Brief Indonesia: Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward and more

In this briefing:

1. Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward
2. The Week that Was in ASEAN@Smartkarma – Thailand’s Election, Philippine Banks, and Data Junkies
3. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA IJ)
4. Lead Intact, Says Preponderance of Polls / MRT Tariff Undecided / EU Trade Tension / PDP Bill Sought
5. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump

1. Leong Hup Pre-IPO – Hard to Pinpoint What’s Going to Be the Revenue Driver Going Forward

Leong Hup International (LEHUP MK) (LHI) plans to raise up to US$400m in its Malaysian IPO. LHI is one of the largest integrated poultry producer in Southeast Asia. 

LHI was listed on Bursa Malaysia from 1990 to 2012.  Since delisting, it has consolidated  its Southeast Asia operations under a single entity and is now looking to relist the larger entity.

While revenue has been growing steadily, margins have been volatile. In addition, its difficult to pinpoint which products are performing well in which geographies. The feedmills business seems to be a more consistent performer as compared to the livestock business. It’s also a larger revenue contributor in the faster growing regions.

2. The Week that Was in ASEAN@Smartkarma – Thailand’s Election, Philippine Banks, and Data Junkies

Macro Insights

In Thailand: Elections Are Not Irrelevant; This One Too Pits Faster Growth Vs. Military “Stability”, Cross ASEAN Insight provider Prasenjit K. Basu discusses the implications of the result of Thailand’s election, which will likely see the incumbent Prime Minister retain his position, this times as a democratically elected leader (result covered in the discussion stream). 

In Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest, Kevin O’Rourke looks at the most important political and economic developments over the past week and provides his value-added comment. 

In Thailand’s Election – Growth Story Plays Wait and See, Dr. Jim Walker discusses the recent monetary moves by the Bank of Thailand and what the result of the election might mean for growth. 

In Philippines: El Niño’s Comeback – How Bad? , Jun Trinidad looks at the potential impact from the predicted comeback of El Nino in the economy. 

In Asian Credit Monitor: The Pad Thai Election, Warut Promboon looks at the potential impact of the results from the Thai election and the implications for credit in that country. 

Equity Bottom-up Insights

In XL Axiata (EXCL IJ) – The Crown Prince of Data, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s most direct play on the rising consumption of mobile data, as pricing in that market starts to look more favourable. 

In Golden Agri: El Nino Back on the Front Burner; Bullish Catalyst for GAR, commodities specialist Charles Spencer zeros on the potential positive impact from an impending El Nino.

In Philippine National Bank – The Beginning of Recognition, Daniel Tabbush circles back to this leading but unappreciated Philippines lender, where he sees greater appreciation from investors starting to transpire. 

In Tisco – A Bright Bank in a Dim Rate World, Daniel Tabbush revisit one of his top financial picks in Thailand. 

In SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap. CrossASEAN Insight Provider Nicolas Van Broekhoven circles back to this small-cap marina play and finds it to be one of the cheapest stocks listed on the SGX. 

In Delta Electronics (DELTA TB): Thoughts on the IFA’s Valuation RangeDelta Electronics Thai (DELTA TB), Arun George circles back to this ongoing tender offer, which he recommends minorities should accept. 

In After You Looks Beyond Thailand For Opportunities, our Thai Guru Athaporn Arayasantiparb, CFA writes on After You Pcl (AU TB) and Amata Corp Public (AMATA TB) following recent meetings with management. The meetings with the two companies whose industries could not have been more different. 

Sector and Thematic Insights

In Thai Telecoms: Slowdown in Mobile Business Continues., our comrades and collaborators at New Street Research circle back to the Thai Telco sector post 4Q18 results. 

In Snippets #21: Bremen, TMB Rights Issue, Thai guru Athaporn Arayasantiparb, CFA highlights five developments/news flows/trends and their potential impact on Thai equities over the past week or so. 

In Phillippine Gaming Tug of War Disguises Vibrant Sector Potential for 2019-2020, gaming specialist Howard J Klein zeros in on the Philippines gaming sector, which currently flies under investor’s radar but has a lot of future potentials, and more especially Bloomberry Resorts (BLOOM PM). 

