Differentiation from peers is a key advantage.

We like WIKA as it has competitive advantages given its:1. sturdy balance sheet compared to another construction SOE, with net cash posi-

tion of Rp62 billion.2. order book is dominated by the government projects (60%), where the company

could potentially benefit from the government’s infrastructure development ac-celeration.

3. margin expansion through business diversification and more contracts serve as the catalyst for higher earnings growth in the future.

Maintain Buy WIKA with TP of Rp780


Table9. Wika’s Strong Financial Position Compared to Other ContractorsTable9. Wika’s Strong Financial Position Compared to Other Contractors


As of 9M'11

(in Rp bn) State Owned Private

Wijaya Karya

Adhi Karya

PT PP Total Bangun Duta Graha

Revenue 5,443 3,114 2,944 1,106 805

Cost of revenue (5,016) (2,824) (2,627) (934) (708)

CASH 568 370 611 473 244

Acc. Receivable 1,083 758 1,143 198 232

Acc. Payable 1,612 1,851 1,744 52 64

Debt 506 1,271 2,083 - 125

Net Debt (Cash) (62) 901 1,472 (473) (119)

Equity 1,913 832 1,246 592 974

Acc. Receivable days 73 89 142 65 105

Acc. Payable days 117 239 242 20 33

Gross Debt/ Equity (x) 0.26 1.53 1.67 0.00 0.13

Net Debt/ Equity (x) net cash 1.08 1.18 net cash net cash

Source: Companies & Ciptadana estimatesSource: Companies & Ciptadana estimates

2012F

Current Price (Rp)

Target Price (Rp)

Mkt Cap (Rp bn)

P/EEV/

EBITDADividend

YieldROE

Wijaya Karya 620 780 3,734 9.8 3.8 2.6 17.3

Adhi Karya * 590 810 1,063 5.1 2.1 4.0 18.1

PT PP * 500 560 2,421 7.2 3.5 4.7 22.8

average: 7.4 3.1 3.8 19.4




33


Most of the largest Indonesian real estate developers are township developers with land inventory that span over 10 years. The bulk of listed developers’ land bank is located in Jakarta and Greater Jakarta. This region is still the preferred markets for developers due to its large population (28 million at the end of 2010). High rise develop-ment is still uncommon in Indonesia, except in Jakarta area, and is still considered as a niche market.

The surge in FDI, especially in manufacturing sector has boosted the demand of land for industrial estate. Indonesia recorded FDI in manufacturing sector of US$ 5.27 billion in first nine month of 2011, surging from US$ 3.47 billion in the same period last year.

Property (Overweight)Property (Overweight)

Land Bank (ha)Land Bank (ha)

45

878

1,200

1,500

1,600

4,600

16,657

- 5,000 10,000 15,000 20,000

Agung Podomoro Land

Summarecon Agung

Alam Sutera

Ciputra Development

Lippo Karawaci

Bumi Serpong Damai

Bakrieland Development

Fig48. Land Banking Business Model Prevails in IndonesiaFig48. Land Banking Business Model Prevails in Indonesia

Source: CompaniesSource: Companies

Source: Bank Indonesia SurveySource: Bank Indonesia Survey

Foreign Direct Investment in Indonesia - Manufacturing (in US$ mn)Foreign Direct Investment in Indonesia - Manufacturing (in US$ mn)

-500

0

500

1,000

1,500

2,000

2,500

Q1

06

Q2

06

Q3

06

Q4

06

Q1

07

Q2

07

Q3

07

Q4

07

Q1

08

Q2

08

Q3

08

Q4

08

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Fig49. Rising FDI Drive the Demand of Industrial EstateFig49. Rising FDI Drive the Demand of Industrial Estate

The limited supply combined with surging demand drive the industrial land price in Ja-karta, Bogor, Bekasi and Karawang higher. That trend is expected to continue as global firms look for low-cost bases, and alternatives to China where growth may be slowing and labour is becoming increasingly expensive. Government’s offer of a tax holiday to big manufacturers investing more than US$100 million has given another boost on industrial estate demand.




