Indonesian property - On a rerating path - Macquarie Research

Event
* The Indonesian property sector index has increased 10% this month and has outperformed the market by 7%. Nonetheless, we maintain our Overweight on the sector as we expect a rerating to occur because the sector is still trading at a lower discount compared to the last upcycle, 2Q11 pre-sales remain on track, and ASP has increased faster than expected.


Impact
* The sector is still trading at a lower discount compared to the last upcycle.During the 2008 upcycle, the sector traded at a 28% discount to NAV, while individual stocks traded at an even lower discount. Currently the sector is trading at a 41% discount to NAV.

* 2Q11 pre-sales o n track . Ex- Lippo Karawaci, which has not reported 2Q11 pre-sales yet, 2Q11 pre-sales for the stocks under our coverage rose 28% YoY and 27% QoQ due to more supply/launches this quarter. This brings 1H11 pre-sales up 28% YoY to Rp5.5tr, or 43% of our FY11 forecast.

* Faster-than-expected increase in ASP. Alam Sutera's ASP has increased 34% in the year to May (vs our FY11 expectation of 50% growth YoY) and BSD City's ASP (Bumi Serpong Damai project) has increased 30% in 1H11 (vs our FY11 expectation of 21% YoY). We believe that a higher-than-expected ASP increase is possible because the developers plan to focus more on pricing rather than volume this year. In 1H11, BSD City sales volume has dropped 14% YoY (vs our expectation of a 9% drop YoY), while Alam Sutera's land sold has declined 33% YoY (vs our expectation of a 24% decline YoY).

Outlook
* We maintain our Overweight on the sector. Our top picks in order of preference are: Summarecon Agung (trading at a 41% discount to NAV), Bumi Serpong (37% discount), Ciputra Development (38% discount), Lippo Karawaci (43% discount), and Alam Sutera (28% discount).


Stocks mentioned:
Summarecon Agung (Rp1,150, OP, TP: Rp1,450)
Bumi Serpong (Rp1,040, OP, TP: Rp1,200)
Ciputra Development (Rp520, OP, TP: 550)
Lippo Karawaci (Rp740, OP, TP: Rp840)
Alam Sutera (Rp400, OP, TP: Rp400)