Macquarie Indonesia Strategy - Consumer and small-caps leading the index

Event
􀂃 We have reviewed the YTD performance of the stocks that we cover. We also
note that the market is up by 37% in rupiah terms and 45% in US dollar terms
YTD. In terms of quarterly performance, the Indonesian composite index was
up by 10% in 1Q, 3% in 2Q and 21% in 3Q. The best-performing stocks under
our coverage have been XL Axiata, BTPN and BNI. We maintain our
Overweight call on Indonesia and mention the stocks that we like.

Impact
􀂃 Out of the top 20 investable stocks, only six are outperforming the index
significantly: Astra, XL, Gudang Garam, BNI, Indofood and Unilever. BCA,
Mandiri and Indocement have performed in line with the market. Eleven
stocks have underperformed the index, with DOID, ENRG and ELTY as the
worst performers, down by 42%, 32% and 15%, respectively.

􀂃 Fifteen out of 37 stocks under our coverage have outperformed the
index; Bakrie names have sharply underperformed. This shows that the
mid-to-smaller-cap stocks have mostly outperformed the large-cap stocks.
Bakrie-related stocks have sharply underperformed, with Bumi, Energy,
Bakrieland and DOID down by 6%, 32%, 15% and 42%, respectively.

􀂃 Consumer stocks and small-cap banks have outperformed the index
significantly. The former include Astra International, Unilever, Gudang
Garam and Indofood. The small-cap banks that have outperformed the index
include BTPN (163%) and BJBR (162%). Of the large-cap banks, only BRI
and Danamon have underperformed the market slightly, up by 33% and 32%,
respectively.

􀂃 Mining stocks have underperformed across the board. Except for smallercap
resource stocks Bayan Resources (+84%) and Indika (+44%), all of the
mining stocks have underperformed the index. All of the large-cap mining
stocks have also underperformed, especially in the 2Q10.

Outlook
􀂃 Maintain our Overweight call on the market; premium valuation appears
warranted. The market is currently trading at a 2011E PER of 14.0x, only a
15% premium to its six-year historical PER and a 17% premium to the
regional valuation. We believe that Indonesia’s valuation premium is
warranted given its strong growth story and high ROE, which we think can
persist for the next 2–3 years.

􀂃 Banks, property, cement and coal are our preferred picks. The domestic
and investment story will continue, in our view, and risk compressions are
happening, given the stability of the economy and the political situation. We
believe that the coal sector should perform going into the 4Q10 and 2011. Our
top large-cap picks are Astra, Bank Central Asia, BRI, Adaro and Semen
Gresik. Our top five mid-to-small-cap picks are Indika Energi, Bank Jabar,
Bumi Serpong, Summarecon Agung and Alam Sutera.