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Traffic congestion is an upside
Equity Strategy Indonesia abc Global Research The Flying Dutchman Indonesia is less export and resources dependent than commonly assumed; thus, we think its growth is resilient Indonesia: Traffic congestion is an upside Indonesia has oligopolistic markets with high ROEs that weak infrastructure HSBC key Indonesia stock ideas helps defend BBG Price HSBC TP Company name code (IDR) rating (IDR) Risks are its high valuations and Bank Central Asia BBCA IJ 9,000 OW 10,000 uncertainty regarding 2014 elections Bank Mandiri Persero BMRI IJ 8,450 OW 9,250 Tempo Scan TSPC IJ 3,475 OW 3,900 Lippo Karawaci Tbk LPKR IJ 950 OW 1,165 Myth busting. Indonesia’s growth model differs from those Astra Agro Lestari AALI IJ 20,650 UW 22,000 Bank Rakyat Indonesia BBRI IJ 7,200 UW 6,000 of other Asian countries. It is less reliant on exports than Jasa Marga JSMR IJ 5,750 UW 5,300 commonly assumed, and it is services – not resources – that Modern Internasional MDRN IJ 770 UW(V) 660 Sumber Alfaria Trijaya AMRT IJ 5,200 UW(V) 4,450 actually hold the key to growth. Contrary to popular Source: HSBC estimates. Prices as of 13 November 2012. misconceptions, labour productivity and growth in services have been more important drivers of growth than resources and an expanding workforce. The upside to traffic congestion. A lack of infrastructure and high levels of traffic congestion create high entry 16 November 2012 barriers to Indonesia’s oligopolistic markets. This keeps Herald van der Linde* ROE high and cash flows strong. Head of Equity Strategy, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited Capex boom. Domestic companies have put their high cash +852 2996 6575 firstname.lastname@example.org levels to use by investing back into their businesses. As a Neel Sinha* result, modern retail is growing, creating opportunities for Head of Equity Research, Southeast Asia The Hongkong and Shanghai Banking Corporation Limited, non-retailers to penetrate Indonesia too. Singapore Branch +65 6239 0658 email@example.com Indonesia buys Indonesia. Healthcare and pensions systems are being built. A consultancy argues that the fastest Devendra Joshi* Strategist growing area of consumer spending will be savings and The Hongkong and Shanghai Banking Corporation Limited investment. Expect demand for equities to rise too. +852 2996 6592 firstname.lastname@example.org Anurag Dayal* Fund weights are low but rising. Funds are reducing their Associate UW position in Indonesia. This and high earnings resilience Bangalore make us rate Indonesia overweight in an Asian context. But high valuations suggest upside is limited. Risks: uncertainty relating to presidential elections and View HSBC Global Research at: http://www.research.hsbc.com rising interest rates. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Key Overweight: BCA, Bank Mandiri, Lippo Karawaci, Issuer of report: The Hongkong and Shanghai Banking Tempo Scan. Corporation Limited Key Underweights: Bank Rakyat, Jasa Marga, Sumber Disclaimer & Disclosures Alfaria Trijaya (Alfamart), Modern Internasional, Astra This report must be read with the Agro Lestari. disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Equity Strategy Indonesia abc 16 November 2012 The upside to congestion Indonesia is less export dependent than commonly assumed; services, not resources, are the key growth driver Traffic congestion could be viewed as a good thing; it creates entry barriers that enable Indonesian companies to maintain oligopolies and high ROEs; strong cash flows fuel a domestic capex cycle Risks are high valuations and uncertainty regarding the 2014 elections Traffic congestion = good If and when Indonesia makes large investments in infrastructure and creates efficient road, rail and Three little words that can mean water transportation systems, expect profit minutes or hours margins to fall. But we think this is unlikely to In a place famed for its traffic congestion, one happen anytime soon. phrase that has entered the lexicon of daily life in Jakarta is “kalau nggak macet”, meaning “if it is It is not just physical barriers that act as a not congested”. challenge to building a business in Indonesia. During a meeting with a foreign diplomat in Long ago, all of Jakarta’s taxi drivers learnt to utter Jakarta, the Flying Dutchman learnt how difficult these three little words to hedge their estimates of it was to persuade companies from his country to travel times. When asked how far it would be to the come and invest in Indonesia. next meeting in the Flying Dutchman’s latest visit to the Indonesian capital, our driver would Perceptions, therefore, act as a barrier to entry too. frequently answer “10 minutes… if it is not In a sense, the diplomat needed to bust some congested”. As it turned out, this meant anywhere myths about Indonesia. between 10 minutes and well over an hour. The Five myths about Indonesia reality is that roads are always congested in Jakarta and asking for an ETA was pointless. In this regard, the diplomat that we met might want to take a look at a recent research note1 The irony is that traffic jams, or macet as the report written by McKinsey, in which the locals call it, play a beneficial role for domestic consultancy firm addressed five common businesses. By hampering efficient distribution misconceptions about Indonesia. These are: across the archipelago, the lack of good infrastructure in Indonesia keeps barriers to ______________________________________ 1 “The archipelago economy: Unleashing Indonesia’s potential”, competition high. McKinsey Global Institute, September 2012 2 Equity Strategy Indonesia abc 16 November 2012 Myth 1: Indonesia’s economy is relatively Consumers trading up unstable. In reality, Indonesia’s growth has been One of the implications of these myths (in less volatile than all of the BRIC countries and particular, myths number three and four) is that South Africa in the past decade. The Indonesian Indonesia is less dependent upon exports than is government has also made considerable generally assumed. improvements in macroeconomic management. Therefore, the decline in commodity prices seen Myth 2: Economic growth centres almost in 2012, especially for coal and palm oil, has yet exclusively on Jakarta. Although Jakarta to put a significant dent in domestic demand. accounts for 20-25% of total output, a large group Indeed, the HSBC PMI for Indonesia has actually of mid- to large-sized cities is growing faster than ticked upwards in 2012. the rest of the economy. These cities include Bandung, Surabaya, Medan and Makassar. Indonesia PMI Penetrating the whole country to build a business Indonesia Manufacturing PMI 54 Index sa is thus increasingly important. 52 Myth 3: Indonesia follows the Asia export- 50 driven growth model. Commodity exports and non-commodity exports make up only 35% of 48 2010 GDP. Domestic GDP accounts for 65% of 46 total, versus 29% in Thailand and 6% in 44 Malaysia (2010). Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Myth 4: Resources are the economy’s main Source: HSBC driver. Yet the resource sector’s share in the economy has fallen from 28% in 2000 to 26% in This does not imply that domestic demand is 2010. Services are the “real” growth sector. immune for weaker offshore markets. It just appears that the transition mechanism to domestic Myth 5: Growth has come from an expanding workforce. That is a fallacy. McKinsey calculates demand is much weaker than in countries where exports are a larger share of the economy. that Indonesia’s growth is largely driven by productivity increases. It calculates incremental A local economist also suggested that the cash- productivity accounted for 61% of total GDP rich nature of household and corporate balance growth in 1990-2010, versus 55% in Malaysia. sheets provide a buffer between weaker export growth and domestic demand, something we will These myths suggest that robustness in domestic demand should not be underestimated, and neither revisit later in this note (as it will appear that this drives the domestic investment cycle). should the need to build a business beyond Jakarta’s borders. But what about some high-frequency data, such as car sales, that have recently weakened? The following chart does illustrate that domestic car and motorcycle sales have weakened during the year. 3 Equity Strategy Indonesia abc 16 November 2012 But this has as much to do with administrative Modern retail ahoy regulations on cash down-payments for these From wet market to mini market consumer goods, imposed in June this year, as Thus far, we noted that growth in services and weaker consumer demand. improvements in labour productivity have been Indonesia vehicle sales YoY growth important sources of growth for Indonesia, and 150% Indo local motorcy cle sales that now translates into robust demand for Indo local car sales 100% (better) consumer products. Indonesians are slowly trading up. 50% Still, about 75% of retail sales are conducted 0% through traditional channels – wet markets and the -50% small roadside shops known as warungs. But -100% modern retail is now making significant inroads. Oct-01 Oct-04 Oct-07 Oct-10 Jan-01 Jul-02 Apr-03 Jan-04 Jul-05 Apr-06 Jan-07 Jul-08 Apr-09 Jan-10 Jul-11 Apr-12 The mini market convenience store format for Source: Bloomberg, HSBC food and drinks is growing fast. Growing demand for chilled food acts as a further impetus to the Indeed, during various meetings we had in Jakarta, development of these modern retailers. we noticed that there are healthy signs that In a meeting, PT Modern informed us that in its Indonesian consumers are trading up. As incomes partnership with 7-11, it will sell fresh foods in its rise, their purchasing patterns are changing. newly opened stores. Here are a few examples: The development of modern retail offers various Astra International noted that consumers are growth opportunities. switching from manual gear motor cycles into First of all, early entrants such as Alfamart appear more expensive, automatic gear scooters, to be leading the pack and experiencing strong which have a better design too. growth in sales and new store openings as its store Kalbe Farma noticed that consumers are network matures. Other key players are Indomart switching from energy drinks to health drinks and Modern Group, a recent entry building a that contain less sugar. It recently launched a network of 7-11 stores. coconut-based health drink that has gained Secondly, it also allows other consumer popularity very fast. companies to benefit from this growth. In food and beverages, Indofood saw a similar Indonesians are highly brand loyal, possibly even trend. Consumers prefer beef noodles over more so than in other parts of Asia2. Thus, chicken noodles and buy more traditional snacks established brands benefit from better penetration that are now wrapped in modern packaging. of their customers. To make sure their consumers remain loyal, they spend more on advertising. Semen Gresik noticed strong demand for Indofood mentioned that TV media is key and cement from households as consumers are estimates media inflation at about 20% in 2012. upgrading or extending their dwellings across the country. It is the largest driver of ______________________________________ cement consumption. 2 McKinsey, September 2012 4 Equity Strategy Indonesia abc 16 November 2012 The third benefit from new, formal retail But it is not just in retail that road blocks act as a distribution is that other non-consumer companies barrier to entry. In cement, Anhui Conch (914 can piggyback on this new retail concept. Banks, HK, HKD24.95, N(V)) of China and Thailand’s in particular BCA, and to a lesser extent BRI, Sian Cement (SCC TB, NR) have expressed an appear to be busy installing ATM machines in interest to enter Indonesia, but regulations and these mini marts as a convenient way to get closer land acquisitions will take time before they can to their customer. start building plants. And distribution networks need to be built from scratch. “Macet” and congestion, again Concentration, cash flow and capex Barriers, oligopolies and margins These difficulties penetrating Indonesia have We already noted that a growing segment of created a highly concentrated market structure. consumer demand comes from outside Jakarta. Indeed, most Indonesian industries are fairly This is not only visible in product sales in oligopolistic in nature: provinces outside Java, but also in transport In banking, the top three control 60% of volumes. Astra International, for example, owns a assets. As a result, the Indonesian banking toll road connecting Java and Sumatra. Traffic on sector is highly profitable. Average NIMs are that road grew 28% y-o-y in the first nine months 5.4% versus the average for Asia of 2.42%4. of 2013 as Sumatra-based demand thrives3. In cement, the top three producers control In general, while the development of modern 75% of production. retail has created better distribution systems across Indonesia, macet or traffic congestion remains Astra controls 55% of car sales and 58% of a challenge. motorcycle sales in Indonesia (9M2012). Supply chains are still not very efficient: In healthcare, parts of the over-the-counter distribution centres do not yet operate 24 hours a market are oligopolistic. In antacid products, day, the transport infrastructure is weak and Kalbe Farma’s ‘Promag’ and ‘Waisan’ regulations can often be a barrier too. products command 77% of the market. With regards to the latter, a recently imposed In previous reports, we have noted that the level franchise regulation stipulates that retailers need of competition in Indonesia is lower than to have 40% of all stores in excess of 150 under a elsewhere in the region, allowing for sustainably franchisee agreement. high profit margins5. This is a significant barrier to entry for new players Macet, in so far as it increases barriers to entry, that will have to build a franchise network from the can thus be a virtue for incumbent players. This is very beginning and locate hundreds of local illustrated in Table 1, which aggregates the partners before they can actively build a sizeable financials of Indonesia’s largest non-financial- network. It means less control and more listed companies. coordination complexities with local partners. ______________________________________ ______________________________________ 4 Bank Rakyat Indonesia Q3 2012 financial update 3 Talking about congestion, the growth in cars outpaces the growth in 5 “Emerging Asia ROEs- Sustainable profitability in China, India and roads across Indonesia, so congestion levels must be on the rise. Indonesia” March 2012 5 Equity Strategy Indonesia abc 16 November 2012 As a result of these oligopolies, Indonesian Indonesia capex to sales at 10-12% in line with EBIT to sales margins remain high. EBIT margins hover around 16% 15% and net margins around 11-12%. ROEs Capex /sales 14% remain high too, around 20%. And as the following chart illustrates, operating cash flow is 12% strong – growing over 15% pa in recent years. 