34


Source: Bank Indonesia SurveySource: Bank Indonesia Survey

Fig50. Uptrending Industrial Land Price in Jakarta, Bogor, Bekasi and Karawang Fig50. Uptrending Industrial Land Price in Jakarta, Bogor, Bekasi and Karawang

The growth of young population, that has relatively high income and spending power, is an important driver of consumer spending. Indonesians aged 20-54 is an important segment of the labor and consumer markets, as they account for 75% of the total gross income. This young population benefits consumer and property sector mainly by their higher spending.

Fig51. Indonesia’s Population is Dominated by Productive AgeFig51. Indonesia’s Population is Dominated by Productive Age

Source: CEICSource: CEIC

As many banks have been aggressively promoting mortgage financing, mortgage rate gradually went down. Low interest rates have increased the ability of the middle-lower class to purchase house unit to live into, while attracting the middle-upper segments to buy house unit as an investment.

Land Price in JabodekaLand Price in Jabodeka

66 67 6763

67 7178

69 6772 74 77 77 78 80 81

94

113

129

-

20

40

60

80

100

120

140

1Q'07 3Q'07 1Q'08 3Q'08 1Q'09 3Q'09 1Q'10 3Q'10 1Q'11 3Q'11

US$/sqm

Indonesia's DemographyIndonesia's Demography

Below 15, Below 15,

28%28%

Productive Productive

Age (15-59), Age (15-59),

65%65%

Over 60, 8%Over 60, 8%




35


Fig52. Bank Indonesia’s Base Lending Rate is Steadily DecliningFig52. Bank Indonesia’s Base Lending Rate is Steadily Declining

Base Lending RateBase Lending Rate

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

Jan-0

8

Apr-08

Jul-0

8

Oct-0

8

Jan-0

9

Apr-09

Jul-0

9

Oct-0

9

Jan-1

0

Apr-10

Jul-1

0

Oct-1

0

Jan-1

1

Apr-11

Jul-1

1

Oct-1

1


Bank Indonesia’s data showed that as of 3Q’11, mortgage is dominating payment mech-anism of property purchases accounting for 75% of total, followed by cash installment (16%), and hard cash (9%).

Fig53. Property Purchase Payment Mechanism is Dominated by MortgageFig53. Property Purchase Payment Mechanism is Dominated by Mortgage

Mortgage has been steadily growing in the past. However, Indonesia’s mortgage size is mere 2.4% of GDP, significantly lower than other countries in the region, except for Philippines which has 2.1% of mortgage to GDP ratio. This low mortgage penetration posed as an opportunity for banks to tap in the untouched market.

Source: Bank IndonesiaSource: Bank Indonesia

Property Purchase Payment MechanismProperty Purchase Payment Mechanism

Mortgage

75%

Cash

Installment

16%

Hard Cash

9%




36


Fig54. Still Low Mortgage Penetration in IndonesiaFig54. Still Low Mortgage Penetration in Indonesia

Fig55. Mortgage Has Been Steadily Growing in The PastFig55. Mortgage Has Been Steadily Growing in The Past

Source: Each Country’s Central BankSource: Each Country’s Central Bank


Fig56. Banking Credit Disbursement to National Property Fig56. Banking Credit Disbursement to National Property


Total Mortgage in IndonesiaTotal Mortgage in Indonesia

0

20

40

60

80

100

120

140

160

180

200

40209 40268 40329 40390 40451 40512 40574 40633 40694 40755 40816

(Rp

tn

)

Mortgage to GDPMortgage to GDP

2.1% 2.4%

30.0%

39.0%

43.7%45.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Philippines Indonesia Malaysia Singapore Thailand Hongkong




37


Effective in early 2012, Bank Indonesia reduced the Risk Weighted Assets (RWA) for housing loan from 40% to 35%. This move will reduced the RWA, which in turn will increase the CAR ratio. Hence, the banks will not reluctant to spur its housing loan disbursement. Lower property tax. Effective on January 2012, Non-Taxable Amount (NJOPTKP) for Land and Building Tax (PBB) will be doubled to Rp24m from Rp12m (since 2001). This effectively decreases the annual property tax (PBB) for owners. PBB is calculated as 0.5% of Taxable amount minus Non-Taxable amount.For the low-income brackets, government increased the tax break limit for home pur-chases to Rp70 million per unit from the previous limit of Rp55 million. This is for low cost houses of below 36 sqm in size. The VAT of 10% is also waived for houses less than Rp70m per unit price.

