Ciptadana Outlook 2012

Market Outlook 2012
December 15, 2011
MARKET OUTLOOK 2012

THURSDAY 15 DECEMBER, 2011
CIPTADANA SECURITIES
http://www.ciptadana.com
In the middle of Euro Crisis

The European Fiasco
There 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 Crisis

No 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 rate

Consensus 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 JCI

Translating 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.
JCI Index
4500
4000
3500
3000
-1 1 1 Au g11 Se p11 Fe b11 Ja n11 -1 1 Oc t 11 11 No v11 M ay M ar Ap r Ju l -1
Ciptadana Research Team

T +62 21 2557 4800 E [email protected]
Source : Bloomberg
JCI Index
VOLUME
Please see analyst certication and other important disclosures at the back of this report
MARKET OUTLOOK 2012

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. Fig1. Countries Debt to GDP ratio 2010
160 143% 140 119% 120 100 80 60% 60 40 20 0 Portugal Italy Greece Spain US Indonesia World 93% 94% 79%
27%
Source : IMF
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. Fig2. Countries 10-year bond yield 2011 (%)
30 25 20 15 10 5 0
n11 n11 l-1 1 -1 1 b11 ar -1 1 p11 ay Ju ct11 O g11 r-1 1 Ap Fe No Ja Ju Se v11
ITA LY
Source : Bloomberg
GERMA NY
Au
GREECE
US
MARKET OUTLOOK 2012

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. Fig3. Italy 10-year bond yield 2011 (%)
8.0
7.0
6.0
5.0
4.0
Fe bM 11 ar -1 M 1 ar -1 Ap 1 r-1 Ap 1 r-1 M 1 ay M 11 ay M 11 ay -1 Ju 1 n1 Ju 1 n11 Ju l-1 Ju 1 lA u 11 g1 Au 1 g1 Se 1 p1 Se 1 p1 O 1 ct11 O ct1 No 1 v1 No 1 v11
Source : Bloomberg
The fear of Italys potential inability to pay its obligation has made the 10-year bond yield of the country soared. Italys current yield of its 10-year bond yield is 6.3%, a very high level historically. Higher bond yield means higher refinancing cost. Italys lack of economic growth means the country has to do strict austerity measures to fulfill its obligation in the future. Fig4. European banks exposure to PIGS debt (percentage of common equity) as of July 2011
500% 400% 327% 293% 300% 200% 100% 0%
Ba rc la ys RB S nk gr ico iba er zb a Co m m Ba nk le s
462% 358%
175%
189%
ut ch e
tA
Cr ed i
Source : European Banking Authority
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 Europes 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.
De
BN P
Pa r
MARKET OUTLOOK 2012

Indonesia in the middle of Euro Crisis

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. Fig5. Indonesia 10 years government bond yield (%)
10.5 INDO NESIA 10 Y e ars G o ve rn m e n t Bo n d Y ie ld 9.5
8.5
7.5
6.5
5.5
4.5
Feb-11
Jan-11
Jun-11
Mar-11
May-11
Jul-11
Source : Bloomberg
Fig6. IDR historical (Rp/USD)

9500 9300 9100 8900 8700 8500 8300
n11 n11 l-1 1 -1 1 p11 v11 No b11 ar -1 1 ay Ju ct11 g11 r-1 1 Ap Fe De Ju Ja Se c11
Au
Aug-11
Source : Bloomberg
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.
Nov-11
Sep-11
Apr-11
O ct-11
MARKET OUTLOOK 2012

Fig7. Selected ASEAN countries GDP growth estimate (%)

7 6 5 5 4.2 4 3 2 1 0 Philippines Indonesia 2011 Malaysia 2012 Singapore Thailand 4.5 4.7 4.1 4.2 6.4 6.2 5.5 5.5
Source : 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%. Fig8. Indonesia historical GDP growth (%)
8.0 7.0 6.0 5.0 4.0 3.0 2.0
ar -0 Ju 6 n0 Se 6 p0 D 6 ec -0 M 6 ar -0 Ju 7 n0 Se 7 p0 D 7 ec -0 M 7 ar -0 Ju 8 n0 Se 8 p0 D 8 ec -0 M 8 ar -0 Ju 9 n0 Se 9 p0 D 9 ec -0 M 9 ar -1 Ju 0 n1 Se 0 p1 D 0 ec -1 M 0 ar -1 Ju 1 n1 Se 1 p11
Source : Bloomberg
MARKET OUTLOOK 2012

Benign inflation, lower interest rate

Low 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). Fig9. Indonesia historical inflation (%)
20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0
l-0 8 n06 n06 -0 9 n11 p07 n11 Ju v06 c08 b08 ar -1 0 ct09 No Ju ay g10 r-0 7 No De Ju Ja Ap Se Fe Ja v11
Source : Bloomberg
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 (%)
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
l-0 8 n06 n06 -0 9 n11 ar -1 0 p07 b08 n11 Ju v06 c08 ct09 No Ju ay g10 r-0 7 No De Ju Ja Ap Se Fe Ja v11
Source : Bloomberg
Au
Au
MARKET OUTLOOK 2012

