CLSA INDO: nickel downgrades, INCO UPF, ANTM SELL

"If a government is determined to create inflation and negative realinterest rates, there is really nothing standing in the way of its doing so," Marc Faber

Last report (Investing at the bottom) by our investment guru Russell Napier highlighted copper price as a particularly useful indicator in confirming the bottom for equities in the two near-deflationary recessions of 1982 and 2002.

Since then, copper prices had one of the most impressive rebound and so did equities especially those in emerging markets. One key conclusionfor equity investors is that they should be wary of buying any rebound inequities that coincides with a continued decline in the copper price, this has not happened yet.

In Russell's latest report "How the rally ends" (Must Read!!! ask me if you want a copy), he argues that we are in another rally in the long bear market that began in 2000. The last rally lasted from 2002-2007 and this current one should also last for a few years.

One can't call the end by using valuations or magnitudes of returns. Instead we must wait for inflation to claw its way back to around 4%. This report shows that inflation is a worry, but it is far too early in the business/reflation/ inflation cycle to worry now.

It is indeed likely that inflation and rising Treasury yields produce the next down leg in the bear market - but financial history strongly suggests that equities are major beneficiaries in that sweet spot when inflation rises from around zero to four percent.

To be frank in an era of global quantitative easing, almost nobody is likely to forecast exactly when and how rapidly inflation will return but equities will be dangerously extended when inflation nears 4%.

My best guess is that such a level will not occur until at least the end of 2010. Until that time, many other positives will develop for equity investors; and before inflation reaches 4% we will see economic and earnings recovery. Russell will be running through his new report on a conferance call this Thursday, 4pm HKT, details attached!

Research Today:
Nickel downgrades, INCO UPF, ANTM SELL Our analyst Olie revises down our earnings forecasts for both Inco (INCO IJ)and Aneka Tambang (ANTM IJ) by 30-60% mainly to reflect sustained weaknessin nickel demand.

INCO: downgrade to UNDER perform w/ Rp3,400 TP (from outperform, 2800).
ANTM: downgrade to SELL w/ Rp1,650 TP (from outperform,1300).
The new TPs are DCF-based. We continue to like in the medium to long-term prospect of INCO and expect the company to become bigger, adding 30% output, and better, lowering cost by 30%, within two years.

However,current valuation does not justify an O-PF. Upside on nickel price, thus earnings of both Inco Indonesia and Antam, hinges on US dollar direction, re-stocking of nickel inventory, and announcements of production cut and delays.

Soaring crude oil price, hencefuel cost, poses downside risk to earnings.What nickel prices are implied in the current share prices?

Current share prices imply a much higher LT nickel price than current spot,US$8.5/lb for ANTM and US$7/lb for INCO.

How do the nickel shares look relative to their historical trading ranges?

INCO was trading at its through-cycle multiple of 40x back in 1998/Asiancrisis and nickel price hit historic lows of US$2.0/lb, with low costssupply under way.

INCO and ANTM are currently trading at 68.5x and 91.2x of their 2009 earnings respectively, suggesting a 70% and 120% premium to the previous though cycle multiple, respectively.

Our earnings revision:Soaring oil prices poses more risk to INCO earnings as fuel cost accounts for 30% of the cash cost. Much less for ANTM due to higher gold contribution: 10% of the cash cost. How do our numbers look like compared to consensus? Our numbers are much lower than consensus. For INCO, we are 31% and 24%below consensus for 2009 and 2010, respectively.

For ANTM, our numbers are 75% below consensus for 2009 and 81% below consensus for 2010. I suspect this is mainly due to our much lower nickel price assumptions and highercost structure assumptions.

News Headlines/Others:
Government raises growth lending target for SOE banks. Currently, SOE banksare targeting around 14-17% full year lending growth for 2009.

This is likely to see upward revision to around 20%. Better than expected 1Q09 GDPgrowth showing a resilient economy is cited as a reason for the upgrade.

Bumi Resources (BUMI IJ) requests more time to review asset report. The coal miner has asked for more time to review the draft appraisal report by the independent valuer on the three acquisitions Bumi did recently.

The result will be announced by the end of this week.Three bidders for Elnusa (ELSA IJ). Pertamina, Ciptadana Securities, and consortium of Northstar and Saratoga Capital are vying for the 37.15% stake in Elnusa.

They have put in a bid price earlier this week. The winner will be announced next week. The last four months saw foreign inflows US$ 4bn.

Bank Indonesia officaisl report that foreign ownership in SBI (Indonesian T Bills) has increased by US$ 4bn in the last four months totaling Rp 89.04 tn (about US$9bn).UNESCO recognizes Batik as a world heritage.

The non-profit educational organization will recognize Indonesian batik as a world heritage in October2009. Local media reports that the city of Pekalongan in Central Java, long known as a batik center, has welcomed this award and hopes that this will give an additional boost to batik sales.

Indo-Premier still seeing an influx of new account openings. One of theInternet-based securities pioneer, Indo Premier Securities, now has around 12,000 customer accounts, reporting a fantastic 2300% growth since 2007 when the company had around 500 accounts.

Electricity installation fee to be raised. The SOE electricity company, PLN has introduced an immediate increase in its electricity installation fees upto 300% (range depending on the installed power capacity) for new customers in greater Jakarta area.

Under the new pricing structure, customers are responsible to help cover the cost for transmission of power from PLN'sclosest transmission tower to their house. Govt to inject Rp 50 bn to SOW sugar firms.

The Ministry of Industry has agreed to inject Rp50bn subsidy to SOE sugar firms, aiming to revitalize the sugar industry and attain self-sufficiency by 2014.

The financial support will be in the form of 10% subsidy for every machine purchased by nine SOE sugar companies including Perkebunan Negara and subsidiaries.

One term applied is the machines must be entirely assembled in Indonesia with min 40% local content.

Direct Cash Disbursement (BLT) may be discontinued next year. The govt plans to stop distributing the Direct Cash Disbursement next year. However, govt says that the BLT program may still be retrieved if there is an extraordinary event such as increase in fuel price that disturb povertyeradication.

Bank Central Asia (BBCA IJ) update.
Trading CUM-DIVIDEND for 65/sh today. Key Indicators: JCI: 2,056.65 -22.28 (-1.07%), T/O US$481.47 mil, YTD: +51.74%

ADR: TLKM US$ 30.63 = IDR 7,677 ISAT US$ 26.20 = IDR 5,253.
The market broke an 8-day winning streak as profit taking took hold yesterday afternoon. But support still very strong, and we could expect the market to revert back to its bullish mode.

Foreign investors have stepped upto the plate recently, and their participation level has increased (to around 25%) as fund inflows continue.We are 2.5x better buyer as of this morning.

Charts of the Day: Indonesia vs. Asia, New Buy Signal, from Laurence Balanco Overweight - Our decision to Overweight Indonesia ahead of the mechanicalbuy signal has been vindicated.

This signal which followed the break above resistance provided by the January 2009 highs has added credibility to ourpositive outlook for Indonesia. The oscillator remains in positive territory and has room to move to the upside.

Our view for the MSCI Indonesia (420) is unchanged as the uptrend remains intact. The next event should be a test of chart resistance at 449. Key support for the uptrend is found at the 335.

Source: Jakarta Post

Best regards,Wuddy Warsono, CFACLSA Indonesia Head of SalesPhone: (62-21) 573 9460Toll Free - HK: 800 938 000Toll Free - SIN: 800 621 1104Toll Free - US: 800 460 2581wuddy.warsono@ clsa.com