Indonesia Market (Back To Java Where Wealth Resides and Flourishes) 20140205

Indonesia market
Special report

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Merlissa Trisno
merlissa.trisno@clsa.com
+62 21 2554 8821
Amie Liem
+62 21 2554 8829
Robert Pranata
+62 21 2554 8825

5 February 2014
Indonesia
Thematics

Top 10 picks
Ace Hardware (O-PF)
BCA (O-PF)
BTN (BUY)
Indocement (BUY)
Kalbe Farma (BUY)
Pakuwon (BUY)
Perusahaan Gas (O-PF)
Sritex (BUY)
Telkom (BUY)
Wijaya Karya (BUY)

www.clsa.com

Watch Merlissa and
Amie on CLSA TV
Prepared for EV: fsudjono@henanputihrai.com

Back to Java

2 merlissa.trisno@clsa.com 5 February 2014
Contents
Executive summary ............................................................................ 3
Investment thesis .............................................................................. 4
Powerful demographics ...................................................................... 9
Fruits of decentralisation ................................................................. 14
Hitting the ground, getting a feel! .................................................... 22
Stocks to own ................................................................................... 69
Company profiles
Ace Hardware ............................ 73
BCA .......................................... 77
BTN .......................................... 81
Indocement ............................... 85
Kalbe Farma .............................. 89
Pakuwon ................................... 93
Perusahaan Gas ......................... 97
Sritex ..................................... 101
Telkom ................................... 105
Wijaya Karya ........................... 109
Appendices
1: GDP by sector ................................................................................ 113
2: Reformist leaders profile ................................................................. 115
3: The rise of online traders ................................................................. 117
All prices quoted herein are as at close of business 27 January 2014, unless otherwise stated
Following the Komodo
In September 2007, our
Not j ust J akarta special report
projected that the booming
commodities industry and
decentralisation would spur
the countrys growth. Back
then, BCA and Telkom were
among our top picks and they
remain so today.

Executive summary Back to Java

5 February 2014 merlissa.trisno@clsa.com 3

Back to Java
More than six years after our seminal Not just Jakarta report, we go Back to
Java to gauge this densely populated islands development, especially outside
the metropolis. Over the past few months, our intrepid team trekked across
Java to see the progress first-hand. What did we find? The provinces are
booming and growth should continue to outstrip that in the capital as
decentralisation continues. An expanding middle class, strong credit growth and
new infrastructure investment cycle will drive the expansion. Companies with a
sound strategy and a strong foothold in Java ex-Jakarta will be the winners.
Forming more than half of Indonesias population with 37m households, Java is
the worlds most populous island and is still adding 2m people every year. A
growing middle class (driven by rapid urbanisation), widening labour cost gap
(Jakarta minimum wage is double the Java average), and lower penetration of
consumer products have led to an accelerating business expansion shift from
Greater Jakarta to other Java regions. Eventually, money will follow the
demographics and cheap labour will attract business people.
Jakartas GDP growth lagged the total of Javas provinces for the first time in
2012, although this is based on preliminary data. This is due to
decentralisation efforts, which have given greater control to local
governments. Some early indicators also suggest that expansion in Java ex-
Jakarta regions has been accelerating, be it for investment, bank loans,
cement or the retail sector. Outer Javas low base will also allow for strong
growth potential in the long term.
We hit the ground over the past few months to get a feel for some of the fastest-
growing cities in Java as well as commodity-exposed islands like Sumatra and
Kalimantan to see the purchasing-power trend. Our team of intrepid investigators
visited 13 cities and spoke with the locals to gauge the situation today. Our
conclusion? The Java provinces are booming and Java ex-Jakarta growth should
continue to outstrip that in the capital for some time to come. We believe the
growth will flourish from West to Central and East Java in the future.
Companies with a great strategy and strong foothold in Java ex-Jakarta
regions should benefit. We like retail chain Ace Hardware, banks BCA and
BTN, cement producer Indocement, healthcare player Kalbe Farma,
developer Pakuwon, gas distributor Perusahaan Gas, textiles firm Sritex,
mobile operator Telkom and infrastructure group Wijaya Karya.
GDP by geography

Source: Statistics Indonesia (BPS)
Sumatra
21%
DKI Jakarta
18%
Java ex-Jakarta
43%
Bali & Nusa
Tenggara
3%
Kalimantan
8%
Sulawesi
5%
Maluku & Papua
2%
Java: the pulse
of Indonesia
Java ex-Jakarta accounts
for 43% of GDP
Powerful demographics
Fruits of decentralisation
Hitting the ground,
getting a feel!
Stocks to play
the theme

Investment thesis Back to Java

The rise of Java regions
Nations need attractive cities to attract businesses and talents. Great
cities are not predestined, but rather created by designs and based on
key decisions. Development of the environmental, social and cultural
aspects is crucial.
Mike Harcourt, co-author of City Making in Paradise
Indonesia is big and diverse, with over 17,000 islands, 240m people and 360
ethnic groups. Since the fall of Suharto in 1998, the country has embarked on
a radical experiment to prevent it from breaking apart, while gradually
striving to create more attractive cities, thanks to decentralisation.
It is also encouraging to see the latest leaders elections in some of the
largest cities like Jakarta, Bandung and Surabaya being won by the reformers
(see their profiles in Appendix 2). Voters in Java regions are becoming more
sophisticated due to growing internet penetration.
Key statistics
Province Land area
(km
2
)
Population
(2010)
GDP
(2012)
2012 GDP growth
(%)
GDP per-capita
(US$)
Jakarta 740 9,607,787 1,103,738 6.53 9,990
West Java 34,817 43,053,732 946,861 6.21 1,912
Central Java 40,801 32,382,657 556,480 6.34 1,494
Yogyakarta 3,186 3,457,491 57,034 5.32 1,434
East Java 47,922 37,476,757 1,001,721 7.27 2,324
Banten 9,163 10,632,166 212,857 6.15 1,741
Java 138,794 136,610,590 3,878,690 6.57 2,469
Indonesia 1,904,569 237,641,326 8,241,864 6.20 3,016
Source: CLSA, BPS
With decentralisation in place, regional growth should continue to outstrip
the centre, supported by a strong demographic profile, a widening
minimum-wage gap and faster investment flow to the cities, albeit less so in
outer Java due to soft-commodity price volatility. The Java ex-Jakarta
regions should continue to expand their power and companies exposed to
this will be big winners.
Forming more than 50% of Indonesias population, Java is the most populous
island in the world with nearly 140m people. Javas land area is one-third that
of Japan but it has a larger population and is adding about 2m people every
year compared with Japan, which is losing 250k people). By simple
extrapolation, Javas population will be double that of Japan within 50 years.
Java (including Jakarta) has nearly 37m households in total - similar to the
Philippines and Thailand combined - with West Java having the highest
number. Out of Indonesias top five provinces with the largest number of
households, four are located in Java.
Striving to create
more attractive cities
Java adds about
2m people every year


Population by geography Minimum wage

Source: BPS
A growing middle class (driven by rapid urbanisation), widening labour cost
discrepancy (Jakartas minimum wage is double the Java average), and low
penetration have led to the shift from Greater Jakarta to other Java regions.
Eventually, money will follow the demographics and cheap labour will attract
business people (particularly labour-intensive industries).
We are already seeing some companies, such as Pan Brothers, moving their
production facilities from Greater Jakarta to other Java cities. Initially, the
reason to expand to Central Java was more labour availability in Central Java,
not cost. But, as the minimum wage discrepancy widens, the company has
preferred to expand capacity in its Central Java facility.
In 2007, the company started its Central Java operation with about 1k sewing
machines, or 30% of its total capacity. Currently, the Central Java facility runs
about 10k sewing machines, or 75% of the total capacity and still rising.
Jakartas GDP growth for the first time lagged the total of Javas provinces in
2012, though this is still based on preliminary figures. This makes sense as
decentralisation has given greater control to local governments, thereby
aiding the development of Javas provinces. With Suharto no longer
controlling the purse strings and the economy in better shape, more central
government money has flowed.
GDP growth Jakarta vs Java Infrastructure spending

preliminary figure, very preliminary figure;
Source: BPS
Source: Government of Indonesia
Regional autonomy has also coincided with another long-run demographic
trend: urbanisation, which consequently leads to some logistics challenges in
the country. Infrastructure spending has continued to rise for both government
and private sectors. Government infrastructure spending saw a 28% Cagr
during 2009-12 and a chunky 52% Cagr for the private sector over the same
period, which implies about 2.6% of GDP as of 2012, the highest ever.
Sumatra
21%
Jakarta
4%
Java
ex-Jakarta
53%
Bali & Nusa
Tenggara
6%
Kalimantan
6%
Sulawesi
7%
Maluku &
Papua
3%
0
500
1,000
1,500
2,000
2,500
3,000
2000 2002 2004 2006 2008 2010 2012 2014
Java ex-Jakarta
Jakarta
(Rp'000)
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2006 2007 2008 2009 2010 2011 2012
Jakarta
Java
(%)
0
50,000
100,000
150,000
200,000
250,000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2005 2006 2007 2008 2009 2010 2011 2012
Government
Private
GDP (LHS)
(%) (Rpbn)
Jakartas GDP growth
for the first time
lagged Javas total
Urbanisation, greater
budget needed
for infrastructure
Money will follow
demographics
Widening labour cost
differential


Indonesia still has long way to go. However, thanks to decentralisation, local
problems allow for local solutions. These logistics problems create more
opportunities for both public and private sectors, eg, Jasa Marga is to build
200km of new toll-road sections within three years, while AKR Corp and
Kawasan Industri Jababeka are developing industrial estates in East Java and
Central Java, respectively.
Some early indicators also suggest that Java ex-Jakarta growth has been
accelerating, be it in investment, bank loans, cement or the retail sector.
Outer Javas low base will also trigger strong growth potential in the longer
term, yet the short-term outlook is less rosy given the low-commodity
price burden.
FDI realisation Cement growth per region (2013 YoY)

Source: BKPM
Hitting the ground, getting a feel!
We hit the ground to get a feel for some of the fastest-growing cities in Java
as well as commodity-exposed islands like Sumatra and Kalimantan to see the
purchasing-power trend. Sumatra and Kalimantan have about 50% of
employees working in the agriculture and mining industries, in contrast to
Java ex-Jakarta, which has more manufacturing capability.
Our conclusion? The Java provinces are booming and Java ex-Jakarta growth
should continue to outstrip the centre for some time to come. We believe the
growth will flourish from West to Central and East Java in the future.
Sumatra employment by sector Java ex-Jakarta employment by sector

Source: BPS
0
10
20
30
40
50
60
0
5,000
10,000
15,000
20,000
25,000
30,000
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
1
Q
1
3
2
Q
1
3
3
Q
1
3
FDI realisation (LHS)
% Java ex-Jakarta
(US$m) (%)
8.1
7.6
5.6
3.9
1.4
0 1 2 3 4 5 6 7 8 9
Java ex-Jakarta
Kalimantan
Jakarta
Sulawesi
Sumatra
(%)
Agriculture
45.9%
Mining
1.7%
Manufacturing
7.3%
Utilities
0.2%
Construction
5.6%
Wholesale
& retail
18.4%
Transport
4.1%
Finance
1.9%
Others
14.8%
Agriculture
29.3%
Mining
0.8%
Manufacturing
19.1%
Utilities
0.2%
Construction
6.9%
Wholesale
& retail
22.4%
Transport
4.4%
Finance
2.3%
Others
14.5%
Logistics problems as
an opportunity
Early indicators
suggest stronger
growth in Java
ex-Jakarta
Half of Sumatra and
Kalimantan
employees work in
agri and mining
Java ex-Jakarta
should continue to
outgrow the centre


We provide fresh on-the-ground perspective on 13 cities spread over three key
islands. This report is not a catch-all to these themes, the island is too broad to
do it in just one report. Rather we have tried to highlight future growth potential
and better understand how these will propel the country going forward.
Our Indonesia team went out and about across Java

Source: CLSA
Stocks to own
Our medium-term strategy is based on the view that Java ex-Jakarta growth
should accelerate given powerful demographics; strong bank-loan growth;
and a new investment cycle with massive infrastructure development.
Companies with great strategies and strong footholds in Java ex-Jakarta
should benefit. We also consider their penetration of provinces and the
sustainability of their strategies. We like BCA, BTN, Perusahaan Gas,
Indocement, Pakuwon, Kalbe Farma, Ace Hardware, Telkom, Wijaya Karya
and Sritex.
Stocks with Java ex-Jakarta exposure
Companies Ticker Market cap
(US$m)
Rec Performance (%) PE (x) EV/Ebitda (x) ROE (%)
3M 1Y 14CL 15CL 14CL 15CL 14CL 15CL
Bank Central Asia BBCA IJ 19,764 O-PF (9) 5 16 13 na na 23 24
Telekom Indonesia TLKM IJ 17,728 BUY (1) 10 14 13 5 4 23 23
Perusahaan Gas PGAS IJ 9,042 O-PF (8) (2) 10 11 8 7 32 29
Indocement INTP IJ 6,090 BUY (1) (6) 14 12 8 7 22 21
Kalbe Farma KLBF IJ 5,196 BUY (0) 28 28 23 19 16 26 27
Pakuwon PWON IJ 1,194 BUY (2) 12 10 7 7 5 33 34
Ace Hardware ACES IJ 996 O-PF 4 (13) 23 19 16 13 24 24
Wijaya Karya WIKA IJ 922 BUY (10) 9 14 11 7 5 23 24
Bank Tabungan BBTN IJ 788 BUY (9) (43) 6 5 na na 13 16
Sritex SRIL IJ 455 BUY 9 - 11 9 7 6 15 18
Source: CLSA
Why Java should
grow stronger?
Who has strong
foothold and great
strategy in Java
ex-Jakarta?
Fresh on-the-ground
perspective on
13 cities

Did you know?
Java fast facts

Lots of people
Java is the worlds most populous island. Although it
is only the 13
th
largest in the world in terms of its
size, it is home to 136 million people. The population
density is over 1,000 people per square kilometre.
By GDP, Java comes 30
th
in the world, ahead of
every other Asean country, assuming around
US$380bn in GDP. If Java was a country, it would be
the 10
th
largest by population.

The biggest tribe
The Javanese are Indonesias largest tribe with
more than 100 million people. Their ancestors are
thought to have originated in Taiwan and migrated
through the Philippines, reaching Java between
1,500BC and 1,000BC.
Kopi Jawa
Coffee has been one of the biggest
exports since the Dutch began
cultivation in the 17
th
Century. The local
Kopi Jawa is a distinct style of coffee
that is very strong, black and sweet.
The birth place of presidents
Every president, from Soekarno
to Susilo Bambang Yudhoyono,
is Javanese. BJ Habibie was the
only exception, yet this was
during a transition period from
the New Order to the
Reformation era. On many
occasions, they will choose a
running partner from outside
Java to boost their popularity
with the non-Java people.
Accounting for 53% of the
population, Javanese people will play an important
role this year in determining the next president.
Traditional Gamelan music
The 1889 Paris Exposition
Universelle hosted many
musical groups from
exotic countries and one
was the Javanese
Gamelan. It was there
that French composer
Claude Debussy first
heard a performance by the Java ensemble.
Debussy was so impressed with what he heard
that it influenced his later works. The piece most
often quoted as an example of gamelans influence
on Debussy is Pagodes, from the piece Estampes
of 1903. Gamelan is a collection of mostly metallic
musical instruments, with gong or bell-like sounds.
Borobudur Temple
Built in the 9
th
Century, this is
the worlds oldest Buddhist
temple. Located in Magelang
in Central Java, the monument
is a shrine to Lord Buddha and
is the countrys single most
visited tourist attraction.
Lots of eruptions
Situated on the Pacific Ring of Fire, Indonesia has
abundant volcanoes. There are over 30 in Java alone.
One of the most active is Mount Merapi, which lies
2,968 metres above sea level. In 1930, one eruption
destroyed 13 villages and killed over 1,400 people.

Photos: Thomas Hirsch, Benny Lin, Gunawan Kartapranata (Wikimedia Commons)

Section 1: Powerful demographics Back to Java


Forming more than half of Indonesias population, Java is the most populous
island in the world with nearly 140m people. Javas land area is one-third that
of Japan but it has a much larger population, with around 2m new additions
every year while Japans population dropped by a record 250k people last
year. Java overtook Japan in 2010 and, by simple extrapolation, Javas
population will be more than double Japans within 50 years.
Java (including Jakarta) has nearly 37m households in total - similar to the
Philippines and Thailand combined - with West Java home to the most
households. Of the top-five provinces with the largest household numbers in
Indonesia, four are located in Java with North Sumatra joining this group.
Figure 1
Map of Indonesia and Java

Source: CLSA, BPS
Figure 2 Figure 3
Population by geography Java: the most populous island in the world

Source: BPS. NT: Nusa Tenggara Source: BPS, United Nations, Japan civil registry
Jakarta
Bali Java
Serpong
Bandung
Krakatau
Islands
Semarang
Yogyakarta
Surakarta
(Solo)
Madiun
Surabaya
Malang
Indonesia
Java stats
Population: 136 million
Land area: 138,794 km
2
Density: 1,064 people per km
2
Sumatra
21%
Jakarta
4%
Java
ex-Jakarta
53%
Bali & Nusa
Tenggara
6%
Kalimantan
6%
Sulawesi
7%
Maluku &
Papua
3%
0 20 40 60 80 100 120 140
Java
Honsh
Great Britain
Luzon
Sumatra
Taiwan
Sri Lanka
Madagascar
Mindanao
Hispaniola
Borneo
Sulawesi
Salsette
Kysh
Cuba
(m)
Java is the worlds most
populous island
Total Java households
similar to the Philippines
and Thailand combined



Figure 4
Java vs Japan population

Source: World Bank, CLSA (assuming 16m additional people for every 10 years in Java)
Indeed, Java has eight cities with populations over a million, with Medan and
Palembang (Sumatra) as well as Makassar (Sulawesi) joining this group.
Jakarta is the second-most crowded city in the world, behind Salsette (India),
as anyone who has experienced Jakarta traffic can attest. Despite being
densely populated, unemployment in Java (ex-Jakarta) still hovers at a
manageable level of 6.6%, much lower than Jakartas 9.9%.
Figure 5
Population over a million
City Province Population (m)
Jakarta Jakarta 9.6
Surabaya East Java 2.8
Bandung West Java 2.4
Bekasi West Java 2.3
Tangerang Banten 1.8
Depok West Java 1.7
Semarang Central Java 1.5
South Tangerang Banten 1.3
Source: BPS
Figure 6 Figure 7
Unemployment rate Indonesias urbanisation rate

Source: BPS Source: UN
0
50
100
150
200
250
1950 1960 1970 1980 1990 2000 2010 2020F 2030F 2040F 2050F
Java population Japan population (m people)
3.3
4.9
5.2
5.3
5.7
6.1
6.6
9.9
0 2 4 6 8 10
Bali & NT
Maluku & Papua
Sulawesi
Kalimantan
Sumatra
Indonesia
Java ex-Jakarta
Jakarta
(%) 0
10
20
30
40
50
60
70
80
1
9
5
0
1
9
5
5
1
9
6
0
1
9
6
5
1
9
7
0
1
9
7
5
1
9
8
0
1
9
8
5
1
9
9
0
1
9
9
5
2
0
0
0
2
0
0
5
2
0
1
0
2
0
1
5
2
0
2
0
2
0
2
5
2
0
3
0
2
0
3
5
2
0
4
0
2
0
4
5
2
0
5
0
(%)
Java population overtook
Japan in 2010
Java has eight cities with
populations over a million
Jakarta is second-most
crowded city in the world



In 2008, for the first time ever, half of the world population lived in cities. For
Indonesia, it was in 2010 when half of the countrys population lived in urban
areas. The figure was 13% in 1990. By 2050, up to three-quarters of the
worlds population will be urbanised and most of the incremental growth will
be in Asian second-tier cities, according to the UN.
Figure 8
Minimum wage

Source: Government of Indonesia
A growing middle class (driven by rapid urbanisation), widening labour cost
discrepancy, and low penetration of consumer products have led to the
business expansion shift from Greater Jakarta to other Java regions.
Eventually, money will follow the demographics and cheap labour will attract
business people (particularly labour-intensive industries).
Indonesia in maps
Back in September 2009, we
published our Unveiling the
Komodo report, which aimed to
illustrate Indonesias economy
through maps. Through graphical
representations, the report shows
the countrys demographics, the
industries, the services, the
natural resources, the transport
infrastructure, the finance
networks as well as the popular
tourist areas.
Beyond its ethnic and cultural diversity, Indonesia is
blessed with an abundance of natural resources.
Globally, it is the largest thermal-coal exporter and
palm-oil producer, and the third-largest natural-gas
exporter. It also boasts the worlds biggest gold mine.
But many of these assets are located in remote regions,
far from the modern world. Our maps and charts
provide investors with a better understanding of the
global significance of such commodities.
0
500
1,000
1,500
2,000
2,500
3,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Java ex-Jakarta Jakarta (Rp'000)
Gap has widened, leading
to the shift from
greater Jakarta
In 2010, half of Indo
population lived in
urban areas
Money will follow the
demographics



Figure 9
Minimum wage in selected cities
Provinces/Cities (Rp000/month) 2013 2014
East Java
Surabaya 1,724 2,165
Malang, Batu 1,317 1,601
Kediri 1,128 1,165
Madiun, Ngawi, Magetan, Nganjuk, Ponorogo 927 1,047
Provincial average 1,140 1,315
Central Java
Semarang 1,130 1,230
Solo, Sragen, Klaten 884 1,184
Cilacap 888 978
Pemalang, Pekalongan 950 1,044
Provincial average 914 1,067
West Java
Bandung 1,424 1,825
Bogor 2,002 2,242
Cirebon 1,082 1,220
Banten
Tangerang 2,201 2,443
Cilegon 2,200 2,443
Serang 1,939 2,166
DI Yogyakarta
Yogyakarta 1,065 1,173
Jakarta
DKI Jakarta 2,200 2,440
Java (ex-Jakarta) average 1,167 1,366
Source: CLSA, Government of Indonesia
Already, we see some companies, such as Pan Brothers, moving their
production facilities from Greater Jakarta to other Java cities. Established in
1980 in Tangerang, Greater Jakarta, it is Indonesias largest garment
manufacturer employing about 18,500 employees.
In 2007, the company started its Central Java operation with about 1,000
sewing machines or about 30% of the firms total capacity. This facility now
operates with about 10,000 sewing machines or 75% of the total capacity and
is still expanding. Meanwhile, the Tangerang production facility did not see
any expansion.
Initially, the reason for expanding to Central Java was down to more labour
availability, not cost. In terms of labour skill (productivity), the company
claims that Central Javas labour productivity was low at first and eventually
caught up; they just needed a learning period. Going forward, it will focus its
expansion on the Central Java facility due to cost advantages and will leave
the Tangerang facility as it is.
Textile company moving
its production facility
Labour availability is
key concern
Jakarta minimum
wage is doubled than
Java average



Figure 10
Pan Brothers sewing machine expansion

Source: Company
Indeed, low penetration is also a key attraction to invest in Java regions as it
still offers huge room to grow. Data from cement and retailers suggest that
penetration is at least about three times higher in the Jakarta region, as
measured by sales/GDP ratio and home-improvement spending per capita.
Figure 11 Figure 12
Cement consumption per capita (2012) Retailers sales to GDP ratio (2012)

Source: CLSA, Company, Indonesia Cement Association (ASI)
Figure 13
Home-improvement spending per capita

Source: CLSA, Company
8,450
11,750
13,250
16,250
20,625
25,000
0
5,000
10,000
15,000
20,000
25,000
30,000
2010 2011 2012 2013F 2014F 2015F
(unit)
0
100
200
300
400
500
600
Jakarta Java (ex-Jakarta) Outer Java
(kg/person)
0
1
2
3
4
5
6
Ace
Hardware
Mitra
Adiperkasa
Ramayana Matahari
Dept Store
Jakarta Java (ex-Jakarta) Outer Java (x)
0
5
10
15
20
25
30
35
40
HomePro
(Bangkok)
HomePro
(provinces)
Ace Hardware
(Jakarta)
Ace Hardware
(Java ex-Jakarta)
Ace Hardware
(ex-Java)
(US$)
Pan Brothers expansion
will be more towards its
Central Java facility
Low penetration, as
measured by cement
and retail data
Java is still
underpenetrated
Java ex-Jakarta has
the lowest cement
consumption per capita

Section 2: Fruits of decentralisation Back to Java


With decentralisation in place, we see greater opportunity for Indonesia to
create more attractive cities (see Section 3 for in-depth discussion on these
cities). In fact, Jakartas GDP growth for the first time lagged that for the total
of Javas provinces in 2012, although this is still based on preliminary data.
This makes sense, in our view, as decentralisation has given greater control
to local governments, thereby aiding the development of Javas provinces.
The country has developed quickly since the end of Suhartos dictatorship in
1998. With Suharto no longer controlling the purse strings and the economy
in better shape, more central government money has flowed to the outer
provinces. See our July 2012 report, Otonomi daerah, for more.
Figure 14
GDP growth Jakarta vs Java

preliminary figure, very preliminary figure. Source: CLSA, BPS
Figure 15 Figure 16
Province GDP growth (2012) Government budget spending on regions

Source: BPS APBN-P, RAPBN; Source: Government of Indonesia

4.0
4.5
5.0
5.5
6.0
6.5
7.0
2006 2007 2008 2009 2010 2011 2012
Jakarta Java (%)
6.5
6.2
6.3
7.3
5.8
4.8
6.2
0
1
2
3
4
5
6
7
8
J
a
k
a
r
t
a
W
e
s
t

J
a
v
a
C
e
n
t
r
a
l

J
a
v
a
E
a
s
t

J
a
v
a
S
u
m
a
t
r
a
K
a
l
i
m
a
n
t
a
n
I
n
d
o
n
e
s
i
a
(%)
0
100
200
300
400
500
600
700
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
(Rptn)
11% 3-year Cagr
16% 3-year Cagr
GDP growth for
Jakarta lagged total
Javas provinces
More opportunity to
create attractive cities
More money from
central government



As the nation needs more attractive cities to lure businesses and talent, it is
encouraging to see that the latest leaders elections in some of the largest cities
like Jakarta, Bandung and Surabaya won by the reformers (see Appendix 2 for
their profiles). Definitely, voters in Java are becoming more sophisticated due
to growing internet penetration.
Figure 17
Joko Widodo

Figure 18
Ridwan Kamil

Figure 19
Tri Rismaharini

Source: DKI Jakarta Source: Ridwan Kamil (Wikimedia) Source: JayaGood (Wikipedia)
At the Jakarta gubernatorial election in 2012, Joko Widodo - better known as
Jokowi - won the contest despite scepticism over the trustworthiness of the
electoral process. Jokowi received 42% of the votes in the first round and
because no candidates achieved more than 50%, Jakarta conducted a second
round of voting, whereby Jokowi won 54% of the votes.
Figure 20 Figure 21
Jakarta gubernatorial election 2012 (first round) Internet penetration (% of population)

Source: KPU Jakarta Source: Euromonitor
Logistics: Challenge yet opportunity
Regional autonomy has also coincided with another long-run demographic
trend: urbanisation. Over time, this will lead to greater budgets needed for
infrastructure and education. For sure, logistics is the key challenge to
penetrate into the Indonesian market, yet there is opportunity for incumbents
with vast distribution network to maintain their competitiveness.
The logistics challenge serves as a great entry barrier in the short term, with
Indonesia logistics costs one of the highest in the region. The nations total
logistics costs account for 27% of GDP, with transport expenses contributing
about 50% of the cost.
Joko Widodo
42%
Fauzi Bowo
34%
Hidayat Nur
Wahid
12%
Faisal Basri
5%
Alex Noerdin
5%
Hendarji
Supanji
2%
0
2
4
6
8
10
12
14
16
18
2007 2008 2009 2010 2011 2012
(%)
Encouraging to see
reformists win leaders
elections in big cities
Joko Widodo won in 2012
in Jakarta after a second
round of voting
Greater budget needed
for infrastructure
Logistic costs account for
27% of GDP
Reformers in Java cities



Figure 22 Figure 23
Logistic costs as % to GDP Logistic costs breakdown as % to GDP

Source: World Bank
Jakartas Tanjung Priok port, for example, has a dwelling time of 8.7 days,
compared to five days in Thailand and 1.2 days in Singapore due to border
administration issues, business practices and poor road infrastructure.
Consequently, terminal handling charges in Indonesia is the highest after
Hong Kong.
Research by The Asia Foundation and University of Indonesia in 2008 found
that the operational cost of trucks in Indonesia was 34 cents per kilometre,
50% higher than average cost for all of Asia.
Figure 24
Logistic cost increment and fuel price

Source: Center for Logistics and Supply Chain Studies

What does our on-the-ground check show?
In our latest Komodo report, our roving analyst
Amie Liem took a road trip from Jakarta to
Central Javas Semarang. From her adventure,
we conclude that it is very slow for people to
move things from one place to another.
The average speed is 58km/hour versus 97km/hour in
China and 110km/hour in America; Amies Jakarta-
Semarang-Klaten-Jakarta trip used more than 315.5km of
toll roads, or 42% of Indonesias
total toll-road network, spending
over 20 hours in total and
traversing more than half of Jasa
Margas toll roads.
Visit clsa.com to see more of our
on-the-ground Komodo reports
from Amie.
0
5
10
15
20
25
30
S
i
n
g
a
p
o
r
e
U
S
A
J
a
p
a
n
M
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l
a
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S
.

