Indonesia

In this briefing:

1. The Week that Was in ASEAN@Smartkarma – Doubledragon, Indonesian Property, and UOB’s Bad Loans
2. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress
3. Moore’s Law May Not Be Dead, After All
4. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise
5. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

1. The Week that Was in ASEAN@Smartkarma – Doubledragon, Indonesian Property, and UOB’s Bad Loans

Macro Insights

In his economic Insight, When Job ‘Quality’ Prevailed over ‘Headcount’, Philippines Economist Jun Trinidad examines the recent encouraging employment numbers in the Philippines.  

Equity Bottom-Up Insights

In UOB – Driving Bad Loans, Daniel Tabbush zeros in on this leading Singapore bank’s loan quality and finds all may not be well despite headlines showing improvement. 

in Krung Thai Bank: Not as Cheap as It Looks, Paul Hollingworth revisits Krung Thai Bank Pub (KTB TB) and despite originally finding the bank attractive on a number of valuation measures, now finds less to cheer about.

In GLOW’s Done Deal As SPA (Almost) Completes events specialist David Blennerhassett circles back to this ongoing takeover situation.  

In Company Visits: Berli Jucker, M Visions, our Thai Guru Athaporn Arayasantiparb, CFA reports back following visits to the two aforementioned companies.

In his insight, Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action, Nicolas Van Broekhoven circles back to this Geo Energy Resources (GERL SP) which reported weak 4Q18 results late last month. 

in Keppel Infrastructure Trust Placement – Scaled Down but Large Deal; Very Well Flagged Deal, Sumeet Singh reports back on this recent placement. 

In Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue ComingRoyston Foo reports back on this Singapore listed Indonesia focused REIT following the announcement of a rights issue. 

Sector and Thematic Insights

in Snippets #20: Dark Clouds in Thai Equities, Athaporn Arayasantiparb, CFA highlights interesting trends/events/developments he heard this month, and highlights five which could impact Thai equities in the near term.

In Singapore Property – February Sales Data Support Investment Thesis on Sing Holdings, Royston Foo examines the most recent property sales figure coming out of Singapore. 

2. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

LNG prices have dropped to a seasonal low, as we flagged in our outlook piece for this year (2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables) but this hasn’t dampened enthusiasm to push new projects forward (see A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies). We continue to see this as positive for the LNG contractors and negative for the LNG developers. We discuss recent LNG prices, European LNG demand and the FID outlook including project updates from Venture Global, Alaska and Cyprus. 

3. Moore’s Law May Not Be Dead, After All

For years semiconductor makers and investors have worried that Moore’s Law will end.  Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.

4. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise

• Russia: Recent study estimates that unreported activity accounts for about 20% of GDP. Moscow could use this lost tax revenue.
• Singapore: MAS qtrly survey of professional forecasters estimates 2019 GDP growth at 2.5% for this year, down from median estimate of 2.7% in the September survey.
• South Africa: Morgan Stanley is calling for outperformance by South African economy and stocks in the coming months.  Focus on Healthcare and Retail Names)
• India: Modi’s government is accused of politicizing economic data government in a growing debate over the credibility of India’s official growth estimates.

5. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

In this briefing:

1. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress
2. Moore’s Law May Not Be Dead, After All
3. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise
4. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
5. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

1. LNG: What Matters This Week? Prices Fall Further in Asia but New Projects Continue to Progress

LNG prices have dropped to a seasonal low, as we flagged in our outlook piece for this year (2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables) but this hasn’t dampened enthusiasm to push new projects forward (see A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies). We continue to see this as positive for the LNG contractors and negative for the LNG developers. We discuss recent LNG prices, European LNG demand and the FID outlook including project updates from Venture Global, Alaska and Cyprus. 

2. Moore’s Law May Not Be Dead, After All

For years semiconductor makers and investors have worried that Moore’s Law will end.  Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.

3. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise

• Russia: Recent study estimates that unreported activity accounts for about 20% of GDP. Moscow could use this lost tax revenue.
• Singapore: MAS qtrly survey of professional forecasters estimates 2019 GDP growth at 2.5% for this year, down from median estimate of 2.7% in the September survey.
• South Africa: Morgan Stanley is calling for outperformance by South African economy and stocks in the coming months.  Focus on Healthcare and Retail Names)
• India: Modi’s government is accused of politicizing economic data government in a growing debate over the credibility of India’s official growth estimates.

4. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

5. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

In this briefing:

1. Moore’s Law May Not Be Dead, After All
2. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise
3. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
4. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
5. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

1. Moore’s Law May Not Be Dead, After All

For years semiconductor makers and investors have worried that Moore’s Law will end.  Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.

2. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise

• Russia: Recent study estimates that unreported activity accounts for about 20% of GDP. Moscow could use this lost tax revenue.
• Singapore: MAS qtrly survey of professional forecasters estimates 2019 GDP growth at 2.5% for this year, down from median estimate of 2.7% in the September survey.
• South Africa: Morgan Stanley is calling for outperformance by South African economy and stocks in the coming months.  Focus on Healthcare and Retail Names)
• India: Modi’s government is accused of politicizing economic data government in a growing debate over the credibility of India’s official growth estimates.

3. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

4. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

5. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The third company that we explore is Pakuwon Jati (PWON IJ), the biggest retail mall operator, and mixed-use high rise and township developer since 1986. PWON has five major projects in the two biggest cities: Jakarta and Surabaya. 

Its recurring income base is the highest in the Indonesian property universe, playing a big role in the company’s solid earnings performance in the past few years of property downturn. However, currency depreciation, stricter mortgage regulations, and falling rental yields curb investors’ appetite for property investments, leading to weak presales in the past three years. Property development revenues are expected to be trending down going forward on lower presales in 2016-2018. Contrary to peers, cashflow generation remains very strong, led by the large recurring income base and thick margin. There is however no plan to increase dividends, but rather reserving the excess cash for future landbank acquisition.  

The weaker presales in 1H19 is widely anticipated, but we fear that there may be some selling pressure on each weak presales announcements, given PWON’s premium valuations and stock outperformance YTD. Nonetheless, potential portfolio inflow to high beta stocks and rising risk appetite for smaller-capped stocks should be beneficial for PWON. Our blended target price of IDR773 per share offers 21% upside.

Summary of this insight:

• PWON currently operates 7 retail malls, 4 office towers for lease, 4 hotels, and 1 serviced apartment as its recurring income base, representing 52% of revenues. Retail mall division is PWON’s single biggest revenue contributor, growing at 16% Cagr over the past 5 years, making up 40% of total revenues and 77% of total recurring incomes. 
• The company sells landed housings, condominiums, and offices in five project locations as its “non-recurring” property development revenues, which account for the remaining 48% of revenues. Condominiums and offices are PWON’s second biggest revenue generator, comprising about 30-40% of sales. PWON has been pushing more landed residential projects to mitigate the impact from slower condominiums and offices market.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. PWON’s landbanks are located in strategic locations, essential to the success of its past projects in Jakarta and Surabaya.
• Presales are more sensitive to investment appetite and rental yield rather than BI rates. Cash and cash installments typically make up 65-85% of total payments, while mortgages comprise a minority 15-35%.

• Slower take up rate on high-rise projects leads to larger funding requirement. Condominiums can take up to four years to complete if it is part of a superblock project, and a big portion of the raw materials for construction has to be secured and paid upfront to lock in prices and ensure availability.  Meanwhile, the presales mortgage disbursement regulation issued in 2014 diminishes cash inflow from mortgage-paying customers. We constructed a cashflow simulation model for a typical condominium tower launch to analyze the monthly cashflow impact from slower take up rate and mortgage regulation changes.
• Pros: The operating cashflow remains positive and strong over the past five years of property downturn, the best among the property developers that we visited. The seven retail malls generate over IDR1tn cash per year in the past three years, enough to sustain company’s working capital and capex requirements. Free cashflow (FCF) is mostly positive with the exception of 2014 and 2015 when PWON had two big acquisitions. Net gearing peaked in 2015 and had slowly decreased over the years.

• Cons: For the first time since 2010, PWON’s advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, fell below 100%. We are expecting a slow recovery for PWON as its inventory account should continue to grow higher in the short term as the company plans to launch few new condominium towers in Surabaya and a new superblock in Bekasi.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 36% to total FY14 presales, while 4Q14 contributed a chunky 36%. If we assume the same quarterly split for 2019 presales target, we may potentially see 4-32% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation: PWON share price is performing relatively in line with the JCI over the past year, outperforming its property peers. Its solid earnings and cashflow are rewarded with premium valuations against peers. The discount to net asset value (NAV) and price-to-earnings (PE) ratio are close to +1 standard deviation above the 5-yr historical mean. After a solid 45% bounce off recent lows, the stock is no longer cheap. However, with better interest rate environment and positive regulatory tailwinds, we may see improving activities after the election. Furthermore, potential portfolio inflow to high beta stocks and better sentiment towards the property sector should also benefit PWON. We derive an IDR773 target price per share for PWON, assuming discount to NAV, PB, and PE valuation re-rating to +1 standard deviation above mean.

