Credit Suisse Indo Strategy: Not yet to enter Indonesia?, Focus on Domestic undemanding valuations!

1) ASIAN STRATEGY: Report- Indonesia drops out of the expensive four club

iSay: 3 sectors are cheaper than the MSCI Indonesia Index, they are Industrials, Telecom, and Consumer Cyclicals, which we continue to reiterate Buy ASII on weakness, Buy ISAT/EXCL and Buy UNTR. Indonesian Coals, CPO and Consumer Staples are still premium to MSCI Asia Index, therefore we continue to reiterate TAKE PROFIT UNVR/KLBF and AALI/IFAR/LSIP, and TRIM Indonesia Coals as Queensland floods situation is improving (Spot Thermal coal has corrected down from USD135 to USD125 but still above our forecast USD120/t for 2011F, while spot Hard Coking coal price eased from USD385 to USD315 but still above our forecast USD235/t for 2011F). Sakthi is recommending MEXF Target 1,350pts end-2011F (19% upside from current 1,137pts) and MXASJ Target 650pts end-2011F (15% upside from current 565pts), while Arief Wana is recommending JCI Target 4,400pts end-2011F (31% upside from current 3,346pts).

·         Sakthi Siva (Report a attached): Indonesia drops out of the expensive four club. While we continue to Underweight the 2007 club (TIPs, India, Malaysia), Figure 1 highlights that Indonesia’s price-to-book versus ROE premium versus the region has dropped from a high of 40% on 31 October 2010 to 7% currently. It is now the fifth most overvalued market (after Shanghai, India, Malaysia and Hong Kong). And within Indonesia, three sectors have moved to a discount – industrials, telcos and consumer cyclicals. Additionally, Indonesia has been associated with net foreign selling YTD of US$427 mn versus net foreign buying of US$2.3 bn in 2010. See Figure 3.

·         But 2011E consensus EPS revisions have turned negative. In our recently introduced GEM model portfolio (see our 6 January GEM Strategy report 2011 Outlook), we suggested zero exposure to Indonesia in a GEM context. Despite the move in valuations, our hesitation to upgrade Indonesia stems from the start of consensus EPS downgrades. For 2011E consensus EPS, Indonesia is associated with downgrades in three of the last five months (see Figure 2) with Telcos, Energy and Materials seeing downgrades. We also note that Coal, Palm Oil and Consumer Staples still trade at high premiums of 61%, 25% and 17%, respectively.

·         We would prefer to upgrade Indonesia if it moves to a discount versus the region. We are likely to review our Indonesia weightings if Indonesia falls to a discount (currently 7% premium) within the region particularly if it becomes one of the four most undervalued countries.

2) INDONESIA STRATEGY: Focus on Valuations as JCI down 11% from peak - MW

iSay: As JCI has broken 3,400pts Technical Support, Psychological Support is now at 3,000pts. However, based on Valuation and Spread of T-Bond and Earnings Yield, there are some Buy Signals. I agree that current market valuation 13x 2011F PER is at discount to 15x forward market PER during 1992-1997 while 9.2% 10-years T-Bond yield has priced the worse case (ie assuming average 7% CPI then BI rate 7.5% and 10-years T-Bond 9% ish). Arief is recommending TRIM Coals and BUY Domestic stocks with undemanding valuations ie ASII, BMRI, BBRI, SMGR, TLKM, ITMG and INDF!

Market is waiting for January Inflation on 1^st February and BI rate direction subsequently. We expect no change in BI rate until early March as soon as Core CPI hit 5%. BI has maintained BI rate at 6.50% since August 2009, but now we are at negative real interest rate. We are forecasting 7% average CPI in 2011F and BI rate to increase 100bps starting from March to 7.50% end-2011F. Fundamentally even 7.50% BI rate is historically low rate for Indonesian Economy!

·         Arief Wana (Daily attached): On YTD basis, JCI has dropped 9% (11% from its peak), driven by, in our view: 1) technical factors – strong outperformance, BMRI’s rights issue, PT Garuda IPO, 2) inflation fears, and to a lesser extent 3) valuations. The market is now trading at 13.0x FY11E P/E, which is at a 15% discount to its 1992-97 average.

·         Our ten-year bond yield has sharply risen to a ten-month high of 9.2% (from 7.5%). However, based on our analysis of the spread between bond and earnings yield, the spread is now back to its seven-year average and does not yet suggest a buying signal.

·         In line with our call in the past three months and on YTD basis, the biggest underperforming sectors are cement (-16%), consumer (-11%), and automotive (-10%), while the coal-related sector has been the biggest outperformer (+22%).

·         We started to see some valuations of these domestic sectors getting attractive. Top six companies with P/E below the market (13.0x), strong management and balance sheets are Astra International, BMRI, BBRI, SMGR, TLKM, ITMG, and INDF.