K
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T
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a
i
l
a
n
d
V
i
e
t
n
a
m
I
n
d
o
n
e
s
i
a
(%)
12.6 12.8 13.3
12.3
11.0 10.9
11.8 11.6
10.2 9.9
10.5
9.0
9.6 9.7 8.0 8.7
4.8 4.8
5.0
4.5
4.3 4.3
4.2
4.3
0
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010 2011
Transportation costs Inventory costs Administration costs (%)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011
Logistic cost increase Fuel price (RHS) (%) (US$/lt)
Increasing dwelling time
in Tanjung Priok port
Logistic cost is highly
correlated with fuel price



Figure 25 Figure 26
Dwelling time in Tanjung Priok port Infrastructure spending

Source: JICT Source: Government of Indonesia
Indonesia definitely has long way to go. However, thanks to decentralisation,
local problems allow for local solutions. These logistic problems are gradually
being addressed.
The logistics challenge has lifted infrastructure spending for both government
and the private sector. Government infrastructure spending jumped by a 28%
Cagr during 2009-12 and a chunky 52% Cagr for private firms, which implies
about 2.6% of GDP as of 2012, the highest ever.
Opportunity for public . . .
Indonesian toll-road operator Jasa Marga, for example, plans to develop close
to 200km new section within the next three years, or about an additional
30% on top its current portfolio.
Figure 27
Jasa Margas toll-road plan
Expected Completion Toll road Section Province Length (km)
4Q 2013 JORR W2 North Kb Jeruk-Meruya Jakarta 1.8
JORR W2 North Meruya- Joglo Jakarta 1.5
Nusa Dua-Ngurah Rai-Benoa Bali 10.0
Semarang-Solo (Stage 1: Sec 2) Ungaran Bawen Central Java 12.3
1Q 2014 Gempol-Pandaan East Java 13.6
Bogor Outer Ring Road Kd Halang-Kd Badak Greater Jakarta 2.0
2Q 2014 Gempol-Pasuruan Gempol-Rembang East Java 13.9
JORR W2 North Joglo-Ciledug Greater Jakarta 2.35
JORR W2 North Ciledug-Ulujami Greater Jakarta 2.05
Surabaya-Mojokerto Krian-Mojokerto East Java 18.5
3Q 2014 Surabaya-Mojokerto Sepanjang-WRR East Java 4.3
4Q 2014 Surabaya-Mojokerto WRR-Driyorejo East Java 5.1
Surabaya-Mojokerto Driyorejo-Krian East Java 6.1
2Q 2015 Gempol-Pasuruan Rembang-Pasuruan East Java 8.1
Gempol-Pasuruan Pasuruan-Grati East Java 12.2
Kunciran-Serpong Greater Jakarta 11.2
3Q 2015 Semarang-Solo (Stage 2) Bawen-Salatiga Central Java 17.5
Semarang-Solo (Stage 2) Salatiga-Boyolali Central Java 24.4
Semarang-Solo (Stage 2) Boyolali-Solo Central Java 7.64
Cengkareng-Kunciran Greater Jakarta 14.2
2Q 2016 Bogor Outer Ring Road Kd Badak-Yasmin Greater Jakarta 2.2
Bogor Outer Ring Road Yasmin-Darmaga Greater Jakarta 3.0
Source: Jasa Marga
4.9
5.8
6.4
8.7
0
1
2
3
4
5
6
7
8
9
10
2010 2011 2012 2013
(days)
0
50,000
100,000
150,000
200,000
250,000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2005 2006 2007 2008 2009 2010 2011 2012
Government
Private
GDP (LHS)
(%) (Rpbn)
Local problems allow
for local solution
Rising infrastructure
spending, both public and
private sectors
Jasa Marga plans to build
200km new section
within three years



Figure 28
Jasa Marga: Taman Mini Indonesia Indah Interchange, Jagorawi Toll Road

Figure 29
Automated toll booth at Cililitan gate, Cawang-Tomang-Cengkareng Toll Road

Source: Jasa Marga annual report
. . . as well as private companies
Two large-scale industrial estate projects in Central and East Java plan to
capitalise upon industrial investment in alternate locations outside Jakarta.
AKR Corporindo and its joint-venture partner, the state-owned ports
corporation Pelindo 3, plan to construct a 2,150-hectare estate between
Gresik and Surabaya in East Java while Kawasan Industri Jababeka (KIJA)
and its partner Sembcorp of Singapore plan to construct a 2,770-hectare
estate in Central Java near Semarang.
To make investment attractive by export-focused industries (both local and
international), each has allocated space for an adjacent port. At present, the
average undeveloped industrial estate space is about 20km away from the
nearest port facility. The total cost of AKRs project is estimated to be around
Rp10tn (US$870m) over a 5-10-year period with the joint venture recently
securing Rp3tn (US$261m) in debt commitments for phase 1.
Two partnerships in East
and Central Java
Allocation for an
adjacent port
Jasa Marga looking
to expand



Figure 30
Industrial estate development in Java
Java Integrated Industrial
Port Estate (JIIPE)
Kendal Industrial Park
Location East Java,
between Gresik and Surabaya
Central Java,
near Semarang
Area (ha) 2,150 2,770
Port area allocation (ha) 250 58
Total indicated investment Rp10t Rp7.8t
Target first operation 2014 2015
Estate ownership AKR 60%: Pelindo 3 40% KIJA 51%, Sembcorp 49%
Port ownership AKR 40%: Pelindo 3 60% KIJA 51%, Sembcorp 49%
Source: Companies
Both estates plan to sell land in stages with about 70% of the designated
area being able to be developed by industry, commencing first with heavy
industry (such as metal smelting) then medium density (agriculture and
fertilisers for instance) and then light commercial. The projects also have
residential areas held adjacent, such as AKRs which will have 700 hectares of
residential land (external to the project).
Figure 31 Figure 32
Kendal industrial estate land area JIIPE industrial estate land area

Source: Company
For these projects to be attractive, the differential in wages between the
respective locations and Greater Jakarta needs to persist and the usual
logistical challenges have to be overcome, including land acquisition (AKR
currently has 900 hectares or about half its planned area), permits and
infrastructure connection with nearby road and rail networks.
Some early indicators
Within the last five years, bank loan growth in Java has been growing above
20% level, despite a high base (25% of total loan), while the latest bank loan
data suggest that the growth has been accelerating in Java areas.

Mapping Batavia
Our property team has produced a series of maps on properties in Jakarta.
These have featured the capitals landmark properties (Batavia Reborn),
industrial estates (Industrious Batavia) and retail malls (Shopping in Batavia).
They provide a practical and user-friendly guide to Greater Jakartas developing
landscape. Visit clsa.com to check them out.
972
792
468
0
200
400
600
800
1,000
1,200
Stage 1 Stage 2 Stage 3
(ha)
346
452
435
528
0
100
200
300
400
500
600
Stage 1A Stage 1B Stage 2 Stage 3
(ha)
Industrial estate
development by
AKR and KIJA
Taking a view that wage
differential should persist
Accelerating bank loan
growth in Java
70% of the area is
allocated for industry
Both estates to sell
land in stages



Supporting the growth is domestic investment as well as foreign direct
investment (FDI) which has continued to pour into Java (ex-Jakarta) regions
despite the high base. FDI in Java ex-Jakarta has increased by 20% within
2007-12 Cagr and now represents about 49% of total FDI as of 3Q13 (vs.
39% in 2012).
Figure 33 Figure 34
Bank loan growth is accelerating in Java FDI breakdown (3Q13)

Source: BI Source: BKPM
Figure 35 Figure 36
FDI realisation Cagr 2007-12 FDI realisation

Source: BKPM
Domestic investment data also suggests that the growth in Java (ex-Jakarta)
regions has been accelerating much faster in 2013, despite the high base. Up
to 1H13, domestic investment in Java (ex-Jakarta) areas rose by 87% YoY, as
compared to the national average of 50%.
Consequently, cement sales in Java (ex-Jakarta) areas has also shown a
strong recovery trend, contributing about 47% of total national sales as of
2013 and showing the strongest growth of 8.1% in 2013 (versus national
average of 5.5%).
0
5
10
15
20
25
30
J
a
k
a
r
t
a
J
a
v
a
e
x
-
J
a
k
a
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t
a
S
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s
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m
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t
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n
B
a
l
i

&

N
T
M
a
l
u
k
u
&

P
a
p
u
a
2007-12 Cagr 9M13 YoY (%)
Sumatra
14%
Java
ex-Jakarta
49%
Jakarta
6%
Kalimantan
13%
Sulawesi
5%
Bali & Nusa
Tenggara
2%
Maluku & Papua
11%
(3)
20
22
61
80
82
246
(50) 0 50 100 150 200 250 300
Jakarta
Java ex-Jakarta
Sumatra
Kalimantan
Sulawesi
Bali & NT
Maluku & Papua
(%)
0
10
20
30
40
50
60
0
5,000
10,000
15,000
20,000
25,000
30,000
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
1
Q
1
3
2
Q
1
3
3
Q
1
3
FDI realisation (LHS)
% Java ex-Jakarta
(US$m) (%)
FDI still grew by 20% in
Java ex-Jakarta despite
high base
Positive sign from
cement data



Figure 37 Figure 38
Cement growth by region (2013 vs 2012) Java (ex-Jakarta) as % to cement sales

Source: CLSA
As suggested by the data below, it seems that most retailers delivered higher
same-store-sales growth (SSSg) in Java ex-Jakarta regions, including Ace
Hardware and Alfamart. They claimed that outer-Java weakness was due to
low commodity prices, particularly in Sumatra. Consumer staple companies
like Unilever also claimed similar.
Figure 39 Figure 40
Ace Hardware Alfamart

Source: Ace Hardware Source: Alfamart
Figure 41 Figure 42
Ace Hardwares SSSg breakdown (2013) Alfamarts SSSg breakdown (2013)

8.1
7.6
5.6
3.9
1.4
0 1 2 3 4 5 6 7 8 9
Java ex-Jakarta
Kalimantan
Jakarta
Sulawesi
Sumatra
(%)
42
44
46
48
50
52
54
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
(%)
0
1
2
3
4
5
6
7
Jakarta Java ex-Jakarta Outer Java Total
(%)
0
2
4
6
8
10
12
14
Jakarta Java ex-Jakarta Outer Java Total
(%)
Stronger same-store-
sales growth in
Java ex-Jakarta

Section 3: Hitting the ground, getting a feel! Back to Java


Hitting the ground, getting a feel!
We hit the ground to get a feel for some of the fastest-growing cities in Java
as well as commodity-exposed islands like Sumatra and Kalimantan to see the
purchasing-power trend. Our conclusion? The provinces are booming and Java
ex-Jakarta growth should continue to outstrip the centre for some time to
come. We believe growth will flourish from the West to Central and East Java
in the future.
We believe purchasing power in outer-Java regions such as Sumatra and
Kalimantan will continue to be more volatile following soft commodity prices.
Sumatra and Kalimantan have about 50% of employees working in the
agriculture and mining industries, in contrast to Java ex-Jakarta, which has a
large manufacturing base.
Figure 43 Figure 44
Sumatras employee by sector Java ex-Jakartas employee by sector

Figure 45
Region with soft commodity exposure (based on production)

Source: BPS
In the following pages, we provide our on-the-ground perspective on 13 cities
spread over three key islands. While this report is not a catch-all to these
themes - the island is too broad to do it in just one report - we have tried to
highlight future growth potential and better understand how these will propel
the country going forward.
Agriculture
45.9%
Mining
1.7%
Manufacturing
7.3%
Utilities
0.2%
Construction
5.6%
Wholesale
& retail
18%
Transport
4.1%
Finance
1.9%
Others
14.8%
Agriculture
29.3%
Mining
0.8%
Manufacturing
19.1%
Utilities
0.2%
Construction
6.9%
Wholesale
& retail
22.4%
Transport
4.4%
Finance
2.3%
Others
14.5%
72.6
33.2
74.2 75.2
20.7
33.7
16.7
3.0
0
10
20
30
40
50
60
70
80
90
100
Palm Coconut Rubber Coffee Cocoa Sugar
cane
Tea Tobacco
Sumatra Java Kalimantan Sulawesi Others (%)
Java ex-Jakarta growth
should continue to
outstrip the centre
Over 70% production of
palm oil, rubber and
coffee are from Sumatra
Half of employees in
Sumatra and Kalimantan
working in agriculture
Visiting 13 cities spread
over three key islands


5 February 2014 russell.cranwell@clsa.com 23

Jakarta: Were jamming
In musing about writing a discussion paper on Jakarta while looking over the
sea in Sulawesi on the Idul Adha holiday and getting ready to sacrifice a cow
for the local villagers, the word that popped in to my head to describe Jakarta
today was Cosmopolitan.
The more I thought about it, I realised it was true. The number of new meeting
places (including our many brand new, high-quality malls such as Grand
Indonesia, Gandaria City and Lippo Mall) along with events such as Jakarta
Fashion Week, the restaurants which cater to all tastes (and pockets) has
dramatically changed the habits of local Jakartans and is spread rapidly with the
increasing connectivity between the Big Durian and other parts of the country as
evidenced by the massive increase in air travel across the archipelago.
Last year, my favourite events were the visits by three English Premier
League teams (Arsenal and two other more minor teams - in my opinion -
Manchester Utd and Chelsea). To put my observations in perspective, I have
been visiting Jakarta since 1984, a frequent flyer since 1995 from Singapore,
a property owner since 2000 by virtue of being married to an Indonesian and
a resident since 2004. In my view, there is no more exciting place to live in
the world, despite our many challenges.
Figure 46 Figure 47
Arsenal FC in Jakarta Gunner Cranwell at Bung Karno Stadium

Source: CLSA
One of the takeaways from our original Not just Jakarta and Enter the
Komodo! themes was that increases in agricultural and commodity prices in
the provinces would slow, or possibly reverse, the move from the villages to
the cities and Jakarta in particular. This has not proved to be the case for a
number of reasons due in part to commodity prices themselves having come
off, but also due to the fact that Jakarta has become an even more attractive
place to live (and work if you can get a job) over the past five years, of
course with the sole exception of our notorious traffic.
Talking of traffic, there have been a number of initiatives to improve traffic
flow, such as the banning of heavy trucks except from the hours of 10pm to
5am in central Jakarta, which, while it may not have done a lot for traffic, has
certainly improved the atmosphere downtown. The completion of the Antasari
flyover on the outskirts of Kemang has changed traffic patterns considerably,
making the journey to and from work much better for residents.
The imminent completion of the Casablanca flyover will hopefully have an equally
beneficial effect on the notorious bottleneck there. This will be important for the
development of what I remember being described by Pak Chandra Ciputra some
years ago as Jakartas future Orchard Road, with the opening of four new malls
over the past three years, including Ciputra World.
Managing the
notorious traffic
Near-term completion of
the Casablanca flyover
Favourite events
in Jakarta
Russell Cranwell
MD, Head of Indonesia
Corporate Finance
russell.cranwell@clsa.com
+62 21 2554 8833

Jakarta


24 russell.cranwell@clsa.com 5 February 2014

Figure 48 Figure 49
Antasari Flyover Uncompleted Casablanca Flyover

Source: CLSA
The other most notable feature of the traffic in Jakarta has been the
improvement in the age and quality of the cars (and buses) on the streets,
more evidence of the general upward movement of the population, which is
contributing, to a degree, to the improved environment. There has certainly
been no impact on traffic volumes due to the various increases in fuel prices,
proving that subsidies are totally unnecessary and the monies would be
better spent on adding road and other infrastructure.
It will be interesting to see over the next few years what impact the proposed
MRT will have, firstly on making our famous macet or traffic jam initially
significantly worse as we have seen in other places in the region such as
Kuala Lumpur and Bangkok and later in improving the travel times and
comfort and convenience of public transport
In our household, we have taken our own initiatives to deal with higher fuel
prices and reduce pollution. The first was the purchase of a three-wheeler
cycle including an integral wire shopping basket (which fits the dog too!) and,
most importantly, Starbucks coffee holder, from our favourite Ace Hardware
at a cost of Rp5 million, which is now used for local shopping rather than the
car and also a fun way to exercise.
Figure 50
Russells three-wheeler cycle with shopping basket

Source: CLSA
Two important
flyovers to reduce
notorious bottleneck
The MRT impact?
Pedal power



One of the ways we have found to deal with the traffic problems, which limits
our ability to meet (clients) face to face, is to arrange meetings in locations
everyone is happy to go to, such as Pacific Place Mall, which is both in the
SCBD and has a wide array of meeting places.
For example, a day of meetings could include breakfast at the Ritz Carlton,
coffee at Starbucks and Liberica, lunch at Potatohead or Sopra, further
meetings in the offices around the mall and dinner at another of the
restaurants in the area, so achieving seven or eight meetings in a day as
opposed to a maximum of four going from office to office.
Figure 51 Figure 52
Liberica coffee shop Starbucks coffee

Source: Ahmad Saiful Muhajir (flickr) Source: nSeika (flickr)
This doesnt count all the informal meetings with all the other bankers doing
the same thing! Efficient, saving on the environment by reducing traffic flows,
but maybe not so good for the waistline (but its ok, the mall has a gym). The
use of in-car Wi-Fi is beginning to take off, which is partly a result of the time
we do spend in traffic and the poor signal quality generally of our wireless
service operators. Incidentally this latter explains why we Jakartans each have
so many mobile phones, we need at least two to have two operators and one
foreign (Singapore) registered simply to ensure continuity of service.
The election of the fresh (and untainted) new governor of Jakarta, Pak Jokowi
in 2012 and the acts his team has taken to push forward the Jakarta MRT and
monorail and in repositioning some of the detriments to traffic flow such as
the street vendors around Tanah Abang have given us great encouragement
that a real focus has been given to improving the situation and I may be
going against the accepted wisdom, but the traffic flows do seem on normal
days (ie, not floods or APEC forums) to be better.
Another notable feature of Jakarta over the past few years has been the
dramatic increase in the usage of English (not helpful to those of us who want
to practice our Bahasa Indonesia). In talking to young Jakartans in hotels,
malls and restaurants as well as family, a lot of this seems to have been
driven by the desire to have full access to the internet, compounded by the
increased availability of access to cable TV through First Media (Lippo),
Indovision (MNC) and TelkomVision (Telkom).
Indonesians are very big on technology and we have been the second-largest
users of BlackBerrys for a number of years. This is good news for Indonesias
ability to participate in the global economy, where for good or bad, English is
a prerequisite and is only likely to further encourage FDI as well as being
good for the tourist industry, which perhaps with the exception of Bali, is still
in its infancy.
Pacific Place as one-stop
meeting point solution
Dramatic increase in the
usage of English
Two ground breakings
in a week
Convenient meeting
points



Perhaps partly as a result of our traffic problems and the access to cable TV
and YouTube etc (and of course our general weather, so the need for air
conditioners), Jakartans have taken to a mall culture, especially where all
needs are catered to; shopping, eating, bookshops, cinemas, childrens play
areas (Kidzania at Pacific Place has to be experienced to be believed),
hairdressing salons (a daily visit is entirely normal for Indonesian ladies) and
of course gyms are available as well as the most important (family) Karaoke
rooms. An increasing number of more middle to upper-tier brands are
arriving, not just the ultra-luxury goods. For example, we recently attended
the opening of the first H&M store in Gandaria City (Pakuwon) and it was
packed for days!
Figure 53 Figure 54
CLSA ladies during H&M opening Posing with celebrity

Figure 55 Figure 56
Queuing up early for H&M opening H&M attracts Jakartans

Source: CLSA
The malls are not just venues for the more affluent to attend either, the
increases in general earnings exemplified by the large hikes in minimum wage
have allowed a broad range of shoppers to go to the malls. Many of the newer
and European fusion types of restaurants-cum-bars that have opened up
(many associated with the newer malls), such as Potatohead at Pacific Place,
Loewys in Kuningan, Union at Plaza Senayan and most recently Odysseia (just
outside the ultra-chic Galeries Lafayette, French cool) and which, according to
my London-based, sophisticated foodie son and daughter-in-law has, fantastic
ambiance, great food, we could really do with one of these in London.
Ultra chic restaurants
Everyone just loves malls
The crowd during first
H&M opening
H&M opening in
Gandaria City



Figure 57 Figure 58
Loewy Union

Figure 59 Figure 60
Hard Rock Caf (reborn) Potato Head Garage

Source: CLSA
The less well-off consumers are also catered for too, one example of which is
the (now much copied) 7-11 franchise here, with its 24-hours opening,
coffee, slurpy and hot dog offerings among others, which has gone from zero
to 140 stores in only three years and is a huge hit with teenagers/students.
One impact of the devolution of power from the centre to the provinces
through the regional autonomy programmes has been the increased demand
for air travel, such that Jakartas main airport Soekarno Hatta is bursting at
the seams, now processing up to 50 million passengers a years from a design
capacity of 20. Hence, starting early this year, some domestic routes have
been diverted to Halim Perdanakusuma airport
Figure 61 Figure 62
Busy Soekarno Hatta airport Opening ceremony of Halim airport

Source: Naif Alas (flickr) Source: CLSA
7-11 has gone from zero
to 140 stores in only
three years
Increasing demand
for air travel
Famous hang-out spots
in Jakarta
Shifting some domestic
routes to Halim airport



This has meant an influx of people from the provinces, both on commercial
and political business who have recently been buying second homes, mainly
apartments, no doubt adding to the property price inflation we have seen but
is also having other impacts on the demand for (private) schooling for their
children who would rather study here than at home. This has also incidentally
increased the demand for Jakarta favourites like Starbucks to open in these
peoples home cities to cater to these expat Jakartans.
For example, our home town in Sulawesi now boasts a J.Co (Indonesian
doughnut and coffee shop, reputedly and bizarrely in a country which loves its
sugar, less sweet than Dunkin Donut or Krispy Kreme) as well as a Solaria
(a local chain of restaurants) as well as a Lippo Group hypermart in its first
mall developed by the Kencana Group. This minor city, which only became a
province in the past 10 years, now has five flights a day to Jakarta, by each
of Garuda (2), Lion (2) and Sriwijaya. All flights have heavy load factors.
On a recent trip to Surabaya, trying to change a Garuda flight back to
Jakarta, it proved impossible to get on any other flight, including business
class as all flights full. This on a Sunday from a city which Garuda has 112
flights a week, implying close to 300 once the other airlines such as Lion,
Sriwijaya, Air Asia Indonesia and (the newly resurrected) Mandala are
included. The inevitable conclusion from this, despite the recent turmoil in the
equity markets, is crisis, what crisis?
Figure 63
Garuda has plenty of flights

Source: Gunawan Kartapranata (Wikimedia Commons)
Sitting here in Jakarta, it is hard to ignore the problems with infrastructure we
face on a daily basis and it is clear the new government (with parliament and
presidential elections scheduled in April and July 2014 respectively) will have to
deal with the subsidy issue as soon as possible in order to free up money to
invest in the road, rail, water treatment, schooling, healthcare issues we face.
However, it is hard not to feel optimistic about the future given the huge progress
we have seen since the Asian financial crisis in particular and the countrys ability
to withstand external shocks as we saw during the global financial crisis (which
was a six-month event here). I hope to have the privilege to still be here in what
will by then be the dominant Southeast Asian economy by some distance and
Jakarta will still be the best city to work and have fun.
Makassar now has five
flights a day to Jakarta
It proved impossible to
change flight schedule,
even including
business class
Government has to deal
with infrastructure and
subsidy issue
Still, it is hard not to feel
optimistic about the future
Property price inflation


5 February 2014 sarina.lesmina/andreas.kongoasa@clsa.com 29

Serpong - Greater Jakarta
We visited thriving Serpong in South Tangerang, a West Jakarta suburb and
home to many prominent developers such as Summarecon, Bumi Serpong
and Alam Sutera. The face of Serpong has changed dramatically in recent
years, from just residential housing estates to a full-blown township where we
are seeing a notable increase in commercial activities.
It is not a surprise that the population in South Tangerang, including Serpong,
had increased by about 50% since 2007. In the past two years, the
population has grown by 4.2% pa, or 57,000 people (which translates into
11,400 households); the highest population growth in Banten province; and
tripled the growth of the total Indonesian population.
Figure 64
Population growth of South Tangerang
Source: BPS
From previously just landed housing, we are seeing more and more vertical
development, including apartments, a rare sight previously. With the growth
of population in the city we have also seen numerous facilities being added to
the community such as schools, universities and hospitals etc.
Figure 65
Large numbers of high rise buildings under construction

Source: CLSA
918,783
1,051,374
1,203,099
1,303,569
1,358,319
1,415,368
600,000
700,000
800,000
900,000
1,000,000
1,100,000
1,200,000
1,300,000
1,400,000
1,500,000
2007 2008 2009 2010 2011 2012
(people)
Serpong - not so
flat anymore
Andreas Kongoasa
andreas.kongoasa@clsa.com
+62 21 2554 8809

Sarina Lesmina
Head of Indonesia Research
sarina.lesmina@clsa.com
+62 21 2554 8820

Serpong


30 sarina.lesmina/andreas.kongoasa@clsa.com 5 February 2014

Figure 66 Figure 67
Binus campus - phase 2 Alam Suteras Silkwood apartments

Source: CLSA
Serpong developers mentioned that it is not enough to just sell houses
anymore - but to ensure steady demand growth for its residential projects,
they have to try to boost job creation by building offices and more
commercial areas.
Hence, Alam Sutera Realty launched The Prominence office, and Bumi
Serpongs Green Office Park is under development with Unilever Indonesia in
the process of building its headquarter in the park. The Green Park has been
awarded the 1
st
Green Mark District in Jakarta by The Building and
Construction Authority Singapore.
Figure 68 Figure 69
The Prominence office of Alam Sutera BSDE Headquarter in Green Office Park

Source: CLSA
More offices to boost
job creation
Growing office
development in Serpong
Binus University is being
built in Serpong


5 February 2014 sarina.lesmina/andreas.kongoasa@clsa.com 31

Figure 70
BCA office in BSD City

Source: CLSA
Retail area is blossoming in Serpong; compared to a few years ago where
only Summarecon Mall Serpong was the mall to go to. Alam Suteras
66,300m
2
NLA Mall @ Alam Sutera was opened on 12 December 2012; the
companys first sizable commercial property. IKEA is setting up its flagship
retail space which will cover 4-5ha; slated to commercially open in 3Q14.
AEON Mall (a joint venture between AEON and Bumi Serpong) was
groundbroke in August 2013; the mall is targeted to cover 160,000m
2
GFA on
10ha of land in BSD City. The mall is targeted to open at the end of 2014.
Some 30% of tenants are expected to be Japanese.
Hongkong Land is also partnering with Bumi Serpong to build a mixed-use
development on 65ha of land in BSD City.
We also heard that Flavor Bliss, an open space food centre in Alam Sutera is a
very popular place to hang out during the weekends.
Figure 71 Figure 72
Mall @ Alam Sutera IKEA under construction

Source: CLSA
More places to shop
and hangout
Retail area is also
blossoming in Serpong


32 sarina.lesmina/andreas.kongoasa@clsa.com 5 February 2014

Figure 73 Figure 74
AEON Mall BSD City
(artists impression)
Kompas Gramedia convention hall
(artists impression)

Source: Company
Kompas Gramedia and BSD are also developing a large convention hall
(150,000m
2
), targeted to be completed by the middle of 2014.
Hotel chains are also coming to Serpong with affordable choices compared to
hotels in the city. There is now a Best Western, and Mercure will also open in
the future.
Figure 75 Figure 76
Best Western Mercure (Alam Sutera)

Source: Company
On the weekends, there are also a lot of outdoor activities, such as biking. In
fact, Serpong also recently hosted the Standard Chartered Half Marathon
wherein 3,000 runners participated.

