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HSBC - The Flying Dutchman


Traffic congestion is an upside

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									Equity Strategy
                                                                                                                         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
                                                                                    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                                        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

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:                          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

   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.
Myth 3: Indonesia follows the Asia export-
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
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.

      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
                                                             (better) consumer products. Indonesians are
                                                             slowly trading up.
                                                             Still, about 75% of retail sales are conducted
                                                             through traditional channels – wet markets and the
                                                             small roadside shops known as warungs. But
    -100%                                                    modern retail is now making significant inroads.








                                                             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

    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

      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
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%
    14,000                      OpCF (IDRbn)
                                                                                      2008           2009     2010   2011      2012f       2013f
    10,000                                                                  Source: HSBC estimates
                                                                        Indonesian companies are, thus, cautious when it
                                                                        comes to investing. Lessons were learned during
                                                                        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
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%
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%
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

   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.
                                                                       Given low domestic fuel prices, Indonesia spent
                                                                       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
                                                                       deal with traffic congestion or other ideas to
      0                                                                alleviate poverty6.









                                                                       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

                                                                         Source: HSBC, CEIC

                                                                       A business to bank on
                   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

    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
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.
This pays off. Its 9M12 results show that it grew
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.

   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
                                                             determined by a new incoming administration in
 150%                                            Singapore   2014, which will implement these new schemes
                                  Taiw an
                                                             for at least until 2019.
                         Malay sia
                                        Korea                This brings us to an increasingly important topic
  50%                  Thailand                              for equity markets – the presidential elections in
                        China                     in '000
                    Indonesia                                2014 (October).
         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

     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
generations before them. They might also look for                   40
new, yet unknown, candidates to run.                                30
The recent Jakarta gubernatorial elections provide
an example of why “unknown-unknowns” must                          -10
be heeded. The incumbent governor was defeated                     -20
by the relatively unknown mayor from Central                       -40                                 -
Java, Joko ‘Jokowi’ Widodo who decided to run

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

   Equity Strategy
   Indonesia                                                                                                                                                                                         abc
   16 November 2012

 Earnings growth expectations                                                                                  Analysts are bullish, but a little less so

  50                                                                              2012                2013     3.4                                         Analyst s f eeling more bearish
  40                                                                                                           3.0
  30                                                                                                           2.8
  20                                                                                                           2.4
  10                                                                                                           2.2
   0                                                                                                           1.8
 -10                                                                                                           1.6                                         Analyst s feeling more bullish
                                                                                                                     94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12







                                                                                                                                 Recommendation consensus score (RCS)
                                                                                                                                 Av erage

 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
  80%                                                                                                        flows. Compared with its history and with its
  60%                                                                                                        counterparts in ASEAN, it witnessed relative
                                                                                                             small inflows during 2012. The Philippines, a
                                                                                                             much smaller market, received similar inflows as
                                                                                                             Indonesia this year.
 -40%                                                                                                        Foreign flows

                                                                                                             (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.

      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
           India                                                                                           28                                                                  4.0
     Hongkong                                                                                                                                                                  3.0
      Thailand                                                                                             24
         Korea                                                                                             22                                                                  2.0
      Malay sia                                                                                            20                                                                  1.0



       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
 6750                                                                                           20x       Still, putting pros and cons against another, we
 6000                                                                                               15x   rate Indonesian equities overweight for the
 4500                                                                                                     visibility and reliability of the country’s growth.
 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.


 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.

   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)                                                                           
                                                      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

     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
believe RoE will remain supported as its asset and       economic growth. Indonesia’s healthcare spending
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

   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                                                          
                                                         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

     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*
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
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

   Equity Strategy
   Indonesia                                                                                                    abc
   16 November 2012

Astra Agro Lestari                                      Valuations: We use a DCF methodology to value           Thilan Wickramasinghe*
                                                        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
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*
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
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.

     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     
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;

   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
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.

     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 Details of these short-term investment opportunities can be found under the Reports section of this

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.

     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

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
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.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at

* HSBC Legal Entities are listed in the Disclaimer below.

     Equity Strategy
     Indonesia                                                                                            abc
     16 November 2012

Additional disclosures
1     This report is dated as at 16 November 2012.
2     All market data included in this report are dated as at close 13 November 2012, unless otherwise indicated in the report.
3     HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
      Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
      operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
      procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
      price sensitive information is handled in an appropriate manner.

   Equity Strategy
   Indonesia                                                                                                                            abc
   16 November 2012

* Legal entities as at 8 August 2012                                                                                   Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation
                                                                                                                       The Hongkong and Shanghai Banking
Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada,
                                                                                                                       Corporation Limited
Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000
HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai;                      Level 19, 1 Queen’s Road Central
‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC                          Hong Kong SAR
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking                         Telephone: +852 2843 9111
Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul                    Telex: 75100 CAPEL HX
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
                                                                                                                       Fax: +852 2596 0200
Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel
Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC                        Website:
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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         +852 2996 6575

Daniel Grosvenor                                   Steven Sun
+44 20 7991 4246   +852 2822 4298

EU and US                                          Roger Xie
                                                   +852 2822 4297
Peter Sullivan
Head of Equity Strategy, EU and US                 Devendra Joshi
+44 20 7991 6702     +852 2996 6592

Europe                                             Taiwan

Robert Parkes                                      Jenny Lai
+44 20 7991 6716      Head of Taiwan Research
                                                   +8862 6631 2860
                                                   South East Asia
John Lomax
+44 20 7992 3712         Neel Sinha
                                                   Head of Equity Research, South East Asia
Wietse Nijenhuis                                   +65 6658 0606
+44 20 7992 3680
                                                   Jitendra Sriram
                                                   Head of Research, India
                                                   +91 22 2268 1271

                                                   Brian Cho
                                                   Head of Research, Korea
                                                   +822 3706 8750

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