10% Indonesia op CF grows at over 15% YoY 8% 16,000 6% 14,000 OpCF (IDRbn) 2008 2009 2010 2011 2012f 2013f 12,000 10,000 Source: HSBC estimates 8,000 6,000 Indonesian companies are, thus, cautious when it 4,000 comes to investing. Lessons were learned during 2,000 0 the 1998 crisis. Still, current high levels of 2008 2009 2010 2011 2012f 2013f profitability and strong cash flows allow them to put capex in place. Source: HSBC estimates The domestic capex cycle is one driver of As the next table also indicates, capex is mostly investments. FDI is the other. Indonesian wages funded from internally generated operating cash are low, allowing foreign companies to relocate flow with capex to sales at 10-12%. factories from elsewhere. While we were in Jakarta, L’Oreal celebrated the opening of its The growth in domestic cash flows drive the largest plant just outside Jakarta. domestic capex cycle and not (excessive) growth in debt. Indeed, one could argue that Indonesian But while low wages are a necessary condition to companies are rather slow in building new plants. attract FDI to Indonesia, it is not a sufficient A look at asset turnover indicates that they are condition for FDI to continue. making sure they sweat an asset first before building a new one. Asset turnover is rising. Table 1: Indonesia corporate - ex financials (USD). Sustainably high ROEs 2008 2009 2010 2011 2012f 2013f Growth Sales 26.7% 2.4% 23.6% 19.7% 12.7% 8.9% EBITDA 7.9% 8.1% 8.7% 8.3% 9.7% 10.0% EBIT 4.6% 3.9% 7.8% 9.0% 11.1% 9.7% Net profits 9.1% 0.1% 33.2% 16.8% 6.1% 9.5% Margins EBITDA 26.3% 27.8% 24.4% 22.1% 21.5% 21.7% EBIT 18.7% 18.9% 16.5% 15.0% 14.8% 14.9% Net profit 11.4% 11.2% 12.0% 11.7% 11.0% 11.1% Productivity Capex/sales 15% 13% 11% 12% 11% 10% Asset turnover (x)-Fixed assets 1.6x 1.5x 1.7x 1.8x 1.9x 1.9x Asset turnover (x)-Total assets 1.0x 0.9x 1.0x 0.9x 1.0x 1.0x Net debt/Eq 0.4x 0.3x 0.4x 0.3x 0.3x 0.2x ROE 23% 19% 22% 21% 20% 19% Source: HSBC estimates 6 Equity Strategy Indonesia abc 16 November 2012 Congestion and other road blocks (labour strikes) In addition, Indonesia is, despite its wealth of oil won’t help companies that run so-called just-in- resources, a net oil importer. Rising oil prices time production schedules, which could explain further increase the bill for these imports. why various larger technology companies have And this is not likely to change. Indonesia is yet to move to Indonesia. entering a resource-intensive stage of General workers – wages per annum development in the next decades. McKinsey 25000 USD pa estimates that 75% of Indonesia’s demand for oil needs to be imported by 2030. 20000 Given low domestic fuel prices, Indonesia spent 15000 USD18bn on fuel subsidies in 2011, of which 10000 USD8bn was for gasoline. This money could also be spent on dealing with road improvements to 5000 deal with traffic congestion or other ideas to 0 alleviate poverty6. ID HK TW CH PH TH IN BD SL SG LO MY PK CB MY KR VN In short, this all further stresses the need for a Source: HSBC, Jetro continuous flow of FDI into Indonesia to alleviate Thus, strong cash flow allows for the domestic pressure on the current account. capex cycle to grow, creating employment and Investment in Indonesia on the rise acting as a buffer against the slowdown in export % y-o-y markets. This is one of the reasons for the 20 Real Inv estment resilience in domestic demand conditions, despite 15 weakness in key commodity prices such as palm 10 oil and coal. 5 Indonesia CA balance 0 15000 -5 USD mn 01 02 03 04 05 06 07 08 09 10 11 12 10000 Source: HSBC, CEIC 5000 0 A business to bank on -5000 Current a/c balance CA: Goods balance Indonesia’s banking industry is probably one of -10000 the most under-penetrated in ASEAN. A survey 04 05 06 07 08 09 10 11 12 has estimated that only 40% of Indonesian Source: HSBC, CEIC businesses in key urban centres have a banking relation and that 12% of all businesses have The flipside of growing domestic demand has access to bank credit, versus 80% in Thailand7. been a weaker current account and pressure on the currency, something that became very visible earlier in 2012. ______________________________________ 6 A proposal to reduce these fuel subsidies was delayed earlier in 2012, effectively pushing this issue to the next administration elected in 2014 7 McKinsey, September 2012 7 Equity Strategy Indonesia abc 16 November 2012 At the ‘bottom’ of this banking market (measured Indonesia loan-to-deposit ratio by income of the average customer) is Bank 90 ID loan to deposit ratio (%) Rakyat Indonesia (BRI), the largest micro lender 80 in the country with 50% market share in micro lending. It uses novel ways to get to its customers, 70 such as mobile banking units that travel to wet 60 markets in search of customers. 50 This pays off. Its 9M12 results show that it grew 40 its loan book by 15% y-o-y, driven by micro Mar-05 Mar-07 Mar-09 Mar-11 lending and lending to SOEs. In addition, BRI was able to grow its deposit base by 21% in the Source: HSBC, CEIC same period, mostly coming from low-cost demand and savings deposits. Cost of funding fell. Growing consumer confidence, an increase in Margins fell from 9.5% in 2011 to 8.4% in 9M12. demand for mortgages and the local capex cycle require growth in credit. It has also been building a network of loan offices. This has increased costs near term but Still, as credit grew, so did the banking system’s ensures that it can deepen penetration more LDR ratio, and it is likely that competition for customers in the future8. BRI suggested that funding will intensify in 2013, putting upward margins were probably at a bottom for now. pressure on deposit rates. At the top of the market is Bank Central Asia This, again, can become a risk to equity market (BCA), the largest seller of mortgages across the performance in 2013. country, although it has only 75,000 of these Welfare system reform mortgages written. Indonesia buys Indonesia It is the de facto cash settlement agent across Indonesians own most of their wealth in land and real Indonesia, allowing for a very low funding base. estate, but diversification into financial assets is slowly Its net interest margins are as high as 5.4% and gathering pace. McKinsey forecasts that Indonesia’s with no NPLs to speak off (0.4%), ROEs are as savings and investment sector will become the largest high as 29%9. consumer market in the next decades. It sees 11% CAGR for 2010-30 in this sector. The formation of a social security system should support this forecast. Indonesia does not have a comprehensive social security system yet, but the current administration has put legislation in place to change this. Employees in the private sector are covered by a pension system based on a defined contribution ______________________________________ 8 For example, it will take time for loan officers to build their own system; employees contribute 2% of earnings, client portfolio. The number of accounts per loan officer fell from 480 while employers add another 3.7% of the in 2011 to 343 in 9M12. This should increase. 9 All numbers refer to BCA’s 9M2012 results employee’s payroll. 