2012 target for JCI

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.
Table1. 20 biggest market cap in JCI TARGET PRICE ASII BBCA BBRI BMRI TLKM UNVR GGRM UNTR PGAS BBNI ADRO BYAN SMGR INTP ITMG BUMI INDF BDMN CPIN 77,302 9,100 8,600 9,200 9,000 16,301 64,672 31,150 3,709 5,700 2,500 9,400 10,593 17,974 59,000 3,050 5,899 5,500 2,637 MARKET CAP (RP BN) 289,660 198,473 166,517 156,333 146,160 136,577 125,643 94,186 76,361 72,264 63,012 59,667 57,239 56,691 44,802 43,624 42,585 41,693 40,236 TARGET MARKET CAP (RP BN) 312,947 224,361 212,155 214,667 181,440 124,378 124,435 116,194 89,923 106,297 79,965 31,333 62,835 66,166 66,666 63,367 51,791 52,716 43,301
Source : Ciptadana Estimate, Bloomberg
MARKET OUTLOOK 2012

Sector Overview
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. Fig11. Indonesia Banking Industry LDR
% 85 80 74.6 75 70 65 59.6 60 55 50 2005 2006 2007 2008 2009 2010 Sep-11 61.6 66.3 75.2 72.9 81.4
Source : Bank Indonesia
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. Fig12. Indonesia Banking Industry NPL
% 16 14 12 10 8 6 3.7 4 2 0 2005 2006 2007 2008 2009 2010 Sep-11 3.5 2.8 3.2 6.5 10.7 14.8
Source : 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.
MARKET OUTLOOK 2012

Fig13. Indonesia Banking Industry CAR

% 22 21.3
20
19.3
19.3 17.4 16.8
18
17.2 16.6
16
14
12
10 2005 2006 2007 2008 2009 2010 Sep-11
source : Bank Indonesia
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. Fig14. Indonesia Banking Industry NIM
% 6 5.9 5.8 5.8 5.7 5.6 5.6 5.7 5.6 5.7
5.4
5.2
5 2005 2006 2007 2008 2009 2010 Sep-11
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 banks 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.
10
MARKET OUTLOOK 2012

Fig15. Indonesia Banking Industry ROA

% 3.2 3 2.8 2.8 2.6 2.6 2.4 2.2 2 2005 2006 2007 2008 2009 2010 Sep-11 2.5 2.3 2.6 2.9 3.1
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. Table2. Selected JCI listed banks Company BMRI BBRI BBCA BDMN BBNI Target Price 9,200 8,600 9,100 5,500 5,700 P/B 2012 2.3 2.8 4.1 1.6 1.1 P/E 2012 12 9.4 21.2 9.7 9.3 Market Cap (Rp Bn) 154,000 164,050 194,775 41,693 71,331 Result 3Q11 (Rp Bn) 9,173 10,436 7,655 2,538 4,059
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 : 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
11
MARKET OUTLOOK 2012

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). Fig16. Coal price 2011 (USD/tonne)
150 145 140 135 130 125 120 115 110 105 100
n11
n11
l-1 1
-1 1
p11
b11
ar -1 1
ct -1 1 O
g11
r11
ay
Ja
Ap
Ju
Ju
Fe
Au
Se
Source : Bloomberg
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. Fig17. Oil price 2011 (USD/Barrel)
120 115 110 105 100 95 90 85 80 75 70
n11 b11 ar -1 1 n11 l-1 1 -1 1 p11 -1 1 ov N D ct -1 1 g11 r11 ay Ap Fe Ju Ja Ju Se ec -1 1
Au
Source : Bloomberg
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 20102015 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).
ov
-1 1
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MARKET OUTLOOK 2012

Fig18. Coal consumption 1990 - 2030

mtoe 5,000 4,000 3,000 15 2,000 10 1,000 90 95 00 05 10 15 20 25 19 19 20 20 20 20 20 20 20 30
% 30 25 20
5 0
Total Coal Production

Source : BP Outlook 2030
Growth
Fig19. Asia pacific coal consumption to total consumption

80% 70% 60% 50% 40% 30% 20% 1990 1995 2000 2005 2010 2015 2020 2025 2030 37% 46% 47% 57% 66% 70% 73% 76% 75%
Asia Pacific coal consumption to total
Source : 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.
13
MARKET OUTLOOK 2012

Fig20. Projected Indonesian Coal Supply and Demand (MT)

500 405 400 321 300 200 100 0 2009 2010 Domestic
Source : PT Bukit Asam Tbk
361 270 254 201 198 56 206 170 64 120 191 220 185
2015 Export Production
2020
2025
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. Fig21. Estimated coal consumption for PLN (MT)
120 100 78 80 59.4 60 40.8 40 20 0 2010
Source : PT Bukit Asam Tbk
95.3 87.5
2011
2012
2013
2014
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.
14
MARKET OUTLOOK 2012