Hotel chains are coming
AEON mall, a JV between
AEON and Bumi Serpong
New affordable
hotel chains
Serpong has recently
hosted the Standard
Chartered half marathon



Bandung - West Java
West Java is the most populous province in Indonesia. Its capital, Bandung,
was formerly known as the Paris of Java due to its European-style
architecture. The countrys third-largest city and second-largest metropolitan
area in Indonesia had a 2.4m population as of 2010.
The city is well known for its volcanoes and large tea plantations. A 54km toll
road linking Bandung and Jakarta (Cipularang), completed by April 2005, has
made it easier to reach the city, cutting travel time from four hours to two.
Figure 77
West Java map

Source: CLSA
Figure 78 Figure 79
Big advertisement in Cipularang Bandung GDP by sector

Source: CLSA Source: BPS
Agri
0.2%
Manufacture
23.5%
Electricity,
Gas, & Water
Supply
2.3%
Construction
4.6%
Trade, Hotel &
Restaurant
41.2%
Transport &
Communication
12.4%
Finance, Real
Estate & Business
Services
6.4%
Services
9.3%
Cipularang toll road has
cut travel time from four
hours to two

Merlissa Trisno
+62 21 2554 8821

Bandung



Nowadays, some strategic spots along the Cipularang toll road have also been
used for advertising purpose. We noticed advertisements for cigarette maker,
Djarum, as well as political party, Hanura (The Peoples Conscience Party),
whereby the party has officially nominated its chairman Gen Wiranto and
media tycoon Hary Tanoesoedibyo as President and Vice President candidates
respectively for the upcoming 2014 election.
A popular weekend destination
Bandung is now a popular weekend destination of Jakarta residents due to its
cooler climate, food varieties, kids attraction and cheaper fashion shops
located in mushrooming factory outlets in the city. More and more car-plate
license of B (Jakarta) can be seen across the city, which eventually leads to
worsening traffic during weekends.
Bandung is the city of fashion in Indonesia with many interesting places to
shop such as Cihampelas street for jeans, Cibaduyut for shoes maniac, and
ample of factory outlets/boutiques mainly in Setiabudi, Riau, and Dago areas.
Textile factories on the outskirts of Bandung have opened factory outlets in the
cities to sell products which are rejected or over-produced export quality items.
Figure 80 Figure 81
Cihampelas street Heritage Factory Outlet

Source: Midori (Wikimedia Commons) Source: Heritage Factory Outlet
During weekends or holidays, it is estimated that 1,000-1,500 people visit
factory outlets each day.
Figure 82
Top 7 factory outlet destination
Factory outlet Location Details
Rumah Mode Setiabudi Jl. Setiabudi no. 41
The Secret Riau Jl. LLRE Martadinata (Riau) no. 47
The Summit Riau Jl. LLRE Martadinata (Riau) no. 61
Grande Fashion Gallery Dago Jl. Ir H. Juanda no. 118
House of Donatello Setiabudi Jl. Setiabudi no. 45
Victoria Dago Jl. Ir H. Juanda no. 111
Heritage Riau Jl. LLRE Martadinata (Riau) no. 63
Source: CLSA, http://hoteldibandungmurah.com
Besides fashion, Bandung is also famous for its food, be it simple traditional
cuisine like Kingsleys fried tofu/meatball (batagor in Bahasa) or a caf with
breath-taking view like Boemi Joglo.
For foodies, Bandung is definitely the best place to buy banana pies/brownies
with some famous brands such as Kartika Sari, Prima Rasa and Amanda. We
even saw some growing their business and distributing their products outside of
Bandung city. Kartika Sari also has online shop (http://store.kartikasari.com/),
which can also deliver to Singapore and Malaysia.
Big advertisements at
strategic spots along
Cipularang toll road
Popular weekend
destination of Jakarta
residents
Bandung is the city
of fashion
Bandung is also famous
for its food
Cihampelas street is
famous for jeans



Figure 83 Figure 84
Kingsleys famous fried tofu/meatball Breathtaking view from Boemi Joglo caf

Source: CLSA
Figure 85

Figure 86

Figure 87
Kartika Saris banana pie

Prima Rasas brownies

Amandas steam brownies

Source: Kartika Sari
As a parent with two kids, Bandung is such an attractive city to bring them
along. The latest kids attractions include the Kampung Gajah theme park and
the floating market in Lembang. Kampung Gajah has more than 20 amazing
attractions and is still very affordable for most Indonesian consumers. To
enter, a visitor needs to pay Rp10k (US$90) during weekday and Rp20k
(US$1.80) on weekends, on top of another US$90 for car.
Figure 88
Kampung Gajah Wonderland

Source: Kampung Gajah Wonderland
During our weekend visit to the Lembang floating market, it was packed with
children. My kids enjoyed the trip very much - feeding the rabbits, riding a
boat and playing in the windmills, while us parents enjoyed the cooler climate
and local foods.
Affordable kids
attractions
Packed floating market
in Lembang
Enjoying the famous
culinary delights in
Bandung
Thrilling attraction for
the kids



Figure 89
Floating market in Lembang, Bandung

Source: CLSA
Other significant tourist sites near Bandung include the Tangkuban Perahu
volcano crater to the north.
Figure 90
Volcano crater at Tangkuban Perahu

Source: CHJL (Wikimedia Commons)
Bandungs economy is mainly built upon tourism, manufacturing, and
textile/apparel among others. It has nearly 50 higher-education institutions
and is among the most popular destination for education in Indonesia.
Enjoying the boat trip
with the kids
Another hot tourist site



Mid/high-end retailers are more optimistic
During our visit, we caught up with both mid/low retailer like Ramayana as well
as mid/high-end retailers like Ace Hardware and Mitra Adiperkasa. While the
store manager of Ramayana looked sceptical about the business due to higher
operating cost and competition, the managers at Ace and Mitra Adiperkasa
stores were excited and optimistic on business prospect going forward.
Interestingly, Aces store performance in the Istana Building Commodities
Center (IBCC) was also impressive despite the competition with traditional
home-improvement stores in the IBCC complex.
Figure 91 Figure 92
Aces store in Plaza IBCC Traditional DIY store in IBCC complex

Figure 93
Retailers key operational matrix
Ramayana (RALS IJ) Mitra Adiperkasa (MAPI IJ) ACE Hardware (ACES IJ)
Store location Cimahi Paris van Java mall
(44% occupied by Mapi)
IBCC,
2
nd
store in Bandung
Store size (sqm) 6,000 11,500 (Sogo), from previously ~7k 7,762 (largest store in Bandung)
Sales breakdown 70% department store
30% supermarket
50% domestic
50% import
60% homeware
40% lifestyle
40% men fashion, 40% women and
kids, 20% shoes and bags

Consignment goods 50% 90% Less than 10%
Traffic trend 1,000 people per day (weekday) 1,000 transaction per day 1,200-1,500 people (weekday)
2,000 people per day (weekend) 3,000 people per day 2,500-3,200 people (weekend)
Sssg trend 5-6% Low double-digit level 8-13%
Basket size Rp60-70k (US$5-6) per person Rp500k (US$45) per person Rp400k (US$35) per person
Monthly sales Rp3.5-4bn (US$300-350k) Rp15bn (US$1.3m) Rp8-9bn (US$700-780k)
Lebaran performance Sales can be as much as 4-5x
compared to normal months
Growing by 28% YoY Some improvement compared
to previous year
2 weeks before lebaran,
store close at midnight
Started increasing prices
post Lebaran
Inventory turnover 5 months 3-6 months 2-3 months
Best selling products T-shirt Polo house (private brand) Samuel & Kevin, Giordano for fashion Spin dry mop, CCTV
Palomino for bags Pineapple water dispenser
No. of employee 112 146, 1,080 including consignment staffs 186
Employee turnover Less than 5% Less than 10% Around 20% due to store relocation
10% of employee is still studying 10% of employee is still studying
Minimum wage impact Not much impact on demand Not much impact on demand Not much impact on demand
Wage adjustment is ~15% in 2013 Sport Station still grew double-digit despite
company introducing Planet Sport
Company has complied with
minimum wage
Cost efficiency strategy Turning off escalator, even during
our visit at 10.30am
Increasing employee productivity Increasing coverage target
per employee
Management visit 1x per year 2x per year 3x per year
Source: CLSA
Mid/high retailers are still
very optimistic
Impressive performance
despite competition
IBCC, home to Aces
second store in Bandung



We were also quite impressed with the management quality at ACE whereby
CEO Prabowo Widyakrisnadi himself still made store visits three times a year.
This also translates to stronger employee motivation and the fact that 10% of
its staff are still studying adds to another interesting highlight of our visit.
In the case of Mitra Adiperkasa, it occupied about 44% space at the Paris van
Java (PvJ) Mall, designed by West Java-based architect Ir. Wawa Sulaeman, who
is also the key man behind the Pondok Indah Mall 1 (South Jakarta), Kelapa
Gading Mall 3 (North Jakarta), and Tunjungan Plaza Mall 3 (Surabaya, East Java).
Mitra Adiperkasas Sports Station store still grew at double-digits despite the
opening of Planet Sport in the same mall. Worth noting is that the best-
performing Zara and Stradivarius stores are also in PvJ Mall, which is most
likely due to less competition and cannibalisation as compared to Jakarta.
Figure 94 Figure 95
Sports Station store in PvJ Mall Zara store in PvJ Mall

Source: CLSA
Some historical perspective
Bandung is home to major examples of Dutch colonial architecture, mainly the
tropical Art Deco style. Henri Maclaine-Pont designed the first technical university
- Institut Teknologi Bandung, J. Gerber the Gedung Sate - the head office of West
Java, and Albert Aalbers the DENIS bank and Savoy Homann hotel.
Figure 96 Figure 97
Institut Teknologi Bandung Savoy Homann hotel

Source: Institut Teknologi Bandung Source: Jagawana (Wikimedia Commons)
More management
visit for Ace
The best performing of
Zara and Stradivarius
Home of the tropical Art
Deco architecture
Mitra Adiperkasas stores
in Paris van Java mall
Examples of tropical
Art Deco style



Figure 98
Gedung Sate

Also, the Pasupati Bridge which was completed in 2005, connecting the
Pasteur and Surapati roads, was designed by Central Java-born architect Ir.
Karsten. With a total length of 2.5km, this is the first skyline bridge which
utilizes anti-earthquake technology.
Figure 99
Pasupati Bridge above residential houses in North Bandung

Source: Prayudi Setiadharma (Wikimedia Commons)

Pasupati Bridge with anti-
earthquake technology
Gedung Sate, the head
office of West Java
Pasupati Bridge,
connecting Pasteur and
Surapati roads


40 wuddy.warsono@clsa.com 5 February 2014

Semarang - Central Java
Just like in many other parts of Indonesia, Semarang - the capital of central
Java - is enjoying a massive property boom. Any kind of property is doing
well there. Landed residential, industrial land, landed commercial property in
its CBD area, and even apartments. Yes, even apartments.
Figure 100 Figure 101
Apartment advertising Apartment boom in Semarang

Source: CLSA
Apartments in Semarang are in high demand, despite limited traffic issue in
this lovely city. Apparently, one of main reasons to buy an apartment is the
anticipation of FDI coming to Semarang or labour-intensive factories
relocating from Greater Jakarta to Semarang.
The relocation is primarily driven to take advantage of more manageable
labour costs and unions. Minimum wage in the region is close to half of the
Greater Jakarta rate. And even with the lower base, wages increased by
only 20% in Semarang in 2013; significantly lower than Jakartas staggering
44% hike.
Many in the city are expecting Japanese and Korean expats to move from
Jakarta to Semarang in the not too distant future, along with the FDI. On the
back of this, some of the apartment buyers are looking to rent out the units
(delivered two years from now) to these expats.

Interview with a property agent
Wuddy: How long have you been a property agent?
Property agent: 3.5 years.
Wuddy: Hows business?
Property agent: It was tough when I started 3.5 years
ago. Things have been awesome in the past two years.
Wuddy: What is your best-selling product?
Property agent: Apartments in the prime area.
Wuddy: Interesting. Whats the selling price per
square metre?
Property agent: Hmmmm . . . I dont know. I mean
the buyers here dont think in terms of price per square
metre. I showed them the floor plan and they just
bought it. All they care is the unit price.
Wuddy: Ok, I hear you. Whats the hottest landed
residential development and whats the price per
square metre?
Property agent: Development in the hilly Candi area is
the hottest for sure. Price per square metre? I just told
you, people DO NOT think in square metre. If they like it,
the buy it. Forget about per square metre price. You
snooze, you lose. Period.
Booming apartment due
to FDI anticipation
Expecting Japanese and
Korean expats
Wuddy Warsono
Country Head - Indonesia
wuddy.warsono@clsa.com
+62 21 2554 8803

Semarang


5 February 2014 wuddy.warsono@clsa.com 41

Well, its clearly a great time to be in the property business in Semarang. In
this supposedly cut-throat property agency business, a property agent who
isnt willing to perform simple elementary school arithmetic to arrive at a per
square metre price still manages to do very well.
Life is also good for property investors in the city. In prime locations,
property prices have more than doubled in the past three years. In case
you are curious, whats the price per square metre in the best CBD
location in the Pandanaran area in Semarang, its about Rp50m (US$4.5k)
per square metre.
The prospect of industrialisation in Semarang has sparked optimism and
bolstered confidence. We visited the S2 lifestyle complex in Semarang. It is
the most hip and stylish lifestyle centre in town with restaurants, cafs,
bakeries and patisserie shop, frozen desserts shop and a fitness centre.
S2 has taken a bold approach in its unusual architectural approach. Owned by
a local businessman and designed by Jakarta-based architect Handoyo
Darmawan Gani, it is a contemporary three-storey building with an all-white
palette and massive glass walls. Impressive looking, the food was great and
the place was packed. Thrifty Semarang is clearly changing. The younger
generation who have experienced Western or Jakarta lifestyles is now living a
different lifestyle from their parents.
S2: Designed by Handoyo Darmawan Gani S2: one-stop lifestyle complex

Source: CLSA
It is also important to note that Semarang is not merely about cheap labour.
The citys strategic location between Jakarta/West Java and East Java has
encouraged some entrepreneurs to set up logistic firms there. One of the
countrys most successful trucking company, Siba Surya (not listed), for
example, is based in Semarang.
Under Sibas second-generation leader, Daniel Budi Setiawan, the group has
recently expanded into the IT solution business. Named Siba System, the new
IT firm is leveraging on their logistic-related IT capability. The building that
hosts Siba System is cool and trendy and designed to allow a lot of
interaction between the firms young programmers.
Strategically located for
logistic purpose
S2 with all-white palette
and massive glass walls
Expanding into IT
business
No need to understand
price per square metre
Property price in
Semarang CBD is
US$4.5k psm
S2 has unusual
architectural approach



Graha Siba And their trendy office in Semarang

Source: CLSA
Semarang property plays
Bekasi Fajar has a property development in Semarang, accounting for
approximately 10% of its NAV. Another industrial estate developer with
exposure to Semarang is Jababeka.
Ciputra Property runs a very successful hotel and mall development in
Semarang, which also represents about 10% of its NAV.
Busy Semarang airport
In writing this report, I also become aware of the fact that there are nine
Garuda flights a day from Jakarta to Semarang and we were told they were
all fully booked. Budget carrier Lion Air (not listed) also flies nine times a day
and its just as busy. I also learned that there are four budget airlines
connecting Semarang and Indonesias second-largest city, Surabaya.
One aspect of CLSA economist Tony Naftes now classic report on Indonesia,
No speeding!, is that Indonesia tried to grow very fast without putting
enough attention to infrastructure spending. Infrastructure investment has
not been able to keep up with strong GDP expansion and the explosion of
middle-class growth.
Rising urbanisation and an expanding middle class only adds to the
pressure, causing heavy congestion and overuse among the countrys public
transport network.
As such, persistent flight delays that occur in many major airports across the
country has also become a daily fixture at Semarang airport, thanks to
surging number of domestic travellers. The combination of rapidly expanding
middle class and low-cost air services has resulted in overall passenger traffic
growing 11% per year over the past decade.
These days, we would feel lucky if our flight is delayed for under an hour.
Even boarding your plane does not always mean much since you may have to
wait as your plane queues on the runway. Not to mention the extended
boarding process; nearly every flight requires bus transit to and from the
runway because the airports lacks capacity to service demand.
In case you want to know what the Semarang airport looks like, please see
the picture below taken one Friday afternoon.
Garuda has nine daily
flights for Jakarta-
Semarang
Passenger traffic growing
11% annually
What is the property
play?
Logistic company
Siba group


5 February 2014 wuddy.warsono@clsa.com 43

Superpacked Semarang airport on Friday Semarang-Surabaya budget airline

Source: CLSA
The rise of the day traders in Semarang
Back in 4Q10, I took the opportunity to meet some aspiring online stock
traders in Semarang. They traded through the Indopremier online trading
platform (IPOT). For the first time ever, online trading facilities made its way
to people living in the smaller cities of Indonesia.
We also argued in the note back then that there was a growing confidence of
Indonesians in our own thing, from art to batik to the stock market. And that
confidence is a good ingredient to be bullish.
The idea is that positive demographics combined with cultural change leads to
more spending, and hence consumption becoming a key economic driver for
the region. The theory is proven by the growing confidence and the J-curve
growth in consumption spending in Indonesia. Coupled with sharply lower
commodity prices - Indonesias main export - this has led into trade deficits
later on.
Some brave spirits tried their hands (and luck) in the market. We interviewed
them back then (Indonesia Slice of life (Confidence on the Rise in Indonesia?)
and we met some of them once again in August 2013. The meeting with the
day traders reminded us how the stock market has changed since the market
started in the late 80s.
Stock broking in the late 1980s Your CLSA brokers today

Source: IDX, CLSA
Three out of six traders that I met in Semarang back in August 2013 are full-
time traders. And half of them started trading since 2008, when IPOD arrived
in Semarang.
Meeting some aspiring
online stock traders
Interview this online
stock trader for
second time
Friday afternoon at
Semarang airport
Stock broking
(past vs present)



Some things never change. These guys have a completely different time
horizon. Their holding period is as short as before. Three days are considered
forever. They still trade every day. Well, more like every hour. The spouses
are still as supportive on their trading activities, largely because they have no
clue what the stock market is. They still learn from each other and share
information, thats the main reason they still come to the IPOD office
although they can actually trade from their gadgets at home.
So, whats new?
The traders religiously follow blogs by well-known market analysts. Trader
Ellen May (www.ellen-may.com), for example, is very popular.
The security guard that I interviewed back in 2010 (see Appendix 3) left his
full-time security guard job in mid-2013. He is now a full-time trader. A great
example of all the excesses we have discussed intensely.
Market conditions remain very tough, but these day traders are not giving
up . . . yet. Encouragingly, they are also very keen to learn.
For better or worse, the emergence of day traders has improved overall
market liquidity. The meeting with them in August 2013 suggests that they
will keep fighting and are not going away anytime soon.

Holding period is as
short as before with
supportive spouse
Security guard left his job
to become stock trader
Keep fighting and not
going away anytime soon


5 February 2014 tim.huang@clsa.com 45

Yogyakarta - Central Java
Winner of Trip Advisor's 2013 Traveler's Choice Award, Yogyakarta is the
cultural/academic epicentre of Indonesia and the last existing Kingdom in Java.
Jogja, as most Indonesians refer to Yogyakarta, is home to Borobudur, the
worlds largest Buddhist archaeological site, and the famous Hindu Temple,
Prembanan. The city also boasts the largest and highest concentration of
student population in Indonesia. With over a hundred universities, it has earned
itself the nickname, Kota Pelajar - students city (think Boston).
Figure 110
The picturesque Borobudur

Source: CLSA
Figure 111
Prambanan temple

Jogja is now the second-most important tourist destination in Indonesia after
Bali. In addition to stunning architecture, it is also known for its Batik fabric,
silverwork, and tastefully crafted furniture. And of course, renowned as a
centre of Javanese fine art and spiritual sensibility, the city has produced
Indonesias finest artists, the pinnacle of that being Nyoman Masriadi.
The famous Borobudur
Second-most important
tourist destination
after Bali
Tim Huang
tim.huang@clsa.com
+62 21 2554 8817

Prambanan, the famous
Hindu temple
Yogyakarta


46 tim.huang@clsa.com 5 February 2014

Figure 112
The Man from Bantul (The Final Round)

Source: Painting by Nyoman Masriadi, mixed media on canvas (2000)
Currently considered to be one of Indonesias best artists, Masriadi is also one
of Southeast Asias most well-received contemporary artists at auctions
(recent works fetched US$ seven figures). In October 2008, Masriadis The
Man from Bantul (The Final Round) sold for more than US$1 million at a
Sothebys auction in Hong Kong in 2008.
Figure 113
The Man With The Short Sword

Source: Painting by Nyoman Masriadi, acrylic on canvas (2006)
We experienced Javanese hospitality first hand when we interviewed Masriadi
and fellow artist, Sutawijaya in Yogyakarta in October 2013. Strangers to
Masriadi's home, we were invited to stay for dinner while Masriadi opened up
to us over a couple bottles of Macallan Select Oak.
Masriadi: Southeast Asias
most well received
contemporary artist
Painting by Masriadi
Interview with Masriadi
The famous painting
by Masriadi


5 February 2014 tim.huang@clsa.com 47

A conversation with Nyoman Masriadi
What does Jogja mean to you?
Jogja is where I raised my family and also where I
work. I find the art community here important to my
development in life as an artist. It is the place where I
have met many of my artist friends and we have grown
together. I find the city very inspiring in my
development as an artist.
Why did you initially decide to pursue your
training in Jogja?
At that time, Jogja was and I think still is the most
important art centre in Indonesia, for young developing
artists. I had also heard stories of the successes of
other artists had and the close artistic community that
characterizes Jogja. It was certainly the place to be if
you wanted to be an artist.
Your paintings often portray clash of cultures
and inconsistencies in daily matters, do all the
elements always come together to tell a story?
Yes, such elements are portrayed in my paintings but
primarily most of these paintings are my personal
experiences. Often, it is vague what these feelings
might be and I have done this purposefully. It leaves
the public the freedom to make sense of what the
works mean to them and their personal lives. As to
whether the elements come together in a story that
depends on the viewer but for me what I want to say
in a painting always comes together.
Could you tell us more about your paintings, how
they have evolved over time and where you feel
your art is headed?
Around 1997, while I was in Bali and struggling as an
artist, several elements came together to give me the
confidence to know what I could do as an artist. I
formed a visual language that I could identify with and
from then on I have developed it gradually.
What advice would you give to an artist just
starting out?
The advice I would give to fellow artists starting out
is to be sincere to your work. This is the most
important thing, your sincerity to yourself. Often
there are many unseen pressures coming from all
directions for artists, from collectors, to curators, to
dealers to the market, and even from yourself and
your personal struggles. Try to maintain your
sincerity throughout all of this.
If you can only pick one word to epitomise you,
what would it be?
Brilliant! Haha!
How do you generate so many fascinating ideas?
I dont know if they are fascinating or not but if you
think so, thank you. I have always tried to maintain
sincerity in my work. Maybe this is hard to come by
as we find artists following market trends and so on.
Perhaps, that is why I can only produce so few works
a year.
Don't go", said Masriadi when we had to part ways.
We were humbled to have such genuine hospitality
from these accomplished world- class artists.
Nyoman Masriadi (left) with CLSAs Wuddy Warsono,
Tim Huang and Daniel Oen

Sorry Hero, I forgot

Source: CLSA Source: Painting by Nyoman Masriadi, acrylic on canvas (2008)



48 tim.huang@clsa.com 5 February 2014

Furthering our on-the-ground style, we then talked to managers and
hospitality workers in Jogja to gain insight into local sentiments:
Dhita, a hospitality worker at a four-star hotel, shared:
She attended university in Jogja, then married and settled with her
husband in 2006 and now has two kids.
As of 2012, her monthly income including tips was about Rp3m
(US$300) and her family total income about Rp5m (US$500), up from
Rp300k (US$30) monthly when she first started in 2006. (wage inflation
you think?)
Monthly cost of living for her family: 2013 about Rp23m (US$2,300 per
annum, US$500 on housing) compared with 2012 about Rp21m
(US$2,100 per annum, US$500 on housing).
From 2010-2013 she saw a lot more mini-marts in Jogja (rising
living standards).
Panuwun, a manager at a five-star hotel, shared:
Tourists at his hotel are 60/40 local/foreigners. Where foreigners were
largely made up of Japanese, French and Dutch but seeing more
Japanese tourists in 2013.
Having worked in hospitality in Jogja since 1999, he felt that living
expenses were largely stable, inflation subtle.
Tourism is expected to grow, with 4-5 star hotels doubling in 2015 from
current number of about 15 4-5 star hotels in Jogja.
We did see quite a bit of construction while in Jogja but doubling high-end
hotel capacity is punchy. This is, however, consistent with the recent FDI
theme weve been talking about since most 4-5 star hotels are foreign
brands. Even a cultural/spiritual epicentre cannot escape commercialisation
and paper chasers.
To identify Indonesia with the hustle and bustle of Jakarta really doesnt do
the country any justice. To see true Indonesian culture and heritage, one
must submerge oneself in the truly Javanese experience that is Yogyakarta.
For those who have never visited Indonesia or specifically, Yogyakarta, it is
definitely worthy of your next trip. Make room for it on your bucket list.

