Asia Equity Focus Structural growth story in Indonesia continues to unfold - Credit Suisse

On-the-ground insights into Indonesia based on positive anecdotes
To gather first-hand information on consumers and corporates in Indonesia, we attended a conference last week in Surabaya, the second largest city in Indonesia. The trip to Surabaya included one-to-one meetings with company managements and site visits to companies with significant operations in Surabaya. The firms we met with were mainly banks, property and consumer companies, including Bank Rakyat Indonesia (BRI), Bank Danamon, Bank Negara Indonesia (BNI), Ciputra Development, Pakuwon Jati, AKR Corporindo, Ace Hardware, Charoen Pokphand Indonesia and Indofood CBP. The key takeaway from the conference was that companies generally remain bullish about their outlook. Although they think that inflation might be on the high side, these companies are confident that they can pass on higher raw material costs to consumers, premised on robust growth in consumer incomes.

Indofood shared an anecdote about the sales of its instant noodles, which have yet to see any impact on volumes after it implemented a price hike of IDR 100 per pack (6%–7% price increase) across the board in January (previous price hike took place in August last year). Bogasari (Indofood's flour unit) has not increased flour prices since September last year and we gather from management that price hikes could be forthcoming. We also visited a Nasi Uduk food store owner, who is currently a BRI micro-lending customer. He started out with a street-side stall and has now moved into a shop, generating revenues of around USD 550 per day. Looking ahead, the food store owner hopes to get another mortgage to buy the shop we visited, which costs around USD 270,000. Among banks and property companies, the sentiment we gathered on the ground concerns expansion plans, with banks targeting the mass market for consumer-related loans (micro-lending, mortgage and automotive) and property companies focusing on launching new residential and township projects.
Indonesia's February CPI numbers surprised on the downside, coming in at 6.8% YoY, compared with market expectations of 7.1% YoY and versus 7% YoY a month ago. The decline in inflation was largely due to easing food prices. The Indonesian government's initiatives to import more rice and remove import duties on wheat, flour, soy beans and animal feed, have also help to ease food price inflation. After hiking the policy rate by 25 bp in February, the Deputy Governor of Bank Indonesia, Hartadi Sarwono, recently commented that the central bank might not need to raise the policy rate any further, saying that the government's efforts to contain food inflation were sufficient. Thus, the market is split as to whether Bank Indonesia will hike the policy rate at its upcoming policy meeting scheduled for tomorrow, 4 March. Despite recent concerns about inflationary pressures and rising interest rates, we believe that structural growth in Indonesia is continuing to unfold. Based on our latest earnings forecasts for 2011E and a higher equity risk premium, we have slightly adjusted our 12-month DDM-based JCI target downwards to 4,100 from 4,300. With the recent correction, Indonesia is trading at a 12M forward P/E of 12.7, approaching its 5-year average P/E of 12.4. We believe the recent correction has provided a window of opportunity for investors to buy into our preferred consumer and infrastructure-related sectors for the multi-year growth
story. Our TOP PICKS are Bank Central Asia (BBCA IJ, BUY), Indofood (INDF IJ, BUY), Indosat (ISAT IJ, BUY) and United Tractors (UNTR IJ, BUY).