In Singapore Real Deals (Issue 5): The Largest Condominium in Singapore, Anni Kum presents a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In this issue, she looks at the launch of Treasure at Tampines in District 18, the largest condominium in Singapore to-date. (Official launch last weekend). 

3. Indonesia Property – In Search of the End of the Rainbow – Part 5 –  Summarecon Agung (SMRA 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 fifth company that we explore is Summarecon Agung (SMRA IJ), a township developer with over 40 years of track record and a combined development area of over 2,700ha. The company benefits from its exposure to the popular Serpong district, but an over expansion, coupled with tightening property regulations caused its balance sheet to suffer in the following years. Earnings have declined by -19% Cagr over the past five years as a consequence of lower margins and burgeoning debt levels.

The company has plans to divest its retail mall division, which can serve as a positive catalyst in the near term. Improving sentiment and better interest rate environment, as well as positive regulatory tailwinds should be a driver to SMRA’s share price this year. We see a 44% upside to our target price of IDR1,408 per share.

Summary of this insight:

• The success of SMRA’s first township, Kelapa Gading, paved way for the next six township development. The same township model is replicated to its Serpong, Bekasi, Bandung, Karawang, Makassar, and soon Bogor. 
• During the height of the property boom, every cluster launch in the Serpong area is 2-3x oversubscribed. Buyers were a mix of speculators and end-users, and both were happy customers benefiting from over 400% land price appreciation over the course of 2009-2013. Land ASP in 2009 was just below IDR3mn versus IDR12-15mn in 2013.
• Driven by the positive momentum of the property boom, SMRA ambitiously launched three new townships at the trough of the property market (2015-2018), growing its total township development area by more than a third. Poor cashflow management, stemming from the over-expansion during the property downturn took a massive toll on the balance sheet. SMRA turned from net cash in 2013 to holding IDR8.6tn of debt in 9M18 (1.2x gearing) with interest costs making up a chunky 49% of EBIT. 
• We have also seen a massive shift to the end-user market since 2014, as the company started to sell more smaller houses and affordable apartments rather than land lots and shophouses. At the peak, shophouses and land lots made up more than 50% of the company’s development revenues. As of 9M18, that number has declined to a mere 7% of revenues, while 93% comes from houses and apartments. Housing units launched in 2016-2017 are 36% cheaper than units launched in 2011-2014, as the company downsized in the area.

• SMRA has the second biggest retail mall portfolio in our coverage after Pakuwon Jati (PWON IJ) with 258,000sqm net leasable area (NLA). The three malls generate about IDR1.3tn revenue per year, returning 42% EBITDA margin. About 40% of tenants in Bekasi and Serpong are up for a rental renewal in the next three years, and this could serve as a potential upside on the average rental rates. 

• Pros: Bank Indonesia (BI)’s move to loosen mortgage regulations last year, and plans to reduce luxury taxes and allow for friendlier foreign ownership scheme should give a breath of fresh air over the medium term. SMRA targets 18% presales growth in 2019, but they have been missing their presales target by an average of 22% over the past three years. We expect a more modest 5% presales recovery this year.
• Pros: Margin on houses show a massive improvement from 51% in 2014 to 59% in 9M18. The improvement brings up the consolidated property development margin by 600bps YoY. As a segment, this is the first margin uptick since 2014, leading to 44% YoY EBIT growth and 115% YoY NPAT growth in 9M18.
• Cons: The stellar property development growth, however, is diluted by the poor performances from the investment property division that recorded 14% YoY EBIT decline. Despite some improvements on the gross margin level and healthy topline growth, opex has doubled YoY, leading to 700bps reduction in the EBITDA margin. 
• Recommendation & catalyst: SMRA has underperformed the JCI by a steep 71% over the past 36 months as earnings and presales continue to disappoint. Discount to NAV, PE, and PB valuation are standing at -1 standard deviation below mean. Improving risk appetite for high beta stocks, better interest rate environment, accomodative policies from the government, and potential pick up of activity after the election are a few of the key catalysts for the stock and sector re-rating. The divestment of its retail arm should also help to clear some debt off the balance sheet and unlock value. We have a BUY recommendation.