Talking to some people
on the ground
Construction is
progressing, with high-end
hotel capacity doubling


5 February 2014 amie.liem@clsa.com 49

Surakarta/Solo - Central Java
Surakarta, better known as Solo, is a city in Central Java with more than half
a million population. It is around 100km south of Semarang (the provincial
capital for Central Java) and 60km east of Yogyakarta. Solo is often being
used as the alternative route from Jakarta to East Javas Surabaya via the
south coast. The road from Yogyakarta to Solo was packed with trucks and
other commercial vehicles.
In the olden days, Solo was a trade centre for agricultural products such as
rubber, rice, corn and sugar. It is also well known for friendliness, soft-spoken
people but on the other side, the city is also considered the centre for militant
Islamic group called Jemaah Islamiah, or JI. The group was responsible for
several bomb attacks in Jakarta and Bali. Solo, indeed, has a bitter history in
1998 when Suharto was ousted. Angry mobs set the minority Chinese-
Indonesia communities in city as the target of vandalisms. Anti-Chinese
ethnic turbulence spread during the riots. The mobs also burnt down many
buildings, especially government-owned and banks. Solo was badly damaged.
As time goes by, the city has healed its wound and evolved to become more
industrial and more vibrant proven by the increasing number of hotels, malls
and residential areas being developed. One particular industry that really is
blossoming is the textile and garment industry. We can claim that Solo is one
of the countrys key textile and garment-producing area. It is home to
recently listed Sritex, Dunia Tex, Tefound Tex and many more. Clothing,
textile yarns and fabrics contribute up to 47% of the regionals export
revenue as of 1H13.
Mall under construction Recently opened mall in Solo Baru

Source: CLSA
Jokowis hometown
Joko Widodo, the former mayor of Solo (2005-2012, serving two terms) who is
now the governor of Jakarta, has branded the city as The Spirit of Java. The
city gained so much traction since Jokowi came to office as the mayor. Solo has
become more developed, cleaner and more efficient - in regards to document
administration. Talking about the healthcare scheme that Jokowi first introduced
to Solo, it was a great success. Even a friend of ours who moved to Greater
Jakarta kept her Solo ID card because she could get free medical treatment in
Solo. Jokowi has now been serving at the capital for more than a year and has
become the peoples choice for this years presidential election.
Solo is a great supporter of preserving and developing Javanese culture,
tradition, culinary and arts. The city has two vocational arts schools and a
higher-education art institution - The Indonesian Arts Institute Surakarta
More industrialised city,
home to textile companies
Solo is Jokowis
hometown
Solo is very supportive to
preserving and developing
Javanese culture
Amie Liem
amie.liem@clsa.com
+62 21 2554 8829

Amie Liem
amie.liem@clsa.com
+62 21 2554 8829

Surakarta (Solo)


50 amie.liem@clsa.com 5 February 2014

which teaches gamelan orchestra and Javanese shadow puppetry. The plan to
build an opera house of international standards and expectation to host
international performing arts on a regular basis is still intact. We will see
more construction in the near future.
Reasonable cost of labour in Solo
The minimum wage in the region is at a 58% discount to Jakartas (Rp915k -
US$82/month vs Rp2.2m - US$200/month) for 2013. For the minimum wage
hike in 2013 alone, Solo only enjoyed a 6% increase from Rp864k in 2012 to
Rp915k in 2013 while Jakarta enjoyed a staggering 44% hike from Rp1.53m
in 2012 to Rp2.2m in 2013. Yet, no violent protests took place in Solo.
Indeed, when it comes to work ethic, however, we find labourers from Central
Java areas more diligent, submissive than workers originally from West Java
or East Java. Hence, they seldom stage protest or vandalise their employers
property. The West Javanese are well-known for their flamboyant and flashy
lifestyle, while the East Javanese are known for their impulsiveness. Let alone
the influence of labour union in the area isnt as strong as in Greater Jakarta.
Figure 116
Minimum wage relative to Jakarta

Figure 117
Seven years growth in minimum wage

Source: Ministry of Manpower and Transmigration
100
85
81
78 78 78 78
76
68
65
58
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(US$/mth) Current min wage (LHS) 7-year growth Cagr (%)
Labour cost is at a 58%
discount to Jakarta in 2013
Work ethic from Central
Java areas more
diligent/submissive
Minimum wage is at 35%
discount to Jakarta
Work ethic of labourers
is good


5 February 2014 amie.liem@clsa.com 51

Seeing the minimum wage in Jakarta beyond Rp2m per month, it is not
surprising that many factory workers try their luck in Greater Jakarta areas
without thinking that the minimum standard of living in Jakarta is also 63%
higher than in Solo. The situation forces companies especially textiles firms to
put on banners along the main street to communicate their need for
replacement.
Banners looking for workers on display Along the Karanganyar street

Source: CLSA
Confident Solo and debt-free people
We also visited Solos famous Klewer textile market and talked to some
business people there. The traders at Klewer are usually micro to medium
enterprises which rely heavily on domestic and foreign tourists who visit the
palace. It is also one of the successful whole-seller markets for people from
outside Solo. The traders at Klewer arent afraid of competition at all despite
the fact that at least two new malls have been built in the past three years.
They argue that their customers are unique and loyal.
One key characteristic of these traders is being debt-free. Hence it shows the
vast potential for micro loans to expand. Our discussion with the traders
reveals classic challenges that banks must overcome such as lack of proper
documents and the fear to pay interest. Banks which are labelled
aggressive in trying to get more clients by traders at the market include
Bank Mandiri and Bank Rakyat. Their loan officers relentlessly canvass the
area and we saw some shops board sign sponsored by Mandiri.
In front of Klewer market Klewer market

Source: CLSA

Trying their luck in
Jakarta, but living cost is
much higher too
A visit to famous textile
market Klewer
A debt-free trader
Communicating the need
for employee replacement
Solos famous Klewer
textile market


52 jayden.vantarakis@clsa.com 5 February 2014

Madiun - East Java
Madiun is close to the border with Central Java and lies nearly 200km inland
West of Surabaya. It is an agricultural centre with 36% of local GDP from
farming - mainly rice and sugarcane - with trade and services driven off the
wealth created by agriculture. The town is an important interchange on the
main Southern rail route between Jakarta and Surabaya.
I travelled to Madiun and caught up with local business people in construction,
retail, farming equipment supply and a credit officer at one of the largest bank
branches in the area - BCA - to get a feel for how development is progressing.
Having been a regular visitor to the area since 2007, the most noticeable
changes are improvements in public infrastructure (roads, public spaces) and
private housing development as the city has spread further to accommodate
more urban dwellings. The area has missed out on more industrial investment
that other parts of Java have enjoyed, largely a function of its location.
This looks set to change though due to rising minimum wages in larger cities
like Jakarta and long-awaited infrastructure improvements, such as the Trans-
Java toll-road, coming to fruition.
Madiun GDP breakdown 2008 Madiun GDP breakdown 2011

Source: Government of Indonesia Central Statistics Agency
Industrial developments coming to Madiun
Madiun is already home to the Industri Kereta Api rail construction factory,
sugar refineries in operation since Dutch colonial times and cigarette
manufacturing. The most immediate wave of development is turning Madiun
into an even bigger rail hub as the government and private sector embark on
more rail infrastructure projects.
Figure 124
Near-complete Kereta Api training centre

Source: CLSA
Agriculture
38%
Trade and
Hospitality
32%
Services
15%
Manufacturing
3%
Others
12%
Agriculture
36%
Trade and
Hospitality
34%
Services
15%
Manufacturing
3%
Others
12%
The region relies on
agriculture and derived
trade
Turning Madiun into a
bigger rail hub
Madiun is an agriculture
centre with 36% of local
GDP from farming
Jayden Vantarakis
Deputy Head of Research
& Banks Analyst
jayden.vantarakis@clsa.com
+62 21 2554 8834

Madiun
Training up to 12,000
rail engineers



5 February 2014 jayden.vantarakis@clsa.com 53

The Industri Kereta Api factory has already designed prototypes for monorail
vehicles that will be used in Jakarta in the near future and a nearby Kereta Api
(state rail operator) technical school to train up to 12,000 rail engineers
annually is in the final stages of completion, open for its first students in 2014.
Figure 125
Entry to the near-complete complex

Source: CLSA
In the private sector, 16 labour-intensive manufacturers have been granted
licenses to build factories in the city, including textiles, footwear and sporting
goods manufacturers. These businesses plan to open additional manufacturing
capacity outside Jakarta to diversify risk on the escalating cost of labour. Local
business people speak highly of the Walikota (head of the city) due to his
commercial background, and credit him with attracting these plans.
As an early sign of impending greater investment, far-sited Japanese hotel
chain Aston has also given the area a vote of confidence, constructing a 14-
storey hotel on the edge of town that dwarfs any other building in the entire
district. I'm told by a friend in Purwokorto, Central Java that a wave of
Japanese and Korean manufacturing investment followed a couple of years
after the construction of the same hotel chain. International standard
accommodation is necessary to attract business people to the area, and the
local incumbent hotel in the centre of town built in 1990, Hotel Merdeka,
plans to construct a new four-star wing to compete with the newcomer.
Madiuns new tallest building, Aston hotel Outside the construction site

Source: CLSA
16 permits issued
An early sign of
impending development is
the Aston Hotel
The wave of Japanese and
Korean manufacturing
investment
Centre will take in first
students this year



Is it really as simple as cheap labour?
Data from the government shows the monthly minimum wage in Madiun and
its neighbouring districts in 2013 increased 19% YoY to Rp927k (US$80). This
is lower than many other regions including greater Jakartas 44%, and also
off a much lower base of Rp778k (US$68). This is one of the key ingredients
necessary to attract investment.
However, there are two near-term challenges: infrastructure links and relatively
high levels of remittance workers. On the infrastructure side, construction of
the long-awaited Solo-Ngawi toll-road link is progressing and is expected to be
complete in three to four years. The road will provide access to Semarang in
Central Java, which is also being linked to Solo via a separate road.
The latter issue of foreign labour opportunities is also surmountable, but may
add an element of wage pressure. Due to such low wages, the area also has a
significant foreign labour contingent supplying remittances. This is particularly
true of neighbouring Ponorogo to the south of Madiun. BCA's staff informed
me that the level of deposits at its Ponorogo sub-branch (under
administration from the Madiun branch) is nearly the same as Madiun itself
despite government statistics showing the areas population is half that of
Madiun at about 855k in 2010 due to the flow of money from outside.
Credit trends - small business and auto finance
I caught up with one of the loan officers at BCAs Madiun branch. Madiun is a
full-service branch offering retail and small business banking and supervises
many sub-branches in neighbouring districts such as Ngawi in the north,
Megetan in the west, Ponorogo in the south and Nganjuk in the east.
In the area, the banks lending is predominantly in the commercial (small
business segment) with about half as each of working capital and investment
credit. Mortgages, though a focus of the bank nationally, are seldom
disbursed in Madiun as relatively low house prices mean there are few
customers with needs of more than the bank's minimum Rp300m (US$26k).
Auto finance has a lot of potential in (the branch has recently put promotions
out front). At one of the three malls in town, car retailers Toyota, Suzuki and
Nissan had set up displays only three months before I visited.
Following increases in interest rates of 150bps during 3Q13, business credit
demand is still evident, but the balances being requested by customers are
lower (increases of Rp1bn for working capital are being scaled back to Rp500m
for instance) and the bank is supporting existing customers (or the second
generation of existing clients who are opening new businesses in town) whilst
being extremely selective in taking over any loans from other banks.
In terms of competition, the BCA banker observes BRI as being the most
aggressive in small business lending and mid-tier private banks, such as
Panin, as being the most competitive for time deposits and promotions.
BCAs Madiun branch Electronics retailer in Madiun

Source: CLSA
Wages in Madiun are 19%
below Jakarta
Infrastructure and a high
proportion of remittance
workers are a challenge
to overcome
Neighbouring districts
have a high contingent of
foreign workers
Meeting the nations
largest private bank
Demand for credit is still
there, but for smaller
loan sizes following
rate increases
BCA banker says BRI the
most aggressive



More modern retailing
The two, ageing, main malls in Madiun's town centre will soon face more
competition. A new complex, Sun City, near the recently completed Carrefour
store, will open soon. The pirate-themed water park adjacent to the new mall
complex and rukos (shophouses) is already a hit with locals as this analyst
can attest to, having visited on a busy Saturday afternoon. Sun City will boast
more national retail and food brands at a more affluent level to the existing
Matahari store in the town centre. The mall provides a place to hang out and
an alternative to new modern retail outlets which has popped up in nearby
Solo (which is a two to three-hour drive away by car).
However, there are some outlets that will probably never change. During my trip
I ate lunch at a restaurant that has served soto (Javanese chicken broth) since
the 1940s and has been passed down from four generations, with the current
owner running the restaurant out of the same building since 1995. Every time I
come to Madiun, its busy with people from all walks of life enjoying this simple
but nutritious dish. When I asked if the owner is keen to open a branch or
expand, she told me the existing restaurant keeps her more than busy as it is.
Sun City mall under construction Traditional market, rebuilt 5 years ago

Source: CLSA
History of occupation and uprising
Madiun and surrounding areas were strategic posts for the ruling Dutch
Colonialists at the meeting point between key rivers in Java with military
bases in both cities. It is most famous as the location for the 1948 so-called
Madiun Affair where the Indonesian Communist Party (PKI) declared a Soviet
Republic of Indonesia. Several weeks later the movement was quashed by
Republican forces under Soekarno-Hatta (Indonesias first president and vice
president) with its leaders executed.
To this day, the area retains a strong military presence with Madiun home to
major air force base.
Dutch fortress built in the 18
th
century Damage to the fortress from WWII

Source: CLSA
New modern retailing
outlets popular
with locals
Madiun was important for
military reasons in
colonial as well the
independence era
Carrefour store will open
soon in Sun City mall
Famous historical sites


56 daniel.oen@clsa.com 5 February 2014

Malang - East Java
In spite of my best attempts to avoid traveling during the 3Q13 earnings
season (or subconsciously perhaps intentionally?), fate had it that I was in
Malang for two days at the end of October, a city in East Java. Malang
happened to be a great escape from the horrible Jakarta traffic. Green and
lush with great traffic, Malang is the second-largest city with a population of
about one million in eastern Java and long known for its good schools,
tobacco, sugar and textile industries.
Beautiful Malang New road to Malang airport

Source: CLSA
During the Dutch colonisation, Malang was a popular destination for Europeans
who wanted to enjoy the famous cool air and the surrounding scenic country
regions of Tumpang, Batu, Singosari, and Turen. In those days, the locals
sometimes gave Malang the nickname the Paris of East Java.
A long time has passed since then but the origins of the name Malang
remains uncertain. Malang in todays Bahasa Indonesia means
poor/unlucky but popular belief has it that the Malang name originated
from the words Malangkucecwara which means God has destroyed the
false and enforced the right.
Malang has been busy. At least six new hotel chains have sprung up in the
city. And after years of sharing the airport with the military, Malang got its
own Abdul Rachman airport in December 2011.
Figure 136

Figure 137

Figure 138
More industrialised city

Busy Malang

More hotel chains

Source: CLSA
Daniel Oen
Head of Sales - Indonesia
daniel.oen@clsa.com
+62 21 2554 8802

Malang as Paris of
East Java
Malang means
poor/unlucky
Malang


5 February 2014 daniel.oen@clsa.com 57

Another terminal being built New terminal under construction

Source: CLSA
But in just two years, the airport is overcrowded and another terminal is
being built. Currently, there is a Jakarta-Malang flight but at least another five
routes to and from Malang will be launched next year.
Crowded airport Chinese tourist to Malang

Source: CLSA
Malang has clearly benefited from a combination rising local tourism and its
traditional strength of good schools drawing many students throughout
Indonesia, the tobacco industry and the textile segment.
One interesting meeting I had in Malang was with management of cigarette
producer Trisakti - known for brands such as Win Mild, Master Mild, Pensil Mas
and Kacang Bayi. In 2011, South Korean KT&G acquired a majority 60%
stake in Trisakti and for the last two years, KT&G and Trisakti have been
working together to consolidate and streamline their operations.
In contrast to the general weaker earnings result and slower economy, KT&G
Indonesia struck a more bullish note and is now ready to make a big push in
Indonesia next year, especially with its super slim brand Esse (already made
inroads in Russia and Eastern Europe). While the cigarette industry is
generally considered a sunset industry, the growth in Indonesia has been
stronger, around 6% Cagr.
The airport is
overcrowded
Rising local tourism and
popular for good schools
Meeting with Trisakti
management, 60% owned
by Korean KT&G
More bullish note
from KT&G
Rising tourism activity
Construction is
in progress


58 daniel.oen@clsa.com 5 February 2014

KT&G brand Esse KT&G expanding outside South Korea

Source: KT&G
Trisakti management believes that the general trend in the tobacco
industry will increasingly favour the big players. Big brands will have
stronger marketing power as the big players will concentrate their
marketing campaigns on national brands (as opposed to focusing on many
regional brands).
There is also a perception that the government is favouring consolidation in
the sector by cracking down on satellite cigarette companies - all affiliated
satellite companies of a cigarette producer will be counted as one as opposed
as separate ones - as there are higher taxes for more sticks produced.
Whatever maybe, clearly competition is heating up and listed cigarette
makers like Gudang Garam and Wismilak have to battle up.
In spite of the growing pains Indonesia is going through right now, the fast
formation of the middle class proves to be too good to ignore for multinationals
who experience slower growth at home. No wonder the Japanese, Chinese and
South Koreans have been establishing footprints in Indonesia.
Few other interesting points:
KT&G Indonesia ready for big push in 2014. After two years of
streamlining operations with Trisakti, the company is ready to make an
aggressive entry with KT&Gs strong name recognition and super slim
brand Esse. Overall capacity of the factory in Purwosari is about 5-6bn
sticks. Interestingly, the KT&G factory is located close to Apache, part of
the Gudang Garam family (not listed Gudang Garam).
Warning pictures on cigarette packaging. The governments
regulation on warning pictures is likely to take place in 2014.
Satellite companies clampdown in process. In the past, cigarette
companies have used multiple affiliated satellite companies to lower their
tax bracket (tax is based on a number of sticks produced).
The final details of this regulation were issued in 4Q13.
The government clampdown is already happening and now in the site
inspection/verification process. We believe that the excise tax hike
cancellation is behind this issue of clamping satellite companies
enforcement - so that the government can still reach its excise tax
revenue target.
Tobacco industry will
increasingly favour
the big players
Cracking down
satellite companies
KT&G is taking a
bullish view
Interesting meeting
points with KT&G


5 February 2014 daniel.oen@clsa.com 59

As the saying goes, some things just dont change. Todays Malang is also
benefiting from a boom in tourism. The difference these days is that it is local
domestic tourists (and the ever-ubiquitous Chinese tourist) that are coming to
Malang. Its satellite city, Batu has seen remarkable development and smartly
positioned itself as the theme park paradise for Indonesia and is attracting
many visitors throughout the country.
Batu Secret Zoo Popular East Java theme park (Jatim park)

Source: CLSA
The theme parks were started in the early 2000s but the Jatim group already
boast six theme parks and plans to add a new park every year. (still a way to
go to US Orlandos 15 theme parks).The parks are modern and run well - one
could have easily thought they are in Singapore or Florida! - this has been a
good cushion for the general economic slowdown the country is experiencing.
We believe cities like Malang and other Javanese cities will weather the
economic slowdown better than resource-rich regions of Sumatra and
Kalimantan. But even Malang is starting to see glimpses of economic slowdown.
A textile businessman interestingly commented that trucking services from
Malang to Jakarta remains strong. But on the way back from Jakarta to the
regions have started to see weakness. There are some trucks now offering
discounted fares from Jakarta back to the region in East Java.
Figure 147
Batus breathtaking scenery

Source: CLSA

Benefiting from tourism
boom as well
Six theme parks and
still counting
Textile businessman
sees glimpses of
economic slowdown
Tourism boom


60 amie.liem/wuddy.warsono@clsa.com 5 February 2014

Surabaya - East Java
The first time I (Amie) visited Surabaya was in 1990, I recalled that it was
quite humid and dull. I recalled a visit to the printing facility owned by Dahlan
Iskan, entrepreneur-turned-SOE minister and the Wonokromo zoo. I was very
excited to see the process of printing newspaper, the big machines but to be
honest, the city itself didnt leave any memorable memories back then. I only
visited the city again after more than a decade.
Unlike my colleague, Amie, I (Wuddy) was born in Surabaya, grew up and
completed my basic and college education in this lovely city. My first post-
college job was with the Citibank branch there and I thought I would live in
Surabaya for the rest of my life.
I pursued post-graduate education in the UK a few years later (mainly to
improve my English, after my excruciating experience of having to produce
reports in English during my Citi days), only to see myself graduate during
the peak of the Asian crisis. Confronted by a very bleak job market at home, I
found myself working in finance in London and Singapore in the years that
followed. That turned out to be blessings in disguise as the experiences
opened up my eyes.
In early 2005, I joined CLSA Indonesias sales desk and moved back to
Jakarta after reading Marc Fabers book Tomorrows Gold, and Jim Rogers
Adventure Capitalist. Coming from completely different angles, both books
made convincing arguments that we were at the early stage of the
commodity super cycle. Indonesia is blessed with plush natural resources and
for the first time had directly elected its president through a democratic
process. Time to return home.
I still travel back and forth to my hometown Surabaya to visit my friends and
family on a regular basis. Something that I notice is that every time I visit
Surabaya, the city is becoming greener and cleaner.
Greener and better Surabaya
It is fascinating to see that Surabaya, despite the fact that it has only
US$545m/year or 10% of Jakartas budget, still could make so many changes
and improve conditions. Thanks to Tri Rismaharini, Surabayas mayor
(affectionately known as Ibu Risma) the city has embarked on e-
procurement, an equal opportunity talent programme and a pro-business
attitude with simpler steps to start a business.
Our recent visit to Surabaya witnessed Ibu Rismas efforts to balance the
development between environment, social and cultural aspects. Illegal road
vendors have largely been relocated successfully to new buildings without
causing unrest. Until today, the city has built around 40 shopping centres to
accommodate these street vendors.
To make the city even greener, the administration has already allocated more
than 20% of the areas as green zone. Some Pole (Astonia Scholaris) trees
are seen in front of the mayor's office and along the main street. The best
quality trees could cost up to Rp100m/tree - US$10k. It has allocated more
than 20 hectares of land for forest in West Surabaya. In the east, the
government has dedicated some land for a mangrove forest.
With 10% of Jakartas
budget, Surayaba can still
make so many
improvements
Great efforts by
Ibu Risma
20% of the areas as
green zone
Amie Liem
amie.liem@clsa.com
+62 21 2554 8829

Wuddy Warsono
Country Head - Indonesia
wuddy.warsono@clsa.com
+62 21 2554 8803

Surabaya


5 February 2014 amie.liem/wuddy.warsono@clsa.com 61

Surabaya prefers to have more high-tech and non-pollutant companies
investing in Surabaya (IT or offices). Any manufacturing companies that want
to set up plants are directed to open up in the Greater Surabaya area (Gresik,
Sidoarjo, etc). It is understandable because prices of land in the city have
already gone up so much in the past two years and the availability of land is
also very tight.
Figure 148
Astonia Scholaris grace the city

Figure 149
Each tree costs between US$2-3k

Source: CLSA
Surabaya to make the city
even greener

Better-quality trees can
cost up to US$10k


62 amie.liem/wuddy.warsono@clsa.com 5 February 2014

All of those dont come for free, however; the government has imposed
higher tax including those imposed in the property sector to fund all their
programmes. Take the non-tax-receipts for example, it has more than tripled
from Rp2.5m (US$250) previously to Rp8m and the cost to secure the license
to build (IMB) is now at Rp30k/m
2
or 5x more expensive than before.
We also notice that trendy restaurants are springing up throughout the city,
such as Platinum Grill. The latest addition to be opened early this year is the
hip and suave restaurant named 1914. Local business people are converting
the splendid French Cultural Center building in Surabaya into a multi-concept
destination. The name 1914 represents the year the building was constructed
by Spanish architect Fritz Joseph Pinedo. It is an awesome artistic building
that has a high artistic value of architecture.
Platinum Grill 1914

Source: CLSA
Obviously, not everything is rosy in Surabaya. Our meetings with business
people and major property agents in Surabaya suggest business is getting
tougher, in line with the general slowdown in the country. Apparently, panic
buying which took place in recent years has now stopped.
Rupiah depreciation coupled with rising financing costs and tightening
measures imposed by the government (higher LTV for second ownership of
property and beyond) put the brakes on the property price movement. In
spite of the slowdown, it feels like Surabaya is on its way to be one of the
nice places to live in this part of the world. Young creative talents will want to
live there.
To attract young talent, Ibu Risma doesnt revise down their infrastructure
spending despite the economy slowdown. Hopefully, this will create a nice
buffer for the economy. Monorail will be built to connect the western and
eastern part of the city. A planned Light Rail Transit (LRT) will connect
north and south Surabaya. Both the monorail and the LRT will start
construction in 2014.

Trendy restaurants are
sprucing up the city
Business is
getting tougher
Put the brakes on the
property price
Stick with infrastructure
budget despite the
slow down
Hip and suave restaurants


5 February 2014 hendy.soegiarto@clsa.com 63

Medan - North Sumatra
Medan is the capital city of North Sumatra and located in the heart of the
palm oil plantation region in Indonesia. We visited the city to get a feel for the
economy most exposed to the tough palm oil price in the past few years.
Much to our surprise, the third-largest city in Indonesia is currently
experiencing rolling power blackouts three times per week on average with
each blackouts happening two to three hours each. PLN Medan manager said
that the blackouts were due to power deficit and they needed to install a
diesel generator with 150MW capacity to increase power.
We also spoke with the glasses factories and currently the biggest challenge for
manufacturing is the rising minimum wage in Medan. Our discussions point out
that a 30% hike in 2014 will make industries in North Sumatra uncompetitive
against peers. The possibility of high minimum wage increase may trigger
demonstrations led by factory workers, similar to the protests in Jakarta.
Medans economy is driven mostly by trade and plantations, which represents
19% and 23% of the North Sumatra economy respectively. We observe that
the local people have been adjusting slowly to the new normality of lower
CPO prices but we are still seeing resilience of the economy in our visit.
2011 Medan GDP Breakdown 2007 Medan GDP Breakdown

Source: CLSA
New airport infrastructure
Medan just received its new airport in Kualanamu which relocates all the
operations from old airport of Polonia. The new airport will be located a bit
further away from the city and will have more capacity.
Figure 154
New Kualanamu Airport

Source: CLSA
Agriculture
23%
Mining
1%
Manufacturing
23%
Utilities
1%
Constructions
6%
Trade
19%
Transport and
Communication
9%
Finance and
Business
Services
7%
Others
11%
Agriculture
23%
Mining
1%
Manufacturing
25%
Utilities
1%
Constructions
6%
Trade
19%
Transport and
Communication
9%
Finance and
Business
Services
6%
Others
10%
New Kualanamu airport
Trading and plantation
are key to the economy
Hendy Soegiarto
hendy.soegiarto@clsa.com
+62 21 2554 8832

Medan


64 hendy.soegiarto@clsa.com 5 February 2014

We have observed that the new airport is half done and access to the main
city is still very poor but they have a train terminal attached to the airport
that connects to the city. The train will cost Rp80k per person to ride and will
take the passengers directly to the middle of the city with a lot of
development in the area.
Figure 155
Flyer for train

Source: Railink
A chat with a taxi driver
When we were heading from the new airport to the city, we took a Bluebird
taxi and had chat with the driver. The driver claimed that Bluebird is currently
aggressively expanding in Medan. At the moment, the company only had one
taxi pool but will be opening up a second pool.
The driver claimed that they were no significant changes in the last year as to
the gross daily income of the driver. Medan also has sufficient subsidised fuel
and only ran out typically only three days out of the week.
Train from the airport
to the city
Bluebird is aggressively
expanding in Medan
The train will cost Rp80k
per person



Growth in Bluebird taxi fleets Heading to the city

Source: Company Source: CLSA
Slowing down loan growth
We also visit a BNI bank branch in Medan. Competition has been very tense in
the capital city of North Sumatra, mainly from smaller banks and regional player
Bank Sumut. The banks claimed that they will slow down loan disbursement in
the area due to bad macro conditions as well as bad harvest season.
The Medan branch office also supervises the Aceh area. We also saw slower
loan growth for credit with YTD loan growth only at 9% for the banking sector.
Figure 158
Bank BNI Medan head office

Source: CLSA
Figure 159
Bank loan composition in Medan

Source: BNI
350
400
450
0
100
200
300
400
500
2012 2013 14F
(fleets)
Agriculture
12.1%
Mining
0.4%
Industry
19.4%
Utilities
1.4%
Constructions
3.5%
Trade
23.7%
Transport
2.3%
Finance
2.5%
Others
4.3%
Consumer
30.5%
Slowing down loan
disbursement given
macro outlook
Loan growth YTD
only a mere 9%
Bluebird will open
up a second pool
Medan branch also
supervises the Aceh area
Consumer is still the
largest loan composition



Vertical development and Ciputra impact
When we visited the city, we observed abundant vertical development in the
city with Agung Podomoro launching its apartments and condominiums.
Agung Podomoro is currently launching studios, one-bed and two-bed units.
The selling price for the units also keeps increasing from Rp21.8m per square
meter to Rp23.9m per square meter for the one-room 70 square metre
apartments. Already, 500 people have signed up to buy units even before the
construction of the project.
Agung Podomoro development site Centre Point project next of train station

Source: CLSA
The development also includes the construction of Centre Point, Siloam
Hospital and Pelita Harapan International School. For the landed housing
development, Ciputra is currently still launching its CitraLand Bagya City.
When we visited the construction site of CitraLand Bagya City, we spoke with
the general manager and find out that most of the payments were using the
companys monthly instalment plan. The CitraLand Bagya City price has
increased by 30% since its initial launch.
CitraLand Bagya City Phase I Shophouses development in CitraLand

Source: CLSA
We also meet with a property agent to discuss if the property market is
impacted by the weaker palm oil. The impact is estimated to be manageable
as 70% of transactions are still using cash. Property prices across Medan
have risen following the launch of CitraBagya City but on the other hand,
there are less transactions in the secondary home market.