Table3. Selected JCI Coal Companies Company HRUM PTBA BUMI ADRO ITMG BYAN INDY Target Price 11,600 22,092 3,055 2,500 59,000 9,400 3,556 P/E 2012 7.3 9.6 7.9 9.8 8.5 19.9 5.6 P/B 2012 3.5 3.7 2.4 2.3 4.0 12.7 1.5 Market Cap (Rp Bn) 19,440 39,631 45,701 61,733 42,994 60,000 11,202 Result 3Q11 (Rp Bn) 1,310 2,323 556 376 361 1,336 774
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.
15
MARKET OUTLOOK 2012

Sector Overview
Consumer (Outperform)
Resilience displayed by Indonesias macroeconomic performance, supported by large domestic consumption gure, reects the strength and persistence of the consumer sector. In the last 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. Fig22. Consumer sector index against JCI index
Jakarta Consumer Index vs JCI Index 2005 = 100 600 548 500
400 370 300
200
100
0
Ja n0 Ma 6 r0 Ma 6 y0 Ju 6 l- 0 Se 6 p0 No 6 v0 Ja 6 n0 Ma 7 r0 Ma 7 y0 Ju 7 l- 0 Se 7 p0 No 7 v0 Ja 7 n0 Ma 8 r0 Ma 8 y0 Ju 8 l- 0 Se 8 p0 No 8 v0 Ja 8 n0 Ma 9 r0 Ma 9 y0 Ju 9 l- 0 Se 9 p0 No 9 v0 Ja 9 n1 Ma 0 r1 Ma 0 y1 Ju 0 l- 1 Se 0 p1 No 0 v1 Ja 0 n1 Ma 1 r1 Ma 1 y1 Ju 1 l- 1 Se 1 p1 No 1 v11
JAKCONS Index
JCI Index
Source : Bloomberg
Built on top of strong macro fundamentals

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. Fig23. Stable growth of disposable income
Disposable Income per Capita - Indonesia
3000 $2,685
13% CAGR
2500 $2,029 2000 $1,715
US$
$2,081
1500
11% CAGR
$1,173 $962 $1,041
$1,468
1000 $696 500
$819
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source : CEIC (2011)
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MARKET OUTLOOK 2012

In tandem with income growth, household expense figure has also experienced stable growth over the past five years; resembling Indonesias 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 Indonesias retail sales index, the sector has maintained a stable performance. With an even more, solid macro fundamentals 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 income
Hous ehold E xpens e per C apita vs G NI per C apita 3000 $2,500 2500 $2,160 2000 $1,600
US $
$1,950 64.55% 64.85% 64.87% 65.04%
1500 1000
$1,370 65.57%
500 0 2006 2007 2008 2009 Hous ehold E xpens e per C apita 2010
G NI per capita (Atlas method) - current US $
Source : World Bank (2011)
Fig25. Historically high retail index resilient on 2008 and 2009

B I R etail S ales Index Y early average, 2000 = 100 281
236
187 159 168 152 168
*Averaged 10 months figure
2005
2006
2007
2008
2009
2010
O c t 2011*
Source : CEIC (2011), Bank Indonesia (2011)
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MARKET OUTLOOK 2012

Fig26. The ordinary Indonesians remain optimistic

BI Consumer Confidence Index 130
120
OPTIMISTIC
110
100
90
80 PESSIMISTIC
70
7 Oc t07
8 Oc t08
5 Oc t05
6 Oc t06
9 Oc t09
0 Oc t10
Ja n
Ja n
Ja n
Ja n
Ja n
Ja n
Ja n
Ap
Ap
Ap
Ap
Ap
Ap
IDCCI Index
Source : CEIC (2011), Bank Indonesia (2011)
Unequal performance within the sector stable foods, volatile durables and other non-foods
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 expected 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 comparison to the consumer foods segment; in the scenario that sentiments become pessimistic or if there are other adverse changes. Fig27. Growing average expendinture - large chunk of which is for foods
Average Monthly Spending
IDR 600
Ap
1 Oc t11
-0 5
-0 6
-0 9
r05
r07
r08
r09
-1 0
r10
Ju l0
r06
Ju l0
Ju l0
Ju l0
Ju l1
r11
-0 7
-0 8
-1 1
Ju l1
Ju l0
IDR 494
IDR 500
IDR 430
IDR 400
Thousands of IDR
5.14%
IDR 386 IDR 353 IDR 286 IDR 293

2.98% 44.29% 44.00% 6.47% 6.38%
5.88% 43.42% 43.49%
IDR 300
4.52% 44.11%
43.46%
IDR 200
IDR 100 51.37% 53.01%
49.24%
50.17%
50.62%
51.43%
IDR 2005 2006 Food 2007 Other non-food 2008 Durables 2009 2010
Source : CEIC (2011), BPS (2011)
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MARKET OUTLOOK 2012