During 2000-2008, the urban population in Indonesia grew at an average of 3.96% per year whilst the rural population declined at an average annual rate of 0.94% largely due to rural-urban migration. These migrations significantly increase the population density in Jakarta, which in turn reduces the comfort of living downtown. For that rea-son, people nowadays avoid this circumstance by shifting to the fringe area. According to Procon, total planned area for residential estates within Greater Jakarta area as of end 2010 reached approximately 42,700 ha. A majority, or approximately 42%, of the planned residential area is located in Tangerang. Bekasi, Bogor and Jakarta followed with their contribution of 31%, 20% and 7% of the total planned residential area re-spectively. Moreover, we believe that Indonesia’s property sector is far from saturation. Overweight.

Table10. Population of Greater Jakarta (end of 2010)Table10. Population of Greater Jakarta (end of 2010)Area Population (mn) Area (km2) Density/km2

Jakarta 9.61 664 14,469.6

Tangerang 5.94 1,426 4,165.4

Bogor 5.73 2,773 2,067.1

Bekasi 5.03 1,480 3,397.2

Depok 1.75 200 8,758.5

Total: 28.06 6,543 4,288.4 Source: Badan Pusat StatistikSource: Badan Pusat Statistik

We like ASRI as our top pick on property sector due to: 1. vast land bank of over 1,500Ha on hand, sufficient for future development.2. good execution, reflected on its strong earnings growth of 275% CAGR during

2006 - 2010 and impressive net margin of 38% in 2010.3. plans to increase the recurring income as a step of diversify source of income,

Maintain Buy ASRI with TP of Rp500

2012F

Current Price

(Rp)

Target Price

(Rp)

Mkt Cap (Rp bn)

P/E EV/ EBITDA

Dividend Yield

ROE

Alam Sutera 455 500 8,128 10.2 7.4 1.6 26.3

Bumi Serpong Damai * 960 1,290 16,797 16.6 9.7 0.9 12.6

Ciputra Development * 620 620 9,403 24.7 9.4 0.6 6.8

Lippo Karawaci * 650 850 15,000 18.7 12.4 1.1 8.3

Summarecon Agung * 1,170 1,420 8,042 20.1 11.3 1.1 15.2

average: 18.1 10.0 1.1 13.9






38


Crude Palm Oil (CPO) price has been falling off decently since it touched its recent peak at US$1,330/ton back in Feb’11. The downturn in CPO prices was not driven by drop in demand but more towards the restoration of supply. We expect CPO prices to remain firmed above US$ 1,100/ton in the following years and maintain a “Neutral” rating for plantation sector. Our assumption based on following factors: 1) Tight stock usage ratio as an indication of robust demand, 2) Widening discount to soybean-oil, and 3) Normal-ize production on the back of draught season.

We highlight the relationship between stock-to-use ratio and CPO prices. Stock-to-use ratio has an inverse relationship with CPO price. Stock-to-use ratio points out the cor-relation between residue inventory and total consumption. United States Department of Agriculture (USDA) expects that stock-to-use ratio for 2012/2013 will continue to de-cline and booked a record low. Declining stock-to-use ratio indicates that consumption can match up with production, no matter how strong the production growth is. Going forward we expect that stock-to-use ratio to remain at low level.

Plantation (Neutral)Plantation (Neutral)

Fig57. Stock Usage vs CPO Prices Fig57. Stock Usage vs CPO Prices

On 5 years CAGR basis, the total demand of crude palm oil (CPO) outpaced the total supply by 0.6% (6.7% vs 6.1%). The demand for edible oils had grown quite strong in the recent years and we believe that it will continue to outpace supply in the long run. Oil world predicts that the incremental demand for world edible oil of 6mn tons will outstrip supply growth of 4.3mn tons, which translate to 2mn tons shortfall in 2012. Our assumption is based from the variety CPO products starting from margarine, cereals, sweets and baked goods until soaps, washing powders, cosmetics and biodiesel.