4. Lead Intact, Says Preponderance of Polls / MRT Tariff Undecided / EU Trade Tension / PDP Bill Sought

The presidential race is unchanged as data from a premier polling firm, SMRC, shows a 26 percentage point lead for Widodo.  Thus far only one poll has shown a narrow lead — 12 percent, according to Kompas — but until other data corroborates this, it appears to be an outlier that does not change the outlook.  Widodo is heavily touting the MRT opening, but provincial leaders are struggling to set a tariff rate — it will therefore still be free when it opens for public use on 25 March.  The Religion Ministry appointments-graft scandal threatens to implicate the minister.  Trade acrimony with the EU is escalating.  West Java Governor Ridwan Kamil, a 2024 presidential contender, garnered negative publicity for appointing relatives.  Legislators and stakeholders are clamoring for government progress on a draft Bill on Personal Data Protection.

Politics: Eager to maximize advantages from the imminent commercial start of Jakarta’s Mass Rapid Transit (MRT) line, President Joko Widodo claimed credit for having made a “political decision” to take on the project’s cost.  In fact, the magnitude of those costs to the province remains unclear: three days from the start of operations, policymakers have yet to set the tariff for riders (Page 2).  The corruption scandal enveloping the Islamic United Development Party (PPP) – at the worst possible time in the election cycle – could further depress the clout of Islamic interests in the next parliament (p. 3).  West Java Governor Ridwan Kamil invited criticism by appointing two relatives to a high-profile Development Acceleration Team (TAP) under his aegis (p. 4).

Surveys: The large lead for President Joko Widodo appears intact, based on findings from three recent polls, although one reputable agency produced divergent results.  Widodo has a lead of at least 19 percentage points according to three surveys in late February and March: in addition to the Survey Network (LSI) and Alvara Research (discussed in recent Ref Wkly editions), new data has emerged from Saiful Mujani Research and Consulting (SMRC) placing Widodo’s margin over Prabowo at 26 percentage points.  A poll conducted simultaneously by Kompas measured the lead at only 12 percentage points – but until other polling corroborates this, it constitutes an outlier that lacks significance.  In any event, even if Widodo’s lead has shrunk as much as Kompas claims, he would still enjoy a comfortable cushion (p. 4). 

Justice: Religion Minister Lukman Saefuddin is under scrutiny after investigators discovered Rp600 million in cash in his office desk drawer.  Meanwhile, former PPP Chair Romahurmuziy failed to appear for questioning as a suspect (p. 7).

Policy News: Public officials clamored for a long-awaited Bill on Protecting Personal Data (RUU PDP) (p. 8).  Energy Minister Ignatius Jonan welcomed a parliamentary suggestion to subsidize the higher-octane petroleum product Pertamax, rather than Premium – but he remained noncommittal about implementation (p. 9).

Infrastructure: Jakarta’s governor rejected suggestions from provincial legislators that the MRT should be free, or at least free for Jakarta residents (p. 10). 

International: Policymakers denounced the European Union (EU) for allegedly discriminating against biodiesel from crude palm oil (CPO).  The planned Comprehensive Partnership Agreement with Europe (IEU‑Cepa) could be at risk (p. 11).

5. Gold May Rise on Lower Real Ylds; Canada Leads Fall in Real Ylds; Aust Inflation Expectations Slump

• The broad decline in global bond yields and curve flattening suggest that the market has become more concerned about weak global economic growth.
• The fall in yields is at odds with the rise in equity and commodity prices this year, but the later may have lost upward momentum.
• Safe haven currencies, gold and JPY, have strengthened this week and are likely to perform well if yields remain low.
• US real yields have fallen more than nominal yields this year, with a partial recovery in inflation expectations from their fall in Q4 last year. Lower real yields point to weaker fundamental support for the USD, and further support safe havens like gold.
• Canadian real long term yields have fallen more abruptly than in the USA, into negative territory, suggesting the outlook for the Canadian economy has deteriorated more than most. This may relate to concern over a peaking in the Canadian housing market. The fall in real yields suggests further downside risk for the CAD.
• Long term inflation breakevens have fallen in Australia sharply since September last year to now well below the RBA’s 2.5% inflation target.
• Australian leading indicators of the labour market have turned lower, albeit from solid levels, and may be enough, combined with broader evidence of weaker growth, for the RBA to announce an easing bias as soon as April.
• Asian trade data and flash PMI data for major countries point to ongoing and significant weakness in global trade.