The rise and rise of corporate Indonesia + Indonesia on the new economic map + Singapore dreaming

It has been a year of mega deals for Indonesia’s largest business groups. For the first time in its history, Indonesia has seen a number of $1 billion corporate deals concluded in the space of 12 months. And notwithstanding external shocks, the next 12 months look like following a similar trajectory.

In the first half of this year, corporate Indonesia managed to execute two billion-dollar deals and five more that were above $500 million. This is unprecedented in the country’s corporate history and reflects a fast-growing corporate sector and an expanding capital market.

All in all, an amazing $4 billion worth of corporate deals was executed in the first six months of the year and market analysts are confident the second six months will be as strong.

That such major deals can now be executed is proof that Indonesia is gaining recognition as a major economy and an emerging regional financial center. Jakarta may be somewhat behind Singapore and Kuala Lumpur in terms of size and sophistication but this should not distract from the fact that a clear upward trend is underway.

Robust economic growth and a strong corporate sector are creating enormous opportunities for the financial sector as well and in the process deepening the country’s capital markets.

“The level of corporate activity now underway is unprecedented,” says Russell Cranwell, managing director of investment banking at CLSA Indonesia. “Indonesia is growing so rapidly that there is a rush by corporates to raise new funds. It’s all about growth.”

“In the past you did not have billion-dollar deals in Indonesia but today such deals are more frequent,” he adds. “This is because companies are bigger and market capitalization has improved.” International investors are looking for bigger deals but, most critically, their appetite for Indonesia is larger.

The large Indonesian groups are expanding at breakneck speed. At almost all of them, from Astra International to Djarum to the Salim Group, the story is all about growth and expansion. “All the large groups have great businesses and are not in direct competition,” says one investment banker.

Astra and Salim, for example, are not exactly in the same industries so both can grow aggressively. The same applies to other groups such as Sinar Mas, Lippo, Djarum and Astra International. “All the large groups have a particular niche that works for them,” he notes. “They have all managed to find something different and are now working to expand.” Property companies with large land banks are also expanding, with many of them now venturing outside the large cities to smaller ones such as Semarang and Pelambang.

Lippo Karawaci, part of the Lippo Group, for example, has plans to build 15 malls within the next three years and operate 50 malls by 2016 as it seeks to tap the country’s rising middle class and consumer spending. In January this year, UK-based private equity firm CVC Capital paid $773 million for a 90.76% stake in Matahari Department Store, which is also owned by the Lippo Group. The deal was billed as the largest private equity deal in Asia, triggering hopes that private equity funds were back in the region.

The two groups that have benefited most from the 1998 financial crisis are Jardine Matheson, which bought a controlling stake in Astra International, and the Djarum Group, which acquired Bank Central Asia from the Indonesian Bank Restructuring Agency (IBRA).

Both these groups got excellent assets at relatively low prices and are now re-investing the cash flow in new assets, says one market analyst.  He adds, however, that at that time few international investors were willing to risk paying for Indonesian assets. Djarum, which built its empire on cigarettes, has expanded into banking, coal mining and plantations while Astra has used its enormous cash reserves to bulk up.

Another group that is sitting on a massive cash machine is Sinar Mas, which has invested heavily in palm oil plantations over the past few years. The group, which was close to collapse at the height of the crisis with $12 billion in debt, has emerged as one of the strongest corporate groups in the country today. Indonesian companies, says Cranwell, are now more sophisticated in terms of understanding market trends and leveraging on these trends.

A few years ago, it was difficult to take an Indonesian company on a road show to some of the larger financial capitals of the world but today that problem does not exist.

Hungry for more

With little to entice them in the more developed markets in the United States and Europe, global investors are likely to continue to snap up assets when they come to the market in fast-growing economies such as Indonesia. The country’s expected impending investment rating hike will further lower the cost of borrowing and intensify large corporate deals.

“There is a big appetite amongst large global companies for good deals in Indonesia,” says Giuseppe Nicolosi, Indonesia managing partner for Ernst & Young.  “When I talked about Indonesia 12 to 18 months ago with my counterparts in other regions, the response was ‘so what’.

But now everybody is looking at Indonesia and while it is still a challenging market, the level of interest has increased by miles.” He adds that his firm has seen increased business in conducting due diligence for M&A activity but so far, this has been largely limited to natural resources and mining. Part of this activity is being driven by a new generation of corporate leaders within the family-owned groups who are selling off non-core assets.

“The new generation will have a different approach to managing their groups,” he notes. “You will see more activity in selling non-core assets and acquisition of assets that are deemed core.” Nicolosi notes that the new generation will look at what makes sense in terms of holding on to assets. “In some groups, you will see more professional management going forward, especially over the next five to 10 years.

Too hot to handle

In the natural resource and mining sector, rising commodity prices have led to Indonesia’s own version of the gold rush. The difference is that the mineral in demand is coal. Over the past few years, Chinese and Indian investors have pushed the valuations for Indonesian coalminers sky-high as they seek to secure supply for their own fast-growing economies. Indonesia’s coal sector is seeing phenomenal growth both in terms of production and in the arrival of new players on the scene.

Vallar, the resources group funded by financier Nathaniel Rothschild, paid $3 billion last year for a majority stake in Bumi Resources, the largest coal mine in Indonesia, and Berau Coal Energy, the fifth largest coal mine. Now the company, which is listed on the London stock exchange as Bumi Plc., has come back to acquire a 75% stake in Bumi Resources Minerals (BRM), the recently listed minerals subsidiary of the Bakrie Group, for a further $2 billion.

“Whenever a coal asset comes up for sale, all the big groups bid,” says CLSA’s Cranwell. Has this led to overheating of the sector? “There is some frothiness but the million-dollar question is whether the market has topped,” he responds. Cranwell adds that global interest in Indonesia’s mining sector will likely intensify, rather than diminish over the next few years. Apart from coal, there is huge interest in other minerals such as nickel, gold and copper.