Source: Bloomberg & USDASource: Bloomberg & USDA

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *2011

RM/ton

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

PAL2MALY Index Stock/usage ratio




39


Fig58. World CPO Production vs ConsumptionFig58. World CPO Production vs Consumption

50.347.745.9

44.041.1

37.335.833.5

30.027.7

25.3

48.746.3

43.441.1

38.435.3

33.231.4

28.526.5

24.1

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

mn MT

Production

Consumption

Palm tree which produces the highest oil-per-hectare-yield relative to any other crops, has a major role to play in feeding the earth. Not to mention that the global population is growing and there will be many more mouths to be fed.

As mention above palm oil provides the highest yield per hectare relative to other veg-etable oil namely soybean oil, rapeseed, coconut and sunflower. The combine yield for palm oil and palm kernel is 3.6ton/ha, more than five folds relative to the second high-est yield, rapeseed oil. This makes palm oil a very efficient component to make pro-cessed food and biodiesel. Although palm oil’s total planted area is only 5% of the world vegetables planted area, CPO’s production contributes the largest market share of total world crops production which accounted for 30%. As such, we expect strong volume growth for palm oil in the long-run.


Fig59. Edible Oil Yield ComparisonFig59. Edible Oil Yield Comparison

0

0.5

1

1.5

2

2.5

3

3.5

4

Palm O

il

Rapes

eed O

il

Sunflower

oil

Soybea

n Oil

Peanu

t Oil

Cottonse

ed Oil

Yield per hectare





40


30%

23%3%2%

7%

14%

15%2%

1%

2%

1%

Palm oil S oybean oil Cotton oil Groundnut oil

S unflow er oil Rapes eed oil S es ame oil Corn oil

Olive oil Coc onut oil Other edible oil

Fig60. Production share to world edible oilFig60. Production share to world edible oil


43%

15%

13%

13%

11%

5%

S oybean Rapes eed Others Cottons eed S unflow ers eed Palm

Fig61. Contribution to total planted areaFig61. Contribution to total planted area


Soybean is the second-largest most consumed edible oil in the world after palm oil, which accounts around 23% of total world production as of 2010. We underline the cor-relation between CPO price and soybean oil given its strong correlation of 97% over the past decade.




41


0

200

400

600

800

1000

1200

1400

1600

1800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US$/ton

PALMROTT Index Soybean price

Fig62. CPO Price vs Soybean OilFig62. CPO Price vs Soybean Oil

Currently palm oil is still trading at a huge discount to soybean-oil price of US$ 180 per ton (15% discount), though the discount to soybean-oil price has narrowed from its broadest gap of US$ 250 per ton (20% discount). Going forward we expect the discount-to-soybean-oil continues to narrow and will drive up CPO price towards its 10 year average discount to soybean-oil at US$ 130 per ton (18% discount).


Discount to Soy-oil priceDiscount to Soy-oil price

-20%

-10%

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Discount to Soy Linear (Discount to Soy)

10 year average discount to soy-oil : 18%

Fig63. Discount to Soy-oil priceFig63. Discount to Soy-oil price

Source: Bloomberg Source: Bloomberg




42


2011 is one of the best years for CPO industry as CPO production soar to record high of 50mn tons, grew by 5.5% over the same period last year. One of the factors that affected the higher–than–expected CPO production was severe rainfall season which occurred throughout 2010. Our channel check reveals that fall will give a positive impact on the following year production since the fresh fruit bunches (FFB) absorbed enough water. Hence, we expect a slowdown in next year production as trees are entering tree-stress cycle after a very strong production in 2011.

We select LSIP as our top picks and have BUY recommendation with a target price of Rp3,000, implying 11.5X FY12F PE.Key points for LSIP:

• Undemanding valuation• Highest CPO Extraction Rate• Prime plantation age profile

Target Price (Rp)

P/E 2012F (X)

P/B 2012F (X)

Market Cap (Rp bn)

Result 9M11 (Rp bn)

AALI

25,400 13.5

3.2

32,912

1,860

LSIP

3,000 8.5

2.2

15,010

1,312

SGRO

3,900 8.8

1.6

5,576

462

Table1. Discount to Soy-oil priceTable1. Discount to Soy-oil price





43

EQUITY RESEARCH

ANALYSTSyaiful AdrianStrategy, Banking, CoalT +62 21 2557 4919E [email protected]

