Good morning. Following exceptional 1Q08 results reported by hybrid seed producer Bisi International (BISI IJ), in typical CLSA first to delivery fashsion, the sales desk decided to immedialtey fly down to Kediri (HQ of BIS, three hours drive from Surabaya) to kick some tires. Conclusion? This is the best story by far in the soft commodity space. We found a hyper growth business (1Q08 net profit: Rp124.5bn, +730% YoY and still accelerating), high margin (60%+ for their hybrid corn seed), low capex requirement, dominant market share (80%), high pricing power with extremely high barriers to entry. A visit to Agri shop tells us that Bisi hybird corn seen is flying off the shelf. (We actually interviewed a farmer buying Bisi hybris corn seen and they were happy customers- more details later). Hybrid corn seeds cost substantially more than conventional sends but because of higher yield, farmers can almost double their income net net. The value proposition here simply cannot get any better. 1Q08 results show that Bisi's market share in the corn has increased from 70% to 79%. The shop that we visited tells us that 90% of their sales were Bisi's (remaining from Pioneer & Syngenta's). Bisi has just launched a new and better corn hybrid called Bisi 16 (selling for Rp35,000/kg Vs its current best seller Bisi 2 at Rp28,000) and the switch from Bisi 2 to Bisi 16 (Gross Margin for Bisi 2 is 60% and Bisi 16 is 70%) is way beyond the managements expectation. Mgmt initially expected a 10% switch to the new product but looking at the current rate 50% is not inconceivable. This means that gross margin will continue to expand. Bisi intend to raise Bisi 16 price from Rp35,000/kg to Rp38,000kg. When we asked the ag shop owner when pricing elasticity will kick in she said the product is selling so well that she thinks she can fetch Rp50,000 and customer only buy competitors product when they run out of Bisi product. (Note: Adoption rate for hybrid corn seed had gone up from 25% in 06 to 43% in 07 and the expects 55-60% in 08).

Biggest potential comes from hybrid rice seed as the adoption rates is less than 2% and Bisi is the only company that produces a hybrid rice seed. Indonesian Agriculture department assumes that penetration of 44% is possible by 2012. This would infer that from 2 % to 44% over the next 4 years implies 250 % CARG! Indonesia rice prices is set by state logistics agency (Bulllog). Just months ago, domestic prices were set above international prices. But with market prices doubling YTD (now US$1,000/ton+), Indo domestic price is trading at a massive discount to market price. Bulog has just announced that they will increase procurement price for unhusked paddy from Rp2,000 to Rp2,200/kh (US$240/ton). Obviously, this will have to be increased further to prevent smuggling which will present massive scope for Bisi to increase their seed prices. Stock has phenomenally well but I am convinced that there is still a lot left on the table. Realistically, probably trading on 25x 08 and low teens for 09. Bluesky scenario will be continue strength in rice and corn prices where Bisi can charge more for their seeds.

More details on our visit next week. In the meantime please find our unique CLSA U report (attached) on rice as we spoek in depth with the International Rice Research Institute, recognised as a world leader in public rice research.

Resources update: What's going on in mining (attached)

Olie has written a piece on the mining sector today, covering several areas of concern. He met with officials from the Ministry of Mines and Energy, the Indonesian Coal Mining Association and several mining companies.

The new Mining Law: On balance positive. Olie believes that the draft Mining Law, if eventually passed, will be a net positive for the mining sector. It will provide a better legal framework and may help resolve issues such as overlapping concessions and forestry permits. It will remove the Contract of Work but will give equal treatment for all. It may also simplify the permit structure. The license system is not ideal for foreign companies, but for major projects there will be something called state reserves where very large mining projects will be managed from. These could result in structures similar to a Contract of Work. There are still some issues to be worked out and we think it is unlikely to be passed this year. However, if it does pass this should be seen as a positive development.

Coal mining issues: Olie is not too concerned about a possible Domestic market Obligation (DMO) for coal. There has been no plan so far form the government for this and indications are that coal will be available. Miners such as Bukit Asam (PTBA IJ) and Bumi Resources (BUMI IJ) have allocated significant future tonnages to domestic sales. Helping them is PLN which is lobbying to reduce the royalty on domestic low grade coal form 13.5% to 7%.

