Property: Greater Jakarta ASP Up 15.1% YTD - Mandiri

Favorable macroeconomic condition (inflation and mortgage lending) might have supported property sector, which is shown by an astonishing 15.1% YTD increase in residential ASP, faster than our initial estimate, based on our survey in Greater Jakarta area. We think this phenomenon could continue due to strong property demand as we view that there should be no major interest rate hike in near term. Our sensitivity analysis shows that a 5% increase in our FY11F ASP growth assumption results in an up to 9% increase in NAV and EPS12F for companies under our coverage. BSDE and SMRA are our top picks, given their main exposure in Serpong, an area which we think should have solid growth due to its strong demographic profile

Favorable macroeconomic situation should continue. Our initial jitters on the prospect of the FY11 property sector growth seems to be unfounded, with inflation still under control, while consumer confidence index sustained above 100 (see exhibit 6). These give banks further room to expand, including loan for property that ytd has increased by 15.6% higher than ytd growth for the same period in 2010 (3.1%). Remained low mortgage rates (8.80% - 10.75%) stimulate property demand, hence boost capital value. Our economist predicts only a mild 25-bp hike later this year as he expects moderate inflation in the second half of the year due to high-base effect from last year and relatively favorable weather that will keep food prices under control.

Faster-than-expected ASP growth. Our survey showed that average land price increased in Jakarta ranging from 3% to 30% with West Jakarta recording the highest increase. However, the increase in West Jakarta was mainly driven by landbank scarcity, unlike in Serpong which was driven primarily by strong demand. We see the general price increases in Jakarta has gone faster than analysts’ expectation of about 20% FY11 ASP growth, especially for area in Serpong-Tangerang. Upside risk by 2-9% is seen, in our sensitivity calculation, taking account the 5% upgrade in our FY11F ASP growth assumption, making property stocks more attractive to collect (see exhibit 2).

Expecting sustainable ASP growth in Serpong area. Looking at the price growth, we place our bet on Serpong area. We are intrigued by its demographic profile, resembling to that in West/North Jakarta areas, with strong purchasing power and entrepreneurial spirit to develop the commercial side of the area. As an anecdotal evidence, a 200-m2 land for residential in Kelapa Nias, Kelapa Gading – West Jakarta was priced Rp2.1mn/sqm in 1997, but had already gone to Rp6mn/sqm in 2002 (only in 5 years!!). We may see a similar pattern of land price growth in Serpong.

Top picks: BSDE and SMRA. Given their main exposures in Serpong, we pick BSDE and SMRA as our top picks. BSDE and SMRA, currently trade at 49% and 43% discount to RNAV11F and PE11F 20.5x and 25.0x, respectively. Risks: (1) surge in interest rates (2) execution risks.