8 Equity Strategy Indonesia abc 16 November 2012 In October 2011, Indonesia passed the much- In a recent report, we highlighted the potential anticipated social security bill into law. Under this for welfare reform to fuel demand for equities law, a new publically owned social security among Indonesians11. organising body (BPJS) will take over the job of Currently, the locally managed assets under providing health insurance to Indonesians, starting management (AUM) are small compared with the in January 2014. By July 2015, another new BPJS size of its economy, implying good potential is expected to take over other social benefit growth in domestic assets. Healthcare reform and schemes, including pensions. pension reform can act as a catalyst in this process. The draft BPJS rule requires both employers and This can impact equities in various ways: workers to share the payment of premium for the social security, with workers expected to In Thailand, we note that fee-based income is contribute around 8% of their earnings. growing as an income source for Thai banks as they sell more financial products. The two BPJS would replace the four state-owned insurers – Jamostek, Taspen, Asabri and Askes – Health insurance can allow for more demand which have a combined AUM of USD22.2bn. for healthcare products, although at the risk of more government price controls. This benefits Also, according to the Association of Indonesian local healthcare players. Healthcare Life Insurance Companies (AAJI), the number of expenditure is expected to grow at a CAGR of insurance policies rose by 15.1% y-o-y in 1Q12. 14% 2007-15e12. This means that insurance penetration is increasing. The assets of member companies of Welfare systems can lower the level of AAJI increased by 28.7% in the same period10. precautionary savings, supporting higher discretionary consumer spending. AUM/GDP vs per-capita GDP The actual implementation of these laws will be 200% determined by a new incoming administration in HK 150% Singapore 2014, which will implement these new schemes Taiw an for at least until 2019. Malay sia 100% Korea This brings us to an increasingly important topic India 50% Thailand for equity markets – the presidential elections in China in '000 Indonesia 2014 (October). 0% 0 5 10 15 20 25 30 35 40 45 50 55 Source: HSBC ______________________________________ ______________________________________ 11 “Asia buys Asia”, September 2012 10 Jakarta Post, 10 July 2012 12 Kalbe Farma’s presentation on company results, October 2012 9 Equity Strategy Indonesia abc 16 November 2012 Young voters A similar scenario in which a dark horse candidate emerges and wins the presidential elections should Looking for ‘unknown-unknowns’ not therefore be dismissed lightly, especially given In 2014, Indonesia will have its third direct how the incumbent president himself rose to power presidential election in which the current from relative obscurity. president, Susilo Bambang Yudhoyono, is constitutionally barred from participation. A new Earnings and valuations president will, thus, have to be elected. So far, we have examined various drivers of So far, only one politician has declared himself to be earnings growth and the political environment. a candidate – Mr A. Bakrie from the Golkar party13. Now it is time to look at earnings estimates and equity valuations. Aside from Mr Bakrie, there are also a number of leading politicians who have not declared they are To us, current earnings expectations look realistic running yet (and might not do so), but have been in Indonesia, if not low. As the following charts touted as potential candidates by political observers. (and Table 1) illustrate, net earnings are expected to grow only 6.1% in 2012 and 9.5% in 2013, on Retired army general Prabowo Subianto stated he the back of 8.9% sales growth and falling EBIT would bid for the presidency, but his Great margins (2013e). Indonesia Movement Party (Gerindra) decided to postpone the announcement14. Indeed, these numbers appear somewhat conservative with sales growing at a slower rate But when it comes to elections in Indonesia, there than nominal GDP growth and margins are also ‘unknown-unknowns’. A large part of the continuing to contract. population will vote for the first time. Remember Indonesia earnings that 60% of the population is less than 30 years old. They might vote differently than the % y -o-y Indonesia 50 generations before them. They might also look for 40 new, yet unknown, candidates to run. 30 20 10 The recent Jakarta gubernatorial elections provide 0 an example of why “unknown-unknowns” must -10 be heeded. The incumbent governor was defeated -20 -30 by the relatively unknown mayor from Central -40 - Java, Joko ‘Jokowi’ Widodo who decided to run 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 with Basuki ‘Ahok’ Tjahaja Purnama, who is both Source: MSCI, Thomson Reuters Datastream, HSBC estimates Christian and ethnically Chinese15. Despite the relative resilience of its economy, Indonesian earnings expectations are in line with the rest of the region, although for 2013 Indonesian analysts see higher growth than their ______________________________________ counterparts who cover Malaysian companies. 13 “Aburizal Bakrie Named as Golkar’s Presidential Candidate”, Jakarta Globe, 30 June 2012 14 “Prabowo Still Keen on Presidency Despite Problems” Jakarta Globe, 06 October 2012 15 “Indonesia’s New Economic Model”, Bloomberg 05 November 2012 10 Equity Strategy Indonesia abc 16 November 2012 Earnings growth expectations Analysts are bullish, but a little less so 3.6 50 2012 2013 3.4 Analyst s f eeling more bearish 3.2 40 3.0 30 2.8 2.6 20 2.4 10 2.2 2.0 0 1.8 -10 1.6 Analyst s feeling more bullish 1.4 -20 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 HK India Indonesia Korea Thailand Singapore China Philippines Taiwan Malaysia Recommendation consensus score (RCS) Av erage ±2SD Source: MSCI, Thomson Reuters Datastream, HSBC estimates Source: MSCI, Thomson Reuters Datastream, HSBC As 2012 progressed, analysts kept their earnings Part of this increased caution might have to do estimates stable, after years of upgrades. Indeed, with lower soft commodity prices, which weaken with the exception of 2009, Indonesian analysts the outlook for coal and palm oil players. It might have generally been behind the curve and needed also reflect fears on currency volatility as the to revise their estimates upwards constantly. current account has come under pressure. Earnings momentum Fund flow and fund positioning 100% This level of caution in 2012 is reflected in capital ID 80% flows. Compared with its history and with its 60% counterparts in ASEAN, it witnessed relative 40% small inflows during 2012. The Philippines, a 20% much smaller market, received similar inflows as 0% Indonesia this year. -20% -40% Foreign flows Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 (USDbn) TW KR TH ID PH IN AEJ 2005 22.2 -4.0 2.9 2.3 0.4 10.8 34.7 Source: MSCI, Thomson Reuters Datastream, HSBC 2006 17.4 -12.1 2.1 1.9 0.9 8.1 18.3 2007 2.1 -29.4 1.6 3.2 1.4 17.8 -3.4 2008 -14.7 -33.3 -4.8 1.7 -1.1 -12.9 -65.1 But while analysts seem content with their current 2009 14.8 24.8 1.1 1.4 0.4 17.6 60.1 2010 9.2 19.0 2.7 2.3 1.2 29.3 63.8 2012 estimates, they have been less convinced of 2011 -9.5 -7.2 -0.2 2.9 1.3 -0.6 -13.1 2012* 1.7 12.5 1.6 1.9 1.8 18.4 37.9 their stock recommendations. They have grown Source: HSBC, Bloomberg , *Note: 2012 flows data is up to 6 November 2012 increasingly cautious, although their underlying tone is still bullish. This is illustrated in the Interestingly, it appears investors have been a bit accompanying chart showing the recommendation too cautious. Our work on mutual fund holdings score in Indonesia. across the region indicates that investors were overweight Indonesia at the start of 2012 (not shown in the chart), but that the latest readings (shown in the chart) indicate they were underweight. Most recently, investors have been adding to their positions. 