Fig28. Varying volatility

Average Monthly Expenditure - % Change 200.00%
150.00%
100.00%
50.00%
0.00% 2006 2007 2008 2009 2010
-50.00% 2006 Food Durables Other non-food 5.47% -32.59% 1.97% 2007 12.01% 161.74% 21.37% 2008 11.38% 7.71% 7.27% 2009 12.33% 2.73% 11.39% 2010 16.90% 0.58% 14.88%
Source : CEIC (2011), BPS (2011)
Table4. Peers comparison Company ICBP GGRM* UNVR* KLBF* INDF* Target Price 6,150 65,695 16,301 3,558 5,850 P/B 2012 2.3 4.3 24.3 4.6 2 P/E 2012 16.8 20.4 29.2 18.1 11.2 Market Cap (Rp Bn) 29,009 119,294 131,999 34,784 40,609 Result 3Q11 (Rp Bn) 1,522 3,787 3,387 1,065 2,324
*Target price is based on Bloombergs consensus Source : Bloomberg (2011), Ciptadana estimates
Our pick for the sector is PT Indofood CBP Sukses Makmur Tbk (ICBP). Here are several 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 consumption Maintained growth for its noodle division; supported by healthy top line potential Solvent and solid financial position, relative to its peers
19
MARKET OUTLOOK 2012

Sector Overview Heavy Equipment (Outperform)

We have an Overweight view on heavy equipment sector due to our expectation that demand 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. Fig29. Domestic Heavy Equipment Sales
Units 25,000
20,000
15,000
10,000
5,000
2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
Source : Company and Ciptadana estimates
Mining sector has been the biggest contributor to domestic heavy equipment sales, averaging 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 Indonesia 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. Fig30. Indonesia Coal Production
mn tons 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 2004 2005 2006 2007 2008 2009 2010 2011F 2012F
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MARKET OUTLOOK 2012

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 plantation 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. Fig31. Indonesia CPO Production vs Palm Oil Plantation Area
mn tons 25.0 20.0 15.0 3,000 10.0 2,000 5.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Indonesia CPO Production (LHS) - mn tons Palm oil plantation area (RHS) - 000 ha
Source : Bloomberg & National Bureau of Statistics
000 ha 6,000 5,000 4,000
1,000 -
From construction sector, we expect more demand will emerge next year as government has been putting serious effort in the infrastructure development. Governments 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 development in Indonesia from 2011-2014 as stated in MP3EI (Masterplan of acceleration and expansion of Indonesias economy development). The approval of long-awaited land acquisition bill will also be another positive catalyst for infrastructure development. Fig32. Governments Capital Spending Realization and Budget
Rp bn 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2006 2007 2008 2009 2010 2011 Budget 2012 Budget 10% FY06-10 CAGR
Source : National Bureau of Statistics & CEIC
21
MARKET OUTLOOK 2012

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.
Table5. Peers Comparison Company Hexindo Adiperkasa* Intraco Penta* United Tractors P/B 2012 (X) N/A 2.2 3.0 P/E 2012 (X) 10.4 6.9 13.2 Market Cap (RP BN) 7,224 1,296 92,694 Net Income 9M11 (RP BN) 277 78 4,349
* target price is based on Bloombergs consensus Source: Bloomberg & Ciptadana estimates
22
MARKET OUTLOOK 2012

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 expect 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 2011s level was 20% lower as compared to 2010s 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). Fig33. LME Nickel Price - Inventory
US D/MT 60,000 50,000 40,000 30,000 20,000 10,000 0 Dec -02 tonnes 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Dec -03 Dec -04 Dec -05 Dec -06 Dec -07 Dec -08 Dec -09 Dec -10 Dec -11
Nic kel Inventory (RHS )
Nic kel Pric e (L HS )
Source: Bloomberg
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 pressure on nickel price. Fig34. Refined Nickel World Production vs Consumption
MT 1,550,000 1,500,000 1,450,000 1,400,000 1,350,000 1,300,000 1,250,000 1,200,000 1,150,000 2005 2006 2007 2008 Consumption 2009 2010 3.2% CAGR 2.8% CAGR
Production
Source : Bloomberg & World Bureau of Metal Statistics
23
MARKET OUTLOOK 2012

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 products 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 Consumption
MT 380,000 1.0% CAGR 370,000 1.9% CAGR 360,000 350,000 340,000 330,000 320,000 310,000 300,000 2005 2006 2007 Tin Production
Source : Bloomberg
2008 Tin Cons umption
2009
2010
Fig36. Tin Price Fig33. Refined Nickel World Production vs Consumption

35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Dec-05 USD/MT
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Source : Bloomberg
24
MARKET OUTLOOK 2012

Telecommunication (Underperform)
As the SIM card penetration rate reached 100% by the end of 2011, the growth of cellular 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 subscriber 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. Fig37. Quarterly Subscriber Addition Trend
Quarterly Subscriber Addition (mn subs) 7 6 5 4 3 2 1 0 -1 -2 1Q10
Source : Company
Telkomsel
Indosat
XL Axiata
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
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.
25
MARKET OUTLOOK 2012

