Equity Research - Asia Indonesia strategy : Criteria for stock picks - Deutsche Bank

A favorable confluence of events The investment surge has already resulted in record-level job creation. The four-fold increase in the upper-middle income population since FY03 has made this consumer group very relevant. The doubling in sales of disposable diapers and of 50g cheese last year, plus the six-fold rise in imported boxed beef in the past five years, are just a glimpse of that impact.
Strongly rising credit (likely to triple in the next five years) should further fuel this robust growth. The recent inflation scare is a distraction that does not affect the structural growth trajectory. Indeed, we think the market has no
again in the next five years. We reaffirm our 4,500 12-m index target.

Key criteria for stock selection As Indonesia evolves and breaks aggressively away from the "lost decade", there are multiple dynamics to consider, and we have refined our thoughts into four themes and pitfalls to avoid with regard to stock selections:
Avoiding pitfalls : Oligopoly structures will, for the first time, be threatened by competition as investment surges and access to capital become cheaper and easier. Some companies could see margin and valuation compression.
Pricing power and earnings leverage: Companies with such attributes are well positioned to capture the fast-growing consumer wallet.
Credit surge: The tripling of credit in Brazil and India in the past six years will likely play out in Indonesia. The synthesization of underleveraged quadruplets - households, corporates, banks and government - means that any businesses that participate in credit and/or its supply chain will do well.
Rupiah needs to track Yuan? The strong rise in FX reserves, due to FDI and current account surplus, means that Rp direction in combating inflation is very much in BI's hand. We expect BI to tag Rp appreciation to its peer exporters, especially China, given the labor-intensive nature of the manufacturing sector.
Stock selections based on our four themes
Big caps: ASII, BBNI, GGRM, BBRI, PTBA, ADRO and SMGR
Mid/small caps: ICBP, GJTL and APLN
Caveat emptor - rising oil price
The impact of a rising oil price looks to be manageable at the fundamental level. Indeed as FX reserves rise has doubled that of portfolio inflow, this helps Rp stability and contains the risk. However, a misperception risk exists; the market may draw parallels to the events in FY05 and FY08.
As such, we would monitor the bond prices as a leading indicator for sentiment change (see pages 22-23).

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