* Multiple gains at the peak of the cycle: Indonesian property firms are characterized by: 1) huge land bank (10-15 years of development); 2) township developer nature; 3) 12-18 month property turnover; and 4) 10%-50% of revenue is recurring income. Hence, Indonesia’s property companies tend to produce relatively lower ROEs but trade at high P/Es in an upcycle. Also, in previous cycles, their multiples have tended to appreciate from start to peak.
* Property up-cycle continues: We estimate another c.20-60% upside potential for stocks under our coverage; we expect the up-cycle to last through 2010. This view assumes no interest rate hikes in FY10 (BI support on pro-growth policy), firm GDP growth, and 17% bank loan growth for FY10E. Discounts to NAV normally narrow during a stable interest rate environment. In the last six months, we view that underperformance is due to concern over BI hikes and marketing sales sustainability. We view it as an opportunity to collect the stocks as inflation is still in line with expectations and marketing sales continue to show a tepid recovery.
* Our top pick is CTRA with a PT of Rp1,050 as we expect the discount to NAV to narrow from 42% to 13%. We see two potential key drivers: 1) undervaluation on its subsidiaries; and 2) a solid recovery in marketing sales.
* Near-term driver—indicative marketing sales have shown a positive turnaround, with marketing sales up by 74% y/y on an average YTD.
* Longer-term—we remain positive on long-term fundamentals due to: 1) middle income creation; 2) rising affordability; 3) rising employment; and 4) increasing availability of financing. We also remain positive on housing demand in Jakarta and Greater Jakarta areas as GDP per capita in Jakarta is rising faster than average growth coupled with rising employment. Improved affordability and middle- income creation should benefit in particular, which caters to middle-low end housing.
* Key risks to our view: 1) Any emergence of rate hike expectations, 2) A rise in construction costs. 3) Political uncertainty.
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