Indo market - Indonesia strategy : Myth buster - Deutsche

- The misperction on Indo econ - super dependent on commodities......
- Remember commodity collapse in 08/09, rather than following the direction of commodity prices, the economy still grew by 4.5%.
- Do you know, the commodity sector contributed only 10% of economic growth over the past five years!!
- Broad-based investment surge is driving the manufacturing and trade sectors to account for half of GDP growth.
- The two largest commodity exports (coal and CPO) account for less than 7% of GDP!!
- Weak commodity prices – means less money, but not losing money. Cash costs for coal and CPO companies are well below the respective spot prices (less than 50%).
- Very interesting to note that despite lower commodity prices in 08/09, indo coal and CPO companies actually added employees and continue to do so until now.
- Triple “surges” driving the economy, not commodity sector per se
Invesment surge, from consumer foods, household/personal care, packaging – to the high capital-intensive cement and steel sectors, as well as retail/distribution, etc. The return of P&G and General Motors’ plan to make Indo its regional production hub are two high-profile cases, replicated in many industries at varying scale. The manufacturing sector is already growing at its fastest pace since the FY98 crisis, supporting record-level job growth.
Credit surge, is another important growth driver; with credit expansion accounting for half of Indonesia’s growth over the next five years as credit will triple and nominal GDP doubles again.

Middle-income surge, more money to spend.
- What do we like? Domestic plays with Top Picks of: ASII, GGRM, UNTR, BBNI, ICBP, GJTL and APLN while underweight commodity and cement.

Snippets:
- Econ, the govt will provide tax holiday facilities to lure investments in the country. The facilities will last for 5 to 10 years, in the form of income tax break. Other key details include a minimum investment of Rp1tr and/or pioneer industries. There are five sectors/industries that will receive these incentives such as base metal, oil refinery (and/or oil and gas organic base chemicals), renewable energy and telecomunication tools. So far at least five foreign firms, such as Posco, Hankook Tire, Kuwait Petroleum Corp, heavy equipment maker Caterpillar and acrylic fiber producer Indorama will receive tax incentives. China's Guong Feng Iron Steel and Iranian Oil Refining & Distributioon may also recieve these incentives from the govt. The govt will also allow exiting investors which have commercially in operations for less than a year may also ask for these incentives.

- KIJA, announced its Rp1.5tr rights issues. The proceeds will be used to acquire 100% stakes in Banten West Java Tourism Development (BWT) and 21.63% stakes in Tanjung Lesung Leisure Industri (TLL). As reference, currently BWT owns 78.37% stakes in TLL. As part of the rights issues, the co. planned to issue 6.0bn new shares (with the RI term of 219 for 500). Post rights issues, KIJA asset base will rise by 44%; while equity will rise by 88%. The transaction is implying PB multiple of 2.0x. We expect post acquisitions there will be more capex needed to be spent as both target companies have been loss making in 2010 and during 1H11. Revenue have been very small with consolidated 1H11 revenue of Rp450ml - particularly when compared to the size of the rights issues.