In this briefing:

1. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise
2. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
3. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
4. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)
5. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

1. RRG Weekly – Is Modi Government Cooking the Books? Brexit Risks Rise. South Africa Could Surprise

• Russia: Recent study estimates that unreported activity accounts for about 20% of GDP. Moscow could use this lost tax revenue.
• Singapore: MAS qtrly survey of professional forecasters estimates 2019 GDP growth at 2.5% for this year, down from median estimate of 2.7% in the September survey.
• South Africa: Morgan Stanley is calling for outperformance by South African economy and stocks in the coming months.  Focus on Healthcare and Retail Names)
• India: Modi’s government is accused of politicizing economic data government in a growing debate over the credibility of India’s official growth estimates.

2. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

3. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

4. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The third company that we explore is Pakuwon Jati (PWON IJ), the biggest retail mall operator, and mixed-use high rise and township developer since 1986. PWON has five major projects in the two biggest cities: Jakarta and Surabaya. 

Its recurring income base is the highest in the Indonesian property universe, playing a big role in the company’s solid earnings performance in the past few years of property downturn. However, currency depreciation, stricter mortgage regulations, and falling rental yields curb investors’ appetite for property investments, leading to weak presales in the past three years. Property development revenues are expected to be trending down going forward on lower presales in 2016-2018. Contrary to peers, cashflow generation remains very strong, led by the large recurring income base and thick margin. There is however no plan to increase dividends, but rather reserving the excess cash for future landbank acquisition.  

The weaker presales in 1H19 is widely anticipated, but we fear that there may be some selling pressure on each weak presales announcements, given PWON’s premium valuations and stock outperformance YTD. Nonetheless, potential portfolio inflow to high beta stocks and rising risk appetite for smaller-capped stocks should be beneficial for PWON. Our blended target price of IDR773 per share offers 21% upside.

Summary of this insight:

• PWON currently operates 7 retail malls, 4 office towers for lease, 4 hotels, and 1 serviced apartment as its recurring income base, representing 52% of revenues. Retail mall division is PWON’s single biggest revenue contributor, growing at 16% Cagr over the past 5 years, making up 40% of total revenues and 77% of total recurring incomes. 
• The company sells landed housings, condominiums, and offices in five project locations as its “non-recurring” property development revenues, which account for the remaining 48% of revenues. Condominiums and offices are PWON’s second biggest revenue generator, comprising about 30-40% of sales. PWON has been pushing more landed residential projects to mitigate the impact from slower condominiums and offices market.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. PWON’s landbanks are located in strategic locations, essential to the success of its past projects in Jakarta and Surabaya.
• Presales are more sensitive to investment appetite and rental yield rather than BI rates. Cash and cash installments typically make up 65-85% of total payments, while mortgages comprise a minority 15-35%.

• Slower take up rate on high-rise projects leads to larger funding requirement. Condominiums can take up to four years to complete if it is part of a superblock project, and a big portion of the raw materials for construction has to be secured and paid upfront to lock in prices and ensure availability.  Meanwhile, the presales mortgage disbursement regulation issued in 2014 diminishes cash inflow from mortgage-paying customers. We constructed a cashflow simulation model for a typical condominium tower launch to analyze the monthly cashflow impact from slower take up rate and mortgage regulation changes.
• Pros: The operating cashflow remains positive and strong over the past five years of property downturn, the best among the property developers that we visited. The seven retail malls generate over IDR1tn cash per year in the past three years, enough to sustain company’s working capital and capex requirements. Free cashflow (FCF) is mostly positive with the exception of 2014 and 2015 when PWON had two big acquisitions. Net gearing peaked in 2015 and had slowly decreased over the years.

• Cons: For the first time since 2010, PWON’s advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, fell below 100%. We are expecting a slow recovery for PWON as its inventory account should continue to grow higher in the short term as the company plans to launch few new condominium towers in Surabaya and a new superblock in Bekasi.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 36% to total FY14 presales, while 4Q14 contributed a chunky 36%. If we assume the same quarterly split for 2019 presales target, we may potentially see 4-32% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation: PWON share price is performing relatively in line with the JCI over the past year, outperforming its property peers. Its solid earnings and cashflow are rewarded with premium valuations against peers. The discount to net asset value (NAV) and price-to-earnings (PE) ratio are close to +1 standard deviation above the 5-yr historical mean. After a solid 45% bounce off recent lows, the stock is no longer cheap. However, with better interest rate environment and positive regulatory tailwinds, we may see improving activities after the election. Furthermore, potential portfolio inflow to high beta stocks and better sentiment towards the property sector should also benefit PWON. We derive an IDR773 target price per share for PWON, assuming discount to NAV, PB, and PE valuation re-rating to +1 standard deviation above mean.

5. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

In this briefing:

1. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
2. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
3. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)
4. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
5. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

1. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

2. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

3. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The third company that we explore is Pakuwon Jati (PWON IJ), the biggest retail mall operator, and mixed-use high rise and township developer since 1986. PWON has five major projects in the two biggest cities: Jakarta and Surabaya. 

Its recurring income base is the highest in the Indonesian property universe, playing a big role in the company’s solid earnings performance in the past few years of property downturn. However, currency depreciation, stricter mortgage regulations, and falling rental yields curb investors’ appetite for property investments, leading to weak presales in the past three years. Property development revenues are expected to be trending down going forward on lower presales in 2016-2018. Contrary to peers, cashflow generation remains very strong, led by the large recurring income base and thick margin. There is however no plan to increase dividends, but rather reserving the excess cash for future landbank acquisition.  

The weaker presales in 1H19 is widely anticipated, but we fear that there may be some selling pressure on each weak presales announcements, given PWON’s premium valuations and stock outperformance YTD. Nonetheless, potential portfolio inflow to high beta stocks and rising risk appetite for smaller-capped stocks should be beneficial for PWON. Our blended target price of IDR773 per share offers 21% upside.

Summary of this insight:

• PWON currently operates 7 retail malls, 4 office towers for lease, 4 hotels, and 1 serviced apartment as its recurring income base, representing 52% of revenues. Retail mall division is PWON’s single biggest revenue contributor, growing at 16% Cagr over the past 5 years, making up 40% of total revenues and 77% of total recurring incomes. 
• The company sells landed housings, condominiums, and offices in five project locations as its “non-recurring” property development revenues, which account for the remaining 48% of revenues. Condominiums and offices are PWON’s second biggest revenue generator, comprising about 30-40% of sales. PWON has been pushing more landed residential projects to mitigate the impact from slower condominiums and offices market.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. PWON’s landbanks are located in strategic locations, essential to the success of its past projects in Jakarta and Surabaya.
• Presales are more sensitive to investment appetite and rental yield rather than BI rates. Cash and cash installments typically make up 65-85% of total payments, while mortgages comprise a minority 15-35%.

• Slower take up rate on high-rise projects leads to larger funding requirement. Condominiums can take up to four years to complete if it is part of a superblock project, and a big portion of the raw materials for construction has to be secured and paid upfront to lock in prices and ensure availability.  Meanwhile, the presales mortgage disbursement regulation issued in 2014 diminishes cash inflow from mortgage-paying customers. We constructed a cashflow simulation model for a typical condominium tower launch to analyze the monthly cashflow impact from slower take up rate and mortgage regulation changes.
• Pros: The operating cashflow remains positive and strong over the past five years of property downturn, the best among the property developers that we visited. The seven retail malls generate over IDR1tn cash per year in the past three years, enough to sustain company’s working capital and capex requirements. Free cashflow (FCF) is mostly positive with the exception of 2014 and 2015 when PWON had two big acquisitions. Net gearing peaked in 2015 and had slowly decreased over the years.

• Cons: For the first time since 2010, PWON’s advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, fell below 100%. We are expecting a slow recovery for PWON as its inventory account should continue to grow higher in the short term as the company plans to launch few new condominium towers in Surabaya and a new superblock in Bekasi.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 36% to total FY14 presales, while 4Q14 contributed a chunky 36%. If we assume the same quarterly split for 2019 presales target, we may potentially see 4-32% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation: PWON share price is performing relatively in line with the JCI over the past year, outperforming its property peers. Its solid earnings and cashflow are rewarded with premium valuations against peers. The discount to net asset value (NAV) and price-to-earnings (PE) ratio are close to +1 standard deviation above the 5-yr historical mean. After a solid 45% bounce off recent lows, the stock is no longer cheap. However, with better interest rate environment and positive regulatory tailwinds, we may see improving activities after the election. Furthermore, potential portfolio inflow to high beta stocks and better sentiment towards the property sector should also benefit PWON. We derive an IDR773 target price per share for PWON, assuming discount to NAV, PB, and PE valuation re-rating to +1 standard deviation above mean.

4. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

5. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

In this briefing:

1. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019
2. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)
3. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
5. Japan – Chinese Flu

1. Upstream Oil & Gas M&A Review: Surge of Takeovers and Mergers in 2018 – What to Expect in 2019

The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.

Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016

2. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The third company that we explore is Pakuwon Jati (PWON IJ), the biggest retail mall operator, and mixed-use high rise and township developer since 1986. PWON has five major projects in the two biggest cities: Jakarta and Surabaya. 

Its recurring income base is the highest in the Indonesian property universe, playing a big role in the company’s solid earnings performance in the past few years of property downturn. However, currency depreciation, stricter mortgage regulations, and falling rental yields curb investors’ appetite for property investments, leading to weak presales in the past three years. Property development revenues are expected to be trending down going forward on lower presales in 2016-2018. Contrary to peers, cashflow generation remains very strong, led by the large recurring income base and thick margin. There is however no plan to increase dividends, but rather reserving the excess cash for future landbank acquisition.  

The weaker presales in 1H19 is widely anticipated, but we fear that there may be some selling pressure on each weak presales announcements, given PWON’s premium valuations and stock outperformance YTD. Nonetheless, potential portfolio inflow to high beta stocks and rising risk appetite for smaller-capped stocks should be beneficial for PWON. Our blended target price of IDR773 per share offers 21% upside.

Summary of this insight:

• PWON currently operates 7 retail malls, 4 office towers for lease, 4 hotels, and 1 serviced apartment as its recurring income base, representing 52% of revenues. Retail mall division is PWON’s single biggest revenue contributor, growing at 16% Cagr over the past 5 years, making up 40% of total revenues and 77% of total recurring incomes. 
• The company sells landed housings, condominiums, and offices in five project locations as its “non-recurring” property development revenues, which account for the remaining 48% of revenues. Condominiums and offices are PWON’s second biggest revenue generator, comprising about 30-40% of sales. PWON has been pushing more landed residential projects to mitigate the impact from slower condominiums and offices market.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. PWON’s landbanks are located in strategic locations, essential to the success of its past projects in Jakarta and Surabaya.
• Presales are more sensitive to investment appetite and rental yield rather than BI rates. Cash and cash installments typically make up 65-85% of total payments, while mortgages comprise a minority 15-35%.

• Slower take up rate on high-rise projects leads to larger funding requirement. Condominiums can take up to four years to complete if it is part of a superblock project, and a big portion of the raw materials for construction has to be secured and paid upfront to lock in prices and ensure availability.  Meanwhile, the presales mortgage disbursement regulation issued in 2014 diminishes cash inflow from mortgage-paying customers. We constructed a cashflow simulation model for a typical condominium tower launch to analyze the monthly cashflow impact from slower take up rate and mortgage regulation changes.
• Pros: The operating cashflow remains positive and strong over the past five years of property downturn, the best among the property developers that we visited. The seven retail malls generate over IDR1tn cash per year in the past three years, enough to sustain company’s working capital and capex requirements. Free cashflow (FCF) is mostly positive with the exception of 2014 and 2015 when PWON had two big acquisitions. Net gearing peaked in 2015 and had slowly decreased over the years.

• Cons: For the first time since 2010, PWON’s advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, fell below 100%. We are expecting a slow recovery for PWON as its inventory account should continue to grow higher in the short term as the company plans to launch few new condominium towers in Surabaya and a new superblock in Bekasi.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 36% to total FY14 presales, while 4Q14 contributed a chunky 36%. If we assume the same quarterly split for 2019 presales target, we may potentially see 4-32% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation: PWON share price is performing relatively in line with the JCI over the past year, outperforming its property peers. Its solid earnings and cashflow are rewarded with premium valuations against peers. The discount to net asset value (NAV) and price-to-earnings (PE) ratio are close to +1 standard deviation above the 5-yr historical mean. After a solid 45% bounce off recent lows, the stock is no longer cheap. However, with better interest rate environment and positive regulatory tailwinds, we may see improving activities after the election. Furthermore, potential portfolio inflow to high beta stocks and better sentiment towards the property sector should also benefit PWON. We derive an IDR773 target price per share for PWON, assuming discount to NAV, PB, and PE valuation re-rating to +1 standard deviation above mean.

3. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

4. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

5. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

In this briefing:

1. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)
2. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
3. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
4. Japan – Chinese Flu
5. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

1. Indonesia Property – In Search of the End of the Rainbow – Part 3 – Pakuwon Jati (PWON IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The third company that we explore is Pakuwon Jati (PWON IJ), the biggest retail mall operator, and mixed-use high rise and township developer since 1986. PWON has five major projects in the two biggest cities: Jakarta and Surabaya. 

