In this briefing:
- What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
- Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
- Map Aktif Follow-On Offering – Lace up for a Potential Long Run
- Indonesia Property – In Search of the End of the Rainbow – Part 6 – Intiland Development (DILD IJ)
- China’s New Semiconductor Thrust – Part 1: Why and How?
1. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States. Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress.
2. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
The future of the US and China relationship remains the most significant geopolitical and economic issue watched by the markets. While the markets prefer to focus on the positives, the eventual outcome of the talks may yet prove disappointing. Meanwhile, a rift is emerging among EU members who have diverging attitudes to cooperation with China. Authorities in Turkey have again spooked investors with their ham-fisted approach to markets. In Ukraine, comedian Zelensky has won in the first round of the presidential poll. In India, sabre-rattling continues ahead of parliamentary elections despite the de-escalation of tensions with neighbouring Pakistan.
3. Map Aktif Follow-On Offering – Lace up for a Potential Long Run
CVC is looking to raise about US$353m through the sale of about 648m Map Aktif Adiperkasa PT (MAPA IJ) shares in the follow-on offering.
Map Aktif (MAPA) is a sports, leisure, and kids retailer in Indonesia. It is a subsidiary of Mitra Adiperkasa (MAPI IJ). The selldown might not be totally unexpected as CVC planned to exit its investment by 2020. However, post this selldown it will still have 192m share left.
4. Indonesia Property – In Search of the End of the Rainbow – Part 6 – Intiland Development (DILD 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 sixth company that we explore is Intiland Development (DILD IJ), a property developer that focuses on landed residential, industrial estates, high-end condominiums, and offices in Jakarta and Surabaya. DILD has a good track record in building and operating high-end condominiums and offices. But the property market slowdown, tighter mortgage regulations, and rising construction costs took a massive toll on the company’s balance sheet and margin.
DILD shows the worst operating cashflow performance versus peers. The operating cashflow is running at a massive deficit after the property market peak in 2013, driven mostly by worsening working capital cycle. Both consolidated gross margin and EBIT margin are also trending down over the past five years, showing the company’s inability to pass on costs. The biggest margin decline is visible in the offices, landed residential, and condominiums.
The total net asset value (NAV) for company’s landbank and investment properties is about IDR10.5tn, equivalent to IDR1,018 NAV per share. Despite an attractive Price-to-Book (PB) valuation and a chunky 65% discount to NAV, DILD still looks expensive on a Price-to-Earnings (PE) basis. Analysts have been downgrading earnings on lower margin expectation and weaker than expected cashflow generation that cause debt levels to remain high.
Consensus expects 16% EPS growth this year with revenues growing by 22%. We may see further downgrades post FY18 results as 9M18 EBIT only makes up 51% of consensus FY18 forecast. The government’s plan to reduce luxury taxes and allowing foreigners to hold strata title on Indonesian properties should bode well for DILD and serve as a potential catalyst in the short term. Our estimated fair value for DILD is at IDR 404 per share, suggesting 14% upside from the current levels.
5. China’s New Semiconductor Thrust – Part 1: Why and How?
China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities. This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.
In the first part of this series we will see what motivated China to enter the market and how it plans to do so.
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