ANALYSTTriwira TjandraTelecommunication, Infrastructure, PropertyT +62 21 2557 4800 ext 739E [email protected]

TECHNICAL ANALYSTTrevor GasmanT +62 21 2557 4934E [email protected]

HEAD OFFICE - JAKARTAPT CIPTADANA SECURITIESPlaza ASIA Offi ce Park unit 2Jl. Jend. Sudirman kav. 59Jakarta 12190T +62 21 2557 4800F +62 21 2557 4900E [email protected]

EQUITY SALES

HEAD OF SALESJohn Herry TejaPlaza ASIA Offi ce Park unit 2Jl. Jend. Sudirman kav. 59Jakarta 12190T +62 21 2557 4808F +62 21 2557 4900E [email protected]

PLUITFerry IshakJl. Pluit Putra Raya No. 7Jakarta 14450T +62 21 6669 6688F +62 21 6669 0770E [email protected]

SURABAYAImelda SoetiknoIntiland Tower Ground Floor Suite 5 & 6Jl. Panglima Sudirman 101-103Surabaya 60271T +62 31 534 3938F +62 31 534 3886E [email protected]

ANALYSTWilim HadiwijayaAutomotive, Mining, PlantationsT +62 21 2557 4799E [email protected]

ANALYSTMitchel JauwantoConsumerT +62 21 2557 4820E [email protected]

PURI - KENCANAChandra HerotionjayaPerkantoran Puri Niaga IIIJl. Puri Kencana Blok M8 No.1H-I, KembanganJakarta 11610T +62 21 5835 6025F +62 21 5835 6026E [email protected]

BOGORDaud DirgahayuJl. Raya Padjajaran Ruko 70 No.70JBogor 16144T +62 251 836 2255F +62 251 837 0054E [email protected]

SEMARANGLusiana PermatasariJl. Gajah Mada No. 107Semarang 50136T +62 24 352 1199F +62 24 356 5599E [email protected]

RESEARCH ASSISTANTSumarniT +62 21 2557 4920E [email protected]

RESEARCH ASSISTANTSilviana SumardjonoT +62 21 2557 4800 ext 740E [email protected]

MANGGA DUAGavin IshakKomplek Harco Mangga DuaRukan Blok C No.10Jakarta 10730T +62 21 600 2850F +62 21 612 1049E [email protected]

BANDUNGMaykel YonathanWisma CIMB NIAGA 3rd Floor - Suite 301Jl. Jend. Gatot Subroto No.2Bandung 40262T +62 22 732 2288F +62 22 732 2287E [email protected]

MEDANJuliawatyJl. Cut Nyak Dien No.14Medan 20152T +62 61 455 5600F +62 61 457 2269E [email protected]

Disclaimer: This document is not intended to be an off er, or a solicitation of an off er, to buy or sell relevant securities (i.e. securities mentioned herein or of the same issuer and options, warrants or rights to or interest in any such securities). The information and opinions contained in this document have been compiled from or arrived at in good faith from sources believed to be reliable. No representation or warranty, expressed or implied, is made by CIPTADANA SECURITIES or any other member of the Ciptadana Capital, including any other member of the Ciptadana Group of Companies from whom this document may be received, as to the accuracy or completeness of the information contained herein. All opinions and estimates in this report constitute our judgmentas of this date and there can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. The information in this document is subject to change without notice; its accuracy is not guaranteed; and it may be incomplete or condensed.




44

Analyst CertificationEach contributor to this report hereby certifies that all the views expressed accurately reflect his or her personal views about the companies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are not and will not be influenced by any part or all of his or her compensation.

Disclaimer

This report does not constitute an offer to buy or sell any security/instrument, invitation to offer or recommendation to enter into any transaction. Nor are we acting in any other capacity as a fiduciary to you. By accepting this report, subject to applicable law or regulation. When making and investment decision, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences of any such transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any transaction and our disclaimer as to these matters.

The information contained in this report is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this report constitute our judgement as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. CIPTADANA SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS REPORT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF.

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