Indonesia strategy Asia marketing feedback - Macquarie Research

Event
§ We visited more than 50 clients last week in Hong Kong (2 days) and Singapore (3 days) to present our view on the Indonesian market, especially on the impact of high oil prices on the government budget and the Indonesian economy as well as present an update on politics and the land acquisition law. We mentioned to clients that the government now has better ability to absorb high oil prices than in the past and we maintain our positive view on the market.

Impact
§ Impact of high oil prices and the overall economy. We presented our view that for every US$10/bbl increase in the oil price (above US$80/bbl) for the full year, and without a limit on the fuel subsidy, the government would need to increase the overall subsidy by Rp21tr (0.3% of GDP) based on the current exchange rate of Rp8,800/US$. High oil prices should have a positive impact on the overall economy given the implied broad uplift to hard commodity prices, which should outweigh the potential drag from a larger net oil import bill. This should support the current account and trade surpluses as well as investment, underpinning both rupiah strength and GDP growth.

§ Government has the ability to absorb high oil prices. We believe that the government has the ability to absorb high oil prices up to US$120-130 without having to reduce the fuel subsidy. The strengthening of the rupiah should also help reduce the subsidy amount. Nevertheless, we informed investors that the government plans to cap the fuel subsidy beginning in September this year, resulting in at least a 20–30% reduction in the fuel subsidy burden.

§ Most clients are neutral/slight underweight, looking to buy. Most clients that we visited were either neutral or slightly underweight but have added some positions in Indonesia in the past weeks. They agreed with us that financials are the best way to play Indonesia given the soundness of the sector. In contrast to our previous marketing trip, only about 10% of the clients that we met asked about market valuation.

§ Our sector pushes are financials, property, and select coal and cement names. On a top-down basis, we favour the financial sector especially banks with a strong deposit franchise and plenty of capital to grow. These banks are Mandiri, BNI and BCA in order of preference. On the property front, we highlighted to investors that pre-marketing sales were very strong in 1Q11. We also pushed some cement and coal names, such as Semen Gresik, Harum Energy and ITMG. Our Asean economist, Philip McNicholas, provided a fresh view on the new mining law, which he believes should be very positive for investments and increase investor certainty.

Outlook
§ Maintain our positive view, index target of 4,500, land acquisition bill closed to being passed. We maintain our positive market view and believe valuations are attractive at 2011E PER of 13x, which is similar to the Asia Pacific ex Japan valuation. We expect the land acquisition bill will be passed in 1H11 and should be positive for the market and the Indonesian structural growth story.