Strategy Alert - Burgeoning middle income - Deutsche

A survey conducted by the Nielsen Company Indonesia highlighted increasing consumption in what is regarded as premium products. For example; cheese (50 grams packaged) up 118%yoy in 2010, frozen meats (chicken, beef and fish) up by 23‐32%yoy, and disposable baby diapers up 93%yoy, supporting the overall FMCG industry to grow by 12% in 2010. The country's demographic profile is certainly conducive to economic growth where private consumption makes up two‐thirds of it.

The increased demand for such products has also led to higher advertising spend; i.e. 2010 adspend in cheese products was up 32%yoy, frozen foods up 39%yoy, whilst baby diaper adspend was up a whopping 70%yoy. This suggests that business confidence is also rising, with companies willing to spend for product awareness and increase its brand equity.

Separately, data from the World Bank noted a continuous reduction in poverty rates, falling from 15.4% in 2008 to c.13% in 2010 (see chart below). The government targets a further contraction in the poverty rate going forward, expecting it to decline to 11.5% by 2012. The government's master plan to speed up infrastructure development and connectivity through its economic development corridor scheme certainly supports this case.

The above development is consistent with one of our four investment theses. In terms of stock selection, companies that have strong pricing, and importantly price leverage to earnings, such as Indofood CBP (Buy, IDR5,400) and Gudang Garam (Buy, IDR43,500) (1:7 and 1:5 price to earnings leverage), should benefit most from rising incomes. Companies that cater to the rising middle‐income demographic should also do well.