Special Report on Indonesia + Risk-Reward on listing regulation for foreign resources companies + cement - Nomura

Indonesia: Building momentum – we identify six key investment opportunities and 10 milestones which, if realised, should lift Indonesia’s real GDP growth above our base case of 7%, on average, over the next five years.

Indonesia is gaining its rightful place on the global stage, as evidenced by its membership in the G20. Its abundant natural gifts, including a large and young population, a stable liberal democracy, proximity in the world’s fastest growing region, and an abundance of natural resources, underlie its tremendous – and now widely appreciated – potential.

It has however taken one and a half decades since the Asian Crisis to regain the “darling of investors” status. The economy – averaging 5.7% growth over the past five years, compared with 4.7% over the five years preceding that – is building momentum.

On the equity side, we favour natural resources stocks (such as Bukit Asam, Adaro, Bumi Resources and London Sumatra); stocks that benefit from discretionary consumption (Astra International); infrastructure stocks (Jasa Marga and Semen Gresik); and stocks in the under-penetrated banking sector (micro-finance leader Bank Rakyat).

Indonesian Finance Minister (in a press report yesterday) was exploring the possibility of requiring resource companies in Indonesia (including mining, plantations & forestry) to list local assets in Indonesia, with a possible minimum public free float of 40%. Our commodity analysts, Ken Arieff Wong and Isnaputra, think this is still at very preliminary stages with no timeline given, and would make companies with Indonesian assets re-visit their plans to list, but any strict requirement (eg 40% public free-float) could be a negative given dilution concerns (though the flipside positive would be a 5% reduction in statutory corporate tax rate). In the mining sector, ITMG can be impacted by the proposal while the impact on INCO is debatable, in our view.

Lafarge (not listed), the global cement player, is reported to have expressed interest and submitted application to the Ministry of Industry seeking permit to build cement plant in East Java. The company is currently in the process of conducting a feasibility study for the plan. In addition, Lafarge is also planning to build a 1.6m tpa of cement plant in Langkat, North Sumatera with total investments of US$275m. If completed, these two plants will augment Lafarge’s presence in Indonesia, in addition to the existing 1.6m tpa capacity it has in Aceh that it has just recently rebuilt post-Aceh tsunami.

Lafarge will be the second international players reported to have interest in investing in the cement industry in Indonesia (the other was a Chinese player), highlighting the attractiveness and potential growth of the sector. While additional players will increase competition pressure in the industry, execution will be the key challenge for new player. East Java tends to be the place for new players to focus given (i) the presence of abundant resources (there is actually a line of limestone mountain in the northern part of Central/East Java), (ii) presence of ports (as distribution point as well as entry point for coal supply).