Fig38. Tariff Has Been Stabilizing

Average Voice Rev./ Minute (Rp) 1,000 800 600 400 200 0 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 Telkomsel Indosat XL Axiata
After intense price war in 2007, the telco operators margin has been slashed to a new level. Telkomsel (TLKMs subsidiary), which enjoyed a 72.6% EBITDA margin in 1Q05, now have to be satisfied with 58% in 3Q11. Meanwhile, ISAT also experienced the same thing with 57% EBITDA margin in 1Q05 which in 3Q11 pinned at 49.7%. EXCL booked an EBITDA margin of 61.7% in 1Q05, which declined to its lowest level at 33% in 3Q08 amid intense competition before rebounding back to 46.8% in 3Q11. Fig39. Stabilizing Margins
Quarterly EBITDA Margin Telkomsel 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% Q1'07 Q3'07 Q1'08 Q3'08 Q1'09 Q3'09 Q1'10 Q3'10 Q1'11 Q3'11 Indosat XL Axiata
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.
26
MARKET OUTLOOK 2012

Fig40. Growth Has Switched To Lower Gear

Quarterly Revenue (Rp bn) 16000 14000 12000 10000 8000 6000 4000 2000 0 Q1'05 Q4'05 Q3'06 Q2'07 Q1'08 Q4'08 Q3'09 Q2'10 Q1'11 Telkomsel Indosat XL Axiata
The low internet penetration rate in Indonesia could give telco companies an opportunity 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 networking platform such as Facebook and Twitter will also play an important role to push the demand higher for internet usage further in Indonesia. Fig41. Indonesias Low Internet Penetration
Internet User/ Population
80% 70% 60% 50% 40% 30% 20% 9.1% 10% 0% Indonesia
Source : ITU
70.0% 55.3%
21.2%
25.0%
Thailand
Philippines
Malaysia
Singapore
More specifically, Indonesia has one of the lowest penetrated wireline broadband market 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 Indonesia. 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 pricing plans for 3G services and attractive smartphone promotions, have also contributed to this relatively higher penetration rate. Going forward we see that wireless broadband 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.
27
MARKET OUTLOOK 2012

Fig42. Still Low Broadband Penetration

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Broadband Penetration Rate
st ra lia Ta iw an Ho ng Ko Ne ng w Ze al an d M al ay si a In do ne si a Vi et na Ph m ili pp in es
na
an
re a
or e
d ai la n
Ja p
Ch i
Ko
Si ng
ap
Source: Frost & Sullivan
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. Table6. Valuation Comparison 2012F Current Price (Rp) Telkom Indosat * XL Axiata * average :
So ut
Au
Target Price (Rp) 9,000 6,000 6,100
Mkt Cap (Rp bn) 142,603 30,430 38,759
Th
P/E 10.7 18.6 10.6 13.3
EV/ EBITDA 4.1 4.6 4.4 4.4
In
di
7,250 5,600 4,550
enileriW
Dividend Yield 5.2 2.5 3.3 3.7 ROE 24.7 8.6 24.6 19.3
28
sseleriW
MARKET OUTLOOK 2012

Cement (Overweight)
We have an Overweight view on the cement sector, due to our expectation that the demand 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 governments Master Plan for Acceleration and Expansion on Indonesias 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 2011
Domestic Cement Sales
('000 tons) 5000 4500 4000 3500 3000 2500 2000 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2008 2009 2010 2011
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 position with 31.3% and 15.6% of market share respectively. Fig44. Market Share of The Top Three Cement Producer
50% 45% 40.9% 40% 35% 31.3% 30% 25% 20% 15.6% 15% 10%
Nov-05 Sep-06 May-08 Mar-09 Aug-09 Nov-10 Feb-07 Sep-11 Jun-05 Apr-06 Dec-07 Jun-10 Jan-05 Oct-08 Jan-10 Apr-11 Jul-07
SMGR
INTP
SMCB
Source: Indonesia Cement Association & Ciptadana estimates
29
MARKET OUTLOOK 2012

SMCBs move in mid 2011 to gain market share by increasing its prices moderately in comparison to its competitors, has made SMCBs sales price to be slightly more attractive 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 Trends

Quarterly EBITDA Margin Indocement 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 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 Semen Gresik Holcim
Source: Companies & Ciptadana estimates
Table7. Valuation Comparison 2012F Current Price (Rp) Indocement Semen Gresik Holcim * avg. Indonesia:
Target Price (Rp) 19,000 11,000 2,320
Mkt Cap (Rp bn) 57,059 58,722 16,667
P/E 13.7 13.0 14.9 13.9
EV/ EBITDA 8.1 8.9 7.7 8.3
Dividend Yield 2.1 3.4 1.5 2.3
ROE 23.6 28.8 13.7 22.0
15,500 9,900 2,175
30
MARKET OUTLOOK 2012

Construction (Overweight)
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 activity pick up. We believe that adequate infrastructure is vital to enhance growth prospect of a countrys 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) whenever 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 Contractor 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 governments endorsement will still be needed to support privately funded construction project. Fig46. Slowing Growth of Infrastructure Related Government Spending
Government's Department Spending
Dept. Energy & Minerals (Rp tn) 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 2010 2011F 2012F Dept. Public Works Dept. Transportation
Source: Ministry of Finance
Fig47. Yet, the government expenditure on construction is keep on rising