Its recurring income base is the highest in the Indonesian property universe, playing a big role in the company’s solid earnings performance in the past few years of property downturn. However, currency depreciation, stricter mortgage regulations, and falling rental yields curb investors’ appetite for property investments, leading to weak presales in the past three years. Property development revenues are expected to be trending down going forward on lower presales in 2016-2018. Contrary to peers, cashflow generation remains very strong, led by the large recurring income base and thick margin. There is however no plan to increase dividends, but rather reserving the excess cash for future landbank acquisition.  

The weaker presales in 1H19 is widely anticipated, but we fear that there may be some selling pressure on each weak presales announcements, given PWON’s premium valuations and stock outperformance YTD. Nonetheless, potential portfolio inflow to high beta stocks and rising risk appetite for smaller-capped stocks should be beneficial for PWON. Our blended target price of IDR773 per share offers 21% upside.

Summary of this insight:

• PWON currently operates 7 retail malls, 4 office towers for lease, 4 hotels, and 1 serviced apartment as its recurring income base, representing 52% of revenues. Retail mall division is PWON’s single biggest revenue contributor, growing at 16% Cagr over the past 5 years, making up 40% of total revenues and 77% of total recurring incomes. 
• The company sells landed housings, condominiums, and offices in five project locations as its “non-recurring” property development revenues, which account for the remaining 48% of revenues. Condominiums and offices are PWON’s second biggest revenue generator, comprising about 30-40% of sales. PWON has been pushing more landed residential projects to mitigate the impact from slower condominiums and offices market.
• Accessibility is a key factor to land appreciation and hence, company’s total NAV. With the traffic worsening around the Greater Jakarta area, time to commute is an increasingly important factor in determining where to stay and access to public transportation such as MRT and LRT will be a powerful driver going forward. PWON’s landbanks are located in strategic locations, essential to the success of its past projects in Jakarta and Surabaya.
• Presales are more sensitive to investment appetite and rental yield rather than BI rates. Cash and cash installments typically make up 65-85% of total payments, while mortgages comprise a minority 15-35%.

• Slower take up rate on high-rise projects leads to larger funding requirement. Condominiums can take up to four years to complete if it is part of a superblock project, and a big portion of the raw materials for construction has to be secured and paid upfront to lock in prices and ensure availability.  Meanwhile, the presales mortgage disbursement regulation issued in 2014 diminishes cash inflow from mortgage-paying customers. We constructed a cashflow simulation model for a typical condominium tower launch to analyze the monthly cashflow impact from slower take up rate and mortgage regulation changes.
• Pros: The operating cashflow remains positive and strong over the past five years of property downturn, the best among the property developers that we visited. The seven retail malls generate over IDR1tn cash per year in the past three years, enough to sustain company’s working capital and capex requirements. Free cashflow (FCF) is mostly positive with the exception of 2014 and 2015 when PWON had two big acquisitions. Net gearing peaked in 2015 and had slowly decreased over the years.

• Cons: For the first time since 2010, PWON’s advances-to-inventory ratio, which is an indicative figure for the property developers’ working capital, fell below 100%. We are expecting a slow recovery for PWON as its inventory account should continue to grow higher in the short term as the company plans to launch few new condominium towers in Surabaya and a new superblock in Bekasi.

• Cons: Election year to election year, we may see some similarity between the 2014 and 2019’s quarterly presales split. 1Q14 and 2Q14 contributed 36% to total FY14 presales, while 4Q14 contributed a chunky 36%. If we assume the same quarterly split for 2019 presales target, we may potentially see 4-32% YoY declines in the next three quarters of presales reporting. Note however that the BI issued its first round of tightening regulations at the end of 2013 and this may have an impact to the 1H14 presales. Also there is a difference in the election schedules as the 2014 election was dragged on until late August, while the 2019 contest will be done by end of April.
• Recommendation: PWON share price is performing relatively in line with the JCI over the past year, outperforming its property peers. Its solid earnings and cashflow are rewarded with premium valuations against peers. The discount to net asset value (NAV) and price-to-earnings (PE) ratio are close to +1 standard deviation above the 5-yr historical mean. After a solid 45% bounce off recent lows, the stock is no longer cheap. However, with better interest rate environment and positive regulatory tailwinds, we may see improving activities after the election. Furthermore, potential portfolio inflow to high beta stocks and better sentiment towards the property sector should also benefit PWON. We derive an IDR773 target price per share for PWON, assuming discount to NAV, PB, and PE valuation re-rating to +1 standard deviation above mean.

2. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

3. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

4. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

5. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

In this briefing:

1. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce
2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
3. Japan – Chinese Flu
4. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
5. Matahari Department Store (LPPF IJ) – A Retail Conundrum

1. The Week that Was in ASEAN@Smartkarma – Widodo Leads, a Retail Conundrum, and Indonesian E-Commerce

Macro Insights

In Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle, Dr. Jim Walker discusses the outlook for Asian Markets in light of a rising profit upcycle. 

In Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested, CrossASEAN Insight Provider Kevin O’Rourke analyses the most important political and economic developments over the past week. 

In Philippines: February Inflation Eases Back to BSP’s Inflation Target Range, Jun Trinidad comments on the latest inflation numbers out of the Philippines. 

Equity Bottom-Up Insights

In Matahari Department Store (LPPF IJ) – A Retail Conundrum,  CrossASEAN Insight provider Angus Mackintosh circles back to this beaten up retailer post FY18 results, which represents a retail conundrum. 

In PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter, Paul Hollingworth takes a close look at Indonesia’sbiggest micro-lender. Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation. 

In OCBC – Difficult to Square, Daniel Tabbush zooms in on this Singapore lender and finds it less than attractive with some conflicting numbers. 

In MINT’s First Post-Acquisition Update, our Thai Guru Athaporn Arayasantiparb, CFA circles back to leading Thai hotel operator Minor International (MINT TB) plus updates on Bangkok Dec Con (BKD TB). 

In Delta Electronics (DELTA TB): Little Option but to Accept the Tender Offer, Arun George revisits Delta Electronics (2308 TT) and its ongoing takeover situation. 

In Sea Ltd Placement – Capitalizing on Momentum, Zhen Zhou, Toh looks at this internet retailer following the announcement of a placement, which is larger than its IPO. 

In Sea Ltd: Follow-On Public Offering an Opportunistic Fundraising?, Johannes Salim, CFA circles back to Sea Ltd (SE US) following up on his recent Insight on the company. 

In Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story, Arun George comments on the recent placement by the company. 

In Sea Ltd (SE US): Placing Price Leaves Money on the Table, Arun George revisits the company following confirmation of the price and size of its placement. 

In Sea Ltd (SE US): The Bear Case – A One-Hit Wonder?, Rickin Thakrar takes a more negative stance referring to earlier insights from Arun George. 

In RHB Bank Placement – A Little Less Surprising but Little Bit Bigger Deal, Sumeet Singh zeros in on the latest placement in RHB Bank Bhd (RHBBANK MK).  

In M: Trimmed 2019-20E Earnings Forecast by 12% and 19%, our friends at Country Group revisit Mk Restaurants Group (M TB) post the company’s results. 

In Accordia Golf Trust (AGT): Buy but Please Consider This…, Henry Soediarko zeros in on this golf play. 

Sector and Thematic Insights

In Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019., our friend at New Street Research revisit the Thai Telecom sector following recent results. 

In Vietnam Market Update: Deep Value Found in Salient Themes, Frontiersman Dylan Waller seeks out attractive investment themes in Vietnam. 

2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

3. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

4. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

5. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

In this briefing:

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
2. Japan – Chinese Flu
3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
4. Matahari Department Store (LPPF IJ) – A Retail Conundrum
5. January Chip Revenues Down 15.6% Year-On-Year

1. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive

• Capital flows are strongly Granger causal
• Gross capital flows lead World shipping activity by 4 months
• Capital flows have been slowly rising since June 2018: in February they jumped
• Reinforces out pro-Asia and pro-China investment message

2. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

3. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

4. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

5. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

In this briefing:

1. Japan – Chinese Flu
2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested
3. Matahari Department Store (LPPF IJ) – A Retail Conundrum
4. January Chip Revenues Down 15.6% Year-On-Year
5. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

1. Japan – Chinese Flu

By Konstantinos Venetis, Senior Economist

• Japan skirts recession but near-term prospects remain weak
• Deflationary headwinds to persist in H1, threatening business spending
• Recovery likely in late 2019 as world trade finds a firmer footing

2. Widodo Leads 59-31 / IA-Cepa Holds Promise / Online Permitting Progresses / Rights Activist Arrested

A credible poll — the first new trustworthy data in a month — shows Widodo having expanded his lead to 59 percent, versus 31 percent for Prabowo.  The latter’s prospects are dim.  Indonesia’s Comprehensive Partnership (Cepa) with Australia will bring myriad import prices down — although, contrary to a spate of international press reports, it does not raise ownership ceilings for Australian investors.  A senior activist with Amnesty International Indonesia suffered arrest for critizing the military’s plan to place hundreds of active officers in civilian posts.  The BKPM’s OSS system for online permiting is making progress, although its smooth functioning remains a distanct prospect.