11 Equity Strategy Indonesia abc 16 November 2012 Mutual funds have recently reduced UW positions MSCI Indonesia 12-month forward PB versus ROE 30 5.0 Philippine India 28 4.0 Singapore 26 Hongkong 3.0 Thailand 24 Korea 22 2.0 China Malay sia 20 1.0 Dec-05 Oct-09 Jan-04 Sep-11 Nov-07 Indonesia Taiw an -4.0 -2.0 0.0 2.0 4.0 ROE% (LHS) Fw d PB (x ) Source: EPFR, HSBC; Note: Red dot shows current fund weight with respect to the Source: MSCI, Thomson Reuters Datastream, HSBC neutral benchmark, black dot shows the same three months ago and grey bar represents the five-year range. Data as at September 2012 In addition, we argue that Asia will witness a Valuations are a risk gradual shift from ‘growth’ to ‘value’ and an As the following chart illustrates, Indonesia trades investment style. This means that stocks and near the top end of its valuation history, which markets trading at lower valuation multiples, suggests that most of the re-rating has now possibly because of lower earnings visibility, will taken place. start to outperform sectors and markets trading at high valuation multiples. This is a risk to Indonesia PE band chart Indonesian equities. P rice level 7500 6750 20x Still, putting pros and cons against another, we 6000 15x rate Indonesian equities overweight for the 5250 4500 visibility and reliability of the country’s growth. 3750 3000 10x Furthermore, we believe investors will need to re- 2250 balance their portfolios to reduce the current 1500 5x 750 underweight position in this market. 0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: MSCI, Thomson Reuters Datastream, HSBC A similar picture emerges when looking at ROEs and PB ratios. Although ROEs have fallen in 2012 owing to a weaker economic environment and external headwinds, PB ratios have remained high. 12 Equity Strategy Indonesia abc 16 November 2012 Stock ideas From macro view to stock ideas Key Overweights: BCA, Bank Mandiri, Lippo Karawaci, Tempo Scan Key Underweights: Bank Rakyat, Jasa Marga, Alfamart, Modern, Astra Agro Lestari Best ideas materialise when interest rates trend up, thereby providing the catalyst for the stock to reverse its In this section, we highlight our best Overweight underperformance. With more than half the and Underweight ideas in Indonesia. For each analysts covering the stock taking a neutral to company, we provide a short write-up in this negative stance on the stock, we are one of the chapter. The stocks we believe investors should few bulls on the Street. Overweight or Underweight are: Valuation: We value BCA at IDR10,000 per Key Overweights: BCA, Bank Mandiri, share, based on an intrinsic PB multiple derived Lippo Karawaci, Tempo Scan. from the Gordon Growth Model. Our target price Key Underweights: Bank Rakyat, Jasa Marga, assumes a 24% sustainable ROE, a 13.3% cost of Kar Weng Loo* Alfamart, Modern, Astra Agro Lestari. equity and 10% long-term growth. This implies Analyst The Hongkong and Shanghai 4x December 2013e PB and 18x 2013e core EPS. Bank Central Asia Banking Corporation Limited Singapore Branch Under our research model, for stocks without a +65 66580621 (BBCA IJ, OW,TP IDR10,000) email@example.com volatility indicator, the Neutral band is 5ppts above *Employed by a non-US affiliate With loans growing at 35% y-o-y, BCA is the and below the hurdle rate for Indonesian stocks of of HSBC Securities (USA) Inc, fastest-growing bank in Indonesia. We expect the 11%. At the time we set our target price, it implied a and is not registered/ qualified pursuant to FINRA regulations bank to continue to grow at a pace in excess of the potential return that was above the Neutral band; sector average as management actively manages therefore, we rate the stock OW. Potential return its liquid balance sheet to preserve NIMs. BCA is equals the percentage difference between the current guiding for 20-25% loan growth for 2012. share price and the target price, including the BCA is one of the few banks that will benefit forecast dividend yield when indicated. from Indonesia’s structural growth potential given Risk: Key risks include regulatory risk. BI seems its highly liquid balance sheet and strong credit to be encouraging banks with stronger deposit culture. The stock is one of the biggest franchises to lend more and/or slow its deposit- underperformers among the big banks having gathering activities by imposing a penalty on stayed flat y-t-d. It now trades at 3.3x Dec 2013e them. We would not rule out the possibility of BI BV. Just two years ago, this stock has traded up to introducing more rules that work in a similar 5x PBV. We believe upside risk to earnings will fashion. Other downside risks include 13 Equity Strategy Indonesia abc 16 November 2012 deteriorating asset quality, a slowdown in loan Risk: Company-specific downside risks to our growth, falling interest rates, or an unexpected rating include deteriorating asset quality, a rise in costs. slowdown in loan growth, falling interest rates, or an unexpected rise in costs. Bank Mandiri Persero (BMRI IJ, OW, TP IDR9,250) Tempo Scan BMRI has successfully improved its RoE from (TSPC IJ, OW, TP IDR3,900) Permada Darmono* 9.8% in 2006 to 23.3% in 3Q12 as it cleaned up We think the market is underestimating the potential Analyst its loan book, repositioned lending activity growth of the consumer health market in Indonesia. The Hongkong and Shanghai Banking Corporation Limited towards higher-yielding lending segments and Based on our analysis, there is a strong correlation Singapore Branch invested heavily in its deposit franchise. We between per-capita healthcare spending and +65 6658 0613 Permada.w.darmono@hsbc. believe RoE will remain supported as its asset and economic growth. Indonesia’s healthcare spending com.sg liability mix improves further. was only 2.1% GDP in 2010, below Singapore, *Employed by a non-US affiliate of HSBC Securities (USA) Inc, India, the Philippines and Thailand. Moreover, its and is not registered/ qualified BMRI had a strong 3Q12 on good loan healthcare spending per capita, according to the pursuant to FINRA regulations momentum and robust NIM. 3Q12 pre-provision World Bank, at USD77 per annum, is lower than profit (PPoP) rose 69% y-o-y as net interest Vietnam and the Philippines despite its significantly income grew 36% while non-interest income was higher GDP per capita. up 19%. Net interest income was clearly buoyed by loan growth of 23% y-o-y and a 60bp y-o-y Tempo Scan used to have an EBIT margin of 20% improvement in NIM to 5.8%. NIM improvement in 2001; since then it has gradually declined to was underpinned by lower funding costs as bottom out at 9% in 2009. From 2009 to 2011, deposit rates were lowered. Tempo has been reversing the declining trend of A good 3Q12 is expected to support stock its EBIT margin and as at 9M12, EBIT margin performance. At 11x 2013E EPS and 2.2x Dec reached 13%. Tempo’s margin deterioration took 13E BV, we like BMRI in the sector. place because of faster growth in its distribution business than its pharmaceutical and consumer Valuation: We value BMRI at IDR9,250 per share, product & cosmetics. Tempo is embarking on a based on an intrinsic PB multiple derived from the multi-year strategy to ensure that its own Gordon Growth Model. Our target price assumes a manufactured products and brands are growing 20% sustainable ROE, 14.6% cost of equity and faster than third-party products by brand building 10% long-term growth rate. This implies 2.5x and prioritising the growth of its own products. December 2013e PB and 13x 2013e core EPS. Catalysts: resumption of a strong sales growth Under our research model, for stocks without a trend in the pharmacy division from the temporary volatility indicator, the Neutral band is 5ppts above setback in 3Q12 owing to labour industrial action and below the hurdle rate for Indonesian stocks of and the structural growth story in Indonesia. 