Macquarie Indonesian Strategy - Rising investments mode

Event
Investment in Indonesia is on the rise, with investment to GDP at 32% as of 1H10, and has exceeded the pre-Asian financial crisis high of 30% in 1996. The improvement can be attributed to the recovery in the investment environment, including the appreciating exchange rate and improved access to finance. In our view, this will translate to more job creations, rising income and more sustainable economic growth. Overweight maintained.

Impact
Indonesian investment as % of GDP has exceeded the pre-Asian financial crisis level. Indonesian FDI data have shown positive momentum, and we expect this would continue. The FDI realisation based on the Investment Coordinating Board has reached US$7.8bn as of June 2010, up 128% YoY. The domestic investment is also on the rise and has reached US$2.4bn, up 21% YoY. Investment to GDP has exceeded that of the pre-Asian financial crisis of 32% as of 1H10 and also that of the pre-crisis high of around 30% in 1996.

Moving from China and Vietnam. In addition to the sizeable domestic market, the growing labour costs in China and Vietnam have made some companies move their factories to Indonesia. Many Korean as well as Taiwanese shoe and electronics companies have considered relocating to Indonesia. The Indonesian Footwear Association estimates that Taiwan and South Korea had relocated factories to Indonesia from China and Vietnam, with a total investment of US$550m.

Leading indicator shows investment momentum to continue. In addition to the investment recovery, Indonesia has continued to see an upward trend in the leading indicator of gross fixed capital formation, imports of capital goods. Imports of capital goods continued to rise this year and reached an average of US$2bn/month in 1H10, indicating that investment will stay strong in the near to medium term. Imports of capital goods have increased, to US$2bn+ from US$400m in the beginning of 2004.

More job creations and rising income. The return of investment would mean creation of jobs and an increase in production efficiency with positive spillover effects on the economy. The recent official unemployment rate in Indonesia is 7.4%, an improvement from 10.4% in 2006. In addition, we expect the Indonesian income per capita will reach close to US$2,858 by 2010, a significant increase from US$1,143 in 2004.

Outlook
Maintain Overweight on the country; infrastructure kick-off will be key.
We remain upbeat on Indonesia and expect the market to perform well over the medium term, supported by the domestic consumption story, capex spending and a stable economy and politics. Should the infrastructure-related projects push forward, these will likely be better for the country and will be reflected in the land acquisition laws, which are expected to be issued by end of year. The market is trading at 2011E PER of 12.5x, with 23.7% EPS growth and 26.7% ROE. Our top ten picks are Astra International, BCA, BRI, Adaro, BNI, Semen Gresik, PTBA, Indika, BSDE and Alam Sutera.