BNP Paribas Indonesia Strategy; New cabinet line up - not the best, but potentially effective

New cabinet line up – not the best, but potentially effective

􀂃 No major surprises in the new cabinet line up.

􀂃 All eyes now on new government programs, which we expect to centre on infrastructure development, improving investment climate and poverty alleviation.

􀂃 We deem the recent market correction as healthy and see it as an opportunity to BUY, maintain index target of 3,000 by August 2010.

WITH A NEW government in place and the cabinet line up decided upon, we believe most of the cards have now fallen into place. Although the current cabinet is not the most ideal, with political appointments still accounting for 19 of the 34 available, this time, ministers come strictly from the ruling party and its coalitions, and are thus expected to be more cohesive. Noticeably, representatives from PDI-P are absent; the party has positioned itself as the opposition party.

We found no major surprises in the new cabinet line up although about 70% of the members are new faces. Therefore, we believe the impact on the market will be neutral to slightly positive. With political stability secured and a more cohesive cabinet in place, we believe the government has a chance of breakthrough in areas of bureaucracy reforms, infrastructure development and improvement in investment climate by first addressing the labour law.

Our top five picks for the market are companies that directly benefit from the political and economic stability, which help maintain the disposable income growth. Telkom is the largest cellular operator and is well placed to capture the market share given its plan to spend the largest amount on capital expenditure, supported by its strong balance sheet, to address the current over-capacity issue. Kalbe Farma we believe is one of the beneficiaries of a strengthening currency and is currently undervalued, trading at only 11x 2010 earnings. Bank Danamon has the largest exposure to consumer loans and is therefore well positioned to take advantage of the rising disposable income given its strong CAR. Ciputra Development’s concentration in residential property allows it to benefit from low mortgage rate and renewed interest in property as an asset class as liquidity remains aplenty. Finally, we remain positive on Astra Agro due to rising global demand as conversions to lower-priced edible oil continue. With the lowest cost structure in Indonesia, we expect the company to benefit from a stable CPO price outlook.