11%. At the time we set our target price, it implied a potential return that was above the Neutral band; Valuation: We increase our target price by 14.7% therefore, we rate the stock OW. Potential return to IDR3,900 from IDR3,400 as we roll-over our equals the percentage difference between the current DCF valuation forecast period from 2012e-21e to share price and the target price, including the 2013e-22e. We have also adjusted our net forecast dividend yield when indicated. working capital growth assumptions from around 35% p.a. to 15% p.a. Previously, we used current 14 Equity Strategy Indonesia abc 16 November 2012 Pratik Burman Ray* assets minus current liabilities to calculate plans and build critical mass, which could lead to Senior Analyst working capital; we are changing this to inventory an eventual listing of the healthcare business. The Hongkong and Shanghai Banking Corporation Limited plus account receivables minus account payables. Given that LPKR investors remain unsure of the Singapore Branch valuation of this business, any transparent sale of +65 6658 0611 Under our research model, for stocks without a firstname.lastname@example.org a stake in the business to an investor could aid in volatility indicator, the Neutral band is 5ppts above *Employed by a non-US affiliate price discovery and potential realisation of value, of HSBC Securities (USA) Inc, and below the hurdle rate for Indonesian stocks of and is not registered/ qualified which could be a key catalyst for the stock. pursuant to FINRA regulations 11%. At the time we set our target price, it implied a potential return that was above the Neutral band; Valuation: We value LPKR’s individual business therefore, we rate the stock OW. Potential return segments and then arrive at an enterprise valuation equals the percentage difference between the current by summing up the parts. Our estimated FY13e share price and the target price, including the gross valuation per share for LPKR based on our forecast dividend yield when indicated. sum-of-the-parts valuation is IDR1,898. Adjusting for net debt and minority interests, our estimated net Risks: Downside risks include weaker-than- liability is IDR604 per share, implying an estimated expected economic growth in Indonesia, negative FY13 RNAV of IDR1,295 per share. labour relations, execution risk, adverse regulatory developments and product counterfeiting, which Our 10% discount to RNAV to arrive at our target could lead to negative reputational issues, sharp price is based on our premium/(discount) depreciation of the IDR against the USD and any framework for ASEAN developers. Our discount event that would lead to interruptions in Tempo’s remains unchanged at 10%, which we ascribe given supply chain. that management has only recently embarked on the aggressive strategy to roll out hospitals and in Lippo Karawaci Tbk the past, investors have raised some concerns (LPKR IJ, OW, TP IDR1,165) regarding the transparency of the group. We believe LPKR remains well on track to Under our research model, for stocks without a achieve its key milestones in the key development volatility indicator, the Neutral band is 5ppts above and healthcare business segments. Over FY11-14, and below the hurdle rate for Indonesian stocks of we project revenue, EBIT and PATMI growth of 11%. As our IDR1,165 target price implies a 24% c30% driven by growth in healthcare revenues potential return (including the prospective dividend and the core development business, which is in yield), we reiterate our Overweight rating. Potential line with the company’s broad strategic goals to return equals the percentage difference between the double revenue and PATMI every 2-3 years. current share price and the target price, including the forecast dividend yield when indicated. LPKR has plans for a sharp ramp-up in its healthcare business. From 7 hospitals in 2011 and Risks: The key downside risks are: delays in an estimated 13 by end-2012, LPKR intends to execution affecting earnings and valuation; lower- roll out a total of 27 hospitals by end-2014. than-projected margins for urban developments and Hospital revenues, which are projected at large-scale integrated developments; and a slower cUSD200m for FY12, are expected to increase to pace of growth for the healthcare and retail cUSD500m by FY14 and c600m by FY15 based business owing to a breakdown of the asset- on our estimates. Management has been on the recycling model, which could impact our valuation lookout for private equity investors into the healthcare business, so as to fast-track expansion 15 Equity Strategy Indonesia abc 16 November 2012 for those businesses. Other risks are general macro change in the near future. Its cash-generative risks and country-specific political risks. business allows it to pay out dividends. Jasa Marga Our terminal growth rate of 3% is in line with the long-term global growth rate. We assume that Jasa (JSMR IJ, UW, TP IDR5,300) Valerie Law* Analyst The key reason for our Underweight is valuation. Marga will be able to renew its concessions when The Hongkong and Shanghai Banking Corporation Limited At 22x PE FY13e, which is 1.5 standard deviation due, as the government of Indonesia owns 70% of Singapore Branch above mean, the stock appears expensive, in our the company. Hence, we also have a terminal +65 6658 0616 email@example.com view. We think the current share price has not value in our DCF valuation. *Employed by a non-US affiliate factored in the following challenges: of HSBC Securities (USA) Inc, Under our research model, for stocks without a and is not registered/ qualified volatility indicator, the Neutral band is 5ppts above pursuant to FINRA regulations 1) The company could disappoint in terms of meeting project completion schedules and and below the hurdle rate for Indonesian stocks of acquisition timeline. 