Vertical development
from Agung Podomoro
Rising property prices
Most buyers apply for
monthly instalment
70% of transactions are
still using cash
Agung Podomoro is
still expanding
CitraLand Bagya City price
has increased by 30%
since initial launch


5 February 2014 abdullah.hashim@clsa.com 67

Balikpapan and Samarinda - East Kalimantan
Following the continued weakness of the coal market, we went On-the-
ground in Balikpapan and Samarinda to check the impact of the low coal
prices. Heading to Balikapapan, we took a 5:50am flight which was
surprisingly full. In Balikpapan, we visited the Ranch Market located in
Plaza Balikpapan. Business has been brisk despite Plaza Balikpapan being
renovated. Ranchs clientele are made up of expats, oil & gas communities
and government officials that are more sheltered from the mining fallout.
Plaza Balikpapan was taken over by Agung Podomoro Land which is upgrading
the real estate to grade A from grade C. They are constructing Borneo Bay
apartments with 4 towers. The first tower was successfully launched recently.
We also visited Auto2000 in the city. Sales of new units has averaged lower
but more sales from maintenance of cars have exceeded target. Sales from
the showroom previously averaged around 230 units per month but this year
it averaged only 210 units per month.
Figure 164
Plaza Balikpapan

Source: Ezagren (Wikimedia Commons)
In our visit to Samarinda, we find that for most of the mine workers, the
increase in the price of beef, onion and other staple items are more of a
concern than the low price of coal. While some mines that were still in
exploration or early development shut down, workers tend to land jobs
elsewhere quite easily. We talked to local graduates and they mentioned
that miners are still hiring. Two of the miners we talked to purchased houses
in the past two years and are planning to buy new motorcycles in the next
12 months.
Rising food prices are
more of a concern; Miners
are still hiring
Plaza Balikpapan with
Ranch Market
Abdullah Hashim
abdullah.hashim@clsa.com
+62 21 2554 8827

Balikpapan
Samarinda


68 abdullah.hashim@clsa.com 5 February 2014

Hotel occupancy was also higher than 80% on average. In the lounge, we
could hear Mandarin, Korean and English being spoken. The high occupancy is
in-line with the full flight that we saw earlier in the day. The government has
continued to pour investment into the area. The roads from Balikpapan to
Samarinda are being widened while new airports are being built.
However, while life has been moving along, there has been a downgrade for
entertainment. Newer bar concepts that are cheaper than karaoke bars are
popping up. Different to karaoke bars with private singing rooms, the newer
bars also have a stage for dancers and performers.
The tab for four people was around 50% lower than the typical tab in karaoke
bars in Samarinda. We asked the floor manager for the bar that was poached
from one of the top karaoke bars in Samarinda. While her initial response was
measured since she thought we were copa, she later shared that business has
been good.
We are led to believe that while thermal coal prices are low, coal operations
remained strong. 2012 was much tougher since most were caught unaware.
But in 2013, the miners have adjusted to the new normal and have continued
mining. Some mine owners who have failed to pay their contractors have
restructured with the contractors. Foreign traders gave financing to
contractors to continue operating in return for coal off take.
Therefore, we are led to believe that coal production will remain high,
pressuring thermal coal prices to be low. Consumption remains high for now.
While this may change in the future but for now, life goes on in Balikpapan
and Samarinda.

Hotel occupancy was
also higher than 80%
on average
Downgrading
entertainment lifestyle
Low coal price is the
new normal
Coal production will
remain high, pressuring
thermal coal prices

Section 4: Stocks to own Back to Java


Stocks to own
Our medium-term strategy is based on the view that Java ex-Jakarta growth
will outstrip the other islands given powerful demographics; strong bank loan
and investment growth with massive infrastructure development; and the
commodities price volatility.
Companies with a great strategy and a strong foothold in Java ex-Jakarta
should benefit. We also consider their penetration of provinces and the
sustainability of their strategy. We like BCA, BTN, Perusahaan Gas,
Indocement, Pakuwon, Kalbe Farma, Ace Hardware, Telkom, Wijaya Karya
and Sritex.
Figure 165
Stocks with Java ex-Jakarta exposure
Companies Ticker Market cap
(US$m)
Rec Performance (%) PE (x) EV/Ebitda (x) ROE (%)
3M 1Y 14CL 15CL 14CL 15CL 14CL 15CL
Bank Central Asia BBCA IJ 19,764 O-PF (9) 5 16 13 na na 23 24
Telekom Indonesia TLKM IJ 17,728 BUY (1) 10 14 13 5 4 23 23
Perusahaan Gas PGAS IJ 9,042 O-PF (8) (2) 10 11 8 7 32 29
Indocement INTP IJ 6,090 BUY (1) (6) 14 12 8 7 22 21
Kalbe Farma KLBF IJ 5,196 BUY (0) 28 28 23 19 16 26 27
Pakuwon PWON IJ 1,194 BUY (2) 12 10 7 7 5 33 34
Ace Hardware ACES IJ 996 O-PF 4 (13) 23 19 16 13 24 24
Wijaya Karya WIKA IJ 922 BUY (10) 9 14 11 7 5 23 24
Bank Tabungan BBTN IJ 788 BUY (9) (43) 6 5 na na 13 16
Sritex SRIL IJ 455 BUY 9 - 11 9 7 6 15 18
Source: CLSA
Ace Hardware (ACES IJ - Outperform)
As more than three-quarters of Aces retail stores are located in Java, the
company should be a key beneficiary of rising wealth and booming property
in the region, on top of benign competition in the home improvement
segment. Half of its store expansion has been channelled to Java ex-Jakarta
regions in the past two years. Aside from location focus, early data suggests
that the Java ex-Jakarta area delivered the highest same-store-sales growth
in 2013.
Bank Central Asia (BBCA IJ - Outperform)
Bank Central Asia is most leveraged to Java with 80% of its branches on the
island (vs 54-65% for top peers) and 88% of loans in Java-Bali. The banks
lending expansion is leveraged to affluent consumers with larger cities in Java
providing the most attractive market. BCA has historically traded at a
premium to peers, on 3x PB as it remains the only bank able to fund all loans
from low-cost deposits (80% of funding) and has the best asset quality
among Indonesian banks under coverage.
Bank Tabungan Negara (BBTN IJ - BUY)
Bank Tabungan Negara is Indonesias No.1 mortgage lender with 32% market
share. Its niche is smaller housing (<70m
2
) on the urban fringe, which
develops in tandem with manufacturing capacity. As development moves from
West to East across Java, the banks network is ready with 55% of branches
in Java ex-Jakarta. BTN is our best small-cap banks idea and our Rp1,350/sh
target price suggests 50% upside.
Why Java should
grow stronger?
Funding Javas housing
Banking on Java

Retailing in Java

Section 4: Stocks to own Back to Java


Indocement (INTP IJ - BUY)
Amid multiple headwinds, we expect domestic cement demand to be soft.
However, Java demand will be more resilient compared to other regions
hence Java-centric players like Indocement should benefit. A new
government in 2014 may re-energize the investment cycle. Indocement is
our key pick for the Back to Java theme, given its strong pricing power
(superior margin and ROIC), dominance in Java, strong balance sheet, and
attractive valuation.
Kalbe Farma (KLBF IJ - BUY)
Kalbe derives 60% of sales from Java, with the company maintaining its
dominance across the pharmaceutical and nutritional segments. Rising wealth
and a growing middle class should bode well for Kalbe given its
premiumisation strategy. Meanwhile, more affordable brands like Zee or
Lovamil allows it to penetrate further in second-tier cities. Its strong brand
equity and vast distribution network are key competitive advantages to
deliver sustainable growth.
Pakuwon (PWON IJ - BUY)
Pakuwon is a main beneficiary of the growth in Java ex-Jakarta with 60% of
NAV from Surabaya. The company is the largest mall operator in East Java
and is poised to expand further. As a dominant retail player, Pakuwon has
bargaining power judging from its strong margin. It also benefits from the
property boom in Surabaya hence is developing a township in the east side.
Perusahaan Gas (PGAS IJ - Outperform)
Perusahaan Gas is the dominant gas supplier in Indonesia and should benefit
as Java develops and demand for gas increases. To overcome stagnant
distribution volumes, it is building a second LNG receiving terminal and
purchased interests in upstream fields in Indonesia. Disputes over pipeline
access with fellow SOE Pertamina is depressing valuation and creating an
attractive entry point.
Sritex (SRIL IJ - BUY)
Sritex is a beneficiary of rising economic activities in Java ex-Jakarta in the
form of improving infrastructure facilities and labour productivity. The textiles
and garment manufacturer has deep roots in Java. Established in 1966 in
Central Java, it now employs about 16k workers, creating a local economy for
the surrounding areas. Sritex is expanding to meet increasing demand. Risk
is rising faster than expected labour costs.
Telkom (TLKM IJ - BUY)
Telkom has 65k base transceiver stations (BTS) across Indonesia and
leverages off its parents extensive fibre-transmission network to ensure
superior network quality, especially in Java. With this, it can charge premium
pricing. Weak and distracted competitors will provide a golden opportunity for
Telkom to gain revenue market share. Telkom has high ROIC that will rise to
27.1% by 15CL. It has one of the highest ROIC in Asean, whilst EV/Ebitda
and PE multiples are the lowest.
Wijaya Karya (WIKA IJ - BUY)
Wijaya Karya will benefit from more construction activity in Java. The
company will profit from several channels: civil and EPC projects and orders
for its pre-cast concrete products (its factories are mostly located in Java). Of
the construction contracts won in 9M13, about 34% came from Java. Wijaya
Karya is our top pick in construction due to its better execution track record
among peers. The stock is trading at 11x, versus peers at 10x. Our Rp2,350
target is based on 13.5x 15CL PE.
Covering Java
Building Java
Knitting Java
Energising Java
Java landlord
Healthy Java
Cementing Java

Back to Java


Company profiles
Ace Hardware ................................................................................... 73
BCA .................................................................................................. 77
BTN .................................................................................................. 81
Indocement ...................................................................................... 85
Kalbe Farma ..................................................................................... 89
Pakuwon .......................................................................................... 93
Perusahaan Gas ............................................................................... 97
Sritex ............................................................................................. 101
Telkom ........................................................................................... 105
Wijaya Karya .................................................................................. 109
All prices quoted herein are as at close of business 27 January 2014, unless otherwise stated


Back to Java


Notes


Ace Hardware
Rp710 - OUTPERFORM

Financials
Year to 31 December 11A 12A 13CL 14CL 15CL
Revenue (Rpbn) 2,497 3,317 3,853 4,527 5,347
Net profit (Rpbn) 285 437 444 528 647
EPS (Rp) 16.63 25.49 25.92 30.81 37.71
CL/consensus (11) (EPS%) - - 101 102 105
EPS growth (% YoY) 66.8 53.3 1.7 18.9 22.4
PE (x) 42.7 27.9 27.4 23.0 18.8
Dividend yield (%) 0.7 0.4 0.5 0.6 0.6
ROE (%) 25.7 31.1 24.8 23.9 23.7
Net debt/equity (%) (17.1) (14.5) (10.1) (13.4) (18.7)
Source: CLSA
Merlissa Trisno
+62 21 2554 8821

5 February 2014
Indonesia
Consumer

Reuters ACES.JK
Bloomberg ACES IJ
Priced on 27 January 2014
Jakarta Comp @ 4,322.8

12M hi/lo Rp1,080/580

12M price target Rp830
% potential +17%

Shares in issue 17,150.0m
Free float (est.) 40.0%

Market cap US$996m

3M average daily volume
Rp12.1bn (US$1.0m)

Major shareholders
PT Kawan Lama Sejahtera 60.0%

Stock performance (%)
1M 3M 12M
Absolute 20.3 4.4 (13.4)
Relative 17.3 10.6 (11.1)
Abs (US$) 20.5 (4.8) (31.7)

Source: Bloomberg
www.clsa.com
80
100
120
140
160
180
200
220
300
400
500
600
700
800
900
1,000
1,100
1,200
Feb 12 Sep 12 May 13 Jan 14
Ace Hardware
Rel to Comp (RHS)
(%) (Rp)

Retailing in Java
As more than three-quarters of Aces retail stores are located in Java, the
company should be a key beneficiary of rising wealth and booming
property in the region, on top of benign competition in the home-
improvement segment. Half of its store expansion has been channelled to
Java ex-Jakarta regions in the past two years. Aside from location focus,
early data suggest that these areas delivered the highest same-store-
sales growth in 2013. We rate it an Outperform.
Three-quarters of stores are in Java
Of its 90+ stores, more than three-quarters are located in Java. The
company should be the key beneficiary of rising wealth and booming
property in the region, on top of benign competition in the home-
improvement segment. While Ikea will open its first store toward the end of
2014, we believe the impact will not be significant as Ikea tends to be the
weekend store for consumers given its location in the Serpong area (1.5hrs
travel from the city).
Expanding in Java ex-Jakarta
In the past two years, half of the companys store expansion (on area basis)
has been channelled to Java ex-Jakarta regions. Finding a location in Jakarta
is increasingly difficult and pricey given space competition. We like Aces
flexibility in term of location as it can also open its stores in independent shop
houses. In 2013, Ace has opened about 16k

m
2
in Java ex-Jakarta areas,
representing close to 50% of its total store expansion.
Early data indicator
Same-store-sales growth (as an early data indicator) also suggests that
Java ex-Jakarta delivered the strongest numbers. As of 2013, Java ex-
Jakarta recorded 6.3% SSSg, while Jakarta and outside Java booked 3.1%
and 4.3% respectively. Not only for Ace, but this trend is also the same for
mass-market retail like minimarkets (Alfamart). We have noticed more
consumer companies claiming weaker purchasing power in outer Java,
particularly in Sumatra.
Java-centric retailer
We continue to like Aces business model given its great pricing power and strong
cashflow generation, on top of benign competition in the home-improvement
retail segment. We set our target price at Rp830/sh based on a 22x 15CL PE
target or slightly above its historical five-year mean. We expect the companys
SSSg and margin improvement to serve as key rerating catalysts.

Ace Hardware - O-PF Back to Java


Ace stores

Store breakdown (based on location)

Expansion split in 2013

Source: Company
26
36
39
45
53
76
95
110
20
30
40
50
60
70
80
90
100
110
120
2007 2008 2009 2010 2011 2012 13CL 14CL
(No. of stores)
46.2
41.7
38.5
40.0
43.4 43.4
34.6
33.3
30.8
33.3
32.1 32.9
19.2
25.0
30.8
26.7
24.5 23.7
0
10
20
30
40
50
60
70
80
90
100
2007 2008 2009 2010 2011 2012
Greater Jakarta Java ex-Jakarta Outer Java (%)
Greater Jakarta
33%
Java (ex-
Jakarta)
42%
Non-Java
25%
We expect Ace to open
15 stores in 2014
Java represents +75%
of its total stores
Java (ex-Jakarta)
expansion accounts for
42% of total expansion



Same-store sales growth as of 2013

China manufacturing index changes

Source: Bloomberg
Gross margin

0
1
2
3
4
5
6
7
Jakarta Java ex-Jakarta Outside Java Total
(%)
(10)
(5)
0
5
10
15
Feb 07 Apr 08 May 09 Jun 10 Aug 11 Sep 12 Oct 13
(%)
37
39
40
42
46
47
48
48
30
32
34
36
38
40
42
44
46
48
50
2007 2008 2009 2010 2011 2012 13CL 14CL
(%)
Java (ex-Jakarta) still
stands out in term of SSSg
China manufacturing
prices have been falling;
Ace imports 50% of
products from China
We expect the
company to sustain
its gross margin



Summary financials
Summary P&L forecast (Rpbn)
Revenue 2,497 3,317 3,853 4,527 5,347
Op Ebitda 414 582 608 751 922
Op Ebit 363 515 524 650 798
Interest income 10 7 7 10 17
Interest expense 0 (32) (37) (43) (49)
Other items (2) 47 50 35 40
Profit before tax 371 537 544 652 805
Taxation (91) (108) (110) (132) (163)
Minorities/Pref divs 6 8 10 8 4
Net profit 285 437 444 528 647
Summary cashflow forecast (Rpbn)
Operating profit 363 515 524 650 798
Operating adjustments 13 30 (7) (8) (9)
Depreciation/amortisation 51 66 84 101 124
Working capital changes (126) (312) (301) (242) (231)
Net interest/taxes/other (198) (103) (155) (164) (195)
Net operating cashflow 104 197 146 338 486
Capital expenditure (186) (150) (150) (153) (187)
Free cashflow (82) 47 (5) 185 299
Acq/inv/disposals 15 20 - - -
Int, invt & associate div - - - 10 17
Net investing cashflow (171) (130) (150) (143) (170)
Increase in loans - 35 5 0 0
Dividends (89) (43) (66) (67) (79)
Net equity raised/other 0 0 37 0 0
Net financing cashflow (89) (7) (24) (67) (79)
Incr/(decr) in net cash (156) 60 (29) 128 237
Exch rate movements - - - - -
Opening cash 366 210 270 241 369
Closing cash 210 270 241 369 606
Summary balance sheet forecast (Rpbn)
Cash & equivalents 210 270 241 369 606
Debtors 32 31 36 42 50
Inventories 290 620 781 975 1,149
Other current assets 315 298 463 540 633
Fixed assets 361 445 512 564 627
Intangible assets - - - - -
Other term assets 244 253 307 348 387
Total assets 1,452 1,917 2,340 2,837 3,451
Short-term debt - 22 20 20 20
Creditors 38 49 55 64 76
Other current liabs 128 138 162 187 220
Long-term debt/CBs - 14 20 20 20
Provisions/other LT liabs 53 77 85 87 89
Minorities/other equity 25 17 17 17 17
Shareholder funds 1,207 1,601 1,980 2,442 3,009
Total liabs & equity 1,452 1,917 2,340 2,837 3,451
Ratio analysis
Revenue growth (% YoY) 47.7 32.8 16.2 17.5 18.1
Ebitda growth (% YoY) 68.1 40.4 4.6 23.5 22.7
Ebitda margin (%) 16.6 17.5 15.8 16.6 17.2
Net profit margin (%) 11.4 13.2 11.5 11.7 12.1
Dividend payout (%) 31.1 9.8 12.3 13.2 12.1
Effective tax rate (%) 24.6 20.2 20.2 20.2 20.2
Ebitda/net int exp (x) - 23.1 20.1 23.1 28.3
Net debt/equity (%) (17.1) (14.5) (10.1) (13.4) (18.7)
ROE (%) 25.7 31.1 24.8 23.9 23.7
ROIC (%) 30.9 32.4 25.1 25.3 26.7
EVA
/IC (%) 19.0 20.4 13.1 13.3 14.7

Source: CLSA
Revenue to grow at
15-20% range
Higher working
capital in 2013 due to
inventory requirement
Strong balance-sheet
position with net cash
We expect margin to
recover in 2014

BCA
Rp9,800 - OUTPERFORM

Financials
Operating profit (Rpbn) 13,297 14,256 15,331 18,095 22,801
Net profit (Rpbn) 10,819 11,722 12,978 15,287 19,193
EPS (Rp) 438.83 475.43 526.39 620.03 778.48
CL/consensus (21) (EPS%) - - 93 97 105
EPS growth (% YoY) 27.6 8.3 10.7 17.8 25.6
PE (x) 22.3 20.6 18.6 15.8 12.6
Dividend yield (%) 1.2 1.2 1.3 1.4 1.6
PB (x) 5.8 4.7 3.9 3.3 2.7
ROE (%) 28.4 25.0 22.8 22.6 23.6
ROA (%) 3.0 2.8 2.6 2.7 3.0
CAR (%) 12.7 14.2 14.9 15.3 16.0
Source: CLSA
Jayden Vantarakis
+62 21 2554 8834
Hendy Soegiarto
+62 21 2554 8832

5 February 2014
Indonesia
Financial services

Reuters BBCA.JK
Bloomberg BBCA IJ

12M hi/lo Rp11,400/8,550

12M price target Rp11,100
% potential +13%


Market cap US$19,764m

Rp113.7bn (US$9.6m)

Major shareholders
Farindo Investment 47.2%

1M 3M 12M
Absolute 4.3 (8.8) 4.8
Relative 1.6 (3.4) 7.6
Abs (US$) 4.4 (16.9) (17.3)

Source: Bloomberg
www.clsa.com
90
95
100
105
110
115
120
125
6,500
7,500
8,500
9,500
10,500
11,500
12,500
BCA (LHS)
Rel to Comp
(%) (Rp)

Banking on Java
Bank Central Asia is most leveraged to Java with 80% of its branches on
the island (vs 54-65% for top peers) and 88% of loans in Java-Bali. The
banks lending expansion is leveraged to affluent consumers with larger
cities in Java providing the most attractive market. BCA has historically
traded at a premium to peers, on 3x PB as it remains the only bank able
to fund all loans from low-cost deposits (80% of funding) and has the
best asset quality among Indonesian banks under coverage. Outperform.
Credit to Java
Some 88% of BCAs loans are in Java and Bali, with the balance shared
evenly across Sumatra and East Indonesia. This is the highest concentration
among Indonesias top banks. Loan growth in Java has been among the
highest at 26% in recent years. The banks asset quality remains one of the
best in the country with only 0.4% NPLs and loan loss provision coverage of
more than 400%.
Targeting affluent consumers in urban centres
BCA has traditionally provided credit to local corporates and SMEs, but is
increasingly extending loans to the consumer segment, focusing on affluent
mortgages and auto-finance. Due to a policy of only funding homes valued
Rp300m (US$26k) or above, the banks mortgage book is concentrated in
Java with 49% in Greater Jakarta and 12% in Greater Surabaya. As more
urban centres across Java become affluent, this should become more diverse.
Incumbent payments bank
The bank has leveraged its branch presence to become the first mover in
electronic payments including ATMs, mobile and internet banking. This affords
the bank a strong funding franchise with 80% of funding coming from low-
cost Casa deposits, primarily in the retail segment. It remains the only bank
in Indonesia which can fund all loans from these deposits, a position we
expect to persist until at least 2015 based on the current trajectory.
Premium valuation for a premium bank
BCA is seldom cheap relative to peers, trading at 3.3x and 2.7x 14CL and
15CL PB. We expect the bank to grow profits at an 18% Cagr and book value
by a 20% Cagr over the next three years, even factoring in slower loan
growth than the current environment. Our Rp11,100/sh target is based on a
blend of 3.4x 14CL PB and 15x 15CL PE. Our fair PB multiple assumes a 25%
target ROE, 14% cost of capital and 9% nominal long-term growth.

