CLSA Sumalindo - Hexindo

Back in 2002, Nick Cashmore published an emerging Asean small cap report. Today, many of the names in that report transformed into leading companies in their respective industries. Some of the return like United Tractors, Astra Agro, Banpu has been staggering (see attached spreadsheet) 75 baggers for UT demonstrates the power of deleveraging.

As it is becoming apparently clear that the world is not going into a freefall and the Chinese economy stabilizing, it is a good time to take a look at massively beaten down Asean small cap which we feel strongly about with good franchises are not expensive and will be multi-baggers for investors prepared to look longer term.

For Indonesia, our two top picks (attached) this time round is Sumalindo (SULI IJ) and Hexindo (HEXA IJ).

Sumalindo is the most leveraged play with its high gearing (stock down 85% from 2007 highs). They manage 802k ha of natural forest and 150k ha of plantation estate (12 times the size of Singapore). While timber players in the world is facing a very tough operating condition with a big demand shock from shrinking housing sector, the longer term potential of timber is unquestionable as the worlds forest continue to get demolished (50k sq km of forest lost every year in the last 15 years). Interesting to note it is reported in the news today that the EU has reached an agreement with the Republic of Congo to halt illegal timber imports to the 27 nation group and label wood that's harvested with methods that keep tropical forest intact. The EU is now negotiating similar agreements with Indonesia and Cameroon. Suli being a sustainable forestry operator will be a prime beneficiary.

Hexindo is the sole distributor for Hitachi heavy equip. The company has gained market share esp for the super sized excavators after Hitachi Japan has identified Indonesia as of their focus markets. The stock is trading on 5x 09 Vs 15x 09CL for United Tractors.

Trading wise, we are slight net sellers today.