11%. Our target price implies a negative potential return of 7.8%, below the Neutral band; therefore, In a recent guidance statement given by we reiterate our UW rating. Potential return equals management, three of the nine new toll road the percentage difference between the current share projects could delay completion by at least two price and the target price, including the forecast quarters, with some pushing the completion dividend yield when indicated. deadline into 2015 versus initial plans to complete them by 2014. We had mentioned in earlier reports Key (upside) risks: A potential acquisition this that the company might not meet its initial capex year that is immediately accretive to the target of IDR7.7trn set earlier this year because of company’s earnings. Faster-than-expected difficulties in predicting the land acquisition phase. completion of its projects or acquisitions. The (9M12 capex is only IDR1.8trn, representing 23% nine roads in the pipeline, as well as part of the of the company’s initial full-year target.) trans-Sumatra phase 1 that we did not factor into our forecasts, could complete faster than 2) Stiff competition despite opportunities for new expected, therefore providing upside potential to concessions. our traffic and toll revenue forecasts. The concession holder for the six inner-Jakarta toll roads is a consortium company. Separately, Indonesia's State Enterprises Minister Dahlan Iskan said he wanted Hutama Karya (a state-owned construction firm) to turn into a state toll-road operator. We believe that Hutama Karya can bid for new concessions at lower prices as a turnkey operator. Valuation: We use a DCF approach to value Jasa Marga, as the company’s business model as an expressway operator has remained relatively unchanged since 1978, and it is not likely to 16 Equity Strategy Indonesia abc 16 November 2012 Astra Agro Lestari Valuations: We use a DCF methodology to value Thilan Wickramasinghe* Analyst Astra Agro, and arrive at a target price of The Hongkong and Shanghai (AALI IJ, UW, TP IDR22,000) Banking Corporation Limited IDR22,000. We use a WACC of 8.9% with a cost Singapore Branch Astra Agro (AALI) has consistently disappointed of equity of 11.5% (risk-free rate of 4.0% and risk +65 6658 0609 firstname.lastname@example.org the Street over the past four quarters, not from a premium of 7.5%) and a cost of debt of 9%. We *Employed by a non-US affiliate lack of delivering revenues, but on cost escalations. use a 3% terminal growth rate. of HSBC Securities (USA) Inc, In the company’s 9M12 results, earnings fell 10% and is not registered/ qualified pursuant to FINRA regulations y-o-y despite an 8% increase in sales, indicating Under our research model, for stocks without a AALI did not benefit from operating leverage. The volatility indicator, the Neutral band is 5ppts above key was a 13% increase in cost of sales, during a and below the hurdle rate for Indonesian stocks of period where crude palm oil (CPO) prices fell 21%. 11%. At the time we set our target price, it implied Cost escalations were in maintenance and a potential return below the Neutral band; infrastructure and factory repair. Underinvestment therefore, we remain Underweight. Potential return in plantation infrastructure over the past five years equals the percentage difference between the has left AALI with significant capex needs in the current share price and the target price, including medium term to rectify the situation. Indeed, in the the forecast dividend yield when indicated. five years between FY06 and FY10, AALI’s capex Key risks: higher-than-expected CPO prices from averaged IDR943bn. This more than doubled to supply disruptions is an upside risk. Separately, a IDR2bn in FY11 as the group embarked on a catch- weakening of the USD could have a negative up programme. We estimate AALI will need to revenue impact, pressuring margins. Falling FFB sustain this higher level of capex at least for yields and bottlenecks in expanding acreage are another three years fully to reach a comfortable medium-term concerns. level at which it can enjoy operating leverage again. Until then, downside earnings risk from Bank Rakyat Indonesia escalating costs remains elevated, in our view. (BBRI IJ, UW, TP IDR6,000) At the end of 2011, only 18% of AALI’s planted BBRI’s strong 3Q12 results belie weak underlying Kar Weng Loo* Analyst acreage was classified as immature. Importantly, trends. 9M12 net profit was strong, accounting for The Hongkong and Shanghai its acreage classified as productive (palm trees 79% of the consensus forecast and 85% of our Banking Corporation Limited Singapore Branch aged between 4-15 years) fell 14% y-o-y as more previous estimate. Although 3Q12 net profit was +65 6658 0621 email@example.com acreage advanced in age. The average age of flat q-o-q at IDR4,468bn, it was entirely supported *Employed by a non-US affiliate AALI’s plantations is 14 years, bordering between by lower credit costs, as 3Q12 pre-provision profit of HSBC Securities (USA) Inc, productive and too old. Unless acreage is (PPoP) was actually down 5% q-o-q. Despite loan and is not registered/ qualified pursuant to FINRA regulations expanded aggressively to increase AALI’s growth slowing to +4% q-o-q (2Q12: +8%), the net immature mix, we believe yield risks will be on loan-to-deposit ratio rose to 84% (2Q12: 80%). the downside. Yet, during FY10-11, AALI has Even with a higher loan-to-deposit ratio, net added on average just 5,300 ha compared with an interest income fell 2% q-o-q as NIM fell 54bp q-o- average of 19,300 ha between FY05-09. q to 7.94% on a higher mix of corporate loans and lower yields from the micro loan portfolio as Overall, underinvestment in infrastructure has growth for this segment remained weak at +15% y- enabled AALI to produce superior ROEs o-y (the slowest rate of growth since BBRI relisted compared with peers over the past five years; in 2003). Meanwhile, operating costs spiked 14% averaging 39%. We estimate this will fall to 25% q-o-q, driving the cost-to-income ratio to 47% in FY12-14e, as AALI spends on catching up. 17 Equity Strategy Indonesia abc 16 November 2012 (2Q12: 42%). The increase came from staff costs Sumber Alfaria Trijaya and does not appear to be a one-off item. (AMRT IJ, UW(V), TP Even after lowering our credit cost assumptions, we IDR4,450) lowered our 2013-14 EPS forecasts by 14-22% to Permada Darmono * Recently announced government regulations account for much weaker margins and higher costs. Analyst capping the ownership of modern retail outlets to The Hongkong and Shanghai Our 2013-14 EPS forecasts are 19-29% below Banking Corporation Limited 150 appear likely to dampen the overall growth Singapore Branch consensus. We feel the risk-reward situation is less +65 6658 0613 expectations of Alfamart and the broader favourable now that the stock has moved up 44% Permada.w.darmono minimarket sector. The government is under @hsbc.com.sg from its low this year of IDR5,250 on 4 June. At public pressure to demonstrate that it is acting to *Employed by a non-US affiliate 2.6x Dec 2013e PB, the stock trades in line with its of HSBC Securities (USA) Inc, cap the growth of modern retail outlets, which is and is not registered/ qualified historical mean, even though ROE is expected to squeezing out traditional retailers. It is not yet pursuant to FINRA regulations trend down to 20% by 2014 compared with the clear how robustly the government will act to historical average ROE of 31% (since 2001). implement the new regulation, but we see rising Valuation: We value BBRI at IDR6,000 per near-term risks for Alfamart and the minimarket share, based on an intrinsic PB multiple derived sector, especially leading to election year in 2014. from the Gordon Growth Model. Our target price Alfamart has announced and confirmed its plan to assumes a 20% sustainable ROE, a 14.6% cost of acquire Alfamidi (MIDI IJ). While the acquisition equity and 9% long-term growth. This implies a makes sense, in our view, as it would expand its 2.1x December 2013e PB and a 10x 2013e PE. store count by more than 500 (8% expansion on Under our research model, for stocks without a existing store count as of June 2012), the volatility indicator, the Neutral band is 5ppts transaction presents a potential dilution for above and below the hurdle rate for Indonesian existing passive minority shareholders. Alfamart stocks of 11%. Our target price implies a negative already owns 12.75% of Alfamidi and currently potential return of 14.0% (including dividend Alfamidi is trading at 30.2x forward consensus PE yield), below the Neutral band; therefore, we versus Alfamart’s 24.1x. We would not be reiterate our UW rating. Potential return equals surprised if the acquisition is on an all-share basis, the percentage difference between the current which could be dilutive for passive minority share price and the target price, including the shareholders. This presents yet another risk to forecast dividend yield when indicated. Alfamart’s currently rich valuation. Risks: Stock-specific upside risks include: 1) Valuation: We value Alfamart at IDR4,450 per micro loan growth momentum improves; 2) NIM share, based on DCF methodology. We highlighted turning out to be stronger than we expect; and 3) a the rising risks of government regulation, sharp and unexpected improvement in asset competitive threats and slowing growth, while quality and credit costs. Alfamart’s current rich valuation at 24.1x 2013e PE does not price these downside risks. Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below the hurdle rate for Indonesian stocks of 11%. Our target price implies a negative potential return of 14.4%, below the Neutral band; 18 Equity Strategy Indonesia abc 16 November 2012 therefore, we reiterate our UW(V) rating. Potential We have chosen a DCF approach as it enables us return equals the percentage difference between the to incorporate our income statement, cash flow current share price and the target price, including and balance sheet forecasts more explicitly. We the forecast dividend yield when indicated. came to our forecast assumptions by looking into each division at Modern separately and arriving at Upside Risks: Better-than-expected growth and a specific revenue growth (shrinkage) forecast for muted impact from regulatory and competitive threats. each division. Modern Internasional Under our research model, for stocks with a (MDRN IJ, UW(V), TP volatility indicator, the Neutral band is 10ppts IDR660) above and below the hurdle rate for Indonesian stocks of 11%. Our target price implies a negative Over the next three years, Modern expects to potential return of 14.3%, below the Neutral band; increase its store count by nearly six times from therefore, we reiterate our UW(V) rating. Potential 76 stores currently. This aggressive growth return equals the percentage difference between the translates into our revenue CAGR forecast of current share price and the target price, including 46.4% and earnings CAGR of 65.2% from 2012e the forecast dividend yield when indicated. to 2015e. Modern also makes a higher net margin from its 7-Eleven operation at around 6-7% versus Risks: We think the execution risk to Modern’s an established player such as Alfamart that makes growth plan has been underestimated by the only around 2% owing to its own produced market. These include: unavailability of suitable proprietary food and beverages. sites, constraints to growth from infrastructure and financing required, competitive threats from the But we think the potential growth is overpriced. likes of Indomaret and Alfamart, and regulatory At 42.1x 2012e PE, Modern is trading at a 44% pressures from the government to protect premium to its sector average of 28.9x. We traditional retailers. Any shortcomings in believe that the Indonesian modern trade sector Modern’s financial results could hurt its share still has plenty of room for growth, but the current price. Also, Modern performing much better than multiple implies a revenue CAGR of 28.2% in the we expect would justify the present or a higher next decade according to our model, which we valuation. think is too aggressive. Valuation: Our target price of IDR660 is based on a discounted free cash flow to debt and equity holders (DCF) valuation. The result of our model yields an equity value of IDR2,740bn, equivalent to 33.1x 2012e PE and 19.7x 2013e PE. This equates to 22.6x 2012e EV to EBITDA and 12.6x 2013e EV to EBITDA. 19 Equity Strategy Indonesia abc 16 November 2012 Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Herald van der Linde, Neel Sinha, Devendra Joshi, Kar Weng Loo, Permada Darmono, Pratik Burman Ray, Valerie Law and Thilan Wickramasinghe. Important disclosures Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. 20 Equity Strategy Indonesia abc 16 November 2012 *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Rating distribution for long-term investment opportunities As of 14 November 2012, the distribution of all ratings published is as follows: Overweight (Buy) 45% (27% of these provided with Investment Banking Services) Neutral (Hold) 38% (27% of these provided with Investment Banking Services) Underweight (Sell) 17% (20% of these provided with Investment Banking Services) Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long- term investment opportunities for the companies the subject of this report, is available from www.hsbcnet.com/research. HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure BANK CENTRAL ASIA TBK BBCA.JK 9050.00 14-Nov-2012 7 BANK MANDIRI PERSERO TBK BMRI.JK 8700.00 14-Nov-2012 6, 7 BANK RAKYAT INDONESIA BBRI.JK 7250.00 14-Nov-2012 7 TEMPO SCAN TSPC.JK 3375.00 14-Nov-2012 1, 5 Source: HSBC 1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 October 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 September 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 September 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 September 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. 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MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 206/01/2012 23 abc Global Equity Strategy Research Team Global Asia Garry Evans Herald van der Linde Global Head of Equity Strategy Deputy Head of Research and Head of Equity Strategy, Asia-Pacific +852 2996 6916 firstname.lastname@example.org +852 2996 6575 email@example.com Daniel Grosvenor Steven Sun +44 20 7991 4246 firstname.lastname@example.org +852 2822 4298 email@example.com EU and US Roger Xie +852 2822 4297 firstname.lastname@example.org Peter Sullivan Head of Equity Strategy, EU and US Devendra Joshi +44 20 7991 6702 email@example.com +852 2996 6592 firstname.lastname@example.org Europe Taiwan Robert Parkes Jenny Lai +44 20 7991 6716 email@example.com Head of Taiwan Research +8862 6631 2860 firstname.lastname@example.org CEEMEA South East Asia John Lomax +44 20 7992 3712 email@example.com Neel Sinha Head of Equity Research, South East Asia Wietse Nijenhuis +65 6658 0606 firstname.lastname@example.org +44 20 7992 3680 email@example.com India Jitendra Sriram Head of Research, India +91 22 2268 1271 firstname.lastname@example.org Korea Brian Cho Head of Research, Korea +822 3706 8750 email@example.com
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