BCA - O-PF Back to Java


Indonesian banks loans by location

Source: Respective banks, CLSA
Indonesian banks loan growth by location

Source: Respective banks, CLSA. 2010-1H13 Cagr
BCAs loans by segment

Source: BCA, CLSA
88
67
60
59
69 69
67
6
19
17 21
20
16
15
6
14
23
21
10
15
18
0
10
20
30
40
50
60
70
80
90
100
BCA Mandiri BRI BNI BTPN Danamon BTN
Java+Bali Sumatra Kalimantan, Sulawesi, East Indonesia (%)
16
26
20
21
9
28
26
45
46
25
17
11
31
19
57
35
25
20
15
33
26
0
10
20
30
40
50
60
BNI BCA Mandiri BRI Danamon BTPN BTN
Java Sumatra Kalimantan (%)
40 41
39
37 35
33 33 32
43 41
39
40
40
40
39
37
17
19
22 24 25
27
28
31
0
10
20
30
40
50
60
70
80
90
100
2007 2008 2009 2010 2011 12CL 13CL 14CL
Corporate Commercial/SME Consumer (%)
Highest exposure to Java
Relative to the Big 3,
growth in Java exposure
the highest
Increasing consumer
exposure



BCA can fund all loans from its low-cost deposits

Source: Company, CLSA
Revenue per employee of Indonesias top four banks

Source: Respective banks
Deposits per branch of Indonesias top 4 banks

Source: Respective banks. Considers full service branches only
59
72
69
73
81
86
91
94
99
50
60
70
80
90
100
110
0
50
100
150
200
250
300
350
400
450
500
2007 2008 2009 2010 2011 2012 13CL 14CL 15CL
(Rptn) Loans
Casa deposits
Loans to Casa (RHS)
(%)
0
200
400
600
800
1,000
1,200
1,400
1,600
2007 2008 2009 2010 2011 2012
(Rpm) BCA BNI BRI Mandiri
0
50
100
150
200
250
300
350
400
450
2007 2008 2009 2010 2011 2012
(Rpbn) BCA BRI BNI Mandiri
BCAs loans to Casa
remains below 100%
The most efficient
of the top 4
Highest improvement in
deposits per branch



Summary financials
Interest income 25,784 28,885 34,975 43,475 52,080
Interest expense (7,730) (7,647) (9,212) (11,372) (13,731)
Net interest income 18,054 21,238 25,763 32,102 38,349
Trading income 558 272 133 65 32
Fee income 4,555 5,453 6,541 7,834 9,334
Other operating income 882 650 325 325 325
Non-interest income 5,995 6,376 6,999 8,224 9,691
Total op income 24,049 27,614 32,762 40,326 48,040
Staff & related costs (5,204) (6,155) (7,848) (9,605) (11,561)
Other operating expenses (5,708) (6,705) (7,983) (9,532) (11,390)
Total operating expenses (10,913) (12,860) (15,831) (19,138) (22,951)
Preprovision OP 13,136 14,754 16,931 21,189 25,089
Loan-loss provisions 161 (499) (1,600) (3,093) (2,288)
Other income/expenses 322 430 474 521 573
Profit before tax 13,619 14,686 15,805 18,616 23,374
Taxation (2,801) (2,968) (2,830) (3,334) (4,185)
Profit for period 10,818 11,718 12,974 15,283 19,188
Minority interest 2 3 4 4 5
Preference dividends - - - - -
Net profit 10,819 11,722 12,978 15,287 19,193
Net loans & advances 198,440 252,697 308,343 363,301 435,240
Placements to other banks 45,510 33,285 36,614 37,107 39,234
Cash & equivalents 10,356 11,054 12,741 12,660 12,625
Other int-earning assets 83,791 92,809 103,049 114,500 117,152
Total int-earning assets 338,097 389,845 460,747 527,569 604,251
Fixed assets 4,145 6,407 7,551 8,696 9,841
Other assets 39,666 46,742 39,044 41,419 45,128
Total assets 381,908 442,994 507,342 577,683 659,220
Customer deposits 323,428 370,274 423,859 479,333 541,334
Deposits from banks 3,467 2,330 2,680 4,020 6,030
Other int-bearing liabs 6,122 8,722 9,153 10,712 13,036
Total int-bearing liabs 333,017 381,327 435,692 494,065 560,400
Other non-int-bearing liabs 6,864 9,770 9,770 9,770 9,770
Total liabilities 339,881 391,096 445,462 503,835 570,170
Ratio analysis
Loan growth (%) 32.3 27.3 22.0 17.8 19.8
Loans/deposits (%) 61.8 68.9 73.4 76.7 81.1
Reported Loans/deposits (%) 61.3 68.2 72.7 75.7 80.4
Net interest margin (%) 5.7 5.8 6.1 6.5 6.8
Net int inc growth (%) 39.6 17.6 21.3 24.6 19.5
Fee income growth (%) 13.9 19.7 20.0 19.8 19.2
Fees & comms/op inc (x) 18.9 19.7 20.0 19.4 19.4
Operating exp growth (%) 14.0 17.8 23.1 20.9 19.9
Op expenses/assets (%) 3.1 3.1 3.3 3.5 3.7
Cost/income (%) 45.4 46.6 48.3 47.5 47.8
Loan provisions/loans (%) 1.9 1.6 1.6 2.1 2.1
Gross NPLs/total loans (%) 0.5 0.4 0.4 0.6 0.5
Loan loss reserve/NPLs (%) 386.3 408.6 420.3 335.3 402.4
Net profit growth (% YoY) 27.6 8.3 10.7 17.8 25.6
Tier 1 CAR (%) 11.6 13.3 13.7 14.1 14.8
CAR (%) 12.7 14.2 14.9 15.3 16.0
ROA (%) 3.0 2.8 2.6 2.7 3.0
ROE (%) 28.4 25.0 22.8 22.6 23.6
Source: CLSA
In addition to interest and
non-interest revenue
growth, opex savings are
another increasingly
important driver
Strong organic capital
generation
Margin expansion as
liabilities are less
sensitive to rising rates

BTN
Rp900 - BUY

Financials
Operating profit (Rpbn) 1,522 1,863 1,893 2,092 2,576
Net profit (Rpbn) 1,119 1,364 1,420 1,569 2,060
EPS (Rp) 126.99 129.13 134.40 148.51 195.07
CL/consensus (14) (EPS%) - - 98 94 103
EPS growth (% YoY) 22.1 1.7 4.1 10.5 31.4
PE (x) 7.1 7.0 6.7 6.1 4.6
Dividend yield (%) 3.5 2.4 4.4 4.6 5.0
PB (x) 1.1 0.9 0.8 0.8 0.7
ROE (%) 16.2 15.5 13.2 13.2 15.6
ROA (%) 1.4 1.4 1.2 1.1 1.3
CAR (%) 15.0 17.7 17.4 16.6 16.1
Source: CLSA
Jayden Vantarakis
+62 21 2554 8834
Hendy Soegiarto
+62 21 2554 8832

5 February 2014
Indonesia
Financial services

Reuters BBTN.JK
Bloomberg BBTN IJ

12M hi/lo Rp1,710/840

% potential +50%


Market cap US$778m

Rp8.4bn (US$0.7m)

Major shareholders
Government of Indonesia 60.2%
GIC 6.4%

1M 3M 12M
Absolute 5.9 (9.1) (43.4)
Relative 3.2 (3.7) (41.9)
Abs (US$) 6.1 (17.1) (55.3)

Source: Bloomberg
www.clsa.com
60
70
80
90
100
110
120
130
140
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
BTN (LHS)
Rel to Comp
(%) (Rp)

Funding Java's housing
Bank Tabungan Negara is Indonesias No.1 mortgage lender with 32%
market share. Its niche is smaller housing (<70m
2
) on the urban fringe,
which develops in tandem with manufacturing capacity. As development
moves from West to East across Java, the banks network is ready with
55% of branches in Java ex-Jakarta. BTN is our best small-cap banks idea
and our Rp1,350/sh target price suggests 50% upside. BUY.
Leading mortgage bank
BTN has the leading market share in mortgage finance in Indonesia (32%)
and focuses on smaller houses that are less than 70m
2
. The bank has
historically distributed subsidised mortgages for homes <36m
2
under
government programmes but is increasingly lending for low-end non-
subsidised mortgages as demand and asset prices in this segment remain
robust. This segment is overlooked by other large mortgage lenders such as
BCA and BNI, which have higher minimum loan amounts.
Focus on the urban fringe
The banks lending is concentrated in the emerging suburbs of the large and
second-tier cities in Java. Historically, this has been the outskirts of Jakarta,
and as Javas cities grow, the banks mortgage portfolio will follow. Some 55%
of BTNs branch network is in Java ex-Jakarta with 20% in the capital.
Savings strategy to boot
BTN has been improving its funding franchise. First, via the roll out of 486
cash offices (up from 110 three years ago) in densely populated urban areas
which has led to growth in savings of 25-28% YoY during 2013. Second, the
governments current housing-subsidy scheme funds 70% of the subsidised
loans via a deposit for the life of the loan at a 0.5% interest rate. In
aggregate, the banks Casa/deposits ratio has grown from 33% in 3Q10 to
46% in 3Q13 and we expect it to continue improving to 57% by 2015.
BUY this restructuring play
At 0.8x PB, BTN is one of the cheapest banks under coverage in Asean. Our
Rp1,350/sh target price is based on a blend of 1x 14CL PB and 7.5x 15CL PE,
which is 1 standard deviation below mean since its listing. The bank is higher
beta than peers (1.3x), and restructuring of legacy troubled subsidised loans
(written between 2008 and 2010) can be achieved without significant loan
losses leading to a rerating opportunity. We rate the stock a BUY.

BTN - BUY Back to Java


BTN branch network by location

BTN mortgages by location

BTN lending by segment

Jakarta
20%
Java ex-Jakarta
55%
Sumatra
13%
Kalimantan
4%
Bali, NTT
2%
Sulawesi
5%
Papua
1%
West Java
(ex Bandung)
31%
Banten
14%
Jakarta
11%
Sulawesi
8%
East Java
(ex Surabaya)
7%
Kalimantan
7%
Bandung
4%
Surabaya
3%
Central Java
(ex Semarang)
3%
North Sumatra
3%
Semarang
3%
Others
(<3% each)
6%
15
19
22
26 26
28
30
33
11
12
16
19
29
39
47
57
6
8
9
11
7
9
12
14
17
8
11
13
15
16
32
41
52
64
81
100
116
134
0
20
40
60
80
100
120
140
160
2008 2009 2010 2011 2012 13CL 14CL 15CL
(Rptn) Subsidised mortgages
Non-subsidised mortgages
Other housing loans
Construction loans
Other loans
More than three-quarters
of the mortgage book
is in Java
Large presence in Java
Non-subsidised
mortgages are the driver



Indonesia mortgage market share

BTN cash outlets

BTN Casa deposits/total

Source: Company
BTN
32%
BCA
19% BNI
11%
Bank Mandiri
10%
CIMB Niaga
9%
Panin
9%
Permata
7%
Others
3%
111
316 316
486
0
100
200
300
400
500
600
2010 2011 2012 9M13
(Outlets)
20
25
30
35
40
45
50
1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13
(%)
The No.1 mortgage
bank focusing on
low-end housing
Cash outlets are an
important part
of improving the
funding franchise
Improvements in the ratio
of savings and current
accounts is evident



Summary financials
Interest income 7,556 8,819 10,884 13,101 15,045
Net interest income 3,786 4,727 5,527 6,488 7,540
Trading income 43 26 26 26 26
Fee income 327 355 436 502 579
Other operating income 142 190 219 243 271
Non-interest income 512 571 681 771 876
Total op income 4,298 5,298 6,208 7,259 8,417
Staff & related costs (1,322) (1,487) (1,832) (2,216) (2,680)
Other operating expenses (1,402) (1,734) (2,029) (2,331) (2,660)
Total operating expenses (2,724) (3,221) (3,861) (4,547) (5,340)
Preprovision OP 1,574 2,077 2,347 2,712 3,076
Loan-loss provisions (52) (214) (454) (620) (501)
Other income/expenses 0 0 - 0 0
Taxation (404) (499) (473) (523) (515)
Profit for period 1,119 1,364 1,420 1,569 2,060
Minority interest 0 0 0 0 0
Preference dividends - - - - -
Net profit 1,119 1,364 1,420 1,569 2,060
Net loans & advances 62,620 80,430 98,198 113,507 131,703
Placements to other banks 9,991 11,636 12,828 14,131 15,569
Other int-earning assets 8,790 9,472 11,665 13,207 14,438
Total int-earning assets 81,913 102,234 123,333 141,492 162,393
Fixed assets 1,497 1,583 1,756 1,709 1,658
Other assets 5,711 7,932 9,186 10,245 11,544
Total assets 89,121 111,749 134,275 153,446 175,594
Customer deposits 61,970 80,668 99,308 115,069 131,871
Deposits from banks 793 707 671 604 604
Other int-bearing liabs 15,584 16,209 19,121 21,455 25,211
Total int-bearing liabs 78,347 97,584 119,100 137,128 157,686
Other non-int-bearing liabs 3,453 3,886 3,886 3,886 3,886
Total liabilities 81,800 101,470 122,986 141,014 161,572
Ratio analysis
Loan growth (%) 23.6 28.4 22.1 15.6 16.0
Loans/deposits (%) 101.3 100.0 99.8 100.0 101.3
Reported Loans/deposits (%) 101.0 99.7 98.9 98.6 99.9
Net interest margin (%) 5.2 5.1 4.9 4.9 5.0
Net int inc growth (%) 12.8 24.9 16.9 17.4 16.2
Fee income growth (%) 33.5 8.7 22.8 15.2 15.3
Fees & comms/op inc (x) 7.6 6.7 7.0 6.9 6.9
Operating exp growth (%) 20.5 18.3 19.8 17.8 17.4
Op expenses/assets (%) 3.5 3.2 3.1 3.2 3.2
Cost/income (%) 63.4 60.8 62.2 62.6 63.4
Loan provisions/loans (%) 1.5 1.2 1.6 1.9 1.9
Gross NPLs/total loans (%) 2.5 4.1 3.9 3.7 3.2
Loan loss reserve/NPLs (%) 60.4 29.5 41.1 50.4 60.3
Net profit growth (% YoY) 22.1 21.9 4.1 10.5 31.4
Tier 1 CAR (%) 14.2 17.0 16.3 15.6 15.0
CAR (%) 15.0 17.7 17.4 16.6 16.1
ROA (%) 1.4 1.4 1.2 1.1 1.3
ROE (%) 16.2 15.5 13.2 13.2 15.6
Source: CLSA
Revenue driven by net
interest income
Additional funding via
securitisation and bonds
NPLs have been a drag on
the banks profitability

Indocement
Rp20,225 - BUY

Financials
Revenue (Rpbn) 13,888 17,290 18,591 20,716 23,234
Net profit (Rpbn) 3,597 4,760 4,993 5,404 5,997
EPS (Rp) 977.11 1,293.15 1,356.47 1,467.88 1,628.99
CL/consensus (18) (EPS%) - - 99 97 95
EPS growth (% YoY) 11.5 32.3 4.9 8.2 11.0
PE (x) 20.7 15.6 14.9 13.8 12.4
Dividend yield (%) 1.1 1.3 1.4 1.9 2.2
FCF yield (%) 4.1 5.9 5.0 2.7 2.7
PB (x) 4.7 3.8 3.2 2.8 2.4
ROE (%) 25.0 27.1 23.6 21.7 20.6
Net debt/equity (%) (43.3) (53.9) (57.3) (52.9) (48.7)
Source: CLSA
Sarina Lesmina, CFA
+62 21 2554 8820
Jessica Tosin
+62 21 2554 8831

5 February 2014
Indonesia
Materials

Reuters INTP.JK
Bloomberg INTP IJ

12M hi/lo Rp26,950/17,750

% potential +21%



Rp47.4bn (US$4.0m)

Foreign s'holding 80.0%

Major shareholders
Heidelberger 51.1%
Salim Group 13.0%

1M 3M 12M
Absolute 1.9 (1.3) (6.4)
Relative (0.7) 4.5 (3.9)
Abs (US$) 2.1 (10.0) (26.1)

Source: Bloomberg
www.clsa.com
95
100
105
110
115
120
125
130
16,000
18,000
20,000
22,000
24,000
26,000
28,000
Indocement (LHS)
Rel to Comp
(%) (Rp)

Cementing Java
Amid multiple headwinds, we expect domestic cement demand to be soft.
However, Java demand will be more resilient compared to other regions
hence Java-centric players like Indocement should benefit. A new
government in 2014 may re-energise the investment cycle. Indocement is
our key pick for the Back to Java theme, given its strong pricing power
(superior margin and ROIC), dominance in Java, strong balance sheet,
and attractive valuation. We are BUYers.
Java-centric players will benefit
Cement demand should moderate in 14CL to 6.5% YoY. But Java demand will
be more resilient and should continue to be the driver, given soft demand
from commodity regions is likely to continue. Moreover, Java is the medium-
term key growth area as most infrastructure projects are taking place on the
island. Contribution from Java has slightly increased by +2% YoY to 56% in
11M13.
Indocement a key beneficiary
Indocement has full advantage given it is Java-centric play, with significant
market share in Java (at least 40% in the past four years) that gives it pricing
power. The company has historically dominated cement sales in Java; in
11M13, it booked 40% market share in Java. It also derives 73% of sales
from Java (as does Holcim but at much lower volume and market share).
Capacity expansion
With tight capacity and flat growth in 11M13 (+0.6% YoY), Indocement is
gearing up to expand its capacity by 10% in 2014 and another 22% by mid-
2015. Expansion can be funded internally given its strong balance sheet (cash
balance as of 9M13 is Rp11tn with no debt). A cement mill, with capacity of
1.9m tonnes pa, will start operating in early 2014; whereas brownfield with
4.4m tonnes pa capacity commences in mid-2015.
Key pick
Indocement is our key pick for the Back to Java theme, given strong pricing
power, dominance in Java, a strong balance sheet and attractive valuation.
Indocement trades at cheaper valuation than its Indonesian peers (13.8x 14CL
PE vs peers avg 15.4x). Its valuation premium over Semen Indonesia has
diminished in recent quarters given lack of capacity; hence provides an
attractive entry point. Our target price is Rp24,500/sh, based on 15x 15CL PE.

Indocement - BUY Back to Java

86 sarina.lesmina@clsa.com 5 February 2014
Java market share Cement sales contribution by region (11M13)

Market share in Java (three key players) Cement demand per region per player (11M13)

Source: Indonesian Cement Association (ASI)
ROICs of Indonesia cement names against regional peers

Source: CLSA
62
62
63 63
62 62
62
60
58
56 56
54
55 55
56
48
50
52
54
56
58
60
62
64
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
1
1
M
1
3
(%)
56
21
8
7
6
2
0
10
20
30
40
50
60
70
J
a
v
a
S
u
m
a
t
r
a
K
a
l
i
m
a
n
t
a
n
S
u
l
a
w
e
s
i
N
u
s
a
T
e
n
g
g
a
r
a
M
a
l
u
k
u
&

P
a
p
u
a
(%)
19
21
20
19
40
41
42
40
38
36 36
39
0
5
10
15
20
25
30
35
40
45
50
2010 2011 2012 11M13
SMCB INTP SMGR (%)
901%
557%
0
10
20
30
40
50
60
70
80
90
100
INTP SMGR SMCB
Sumatra Java Kalimantan Sulawesi NTT Others (%)
11.2
45.4
26.9
10.2
20.2
14.9
0
5
10
15
20
25
30
35
40
45
50
SMCB INTP SMGR Avg Chinese Avg Indian SCC
(Thailand)
(%)
Indocement churns
high ROIC


5 February 2014 sarina.lesmina@clsa.com 87

Indonesia cement valuation
Indocement Holcim Indonesia Semen Indoensia
Ticker INTP IJ SMCB IJ SMGR IJ
Rec BUY SELL O-PF
Capacity FY14 (000 tonnes) 20,500 10,000 29,400
Market cap (US$m) 6,090 1,397 6,808
Free float (%) 36 20 44
FF mcap (US$m) 2,201 279 2,996
MV/tonne (x) 298 140 232
Current price (Rp/share) 20,225 2,220 13,975
Target price 24,500 2,160 14,500
Upside (%) 21 (3) 4
Net profit (Rpbn) 2012 4,760.4 1,350.8 4,846.6
13CL 4,993.5 895.9 5,106.8
14CL 5,403.6 1,035.8 5,206.7
EV/tonne (US$) 2012 334 194 306
13CL 286 188 270
14CL 241 158 231
PE (x) 13CL 14.9 19.0 16.2
14CL 13.8 16.4 15.9
15CL 12.4 14.1 14.4
EPS growth (%) 2012 32.3 27.0 23.5
13CL 4.9 (33.7) 5.4
14CL 8.2 15.6 2.0
EV/Ebitda (x) 13CL 8.8 8.1 10.7
14CL 7.9 7.6 9.9
Domestic demand growth (%) 2012 16.5 14.6 14.8
13CL 2.0 4.0 13.0
14CL 7.5 7.5 7.0
Ebitda margin (%) 2012 38.2 29.4 34.9
13CL 37.6 25.6 33.9
14CL 37.0 24.0 33.3
Operating margin (%) 2012 33.8 23.1 31.2
13CL 32.9 18.1 29.9
14CL 31.6 16.2 28.7
Net debt/Equity (%) 2012 (53.9) 13.0 3.4
13CL (57.3) 28.7 (3.3)
14CL (52.9) 23.4 (4.2)
ROE (%) 2012 27.1 16.9 30.5
13CL 23.6 10.3 27.3
14CL 21.7 11.2 24.4
Ebitda/tonne (US$) 2012 37.9 34.1 32.1
13CL 32.7 23.2 25.3
14CL 30.7 20.7 22.6
Source: CLSA



Summary financials
Revenue 13,888 17,290 18,591 20,716 23,234
Op Ebitda 4,815 6,600 6,991 7,672 8,711
Op Ebit 4,427 5,845 6,125 6,555 7,290
Interest expense (24) (32) 0 0 0
Other items (1) 40 10 11 12
Taxation (1,107) (1,476) (1,551) (1,678) (1,862)
Minorities/Pref divs (5) (3) (10) (11) (12)
Net profit 3,597 4,760 4,993 5,404 5,997
Operating profit 4,427 5,845 6,125 6,555 7,290
Operating adjustments (5) 37 0 0 0
Depreciation/amortisation 388 755 866 1,117 1,421
Net interest/taxes/other (1,111) (1,029) (1,523) (1,571) (1,735)
Net operating cashflow 3,361 5,428 5,352 5,788 6,603
Capital expenditure (323) (1,052) (1,661) (3,768) (4,560)
Free cashflow 3,037 4,376 3,691 2,020 2,043
Acq/inv/disposals (6) (9) - - -
Int, invt & associate div 310 389 434 535 578
Net investing cashflow (19) (672) (1,227) (3,233) (3,982)
Increase in loans (193) (68) - - -
Dividends (968) (1,079) (1,428) (1,498) (1,621)
Net equity raised/other 0 - 0 0 0
Net financing cashflow (1,162) (1,147) (1,428) (1,498) (1,621)
Incr/(decr) in net cash 2,180 3,610 2,697 1,057 1,000
Exch rate movements 0 0 0 0 0
Opening cash 4,685 6,865 10,474 13,171 14,228
Closing cash 6,865 10,474 13,171 14,228 15,228
Debtors 1,977 2,511 2,907 3,239 3,633
Inventories 1,328 1,470 1,592 1,810 2,040
Fixed assets 7,638 7,935 8,731 11,382 14,521
Total assets 18,151 22,755 26,787 31,067 35,854
Short-term debt 45 - - - -
Creditors 836 1,332 1,735 1,973 2,224
Other current liabs 595 1,086 1,042 1,147 1,271
Long-term debt/CBs 0 0 0 0 0
Provisions/other LT liabs 941 918 1,011 1,035 1,063
Ratio analysis
Ebitda margin (%) 34.7 38.2 37.6 37.0 37.5
Dividend payout (%) 23.0 20.3 21.6 26.4 27.0
Ebitda/net int exp (x) - - - - -
Net debt/equity (%) (43.3) (53.9) (57.3) (52.9) (48.7)
ROE (%) 25.0 27.1 23.6 21.7 20.6
ROIC (%) 35.0 45.5 45.4 40.9 36.2
EVA
/IC (%) 21.3 31.8 31.7 27.2 22.5

Source: CLSA
Capacity increase to boost
sales in the future
Strong cashflow
generation to fund
future capex
Healthy balance sheet
with no debt
Strong profitability

Kalbe Farma
Rp1,355 - BUY

Financials
Revenue (Rpbn) 10,912 13,636 16,060 18,672 21,970
Net profit (Rpbn) 1,482 1,734 1,938 2,260 2,718
EPS (Rp) 31.62 36.99 41.34 48.20 57.98
CL/consensus (13) (EPS%) - - 99 100 99
EPS growth (% YoY) 15.2 17.0 11.8 16.6 20.3
PE (x) 42.9 36.6 32.8 28.1 23.4
Dividend yield (%) 0.2 1.4 1.4 1.6 2.1
FCF yield (%) 1.4 0.4 0.1 1.8 2.7
PB (x) 10.2 9.0 7.9 6.8 5.9
ROE (%) 25.6 26.1 25.6 25.9 27.1
Net debt/equity (%) (33.0) (22.1) (10.7) (11.9) (14.8)
Source: CLSA
Merlissa Trisno
+62 21 2554 8821

5 February 2014
Indonesia
Consumer

Reuters KLBF.JK
Bloomberg KLBF IJ

12M hi/lo Rp1,540/1,060

% potential +14%



Rp77.9bn (US$6.6m)

Major shareholders
PT Gira Sole Prima 10.2%
PT Santa Seha Sanadi 9.6%

1M 3M 12M
Absolute 9.3 (0.4) 27.8
Relative 6.5 5.6 31.2
Abs (US$) 9.5 (9.1) 0.9

Source: Bloomberg
www.clsa.com
80
100
120
140
160
180
200
600
800
1,000
1,200
1,400
1,600
1,800
Kalbe Farma
Rel to Comp (RHS)
(Rp) (%)

Healthy Java
Kalbe derives 60% of sales from Java, with the company maintaining its
dominance across the pharmaceutical and nutritional segments. Rising
wealth and a growing middle class should bode well for Kalbe given its
premiumisation strategy. Meanwhile, more affordable brands like Zee or
Lovamil allow it to penetrate further in second-tier cities. Its strong brand
equity and vast distribution network are key competitive advantages to
deliver sustainable growth. BUY.
Java is 60% of the business
The company derives 60% of sales from Java with dominant market share
across its categories, be it pharmaceutical or nutritional products. Despite
higher penetration, growth in Java has been as strong as outer Java areas,
underpinned by expanding affluent customers in big cities. Kalbes strong
brand equity and effective marketing activities are the key growth drivers. It
spends 12-13% of sales on advertising/marketing activities.
Premiumisation strategy
Rising wealth and a growing middle class should bode well for Kalbe given its
premiumisation strategy across its division, such as mid/high multivitamin in
its consumer health division or ready-to-drink milk for its nutritional business.
Meanwhile, more affordable products through second brands like Zee (powder
milk for tweens/teens) or Lovamil (powder milk for expecting/lactating
mothers) allow Kalbe to penetrate further into second-tier cities.
Leveraging distribution network
Obviously, as logistic is still the key challenge for the Indonesian market,
incumbents with a vast distribution network should continue to benefit in
the medium term. Kalbe has been aggressively expanding its network - be
it for branches addition/warehouse expansion or through its clinic
expansion. Currently, it has two regional distribution centres and 66
branches in 48 cities.
Go for ROIC
We set our target price at Rp1,550/sh based on a blend of our DCF valuation
and 27x 15CL PE, which is 1 standard deviation above its historical multiple to
reflect its sustainable volume growth, higher ROIC, and long-term structural
healthcare growth story. We rate the stock a BUY.

