Deutsche Bank Strategy - Indonesia's decade

Earnings-driven market
The Indonesian market has impressively outperformed its regional peers over the past 15 months, but this is nothing out of the ordinary; it has outperformed the regional market in seven of the past eight years. Simply, the key driver is growth. In the past five years, the Indonesian economy has more than doubled and outpaced not only the regional economy but also all except one of the BRIC countries. This report, with numerous charts, argues that Indonesia is still in an early stage of its secular growth, with various strong drivers.

Credit-infused growth
􀂄 The doubling of the Indonesia economy was on “lazy” capital; its 25% loans to GDP is similar to India and Brazil five years ago, but those countries are now just under 50%, and credit expansion did propel their economies.
􀂄 Unbeknownst to many, Indonesia’s credit growth is one of its most important drivers, contributing at least one-third of economic growth.
􀂄 Loan-growth trend is already encouraging, with headline growth of a mere 9% yoy masking the actual growth of c. 30% yoy in February (ex-FX effect on a strong rupiah) and, interestingly, loans for investment are up 30% yoy.

Consumptive and confident consumers
􀂄 Consumer wallet size that doubled in the past five years to US$2,350, backed up by healthy 5% employment growth, was a strong demand driver.
􀂄 But its consumptive nature is due to demographics: a young population (50% under 25 years and below), a doubling of middle-income population and rising urbanization (urban wages are almost twice the rural) and a demographic dividend stemming from the rising workforce in proportion to the total population.
􀂄 Consumers are also highly confident, as shown by its all-time high consumer
confidence index. The AC Nielsen survey of 14 regional countries also showed that Indonesia consumers are the most confident. This has to be put in the context of more than a decade of economic and political crisis.
􀂄 The high-consuming, confident consumer and credit leverage potential (household debt only 10% of GDP) suggest strong secular drivers, particularly when private consumption makes up almost two-thirds of Indonesia’s economy.

Valuation – earnings-driven performance
􀂄 The stock market has had an impressive performance, up by an average of 34% pa, beating the regional market by a punchy 15ppt for the past eight years. Such gains raise concerns, but a closer investigation suggests a relatively healthy market performance.
􀂄 Its market performance has been mostly earnings-driven, with earnings accounting for 60% of market gains, while re-rating was a more modest 40%. Still, we believe market valuation remains weighed down by a legacy perception of high risk.
􀂄 We have a target index of 3,333, implying a valuation of 15.3x FY11E earnings. This suggests the entire potential upside of the market is actually driven by earnings growth (EPS growth of 24% pa in FY10 and FY11). We think our index target has room for upward adjustment.
􀂄 We estimate that for every 1ppt decline in the country’s risk-free rate, our target price as a whole would increase further by 14%, bringing the 12-month forward P/E from 15.4x currently to 17.5x.