BII 1Q08 results (from Nicolaos)

Net profit was in-line with our forecast at Rp198bn, back in the black from 4Q07 and up 71% YoY. NIM improved both sequentially and year-on-year driven by stronger loan growth, +3% QoQ and 28% YoY, and lower cost of funds. Core revenues ex-bond gains/losses were up 15% YoY with operating expenses up only 10% YoY. As a result, cost-to-income ratio improved by 300bp to 64.5%, but still one of the highest in the industry. Provisioning was higher than expected, down 54% QoQ, but up 44% YoY, as the bank build-up its loan loss reserves. NPL ratio was flat at 2.6% and coverage improved to 86.7% from 55% previous year and 65.8% in 4Q07. More details after analyst meeting at 10:00amp today.

Aneka Kimia Raya posted strong 1Q08 performance (from Hadi)

Aneka Kimia Raya (AKRA IJ) booked Rp84bn net profit (+92% YoY) on growing sales and improving margins. This is equivalent to 31% of our full year forecast. AKRA sales reached Rp2.1tn (+66% YoY) due to higher volumes and prices. Best performance came from fuel distribution business and the sorbitol business (SOBI IJ). The overall gross margin dropped slightly to 11.5% because of the low performance in the domestic logistic business but should recover in the 2H08. AKRAĘs operating margin improved as AKRAĘs opex grew only 39%. The overall performance is above HadiĘs expectation and he is reviewing for a possible earnings upgrade. BUY

Q1 08 Q107 growth
Net Sales 2,091.40 1,258.50 66.0%
Gross Profit 241.1 151.4 59.0%
Operating profit 134.6 74.2 81.0%
Net Profit 83.8 43.7 92.0%

Gross margin 11.5% 12.0%
Operating margin 6.4% 5.9%
Net margin 4.0% 3.5%

Other news

Truba looks for high yield debt
Truba Alam (TRUB IJ) is looking to raise $300m in high yield debt. Their CFO is the former king of High Yield in his days at APP Group but this could be a tough sell. To be fair, Truba has some interesting opportunities in the power station sector but this is not a company I want to invest in just yet. I would prefer to wait for clarity on what they can deliver in terms of construction contracts and margins and investments in IPPs. Initial projections from the company looked wildly optimistic (and were).

Semen Gresik; Strong 1Q08
Semen Gresik (SMGR IJ) is reported in the local press as having a 38% increase in net profit in 1Q08. Revenues rose 20%. This looks very strong and is above our analyst expectations. It suggests the industry continues to operate as an oligopoly and pass through rising costs. Preferred stock is Indocement (INTP IJ) with its rising market share, spare capacity and low cost expansion plans. Semen Gresik may now be for sale as Rajawali looks to exit its 24.9% stake but it is unclear who would want to buy it.

Bulog to get Rp15tr loan for rice purchases
Bulog, the national Food Agency will get a Rp15tr loan from three banks: Bank Mandiri (BMRI IJ, Bank Rakyat (BBRI IJ and Bank Bukopin (BBKP IJ) to finance its price purchase program. The government has moved to raise domestic rice prices, sacrificing some inflation for food security. It was an appropriate move.

Antam moving on Alumina?
Press reports suggest Antam (ANTM IJ) is moving ahead with its $400m (was previously $250m) Alumina project. This has been long delayed but Antam really needs to show some progress in something. Nickel has been the mainstay in recent years but the company has other interesting opportunities that it has been slow to move ahead with.

Saving electricity. Government looking to restrict shop opening hours
The Minister for Planning wants to reduce shopping hours to save on energy consumption as shopping malls use subsidized energy. Not sure he really understands that this will also result is a slowdown in spending as well. If the government wants to slow consumption there are better ways to do it: raise interest rates and/or raise fuel prices. Many shopping centres generate their own power with unsubsidized fuel. Would these still be allowed to open? All very panicky and probably ineffective. If enforced it would not be great news for the retail sector.


Eugene Chung
CLSA Indonesia | Institutional Sales
Phone: (62-21) 573 9460
HP: (62) 0 815 1356 7666
[email="[email protected]"][email protected][/email]