Kalbe Farma - BUY Back to Java


Market leader in pharma segment

Dominant player in OTC segment

Zee products

Source: Company
Kalbe Farma
13%
Sanbe
8%
Dexa Medica
6%
Bio Farma
6%
Novartis
4%
Others
63%
Kalbe Farma
10%
Soho
10%
Pharos
8%
Tempo Scan
8%
Konimex
5%
Others
59%
Kalbe Farma an
undisputable market
leader in pharma
Kalbe is also No.1 player
in OTC market
Nutritional product to tap
middle-class market



RTD milk product

Source: CLSA
Distribution coverage

Mitrasana clinic expansion

Source: Company
4
14
25
27
39
0
5
10
15
20
25
30
35
40
45
2008 2009 2010 2011 2012
(No. of outlets)
Innovative packaging in
convenient format
Distribution is key
competitive advantage
for incumbent
Mitrasana clinic
will benefit in the longer
term from universal
health coverage



Summary financials
Revenue 10,912 13,636 16,060 18,672 21,970
Op Ebitda 2,133 2,338 2,871 3,372 4,013
Op Ebit 1,968 2,218 2,568 3,007 3,590
Interest expense (13) (18) (36) (38) (21)
Other items (64) 33 (5) (5) (5)
Taxation (464) (533) (596) (695) (836)
Net profit 1,482 1,734 1,938 2,260 2,718
Operating adjustments (105) (8) (54) (62) (72)
Net operating cashflow 1,335 793 1,451 2,140 2,554
Capital expenditure (420) (515) (1,374) (997) (823)
Free cashflow 915 279 76 1,143 1,731
Acq/inv/disposals - - - - -
Net investing cashflow (323) (440) (1,318) (950) (767)
Increase in loans 115 93 166 (200) (50)
Dividends (656) (891) (884) (988) (1,356)
Net equity raised/other (82) 12 30 56 66
Net financing cashflow (623) (785) (688) (1,132) (1,339)
Incr/(decr) in net cash 389 (432) (555) 58 448
Opening cash 1,902 2,291 1,860 1,304 1,363
Closing cash 2,291 1,860 1,304 1,363 1,810
Debtors 1,530 1,805 2,126 2,472 2,908
Inventories 1,705 2,115 2,763 3,081 3,468
Fixed assets 1,868 2,255 3,326 3,958 4,358
Intangible assets 233 341 336 330 325
Total assets 8,275 9,418 10,917 12,298 14,005
Short-term debt 140 234 400 200 150
Creditors 850 809 944 1,098 1,292
Other current liabs 640 849 963 1,062 1,197
Long-term debt/CBs 0 0 - - -
Ratio analysis
Ebitda margin (%) 19.5 17.1 17.9 18.1 18.3
Dividend payout (%) 8.9 51.4 45.6 43.7 49.9
Net debt/equity (%) (33.0) (22.1) (10.7) (11.9) (14.8)
ROE (%) 25.6 26.1 25.6 25.9 27.1
ROIC (%) 35.5 33.0 29.1 28.1 29.9
EVA
/IC (%) 23.4 20.9 17.0 16.0 17.8

Source: CLSA
Revenue to grow in the
range of 15-20%
Strong cashflow
generation
Higher dividend payout is
likely given mounting
cash balance
We expect rising ROIC
going forward

Pakuwon
Rp303 - BUY

Financials
Revenue (Rpbn) 1,478 2,165 3,207 3,994 5,269
Net profit (Rpbn) 346 748 1,126 1,459 2,042
EPS (Rp) 7.19 15.53 23.38 30.29 42.41
CL/consensus (3) (EPS%) - - 93 100 100
EPS growth (% YoY) 9.1 116.0 50.6 29.5 40.0
PE (x) 42.2 19.5 13.0 10.0 7.1
Dividend yield (%) 0.0 0.5 1.2 1.5 2.0
FCF yield (%) 0.2 2.1 2.8 2.5 10.5
PB (x) 6.5 5.0 3.8 2.9 2.1
ROE (%) 16.8 29.1 33.2 32.5 34.2
Net debt/equity (%) 61.1 35.5 20.1 11.3 (10.4)
Source: CLSA
Sarina Lesmina, CFA
+62 21 2554 8820

5 February 2014
Indonesia
Property

Reuters PWON.JK
Bloomberg PWON IJ

12M hi/lo Rp430/250

% potential +16%



Rp14.9bn (US$1.3m)

Major shareholders
Pakuwon Group 52.0%

1M 3M 12M
Absolute 14.3 (2.3) 12.2
Relative 11.4 3.6 15.2
Abs (US$) 14.5 (10.9) (11.5)

Source: Bloomberg
www.clsa.com
80
90
100
110
120
130
140
150
160
170
180
150
200
250
300
350
400
450
500
Pakuwon (LHS)
Rel to Comp
(Rp) (%)

Java landlord
Pakuwon is a main beneficiary of the growth in Java ex-Jakarta with 60%
of NAV from Surabaya. The company is the largest mall operator in East
Java and is poised to expand further. As a dominant retail player,
Pakuwon has bargaining power judging from its strong margin. It also
benefits from the property boom in Surabaya hence is developing a
township in the east side. We rate it a High-Conviction BUY.
Largest mall operator in East Java
Pakuwons flagship mall Tunjungan Plaza is the largest in East Java and an
important landmark in Surabaya. First developed in 1986, it has expanded in
phases; now covering 103k m
2
NLA. The company is expanding phase 5 and 6
with premium retail (45k m
2
), office and condo towers. Some 65% of recurring
revenue is from Tunjungan Plaza. We expect rental revenue for Pakuwons retail
portfolio to increase at a 13% Cagr over 2014-17 with rent hikes and mall
expansion. Indonesias retail penetration is the second lowest in Asia (half of
Thailands and one-10th of Singapores) so there is plenty of potential.
Strong bargaining power
As a dominant mature player in Surabaya, Pakuwon has bargaining power in
raising rents and service charges to pass on rising cost. Hence, GP margin for
Tunjungan Plaza is higher than Pakuwons Jakarta malls especially given its
Jakarta malls are still relatively new. As these malls mature, we expect GP
margin to expand to 52% in 2013 and 54% by 2015.
Strong property sales
Pakuwon also benefits from strong property booms in Jakarta and Surabaya.
Specifically in Surabaya, besides condo projects at Tunjungan Plaza, the
company is also developing Pakuwon City township in East Surabaya with future
development of residential homes, commercial area and an education park.
Pakuwons overall property sales have enjoyed a 45% Cagr in the past five years.
Recurring income reduces earnings risk
We estimate 60% of Pakuwons NAV (Rp427/sh) to come from Surabaya
which bodes well with our investment theme that Java ex-Jakarta will be the
future growth engine. A weakening macro backdrop means low visibility on
property sales; hence strong recurring income generation helps. With 45% of
income recurring, Pakuwon will fare better than most peers. Its balance sheet
is also strong. We set our target price at Rp350, implying a 18% discount to
its NAV. BUY.

Pakuwon - BUY Back to Java

Pakuwons rental revenue Pakuwons retail space NLA growth

Pakuwons rental GP margin Recurring vs non-recurring revenue

Source: Company
Tunjungan Plaza Pakuwons revenue and profit growth

Source: Simon Wedeg (Wikimedia Commons) Source: CLSA, Company

296
327
408
635
807
1,044
1,167
1,353
0
200
400
600
800
1,000
1,200
1,400
1,600
2008 2009 2010 2011 2012 13CL 14CL 15CL
(Rpbn)
24,030
47,080
103,022
222,753
333,889
353,539
377,339
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
1982 1991 2002 2010 2011 12CL 13CL 14CL 15CL 16CL 17CL
(m)
54.0
59.3
51.5
51.8
50.5
51.4
46
48
50
52
54
56
58
60
2008 2009 2010 2011 2012 9M13
(%)
0
500
1,000
1,500
2,000
2,500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 9M13
(Rpbn) Recurring Non-recurring
698
1,228
1,478
2,165
3,207
3,994
5,269
147
273
346
748
1,126
1,459
2,042
0
1,000
2,000
3,000
4,000
5,000
6,000
2009 2010 2011 2012 13CL 14CL 15CL
(Rpbn) Revenue Net profit


5 February 2014 sarina.lesmina@clsa.com 95

Pakuwon's NAV
NAV
(% stake)
Value
(Rpbn)
Stake
(%)
Dev area
(ha)
% of
NAV
Investment properties
Pakuwon City (East Surabaya) 123 123 100 0.6
East Coast Center 123
Tunjungan City (Central Surabaya) 5,186 5,186 100 24.5
Tunjungan Plaza 3,848
Sheraton Hotel 437
4-star hotel 200
Tunjungan Plaza V Mall 447
Tunjungan Plaza VI Mall 254
Gandaria City (South Jakarta) 2,631 3,169 83 12.4
Gandaria City Mall 2,376
Gandaria 8 Office 265
5-star hotel 529
Kota Kasablanka (South Jakarta) 3,633 3,633 100 17.1
Kota Kasablanka Mall 2,264
Office 1,369
Development properties
Pakuwon City (East Surabaya) 4,510 4,510 100 183.0 21.3
Palm Beach 516
Community 1 804
Community 2 1,559
Educity Condominium - Twin Tower 1 11
Educity Condominium - Twin Tower 2 (39)
Landbank (100ha) 1,660
Pakuwon New Town (West Surabaya) 1,922 1,922 100 125.0 9.1
Town 1 790
Town 2 411
Landbank (55ha) 722
Kota Kasablanka (South Jakarta) 1,688 1,688 100 10.5 8.0
Kasablanka 88 Office -
Casa Grande 105
Expansion:
Condo 3 211
Condo 4 298
Condo 5 279
Office 595
1ha land bank 200
Gandaria City (South Jakarta) 701 844 83 8.0 3.3
Office 769
0.5ha land bank 75
Tunjungan City (Central Surabaya) 789 789 100 7.4 3.7
The Peak Condo 39
Pakuwon Center Office 281
Tunjungan VI Condo 196
Tunjungan VI Office 272
Total value (Rpbn) 21,182
Less: Net debts (2014) 600
Net asset value (Rpbn) 20,583
NAV per share (Rp/sh) 427



Summary financials
Revenue 1,478 2,165 3,207 3,994 5,269
Op Ebitda 738 1,142 1,787 2,231 2,945
Op Ebit 624 1,062 1,620 2,033 2,712
Other items (8) (30) - - -
Profit before tax 469 901 1,482 1,919 2,687
Taxation (91) (135) (252) (326) (457)
Net profit 346 748 1,126 1,459 2,042
Operating profit 624 1,062 1,620 2,033 2,712
Operating adjustments (33) (13) (104) (134) (188)
Working capital changes (21) (39) 40 46 (32)
Net operating cashflow 382 962 991 1,402 2,676
Capital expenditure (357) (654) (581) (1,033) (1,150)
Free cashflow 25 308 410 370 1,526
Net investing cashflow (334) (606) (533) (953) (1,050)
Increase in loans 226 359 (569) (311) (414)
Dividends 0 (69) (169) (225) (292)
Net equity raised/other 105 83 0 - -
Net financing cashflow 331 373 (737) (536) (706)
Incr/(decr) in net cash 379 729 (279) (87) 920
Exch rate movements (110) (35) 0 0 0
Opening cash 351 621 1,315 1,036 949
Closing cash 621 1,316 1,036 949 1,869
Cash & equivalents 621 1,315 1,036 949 1,869
Debtors 109 128 274 298 465
Inventories 3 6 6 7 10
Fixed assets 3,710 4,305 4,719 5,553 6,471
Other term assets 1,301 1,812 2,303 2,678 2,908
Total assets 5,745 7,566 8,338 9,485 11,723
Short-term debt - - - - -
Creditors 65 34 113 82 171
Long-term debt/CBs 2,070 2,429 1,860 1,549 1,135
Provisions/other LT liabs 1,159 1,878 2,074 2,228 2,991
Ratio analysis
Ebitda margin (%) 50.0 52.7 55.7 55.9 55.9
Dividend payout (%) 0.0 9.3 15.0 15.4 14.3
Ebitda/net int exp (x) 5.0 8.7 13.0 19.6 118.5
Net debt/equity (%) 61.1 35.5 20.1 11.3 (10.4)
ROE (%) 16.8 29.1 33.2 32.5 34.2
ROIC (%) 10.7 16.3 20.5 22.3 25.7
EVA
/IC (%) (0.9) 4.4 8.8 10.5 14.0

Source: CLSA
Strong recurring income
supports downturn in
property cycle
Cashflow from property
sales to fund capex in
investment properties
Assets doubled in five
years since 2011
Margin expansion from
maturing malls and
property sales

Perusahaan Gas
Rp4,560 - OUTPERFORM

Financials
Revenue (US$m) 2,230 2,576 3,119 3,300 3,647
Net profit (US$m) 681 891 845 897 915
EPS (US$) 0.03 0.04 0.03 0.04 0.04
CL/consensus (17) (EPS%) - - 106 103 94
EPS growth (% YoY) 2.6 30.8 (5.2) 6.2 2.0
PE (x) 18.5 13.3 12.5 10.4 10.9
Dividend yield (%) 3.4 3.0 3.7 4.9 5.3
FCF yield (%) 6.6 8.3 5.2 8.6 10.1
PB (x) 7.3 5.4 4.1 3.1 2.9
ROE (%) 41.9 45.3 35.6 32.4 28.6
Net debt/equity (%) (2.6) (26.7) (13.9) (3.6) (18.8)
Source: CLSA
Jayden Vantarakis
+62 21 2554 8834
Hendy Soegiarto
+62 21 2554 8832

5 February 2014
Indonesia
Power

Reuters PGAS.JK
Bloomberg PGAS IJ

12M hi/lo Rp6,350/4,250

% potential +10%



Rp120.1bn (US$10.1m)

Foreign s'holding 34.4%

Major shareholders

1M 3M 12M
Absolute 3.6 (8.3) (1.9)
Relative 1.0 (2.9) 0.7
Abs (US$) 3.8 (16.4) (22.6)

Source: Bloomberg
www.clsa.com
90
100
110
120
130
140
150
160
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
Feb 12 Oct 12 May 13 Jan 14
Perusahaan Gas
Rel to Comp (RHS)
(%) (Rp)

Energising Java
Perusahaan Gas is the dominant gas supplier in Indonesia and should
benefit as Java develops and demand for gas increases. To overcome
stagnant distribution volumes, the company is building a second LNG
receiving terminal and purchased interests in upstream fields in
Indonesia. Disputes over pipeline access with fellow SOE Pertamina is
depressing valuation and creating an attractive entry point. We rate PGAS
an Outperform with a Rp5,000/sh DCF-derived target price.
Dominant supplier
Following the completion of its pipelines linking South Sumatra to West Java in
2009, Perusahaan Gas has retained about 90% market share in the gas-
distribution market. Constrained supply and growing demand means Java will
remain in an estimated net deficit for gas of between 325mmscfd to 570mmscfd
over the next three years. In addition to unmet demand, the price differential
between alternative sources of energy such as high-speed diesel (US$29/mmbtu
vs US$10/mmbtu for PGAS current ASP) gives PGAS pricing power.
Network expansion to serve factories in Java
PGAS is increasing the size of its pipeline network to reach more industrial
users in Java, including a 350km network buildout in Semarang once
Pertamina completes the trans-Java pipeline, linking Gresik in the East with
Cirebon in the West part of Java. As industries develop across the island, this
infrastructure is critical.
Future growth options to fight stagnant supply volumes
Piped-gas volumes in PGAS distribution business have remained flat at about
800mmscfd over the past few years as key supplier Pertaminas supply (12%
of the total) stalls. To compensate, PGAS is constructing its second floating
LNG regasification and storage unit in South Sumatra, linked into its network.
The company is also in the process of purchasing minority stakes in upstream
oil and gas assets to gain access to supply.
Attractive valuation
Valuation has been depressed owing to a dispute between it and Pertamina on
access to pipelines and upstream acquisitions in Indonesia. This is creating a
buying opportunity, with the business additionally a hedge on declines in the
rupiah. Our Rp5,000 target price is based on PGAS as a going concern (70%
@ Rp5,500/sh based on 14.7% WACC) and an asset-injection case based on
terms outlined by Pertamina (30% @ Rp3,850/sh).

Perusahaan Gas - O-PF Back to Java


PGAS distribution volumes

Source: PGAS, CLSA
PGAS PE relative to JCI

Source: CLSA
PGAS distribution margins

Source: Company
423
578
792
824
795 807 805
785
727
618
35
85
135
64
95
150
230
827
884
915
962
983
0
200
400
600
800
1,000
1,200
07 08 09 10 11 12 13CL 14CL 15CL 16CL
(mmscfd)
Existing piped gas contracts New piped gas LNG
0.5
0.6
0.7
0.8
0.9
1.0
1.1
Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14
(x)
2.5 2.9
3.1
3.4
3.6
4.6 4.5 4.5
4.1 4.1 4.0
3.7
4.3 4.2 4.2
4.5 4.1
4.0
3.7
0
2
4
6
8
10
12
1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13
(US$/mmbtu) Purchase price ASP Cash margin
Volume growth
relies on LNG
Valuation attractive
to history

The value of the
business is in its
distribution margins



Price of gas relative to energy alternatives in Indonesia

PGAS distribution network length

Source: Company
PGAS pipeline addition

9.2
11.6
17.5 17.7 17.9
22.8
28
29.3
32.6
0
5
10
15
20
25
30
35
Current
gas ASP
ASP with
LNG blend
Current
LNG regas
LPG 50kg LPT Bulk Marine
Fuel Oil
Marine/
Industrial
Diesel
High
speed
Diesel
Gasoline
(88 RON)
(US$/mmbtu)
3,240
3,480
3,654
3,752
3,804
3,865
1,894
2,047 2,047 2,047 2,047 2,047
1,500
2,000
2,500
3,000
3,500
4,000
2007 2008 2009 2010 2011 2012
(km) Distribution Transmission
53
240
174
98
52
61
271
820
153
0 0 0 0 0
0
100
200
300
400
500
600
700
800
900
2007 2008 2009 2010 2011 2012 14-15 plan
(km) Additional distribution Additional transmission
Gas remains an
attractive source of
energy for industry
Network buildout
to reach more
distribution customers
After a couple of years
of no more pipelines,
we expect this to
change over 2014-15



Summary financials
Summary P&L forecast (US$m)
Revenue 2,230 2,576 3,119 3,300 3,647
Op Ebitda 1,072 1,185 1,194 1,228 1,283
Op Ebit 883 998 967 1,004 1,078
Other items (19) 144 102 124 78
Profit before tax 872 1,148 1,085 1,140 1,162
Taxation (170) (233) (206) (208) (211)
Net profit 681 891 845 897 915
Summary cashflow forecast (US$m)
Operating profit 883 998 967 1,004 1,078
Operating adjustments 28 (115) (66) (75) (25)
Working capital changes 50 203 (57) (1) 0
Net operating cashflow 912 1,139 903 996 1,052
Capital expenditure (78) (159) (350) (200) (50)
Free cashflow 834 979 553 796 1,002
Acq/inv/disposals (33) (91) (346) (621) 31
Net investing cashflow (76) (222) (665) (797) (3)
Increase in loans (419) (107) (108) (112) (96)
Dividends (450) (328) (490) (465) (493)
Net equity raised/other (57) (55) 0 - -
Net financing cashflow (925) (490) (598) (577) (590)
Incr/(decr) in net cash (89) 426 (360) (377) 460
Opening cash 1,231 1,141 1,567 1,208 830
Closing cash 1,141 1,567 1,208 830 1,290
Summary balance sheet forecast (US$m)
Cash & equivalents 1,141 1,567 1,208 830 1,290
Debtors 219 259 313 331 366
Inventories 2 2 4 4 4
Fixed assets 1,734 1,694 1,817 1,793 1,638
Other term assets 262 259 715 1,422 1,456
Total assets 3,400 3,908 4,184 4,508 4,884
Short-term debt 98 99 112 96 44
Creditors 61 189 276 298 343
Long-term debt/CBs 994 840 718 622 578
Ratio analysis
Ebitda growth (% YoY) (5.8) 10.6 0.8 2.8 4.4
Ebitda margin (%) 48.1 46.0 38.3 37.2 35.2
Dividend payout (%) 62.7 39.3 46.9 50.5 57.7
Net debt/equity (%) (2.6) (26.7) (13.9) (3.6) (18.8)
ROE (%) 41.9 45.3 35.6 32.4 28.6
ROIC (%) 34.1 39.3 35.1 28.9 28.3
EVA
/IC (%) 22.2 27.4 23.2 17.0 16.4

Source: CLSA
High return on
invested capital
Net cash position
Strong free cashflow
generator, even post
capex and acquisitions
Profit growth of
about US$50m pa

Sritex
Rp299 - BUY

Financials
Revenue (Rpbn) 3,563 4,114 5,816 7,097 8,162
Net profit (Rpbn) 161 229 358 494 641
EPS (Rp) 12.43 17.65 22.02 26.58 34.47
CL/consensus (2) (EPS%) - - 105 105 104
EPS growth (% YoY) 13.6 42.0 24.8 20.7 29.7
PE (x) 24.1 16.9 13.6 11.2 8.7
Dividend yield (%) 0.0 0.0 0.0 1.6 2.2
FCF yield (%) (22.0) (11.7) (24.7) 4.0 5.4
PB (x) 3.6 2.9 1.9 1.6 1.4
ROE (%) 17.9 19.0 16.6 15.5 17.5
Net debt/equity (%) 111.0 125.4 54.2 43.1 32.2
Source: CLSA
Stifanus Sulistyo
stifanus.sulistyo@clsa.com
+62 21 2554 8819

5 February 2014
Indonesia
Consumer

Reuters SRIL.JK
Bloomberg SRIL IJ

12M hi/lo Rp300/196

% potential +32%


Market cap US$455m

Rp7.9bn (US$0.7m)

Major shareholders
Huddleston Indonesia 56.1%
HM Lukminto 0.1%

1M 3M 12M
Absolute 24.6 8.7 0.0
Relative 21.4 15.2 0.0
Abs (US$) 24.8 (0.8) 0.0

Source: Bloomberg
www.clsa.com
80
90
100
110
120
130
140
180
200
220
240
260
280
300
320
Jun 13 Aug 13 Nov 13 Jan 14
Sritex (LHS)
Rel to Comp
(%) (Rp)

Knitting Java
Sritex is a beneficiary of rising economic activity in Java ex-Jakarta in the
form of improving infrastructure facilities and labour productivity. The
textiles and garment manufacturer has deep roots in Java. Established in
1966 in Central Java, it now employs about 16k workers, creating a local
economy for the surrounding areas. Sritex is expanding to meet
increasing demand. Risk is rising faster than expected labour costs. BUY.
Rising economic activity to improve infrastructure and labour
Demand for textiles is coming to Indonesia, however it is in bulk. The size of
operation and infrastructure are typically the key hurdles for Indonesian
textile manufacturers to capture incoming demands. Rising Java ex-Jakarta
economic activity should eventually translate to better infrastructure and
labour productivity. Currently, Indonesian textile labour productivity is lower
than that in China.
Deep local root in Central Java
The company has deep roots in Central Java. As a testimony to this, during the
social unrest in 1997-98, the locals united to defend the factory from rioters.
Sritex runs an integrated production facility in Central Java, established 47
years ago, and now employs 16k workers. The founder started from a small
fabric trading company in a local market. The presence of a Sritex facility
benefits the surrounding area by creating a local economy. The family members
are prominent figures in Solo, where the company was founded.
Risks, but deep local root mitigate
Growing economic activity also brings in some risks for Sritex in the form of
rising costs and labour availability. We believe that cost increase will be
modest and compensated with the increase in productivity. While on the
labour availability issue, the companys deep local roots as well as its local
brand equity will allow it to attract the best talent.
Growing through cost competitiveness
Sritex now operates two production facilities, both located in Central Java
(Solo and Semarang), which bodes well given our investment theme of Java
ex-Jakartas rising economic activity. We see Sritex as a growth-driven stock
and expect it to deliver a 41% earnings Cagr over 2013-15. Our SOTP-
derived target price of Rp395/sh implies 11.5x 15CL PE and 32% upside, and
we reiterate our BUY call.

Sritex - BUY Back to Java

102 stifanus.sulistyo@clsa.com 5 February 2014
Sritexs margin Sritex established since 1966 in Solo traditional market

Source: CLSA, Company Source: CLSA
Worlds top 30 terminals
Rank (m TEU) 2008 2009 2010 2011
1 Shanghai, China 27.9 22.5 29.1 31.7
2 Singapore 29.9 25.9 28.4 29.4
3 Hong Kong 24.5 21.0 23.7 24.4
4 Shenzhen, China 21.3 18.1 22.5 22.6
5 Busan, South Korea 13.5 12.0 14.2 16.2
6 Ningbo, China 11.2 10.4 13.1 14.6
7 Guangzhou, China 10.8 11.0 12.6 14.1
8 Qingdao, China 10.0 10.3 12.0 13.0
9 Dubai, UAE 11.8 11.1 11.6 13.0
10 Rotterdam, Netherlands 10.8 9.7 11.1 11.9
11 Tianjin, China 8.5 8.7 10.1 11.6
12 Kaohsiung, Taiwan China 9.7 8.6 9.2 9.6
13 Port Klang, Malaysia 8.0 7.3 8.9 9.6
14 Hamburg, Germany 9.7 7.0 7.9 9.0
15 Antwerp, Belgium 8.7 7.3 8.5 8.6
16 Los Angeles, US 7.8 6.7 7.8 7.9
17 Tanjung Pelepas, Malaysia 5.6 6.0 6.5 7.5
18 Xiamen, China 5.0 4.6 5.8 6.5
19 Dailan, China 4.5 4.6 5.3 6.4
20 Long Beach, US 6.5 5.1 6.3 6.1
21 Bremen, Germany 5.5 4.5 4.9 5.9
22 Laem Chabang, Thailand 5.1 4.6 5.2 5.7
23 New York, US 5.3 4.6 5.3 5.5
24 Tanjung Priok, Indonesia 4.0 3.8 4.7 5.0
25 Lianyungyung, China 3.0 3.0 3.9 4.8
26 Jawaharlal Nehru Port, India 4.0 4.1 4.3 4.3
27 Valencia, Spain 3.6 3.7 4.2 4.3
28 Colombo, Sri Lanka 3.7 3.5 4.1 4.3
29 Tokyo, Japan 4.2 3.7 4.3 4.2
30 Ho Chi Minh, Vietnam 3.4 3.4 4.1 na
Source: Containerisation International
9
10
11
11
11
11
12 12
12 11
13
16
16
16
25
33
32 32
30
15
20
25
30
35
40
4
6
8
10
12
14
16
18
2011 2012 13CL 14CL 15CL
Spinning Weaving
Dyeing/Finishing Garment (RHS)
(%) (%)
11
China ports rank high
(11 out of 30) on worlds
top 30 container terminals
Indonesia only managed
to list one of its port
in the worlds
top-30 terminals . . .
. . . compare to China
which managed to list 11
We believe that Sritexs
competitiveness towards
Chinese textile will
improve along with
infrastructure
development in Java


5 February 2014 stifanus.sulistyo@clsa.com 103

Indonesias textile and garment enterprise units far below China, 2011

Source: CEIC
Indonesia only accounts for 1.8% of world total clothing export

Source: WTO
Asia labour costs comparison

Source: CLSA, Jetro survey of Japanese affiliated companies in Asia and Oceania (Oct-Dec 2012)
22,945
11,750
2,645
2,087
0
5,000
10,000
15,000
20,000
25,000
China textile China garment Indo textile Indo garment
(No. of enterprises)
0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012
China Bangladesh India Vietnam EU 28 Others Indonesia (%)
345
344
328
290
253
229
145
94
74
53
250
117
0 50 100 150 200 250 300 350 400
Thailand
Malaysia
China
India
Philippines
Indonesia - Jakarta
Vietnam
Indonesia - Sukoharjo
Cambodia
Myanmar
(US$/month)
2013
14CL
Coming from a small base,
relocation from China will
trampoline Indonesias
textile industry
Java is one of the best
candidates for textile-
garment relocation
Competitive labour costs
in Central Java, only next
to Cambodia and Myanmar


104 stifanus.sulistyo@clsa.com 5 February 2014

Summary financials
Revenue 3,563 4,114 5,816 7,097 8,162
Op Ebitda 434 581 798 1,003 1,220
Op Ebit 347 469 665 835 1,010
Other items 13 (7) (5) (4) (3)
Profit before tax 219 307 477 659 855
Taxation (58) (78) (119) (165) (214)
Minorities/Pref divs 0 0 0 0 0
Net profit 161 229 358 494 641
Operating profit 347 469 665 835 1,010
Operating adjustments - - - - -
Net operating cashflow (268) 317 211 347 667
Free cashflow (856) (455) (1,203) 221 303
Int, invt & associate div 14 12 (69) 26 25
Net investing cashflow (574) (760) (1,483) (100) (340)
Dividends 0 0 0 (90) (124)
Net equity raised/other 237 (2) 1,310 0 0
Net financing cashflow 884 443 1,463 (246) (351)
Incr/(decr) in net cash 43 (1) 192 2 (23)
Opening cash 27 70 69 261 263
Closing cash 70 69 261 263 240
Debtors 194 307 367 444 509
Inventories 765 979 1,278 1,639 1,871
Fixed assets 1,682 2,056 3,337 3,295 3,450
Intangible assets - - 85 85 85
Total assets 2,747 3,554 5,469 5,868 6,295
Short-term debt 784 951 827 717 621
Creditors 243 301 382 466 531
Long-term debt/CBs 501 778 1,055 1,009 877
Ratio analysis
Ebitda margin (%) 12.2 14.1 13.7 14.1 15.0
Dividend payout (%) 0.0 0.0 0.0 18.1 19.3
Net debt/equity (%) 111.0 125.4 54.2 43.1 32.2
ROE (%) 17.9 19.0 16.6 15.5 17.5
ROIC (%) 13.9 12.9 12.9 13.1 14.9
EVA
/IC (%) 2.1 1.2 1.2 1.3 3.1

Source: CLSA
2013-15CLs revenue Cagr
of 26% on the back of
capacity expansion that . . .
. . . caused negative free
cashflow in 2011-13CL
Healthier gearing post
IPO in mid-2013
Margin support on higher
garment segment
contribution and
deleveraging effect

Telkom
Rp2,150 - BUY

Financials
Revenue (Rpbn) 71,253 77,143 82,989 90,782 98,167
Net profit (Rpbn) 10,965 12,850 14,386 15,617 16,950
EPS (Rp) 111.94 133.84 142.72 154.93 168.15
CL/consensus (21) (EPS%) - - 95 95 98
EPS growth (% YoY) (4.6) 19.6 6.6 8.6 8.5
PE (x) 19.2 16.1 15.1 13.9 12.8
Dividend yield (%) 3.5 4.1 4.3 4.7 5.1
FCF yield (%) 8.2 9.6 8.6 9.7 10.7
PB (x) 4.5 4.1 3.5 3.1 2.7
ROE (%) 24.2 26.3 25.3 23.4 22.7
Net debt/equity (%) 13.5 9.2 0.3 (5.0) (10.3)
Source: CLSA
Clare Chin
clare.chin@clsa.com
+60 3 2056 7878
Robert Pranata
+62 21 2554 8825

5 February 2014
Indonesia
Telecoms

Reuters TLKM.JK
Bloomberg TLKM IJ
ADR TLK.N

12M hi/lo Rp2,480/1,910

% potential +16%



Rp339.3bn (US$28.5m)

Major shareholders
Republic of Indonesia 53.7%

1M 3M 12M
Absolute 1.2 (1.1) 9.7
Relative (1.4) 4.8 12.6
Abs (US$) 1.3 (9.8) (13.5)

Source: Bloomberg
www.clsa.com
90
100
110
120
130
140
150
160
170
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
Telkom (LHS)
Rel to Comp
(%) (Rp)

Covering Java
Telkom has 65k base transceiver stations (BTS) across Indonesia and
leverages off its parents extensive fibre-transmission network to ensure
superior network quality, especially in Java. With this, it can charge
premium pricing. Weak and distracted competitors will provide a golden
opportunity for Telkom to gain revenue market share. Telkom has high
ROIC that will rise to 27.1% by 15CL. It has one of the highest ROIC in
Asean, while EV/Ebitda and PE multiples are the lowest. We are BUYers.
Outspends its peers
Telkom has 65k BTS across Indonesia comprising 42k and 23k 2G and 3G
stations. Out of this, 45% are located in Java, which reinforces its dominant
position there. Telkom is also able to tap on its parents extensive fibre-
transmission network, which ensures superior network quality, especially in
Java. Still we expect Telkom to spend heavily on capex at Rp18tn pa,
outspending its competitors by a ratio of 2:1.
Premium pricing
With superior network quality, Telkom charges premium pricing too. Its voice
tariff is Rp1,800/min, which is 80-200% more expensive than peers.
Similarly, Telkoms data plans are priced at Rp5/kb, 5x more expensive than
rivals. Its SMS tariffs are on par with competitors at Rp150/SMS.
Golden opportunity
We expect Telkom to gain revenue market from 58.9% in 13CL to 59.7% by
15CL. This is a golden opportunity for Telkom as Indosats falling revenue
market share could turn into a vicious cycle of weak FCF and persistently poor
quality network, leading to further subscriber churn. As for XL, it could be
distracted with its potential acquisition of Axis in the near term. XL
management efforts will be focused on integrating networks, streamlining
distribution networks, realigning cost structures and rebranding.
The dominator
Telkom has a dominant position in Indonesias telecoms sector, and we value
the stock at Rp2,500. Our DCF-derived target price uses WACC of 11.7% and
terminal growth of 2%. Telkom has high ROIC that will rise to 27.1% by
15CL. It has one of the highest ROICs in Asean, while EV/Ebitda and PE
multiples are the lowest. We rate the stock a High-Conviction BUY.