Central Government Expenditure - Industry and Construction
(Rp tn) 3.0 2.5 2.0 1.4328 1.5 1.1194 1.0 0.5 0.0 2006 2007 2008 2009 2010 2011F 2012F 1.27 1.4257 1.5263 2.3012 2.4175
Source: Ministry of Finance
31
MARKET OUTLOOK 2012

Indonesias 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 position of Rp62 billion. 2. order book is dominated by the government projects (60%), where the company could potentially benefit from the governments infrastructure development acceleration. 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 Table8. Valuation Comparison 2012F Current Price (Rp) Wijaya Karya Adhi Karya * PT PP * average:
Target Price (Rp) 780 810 560
Mkt Cap (Rp bn) 3,734 1,063 2,421
P/E 9.8 5.1 7.2 7.4
EV/ EBITDA 3.8 2.1 3.5 3.1
Dividend Yield 2.6 4.0 4.7 3.8
ROE 17.3 18.1 22.8 19.4
620 590 500
Table9. Wikas Strong Financial Position Compared to Other Contractors As of 9M'11 (in Rp bn) Wijaya Karya Revenue Cost of revenue CASH Acc. Receivable Acc. Payable Debt Net Debt (Cash) Equity 5,443 (5,016) 568 1,083 1,612 506 (62) 1,913 State Owned Adhi Karya 3,114 (2,824) 370 758 1,851 1,271 901 832 PT PP 2,944 (2,627) 611 1,143 1,744 2,083 1,472 1,246 Private Total Bangun 1,106 (934) 473 198 52 (473) 592 Duta Graha 805 (708) 244 232 64 125 (119) 974
Acc. Receivable days Acc. Payable days Gross Debt/ Equity (x) Net Debt/ Equity (x)
73 117 0.26 net cash
89 239 1.53 1.08
142 242 1.67 1.18
65 20 0.00 net cash
105 33 0.13 net cash
Source: Companies & Ciptadana estimates
32
MARKET OUTLOOK 2012

Property (Overweight)
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 development is still uncommon in Indonesia, except in Jakarta area, and is still considered as a niche market. Fig48. Land Banking Business Model Prevails in Indonesia
Land Bank (ha)
Bakrieland Development Bumi Serpong Damai Lippo Karawaci Ciputra Development Alam Sutera Summarecon Agung Agung Podomoro Land 45 5,000 10,000 15,000 20,000 1,600 1,500 1,200 878 4,600 16,657
Source: Companies
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. Fig49. Rising FDI Drive the Demand of Industrial Estate
Foreign Direct Investment in Indonesia - Manufacturing (in US$ mn)
2,500 2,000 1,500 1,000 500 0 -500 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11
Source: Bank Indonesia Survey
The limited supply combined with surging demand drive the industrial land price in Jakarta, 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. Governments offer of a tax holiday to big manufacturers investing more than US$100 million has given another boost on industrial estate demand.
33
MARKET OUTLOOK 2012

Fig50. Uptrending Industrial Land Price in Jakarta, Bogor, Bekasi and Karawang
Land Price in Jabodeka
US$/sqm 140 120 100 78 80 60 40 20 1Q'07 3Q'07 1Q'08 3Q'08 1Q'09 3Q'09 1Q'10 3Q'10 1Q'11 3Q'11 66 67 67 63 67 71 69 67 72 74 77 77 78 80 81 94 113 129
Source: Bank Indonesia Survey
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. Indonesias Population is Dominated by Productive Age
Indonesia's Demography
Over 60, 8% Below 15, 28%
Productive Age (15-59), 65%
Source: 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.
34
MARKET OUTLOOK 2012

Fig52. Bank Indonesias Base Lending Rate is Steadily Declining

Base Lending Rate
17.5% 17.0% 16.5% 16.0% 15.5% 15.0% 14.5% 14.0%
Source: Bloomberg
Bank Indonesias data showed that as of 3Q11, mortgage is dominating payment mechanism 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 Mortgage
Property Purchase Payment Mechanism
Hard Cash 9%
Source: Bank Indonesia
Mortgage has been steadily growing in the past. However, Indonesias 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.
-0 8 r08 Ju l08 Oc t0 Ja 8 n09 Ap r09 Ju l09 Oc t0 Ja 9 n1 Ap 0 r10 Ju l10 Oc t10 Ja n1 Ap 1 r11 Ju l11 Oc t11
Cash Installment 16%
Ja n
Ap
Mortgage 75%
35
MARKET OUTLOOK 2012

Fig54. Still Low Mortgage Penetration in Indonesia

Mortgage to GDP 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Philippines Indonesia Malaysia Singapore Thailand Hongkong 2.1% 2.4% 30.0% 39.0% 43.7% 45.8%
Source: Each Countrys Central Bank
Fig55. Mortgage Has Been Steadily Growing in The Past