Politics: President Joko Widodo proposed monthly income support for graduates of vocational programs who lack immediate employment and need to search for jobs.  He did not specify an amount per recipient.  The proposal has some merit – but simple regulatory changes to facilitate investment and job‑creation would obviate its need.  Politically, the concept will likely prove popular, further boosting Widodo (Page 2).  A prominent Partai Demokrat official, Andi Arief, left the party to undergo drug rehabilitation.  This marks yet another blow for a party that had been Indonesia’s largest only five years ago (p. 3).  A human rights activist and lecturer suffered arrest for allegedly defaming the military (p. 4). 

Surveys: In the first new poll data to emerge in over a month, the Survey Network (LSI) showed that, as of late February, nationwide support for Widodo stood at 59 percent, versus 31 percent for Gerindra Chair Prabowo Subianto.  The findings, which are credible, suggest that Widodo strengthened during February, perhaps due to the two televised debates – and despite Prabowo’s emphatic attempts to provoke various economic fears.  The data portray Prabowo’s prospects as distinctly remote.  A Widodo landslide would further reduce the likelihood of disruption or unrest, as Prabowo‑camp claims of fraud or manipulation would lack credence.  Meanwhile, Widodo would emerge with an unequivocal mandate and particularly strong political capital.  Parties that defy him would jeopardize their own image.  But whether he would use this strength effectively is questionable (p. 5).  Findings from Polmark, a somewhat obscure firm employed by the National Mandate Party (Pan), claim that Widodo’s margin over Prabowo is only 15 percentage points – but the poll is old, it has a large error margin and it featured a 34 percent level of undecided respondents.  As a percen­tage of decided respondents, Widodo’s support is comparable to other (and better) polls (p. 6). 

Justice: In the first verdicts in Lippo’s Meikarta scandal, four Lippo personnel including Billy Sindoro received sentences ranging from 1.5‑3.5 years each.  This is Sindoro’s second conviction from the Anti-Corruption Commission (KPK) (p. 8).

Policy News: A new phase of implementation is underway for online permitting (p. 8).

International: During an election that features strident economic critiques, the govern­ment concluded the Comprehensive Economic Partnership with Australia (IA‑Cepa).  Parties may yet posture when it comes due for ratifi­cation, but other trade agreements have managed to pass.  The IA-Cepa reduces tariffs on myriad Australian goods from five percent to zero, while higher tariffs on certain foods will fall precipitously.  Contrary to reports, it sets no new foreign ownership ceilings (p. 8). 

3. Matahari Department Store (LPPF IJ) – A Retail Conundrum

Pt Matahari Department Store (LPPF IJ)‘s FY18 results call was an interesting combination of kitchen sinking, a cautious outlook, combined with some more optimistic strategies on specialty stores with new brands and smaller format stores for regional expansion. The big question is whether these strategies will win out or will the company continue to underwhelm on its growth prospects? 

Pt Matahari Department Store (LPPF IJ) remains a market leader in its space with 159 departments stores across Indonesia selling affordable fashion to the middle classes but it has underwhelmed on a few occasions on its growth and guidance. It is reducing its dividend payout to facilitate the build-out of specialty stores with new brands on board. 

Valuations do now look interesting with the company trading on 6.0x FY19E PER and 5.4x FY20E PER. It generates a forecast ROE of 70% and ROE of 30%, which is extremely high for a retailer. The question is how much analysts will downgrade and whether investors will look through its Lippo connection. After another 9% fall in the share price today after 22% yesterday, a lot does seem to have been factored in already.

4. January Chip Revenues Down 15.6% Year-On-Year

The Semiconductor Industry Association in the US released the latest WSTS figures for January chip revenues.  Monthly revenues are down 15.6% from January of 2018.  While this is not a surprise to our clients it is frightening to those who anticipated that 2019 would be a continuation of the bonanza enjoyed in 2018.

5. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter

Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.

Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.

However, we are concerned about rising interest costs, at a pace in excess of interest income generation.

The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.

In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.

Debt to Equity is on the rise.

Overall, trends are no better than average – as testified by a PH Score of 5.

Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.