Telkom - BUY Back to Java

106 clare.chin@clsa.com 5 February 2014
Indo telco subscribers

Big three revenue market share

Big Three number of BTS

Source: CLSA, companies
0
5
10
15
20
25
0
50
100
150
200
250
300
2009 2010 2011 2012 13CL 14CL 15CL
(m)
Telkom Indosat XL YoY growth (RHS) (%)
0
10
20
30
40
50
60
70
2010 2011 2012 13CL 14CL 15CL
Telkom Indosat XL (%)
42,215
28,074
18,214
23,438
14,722
4,993
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Telkom XL Indosat
(BTS)
2G 3G
Telkom revenue market
share to rise to
59.7% by 15CL
Telkoms advantage is
reflected in its large
number of BTS
Telkoms subscriber base
to deliver three-year
Cagr of 5.6%


5 February 2014 clare.chin@clsa.com 107

Big Three spectrum

Big Three capex spending

Big Three capex/sales

Source: CLSA, companies
0
5
10
15
20
25
30
35
40
45
50
Telkom Indosat XL XL-Axis
(post merger)
(Mhz)
900MHz (2G) 1800MHz (2G) 2100MHz (3G)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2012 13CL 14CL 15CL
(Rpbn) Telkom Indosat XL
0
10
20
30
40
50
60
2012 13CL 14CL 15CL
(%)
Telkom Indosat XL
Telkom benefits from
parents capex on
transmission and towers
Despite its large capex,
Telkoms capex/sales
ratio is the lowest
XL will be busy
integrating Axis


108 clare.chin@clsa.com 5 February 2014

Summary financials
Revenue 71,253 77,143 82,989 90,782 98,167
Op Ebitda 36,821 40,154 43,769 47,443 50,961
Op Ebit 21,958 25,698 28,492 30,595 32,424
Interest income 546 596 721 1,238 1,428
Other items (10) (11) 0 0 -
Taxation (5,387) (5,866) (6,772) (7,378) (8,001)
Minorities/Pref divs (4,505) (5,512) (5,931) (6,516) (7,052)
Net profit 10,965 12,850 14,386 15,617 16,950
Operating adjustments (10) (11) 0 0 0
Depreciation/amortisation 14,863 14,456 15,277 16,848 18,537
Working capital changes (236) (692) (331) 205 218
Net interest/taxes/other (6,022) (11,510) (8,175) (8,462) (8,422)
Net operating cashflow 30,553 27,941 35,263 39,185 42,757
Capital expenditure (13,197) (8,221) (16,598) (18,156) (19,633)
Free cashflow 17,356 19,720 18,666 21,029 23,123
Acq/inv/disposals (1,308) (3,090) - - -
Int, invt & associate div - - - - -
Net investing cashflow (14,505) (11,311) (16,598) (18,156) (19,633)
Increase in loans (4,378) (836) (1,904) (1,906) (4,480)
Dividends (9,102) (10,734) (13,247) (14,358) (15,519)
Net equity raised/other (2,059) (1,744) 2,409 0 0
Net financing cashflow (15,539) (13,314) (12,742) (16,264) (19,999)
Incr/(decr) in net cash 509 3,316 5,924 4,765 3,124
Exch rate movements 5 168 0 0 0
Opening cash 9,120 9,634 13,118 19,042 23,807
Closing cash 9,634 13,118 19,042 23,807 26,931
Debtors 5,250 5,223 5,809 6,355 6,872
Inventories 758 579 830 908 982
Other current assets 5,616 9,053 9,234 9,419 9,607
Fixed assets 74,897 77,047 84,109 88,844 93,465
Intangible assets 1,856 1,532 1,518 1,503 1,489
Total assets 103,054 111,369 125,372 135,679 144,202
Short-term debt 4,913 5,658 5,601 5,545 5,490
Creditors 8,354 7,456 7,962 8,791 9,599
Other current liabs 8,922 10,993 11,415 11,857 12,320
Long-term debt/CBs 12,958 13,617 13,713 13,807 11,327
Provisions/other LT liabs 6,926 6,667 6,734 6,801 6,869
Minorities/other equity 14,137 16,155 17,236 18,392 19,629
Ratio analysis
Ebitda growth (% YoY) (1.9) 9.1 9.0 8.4 7.4
Ebitda margin (%) 51.7 52.1 52.7 52.3 51.9
Dividend payout (%) 66.3 65.2 65.0 65.0 65.0
Net debt/equity (%) 13.5 9.2 0.3 (5.0) (10.3)
ROE (%) 24.2 26.3 25.3 23.4 22.7
ROIC (%) 22.5 26.2 26.8 26.8 27.1
EVA
/IC (%) 11.7 15.4 16.0 16.0 16.3

Source: CLSA
Revenue growth is
7-9% per annum
Entering a 3G
capex cycle
Sub-optimal
balance sheet
Rising ROIC

Wijaya Karya
Rp1,835 - BUY

Financials
Revenue (Rpbn) 7,843 10,014 12,673 16,148 19,202
Net profit (Rpbn) 354 458 575 805 1,070
EPS (Rp) 58.94 75.47 93.89 131.04 174.28
CL/consensus (6) (EPS%) - - 101 116 133
EPS growth (% YoY) 22.5 28.0 24.4 39.6 33.0
PE (x) 31.1 24.3 19.5 14.0 10.5
Dividend yield (%) 0.9 1.0 1.2 1.5 2.2
FCF yield (%) 4.6 (0.7) (15.0) (1.1) 3.0
PB (x) 5.3 4.4 3.6 2.9 2.3
ROE (%) 18.3 19.7 20.2 22.9 24.1
Net debt/equity (%) (35.5) (8.8) 39.0 34.3 21.6
Source: CLSA
Hendy Soegiarto
hendy.soegiarto@clsa.com
+62 21 2554 8832

5 February 2014
Indonesia
Infrastructure

Reuters WIKA.JK
Bloomberg WIKA IJ

12M hi/lo Rp2,875/1,460

% potential +28%


Market cap US$922m

Rp33.4bn (US$2.8m)

Major shareholders

1M 3M 12M
Absolute 16.1 (10.5) 9.2
Relative 13.2 (5.1) 12.1
Abs (US$) 16.3 (18.4) (13.8)

Source: Bloomberg
www.clsa.com
50
100
150
200
250
300
350
500
1,000
1,500
2,000
2,500
3,000
Feb 12 Oct 12 May 13 Jan 14
Wijaya Karya
Rel to Comp (RHS)
(Rp) (%)

Building Java
Wijaya Karya will benefit from more construction activity in Java. The
company will profit from several channels: civil and EPC projects and
orders for its pre-cast concrete products (its factories are mostly located
in Java). Of the construction contracts won in 9M13, about 34% came
from Java. Wijaya Karya is our top pick in construction due to its better
execution track record among peers. The stock is trading at 11x, versus
peers at 10x. Our Rp2,350 target is based on 13.5x 15CL PE. BUY.
Exposure to Java
The government and private-sector push for more infrastructure in Java will
benefit the construction sector. The government has several aggressive plans
to build infrastructure in the island such as the Giant Sea Wall, Sunda Strait
Bridge, and Jakarta-Surabaya Toll Road. The company derived about 34% of
construction contracts in 9M13 from Java Island.
Supplying pre-cast for Java development
Wijaya Karyas competitive advantage includes its 2mtpa pre-cast concrete
factory capacity. Some 75% of its concrete capacity is located in Java with
most of it supplying civil construction such as toll roads. The company
currently has eight factories in Indonesia, five of which are located in Java. Its
pre-cast concrete products are used for foundation poles, civil structures and
pipe racks.
Investing in Java toll road minority stake
The company has also invested in two toll roads as a minority investor:
Surabaya-Mojokerto with 20% and Kunciran-Cengkareng with 2%. Its
strategy is to invest in prospective toll-road projects to get the construction
contract for the project. The development and eventual resolution of land-
acquisition issue in Java will provide additional upside.
Diversified business model
Wijaya Karya has the best execution among SOE contractors which tend to
benefit given extensive presence in pre-cast concrete and civil construction in
Java. The stock is currently trading at 11x 15CL PE, compared to peers at 10x.
Our Rp2,350 target price is based on 13.5x 15CL PE on rising confidence in the
companys ability to obtain new contracts post-election. Our 13.5x target
multiple is on a slight premium versus historical, justified by its more stable
business mix than in the past (diversification story). BUY.

Wijaya Karya - BUY Back to Java


9M13 EPC and construction orderbook by location

Pre-cast capacity by location

Construction services GP margin

Source: CLSA
Java
34%
Ex-Java
66%
Java
74%
Others
26%
7.1
7.3
8.0
8.2
5.6
6.5
11.6
9.6
8.6
9.1
0
2
4
6
8
10
12
14
2004 2005 2006 2007 2008 2009 2010 2011 2012 9M13
(%)
Java is only 34% of
new contracts
The companys high
capacity in Java will
enable it to tap into new
projects in the area
GP margin might be
impacted slightly by the
foreign-exchange rate



New orderbook growth

Source: CLSA
Revenue breakdown

Cost breakdown

Source: Company
24.2
33.8
14.1
(0.3)
32.7
26.2
20.0
15.0
(5)
0
5
10
15
20
25
30
35
40
0
5,000
10,000
15,000
20,000
25,000
2006 2007 2008 2009 2010 2011 2012 13CL 14CL
(Rpbn) Growth (RHS) New orderbook (%)
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 9M13 13CL
Construction services Sales of electricity Eletrical mechanical
Concrete product Realty product Manufacturing and trading
(%)
Steel
10%
Concrete
10%
Cement
10%
Other
Materials
20% Wage
10%
Equipments
10%
Sub Con
30%
We expect 15% new
orderbook in 14CL
Earnings becoming
more diversified with
construction services
representing a smaller
proportion each year
Some of the companys
raw material is indirectly
linked to US$



Summary financials
Revenue 7,843 10,014 12,673 16,148 19,202
Op Ebitda 712 930 1,354 1,735 2,132
Op Ebit 654 845 1,172 1,519 1,883
Other items (43) (38) (20) (20) (20)
Profit before tax 630 808 1,005 1,361 1,743
Taxation (239) (303) (373) (476) (566)
Net profit 354 458 575 805 1,070
Operating profit 654 845 1,172 1,519 1,883
Operating adjustments - - - - -
Working capital changes 463 313 (692) (607) (483)
Net operating cashflow 804 415 92 481 940
Free cashflow 512 (82) (1,688) (119) 340
Acq/inv/disposals (220) (154) - - -
Int, invt & associate div (269) (381) 129 (4) (11)
Net investing cashflow (781) (1,031) (1,651) (604) (611)
Dividends (119) (129) (138) (173) (243)
Net equity raised/other 19 204 114 160 213
Net financing cashflow (6) 871 629 (323) (340)
Incr/(decr) in net cash 17 255 (929) (446) (11)
Opening cash 1,228 1,244 1,499 570 124
Closing cash 1,244 1,499 570 124 112
Cash & equivalents 1,244 1,499 570 124 112
Debtors 2,372 2,814 3,537 4,501 5,342
Inventories 873 1,138 1,424 1,805 2,137
Other current assets 952 1,439 1,612 1,985 2,311
Fixed assets 1,878 2,820 4,417 4,802 5,153
Intangible assets 5 5 5 5 5
Total assets 8,323 10,945 13,117 14,758 16,535
Short-term debt 206 321 787 787 787
Creditors 2,119 2,529 3,164 4,012 4,749
Other current liabs 2,802 3,677 3,846 4,078 4,281
Long-term debt/CBs 251 931 1,118 808 499
Ratio analysis
Ebitda margin (%) 9.1 9.3 10.7 10.7 11.1
Dividend payout (%) 29.0 23.3 24.0 21.5 22.7
Ebitda/net int exp (x) - - 9.2 12.5 17.6
Net debt/equity (%) (35.5) (8.8) 39.0 34.3 21.6
ROE (%) 18.3 19.7 20.2 22.9 24.1
ROIC (%) 24.1 20.8 17.5 16.8 18.7
EVA
/IC (%) 10.5 7.2 3.8 3.1 5.0

Source: CLSA
Revenue growth is driven
by previous new
contract signed
Companys diversification
drives up margin

Appendices Back to Java


Appendix 1: GDP by sector
Jakarta GDP by sector (2012)

Banten GDP by sector (2012)

West Java GDP by sector (2012)

Source: BPS, CLSA
Agriculture,
plantation, animal
husbandry and
forestry
0.1%
Mining and
excavation
0.5%
Processing
industry
15.6%
Electricity, gas and
water supply
1.0%
Construction
11.5%
Trade, hotel and
restaurant
20.8%
Transportation and
communication
10.3%
Finance, leasing
and business
services
27.6%
Services
12.6%
Agriculture, plantation,
animal husbandry
and forestry
7.3%
Mining and
excavation
0.1%
Processing
industry
48.1%
Electricity, gas
and water supply
3.7%
Construction
2.9%
Trade, hotel
and restaurant
20.3%
Transportation and
communication
9.5%
Finance, leasing
and business services
3.7%
Services
4.4%
animal husbandry
and forestry
12%
Mining and
excavation
2%
Processing
industry
41%
Electricity, gas and
water supply
2%
Construction
4%
Trade, hotel and
restaurant
23%
Transportation and
communication
5%
Finance, leasing and
business services
4%
Services
7%
Processing industry and
trading are key drivers
Finance and trading are
key drivers



Central Java GDP by sector (2012)

East Java GDP by sector (2012)

Source: BPS, CLSA
animal husbandry
and forestry
18%
Mining and
excavation
1%
Processing
industry
33%
Electricity, gas
and water supply
1%
Construction
6%
Trade, hotel and
restaurant
22%
Transportation and
communication
5%
business services
4%
Services
10%
animal husbandry
and forestry
14%
Mining and
excavation
2%
Processing
industry
25%
Electricity, gas
and water supply
1%
Construction
3%
Trade, hotel
and restaurant
33%
Transportation and
communication
8%
business services
5%
Services
9%
Trading and processing
industry are key drivers



Appendix 2: Reformist leaders profile
Jakarta Governor, Joko Jokowi Widodo
Joko Widodo, better known as Jokowi, is Jakartas current governor. He was
previously the mayor of Solo from 2005 to 2012. Jokowi is a small furniture
entrepreneur; coming from a humble background and not from the political
establishment. Many see him as the embodiment of change.
As the mayor of Solo, he moved pushcart traders and traditional sellers to a
special built zone. He also applied for Solo to become a member of the
Organization of World Heritage Cities. Approved in 2006, the city hosted the
organizations conference in October 2008. In 2007, Solo hosted the World
Music Festival at Fort Vastenburg Complex. It is worth nothing that Fort
Vastenburg was to be bulldozed and replaced by a business centre and
shopping mall.
He stood up against Central Java governor and former general Bibit Waluyo
refusing a mall construction project to save the Sari Petojo heritage building.
The case propelled him into national media. As Jakartas governor, Jokowi
continue to rise as he did well in two cases, Tanah Abang market and Pluit
dam. In Tanah Abang, Jokowi managed to resettle more than 700 street
vendors from the street to the upper floors of a market building called block
G. These vendors have been a problem for Jakarta for decades.
Pluit dam, which was built in 1983 and protects the area from flood, was
shrinking in size due to thousands of squatters setting up houses around the
rivers banks. Jokowi addressed the problem by instituting a rehabilitation project
relocating squatters to low-cost housing apartments and rehabilitating the slums
around Pluit. On top of all that, he started a free healthcare programme that
created a stir from the hospitals, he removed bureaucrats who failed to deliver
services, and he stood with the people and against the incompetent.
In a reliable poll, Jokowi has 88% approval ratings and virtually all (97%)
regards him as diligent. Many presidential polls put him as the clear winner if
the election was held today and he has not decided whether to run or not. He
has smartly said that he wants to finish his term as Jakarta governor and
focus on Jakartas myriad problems first. This is a brilliant move as it is
always good to be seen as humble and not too ambitious in Indonesia.
Surabaya Mayor Tri Rismaharini
Dubbed Indonesias best-kept secret by the Huffington Post, Tri Rismaharini is
Surabayas first female mayor. Better known as Mother Risma, Surabayas
mayor is part of rising regional leaders who have attracted public attention for
their siding with the people.
Risma was an architectural major who in 2005 rose to prominence as the
head of the city parks department. Before her tenure, Surabaya was known
as being hot, dusty and crowded. Since she took the helm of the city, she has
transformed Surabaya into a leafy metropolis. The daughter of a small
business owner, she was elected in 2010 with 41% of the votes versus her
closest opponent of 36%.
On her second day in office, she visited the Vice-Presidents office to talk
about a critical port development project that has been put off for decades.
Despite being brushed off, she refused to leave until she met the Vice
President. The port groundbreaking happened a week after that.



Like Jokowi, Risma also prefers a hands-on approach. During early mornings,
she can often be found picking up trash along the roadside. She once got out
of her car and directed the traffic herself. At night, she would go to the parks
and scold underage teenagers for breaking the curfew.
At her watch, she transformed brothels into kindergartens and converted old
gas stations into parks and playgrounds, winning Surabaya Adipura Kencana,
the highest environment award in the country. She not only wants to develop
the citys economy and infrastructure but also its people through spending 35%
of Surabayas budget on education, far higher than the national standard.
Bandung Mayor Ridwan Kamil
Ridwan Kamil, an architect from University of California - Berkeley, was
elected in June 2013 as the mayor of Bandung, Indonesias third-largest city
and the capital of Indonesias most populated province. When the 41-year-old
mayor decided to run as Bandungs Mayor earlier in March, he was polling at
a lowly 6%. A few months later, he won the election with 45% of the votes in
a seven-horse race; the closest rival got 18% votes.
After a brief period of studying and working in the USA, he went back to
teach at his alma mater Bandung Institute of Technology and then established
an architectural firm called Urbane, short for urban revolution.
After a month after taking office, Ridwan wants to get the beggars off the
streets by offering them a job as municipal cleaners. He also persuaded the
military to participate in the cleanliness programme with 1,000 troops going
to the streets to help clean up. He wants a park in every neighborhood and an
urban garden in every new building.
In his five-year term, he plans to double the citys infrastructure budget,
expand the bike scheme from 75 to 15,000 two-wheelers, revamp the ailing
bus system, build a proper form of mass transport in the city and establish
100 new parks and playgrounds. A very daunting task given the civil service
is notoriously bureaucratic and riddled with corruption.




Appendix 3: The rise of online traders
Interview with online stock traders
The first person is a retired medical doctor. The second is a salesperson like
myself (but selling real stuff). The last person is a security guard turned
stock trader.
Q: When did you start trading? Are you a full-time trader?
Retired doctor: In 2009 and I am now a full time investor. Honestly, it was not
that difficult for me to leave my career as a medical doctor. It is not easy to
compete with young doctors. I knew my career as a medical doctor has ended
when I prescribed a medicine for a patient and the patient came back to me
and told me that the medicine that I prescribed is no longer produced. Thats
it for me. Time to move on.
Salesperson: Directly trading since 2009. Previously I had my brother doing
the investing for me. I am still working as a salesperson, but my working
hour is rather flexible.
Security guard: In 2009. An yes, I am a full time trader although until now I
am still working full time as a security guard, doing night shift.
Q: Do you read news? Do you follow what foreign investors are doing
in the market?
Retired doctor: Yes, I make sure I read all the newspaper and magazine that
I could get my hands on. I read every morning. I also read research reports
and follow what foreign brokers are doing. I am a fundamental and long
term investor.
Salesperson: Yes, I tried to follow news and I do follow what institutional
investors are doing.
Security guard: No, I dont care what foreign brokers are doing and I dont
follow news that closely.
Q: Do you trade everyday?
Retired doctor: Yes.
Salesperson: Yes.
Security guard: Every day is an understatement, I trade every hour.
Q: How long do you usually hold your position?
Salesperson: Hard to say. It depends on the position. I have stocks that I get
in and out within hours and there are other stocks that I hold for a few days.
Security guard: Few hours at most, I dont really carry a position to the next day.
Retired doctor: I am different, I am a long term investor and I hold my
position longer. My holding period is around . . . 3 days.
Q: Why are you using online trading?
Salesperson: My wife started trading stock online before I did. I love the
flexible nature of online trading. I could drop by when business is slow and
take a position in the morning from home. Plus, the minimum deposit
required is lower.
Three people were
being interviewed
All three started trading
in 2009
Some do follow
news, some dont
Some trade every day,
some even every hour
Long term investor is
holding portfolio for
few days only
All love online trading for
various reasons



Retired doctor: Agree, and you can also get some research reports and charts
from online brokerage services.
Security guard: The minimum deposit required is lower. It is good that I can
meet fellow traders, physically and on line, so that we can exchange ideas.
Special Q&A for our security trader turned a stock trader.
Q: Does your wife know what you are doing?
A: No, she does not even know what stock market is. As far as she knows,
I bring home extra money every month, so she thinks I must be doing
something productive.
Q: Can you tell us what makes you interested in stock trading?
A: Well, I am working as a security guard in a local stock brokerage office in
Semarang. One day I met an investor who just traded his motorcycle up for a
car. The investor told me that all that was possible thanks to stock trading.
This was about ten years ago. That was the trigger point. Since then I saved
up and keep on learning the secret of stock trading.
Q: Who do you learn it from?
A: From the stockbrokers in my office (comment: I know it is hard to believe,
but there could be a thing or two someone can learn from a stockbroker).
They initially discouraged me, afraid that I would be totally devastated if
I lose all of my hard earned money. But after they saw that I seriously
wanted to learn, they taught me about stocks.
Q: What is your style of investing?
A: I only want to get involved in the most speculative stocks or warrants.
I am looking at things that have gone up 9 points and then pulled back by 5
points. I would buy at that level and sell it back when the stock is up 3 points
from my entry level. My friend called this a poco-poco strategy. (Poco-poco is
the name of a traditional Indonesian dance).
Note: at this point, investors sitting next to him commented that his strategy
has been working very well. He got some sort of following now.
Q: Last question, you are trading full time during trading hour and
you work as a security guard at night. So, when do you sleep?
A: At night, when I am working as a security guard.

Their wives have no idea.
Extra money is enough
Stock trading is a
game changer
Learning from
stockbrokers
Only get involved in the
most speculative stocks
Security guard
sleeping at night???

Back to Java


Notes


Back to Java


Notes


Back to Java


Notes

Back to Java


Companies mentioned
Ace Hardware (ACES IJ - RP710 - OUTPERFORM)
BCA (BBCA IJ - RP9,800 - OUTPERFORM)
BTN (BBTN IJ - RP900 - BUY)
Indocement (INTP IJ - RP20,225 - BUY)
Kalbe Farma (KLBF IJ - RP1,355 - BUY)
Pakuwon (PWON IJ - RP303 - BUY)
Perusahaan Gas (PGAS IJ - RP4,560 - OUTPERFORM)
Sritex (SRIL IJ - RP299 - BUY)
Telkom (TLKM IJ - RP2,150 - BUY)
Wijaya Karya (WIKA IJ - RP1,835 - BUY)


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01/01/2014
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Indonesia market

/IC (%) 19.0 20.4 13.1 13.3 14.7

/IC (%) 21.3 31.8 31.7 27.2 22.5

/IC (%) 23.4 20.9 17.0 16.0 17.8

/IC (%) (0.9) 4.4 8.8 10.5 14.0

/IC (%) 22.2 27.4 23.2 17.0 16.4

/IC (%) 2.1 1.2 1.2 1.3 3.1

/IC (%) 11.7 15.4 16.0 16.0 16.3

/IC (%) 10.5 7.2 3.8 3.1 5.0

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