Total Mortgage in Indonesia 200 180 160 140
(Rp tn)
120 100 80 60 40 20 0 40209 40268 40329 40390 40451 40512 40574 40633 40694 40755 40816
Fig56. Banking Credit Disbursement to National Property
36
MARKET OUTLOOK 2012

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 purchases 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 reason, 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 respectively. Moreover, we believe that Indonesias property sector is far from saturation. Overweight. Table10. Population of Greater Jakarta (end of 2010) Area Population (mn) Area (km2) Density/km2 Jakarta Tangerang Bogor Bekasi Depok Total:
Source: Badan Pusat Statistik
9.61 5.94 5.73 5.03 1.75 28.06
664 1,426 2,773 1,480 200 6,543
14,469.6 4,165.4 2,067.1 3,397.2 8,758.5 4,288.4
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 Table11. Valuation Comparison 2012F Current Price (Rp) Alam Sutera Bumi Serpong Damai * Ciputra Development * Lippo Karawaci * Summarecon Agung * average:
Target Mkt Cap Price (Rp bn) (Rp) 500 1,290 620 850 1,420 8,128 16,797 9,403 15,000 8,042
P/E
EV/ EBITDA 7.4 9.7 9.4 12.4 11.3 10.0
Dividend Yield 1.6 0.9 0.6 1.1 1.1 1.1
ROE
455 960 620 650 1,170
10.2 16.6 24.7 18.7 20.1 18.1
26.3 12.6 6.8 8.3 15.2 13.9
37
MARKET OUTLOOK 2012

Plantation (Neutral)
Crude Palm Oil (CPO) price has been falling off decently since it touched its recent peak at US$1,330/ton back in Feb11. The downturn in CPO prices was not driven by drop in demand but more towards the restoration of supply. We expect CPO prices to remain firmed above US$ 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) Normalize 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 correlation between residue inventory and total consumption. United States Department of Agriculture (USDA) expects that stock-to-use ratio for 2012/2013 will continue to decline 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. Fig57. Stock Usage vs CPO Prices
RM/ton 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *2011 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
PAL2MALY Index
Stock/usage ratio
Source: Bloomberg & USDA
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.
38
MARKET OUTLOOK 2012

Fig58. World CPO Production vs Consumption

mn MT 60 50.3 50 44.0 41.1 40 33.5 30.0 30 27.7 25.3 24.1 26.5 28.5 31.4 33.2 35.8 37.3 38.4 35.3 43.4 41.1 45.9 47.7 46.3 48.7
20
10
Production Consumption
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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 vegetable 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 highest yield, rapeseed oil. This makes palm oil a very efficient component to make processed food and biodiesel. Although palm oils total planted area is only 5% of the world vegetables planted area, CPOs 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 Comparison
4 3.5 3 2.5 2 1.5 1 0.5 0 Yield per hectare
il
O il
il
il
il
Pa lm
er o
ap es ee d
So yb ea n
Pe an ut
Su n
ot to
ns ee d
flo w
O il
39
MARKET OUTLOOK 2012

Fig60. Production share to world edible oil

15% 2% 2% 1% 1% 30%
14%
7% 2% 3% Palm oil S unflow er oil Olive oil S oybean oil Rapes eed oil C oc onut oil C otton oil S es ame oil
23% G roundnut oil C orn oil
Other edible oil
Fig61. Contribution to total planted area

5% 11%
13%
43%
13% 15% S oybean Rapes eed Others C ottons eed S unflow ers eed Palm
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 correlation between CPO price and soybean oil given its strong correlation of 97% over the past decade.
40
MARKET OUTLOOK 2012

Fig62. CPO Price vs Soybean Oil

US$/ton 1800 1600 1400 1200 1000 800 600 400 200 PALMROTT Index 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Soybean price
Source: Bloomberg
Currently palm oil is still trading at a huge discount to soybean-oil price of US$ 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 discountto-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). Fig63. Discount to Soy-oil price
50% Discount to Soy-oil price
40%
10 year average discount to soyoil : 18%
30%
20%
10%
0%
-10% Discount to Soy -20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Linear (Discount to Soy)
Source: Bloomberg
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MARKET OUTLOOK 2012

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 higherthanexpected 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
Table1. Discount to Soy-oil price Target P/E 2012F Price (Rp) (X) AALI LSIP SGRO
Source: Bloomberg
P/B 2012F (X) 3.2 2.2 1.6
Market Cap (Rp bn) 32,912 15,010 5,576
Result 9M11 (Rp bn) 1,860 1,312 462
25,400 3,000 3,900
13.5 8.5 8.8
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MARKET OUTLOOK 2012

