Indonesia Fund (IF, $10.51, $87M mkt cap).
Key Investment Points:
1. Indonesia has one of the strongest demographic fundamentals in Asia. The country is young with almost 30% of the population below age fifteen, compared to aging Japan at 14% and Western Europe at 16%. Its overall population is large by global standards and ranked 4th in the world at 240M, between the US at 290M, and Brazil at 190M. Importantly, Indonesia has a relatively high participation rate (percentage of people employed or seeking employment) at 66% versus India at 52% and China at 60%. Population density is not extreme, and its largest cities have room to grow their share of the overall population.
2. Significant geographical advantages. Unlike many other populous countries, Indonesia has water borders on its major coastlines like 3 of the top world economies: the US, Japan, and UK. It is located along key shipping routes and will benefit from its proximity to Asia, where most of the world's economic growth is expected to occur. Indonesia's land mass is primarily coastal lowlands, which are easier to develop from an economic standpoint compared to mountains, landlocked plains, and desert.
3. Improving socio-political systems. Indonesia transitioned to a modern democracy 10 years ago from authoritarian rule, and its economy is market-based capitalism. Corruption, while still a large influence, is declining at the margin. Freedom of the press has increased significantly since the peace accords reached with the separatists in Aceh after the tsunami.
4. Attractive valuation. Indonesian stocks trade at lower multiples compared to China and India and perhaps emerging markets in general. However, Indonesia's GDP continues to post solid growth at 5-6% annually, 50% greater than the US at 3-4%. The country's largest company, PT Telekomunikasi (wireless and wireline carrier, NYSE: TLK), only trades at 13x 2007 earnings despite EPS growth of 20%.
5. Few direct opportunities for US investors to invest in Indonesia. There are only 3 publicly traded Indonesian companies: TLK and IIT (both telecom carriers) and IF. IF is the only diversified way to invest in Indonesia, and when Indonesia gets hot, the NAV premium could soar to 30-40% as it did in mid 2006. Right now IF is trading very close to NAV.
6. Undervalued currency. The rupiah is very undervalued on a purchasing power basis despite an attractive short term interest rate of 8.5%. The rupiah has been flat over the past five years, compared to 20% appreciation for the Indian rupee, 15% for the Brazilian real, and 10% for the Thai baht.
Risks:
1. Corruption. Indonesia is one of the most corrupt countries, coming in at 130 out of 145 in a ranking by Transparency International. But this is better than its ranking of 137 in 2005. Because of corruption, the country has an underdeveloped mineral/energy infrastructure despite substantial natural gas reserves. Indonesia is also #2 in coal exports, #2 in tin production, #3 in copper production, and #4 in nickel production. Not bad for a country ranked #21 in nominal GDP, below that of #19 Sweden.
2. Civil unrest. Indonesia is a collection of many islands, which is more difficult to unite politically. However, the most populous island, Java, has a population of 124M, close to all of Japan at 128M.
3. Vulnerability to Asian downturn. Indonesia got hammered during the last Asian crisis, and the country could use more time to develop its economy to make it more resilient.
4. If an Indonesian ETF were to come out, IF could trade at a significant discount to NAV. This happened to the Indian closed end funds IIF and IFN when the Barclays Exchange Traded Fund INP came out.
Target Price:
My target price is $20, based on annual appreciation of 25% over 3 years as the Indonesian economy continues to grow at an above average rate, and its valuation multiple expands on declining corruption & improving reputation for political and economic stability.
Margin of Safety:
Assuming world economic growth remains stable, I would not expect IF to go below its recent low of $8 given the current lack of NAV premium and low sentiment by foreign investors. |