http://www.ciptadana.com EQUITY RESEARCH ANALYST Syaiful Adrian Strategy, Banking, Coal T +62 21 2557 4919 E [email protected] ANALYST Triwira Tjandra Telecommunication, Infrastructure, Property T +62 21 2557 4800 ext 739 E [email protected] TECHNICAL ANALYST Trevor Gasman T +62 21 2557 4934 E [email protected] HEAD OFFICE - JAKARTA PT CIPTADANA SECURITIES Plaza ASIA Office Park unit 2 Jl. Jend. Sudirman kav. 59 Jakarta 12190 T +62 21 2557 4800 F +62 21 2557 4900 E [email protected] www.ciptadana.com EQUITY SALES HEAD OF SALES John Herry Teja Plaza ASIA Office Park unit 2 Jl. Jend. Sudirman kav. 59 Jakarta 12190 T +62 21 2557 4808 F +62 21 2557 4900 E [email protected] PLUIT Ferry Ishak Jl. Pluit Putra Raya No. 7 Jakarta 14450 T +62 21 6669 6688 F +62 21 6669 0770 E [email protected] SURABAYA Imelda Soetikno Intiland Tower Ground Floor Suite 5 & 6 Jl. Panglima Sudirman 101-103 Surabaya 60271 T +62 31 534 3938 F +62 31 534 3886 E [email protected] PURI - KENCANA Chandra Herotionjaya Perkantoran Puri Niaga III Jl. Puri Kencana Blok M8 No.1H-I, Kembangan Jakarta 11610 T +62 21 5835 6025 F +62 21 5835 6026 E [email protected] BOGOR Daud Dirgahayu Jl. Raya Padjajaran Ruko 70 No.70J Bogor 16144 T +62 251 836 2255 F +62 251 837 0054 E [email protected] SEMARANG Lusiana Permatasari Jl. Gajah Mada No. 107 Semarang 50136 T +62 24 352 1199 F +62 24 356 5599 E [email protected] MANGGA DUA Gavin Ishak Komplek Harco Mangga Dua Rukan Blok C No.10 Jakarta 10730 T +62 21 600 2850 F +62 21 612 1049 E [email protected] BANDUNG Maykel Yonathan Wisma CIMB NIAGA 3rd Floor - Suite 301 Jl. Jend. Gatot Subroto No.2 Bandung 40262 T +62 22 732 2288 F +62 22 732 2287 E [email protected] MEDAN Juliawaty Jl. Cut Nyak Dien No.14 Medan 20152 T +62 61 455 5600 F +62 61 457 2269 E [email protected] ANALYST Wilim Hadiwijaya Automotive, Mining, Plantations T +62 21 2557 4799 E [email protected] ANALYST Mitchel Jauwanto Consumer T +62 21 2557 4820 E [email protected] RESEARCH ASSISTANT Sumarni T +62 21 2557 4920 E [email protected] RESEARCH ASSISTANT Silviana Sumardjono T +62 21 2557 4800 ext 740 E [email protected]
Disclaimer: This document is not intended to be an offer, or a solicitation of an offer, 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 judgment as 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.
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MARKET OUTLOOK 2012

Analyst Certification Each 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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Market Outlook 2012

December 15, 2011

MARKET OUTLOOK 2012

In the middle of Euro Crisis

Indonesia in the middle of Euro Crisis

Benign inflation, lower interest rate

2012 target for JCI

Ciptadana Research Team

MARKET OUTLOOK 2012

The European Fiasco

MARKET OUTLOOK 2012

Source : European Banking Authority

MARKET OUTLOOK 2012

Indonesia in the middle of Euro Crisis

Fig6. IDR historical (Rp/USD)

MARKET OUTLOOK 2012

Fig7. Selected ASEAN countries GDP growth estimate (%)

Source : Bloomberg, Bank of Thailand, Government of Singapore

MARKET OUTLOOK 2012

Benign inflation, lower interest rate

MARKET OUTLOOK 2012

2012 target for JCI

Source : Ciptadana Estimate, Bloomberg

MARKET OUTLOOK 2012

Source : Bank Indonesia

Source : Bank Indonesia

MARKET OUTLOOK 2012

Fig13. Indonesia Banking Industry CAR

19.3 17.4 16.8

10 2005 2006 2007 2008 2009 2010 Sep-11

source : Bank Indonesia

5 2005 2006 2007 2008 2009 2010 Sep-11

source : Bank Indonesia

MARKET OUTLOOK 2012

Fig15. Indonesia Banking Industry ROA

source : Bank Indonesia

MARKET OUTLOOK 2012

MARKET OUTLOOK 2012

Fig18. Coal consumption 1990 - 2030

Total Coal Production

Fig19. Asia pacific coal consumption to total consumption

Asia Pacific coal consumption to total

Source : BP Outlook 2030

MARKET OUTLOOK 2012

Fig20. Projected Indonesian Coal Supply and Demand (MT)

2015 Export Production

MARKET OUTLOOK 2012

MARKET OUTLOOK 2012

400 370 300

Built on top of strong macro fundamentals

1000 $696 500

Source : CEIC (2011)

MARKET OUTLOOK 2012

$1,950 64.55% 64.85% 64.87% 65.04%

G NI per capita (Atlas method) - current US $

Source : World Bank (2011)

Fig25. Historically high retail index resilient on 2008 and 2009

187 159 168 152 168

*Averaged 10 months figure

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