“We are seeing a lot of people take a look at the hard rock business and this includes local groups as well.” Wuddy Warsono, head of sales at CLSA Indonesia, says the demand for commodities will continue as long as inflation is manageable and commodity prices do not rise too far.

“We are in a sweet spot because inflation is under control but commodity prices are strong. The big danger is the balance shifting between commodity prices and inflation.” CLSA has already been involved in a number of large deals this year such as the $1.3 billion Bank Mandiri rights issue and the $700 million United Tractors right issue, which the heavy equipment company raised to acquire a coal mine and other mining assets.  And, says Cranwell: “We’ve got more to come.” GA


Indonesia on the new economic map

Indonesia is arriving. “Better to be lucky than smart” is a common Indonesian saying. But in Indonesia’s case today, improved policy making and some good fortune have both contributed to its success. Expected to be Asia’s third-fastest growing economy this year, Indonesia’s consistent growth of 6%, the strengthening rupiah, low sovereign and household debt, an imminent investment grade rating, and growing foreign reserves are evidence of better macroeconomic management over the past decade.

Throw in a bit of good fortune:  The shifts in global economic trends – from the food and water crisis, to increased economic volatility, and the commodities boom – are playing right to Indonesia’s strengths, an archipelago surrounded with water, bestowed with fertile land, natural resources and a young demographic. It is also the only ASEAN member state to be part of the G-20, and a strong candidate to be part of the BRIC nations.

With the exception of an erratic Russia, the BRIC countries have developed a growth model that has acquired some immunity against economic volatility. In the immediate aftermath of the 2008 sub-prime crisis, China and India achieved 6% growth in the first quarter of 2009.  Indonesia was the only other G-20 nation to post positive growth – and the only one to do so without government stimulus.

This was possible because Indonesia was less export-dependent than its giant peer nations. Moreover, thanks to lessons learned from the 1998 financial crisis, a much healthier banking regulatory environment prevented the sort of banking crisis that engulfed other western economies.  Another point in Indonesia’s favor is its size (the world’s fourth largest, at 240 million), contributing to a large domestic market stimulating sustained economic growth.

Expansive regional growth

The Indonesian middle class is not growing as fast as China’s and India’s, but improvements in education and a wave of decentralization policies have created a new middle class and new cities serving as additional engines of growth.  Today, on average, those residing outside of the island of Java – traditionally the center of economic power – enjoy higher incomes than those living within Java.

We are also seeing a deepening of capital markets, helped by the continued privatization of state-owned companies.  A more robust market has attracted foreign capital and will provide Indonesian companies access to capital needed to expand and create jobs.
Domestic demand is going to be Indonesia’s trump card as it prepares to move into the big leagues. But the nation can get its job numbers up faster.

The current 7% unemployment could deepen before the situation improves on inward investment by companies eyeing the home market.When it comes to natural resources, Indonesia is a byword for endowments. Strategic planning in this sector is not yet a strong suit of Jakarta, and may threaten the economy’s sustainability in the long run. For the foreseeable future, however, Indonesia has plenty to run on.

Better still if proceeds from resources can be allocated to upgrade infrastructure and other social services.The same picture emerges with forestry assets. Indonesia is home to the second largest rain forest after Brazil, but questions over how much to cut, conserve, and rejuvenate will have implications for the nation’s international standing with carbon emissions and climate change being global concerns. Indonesia’s leadership in the Copenhagen Summit and moratorium on new forest clearing – at the expense of short-term economic growth – are positive signals.

On the political front, the government’s inaction over the murderous attacks on the minority Islamic Ahmadi sect is worrying but the larger picture is that of a country of moderate Muslims that stands out in a world marked by too much religious conflict.

Indonesia sits at the crossroads of many global challenges — democracy, extremism, food, water and resource security and global warming. Indonesia stands to benefit from these challenges and can make a positive contribution to the resolution of these issues. President Susilo Bambang Yudhoyono has done a competent job of steering Indonesia toward a rule of democratic accountability, economic management, improving the security situation and establishing Indonesia as an increasingly engaging, responsible and constructive global citizen.

Indonesia is well-placed to take on a role beyond just Southeast Asian concerns to that of more complex global issues. International heft, as a function and a privilege of economic success, is the ultimate defining trait of a nation on the economic rise.

Now, the government’s over-arching goal should be to deliver on education, infrastructure and even more effective economic regulation.Indonesia is the name to watch on the new economic map.

John Riady is Editor At Large of Globe Asia and Lecturer at the Universitas Pelita Harapan Law School


Singapore dreaming

Despite towering price tags, cash-flush Indonesians still covet strategic properties in the neighboring city state. “Singapore and Indonesia have always been so friendly with each other,” Edmund Cheng, deputy chairman at Wing Tai holdings, tells media representatives during a visit to the company’s new developments in Singapore’s CBD.

“Singapore is so small, so it needs to capture a lot of investment,” he adds, referring to the country’s population of only 5 million.
Cheng, a Hong Kong-born businessman who has lived in Singapore for 32 years, says Asian countries — including Singapore, Indonesia and Malaysia — will become the economic “stars” of the world in the coming decade.

Little more than a fishing village 50 years ago, Singapore itself has developed into a modern and wealthy cosmopolitan state.  “Looking at history and how the West is doing; (opportunity) is coming back to the East,” he notes.

Tremendous investment potential, says Cheng, has property firms marketing their products throughout the region. “Property is very much tied to how well a country is doing, especially in a small country like Singapore. However, small is good for a property business because that means limited land and when economic development is good, people can afford more,” he says.

Wing Tai was founded as a family business in Hong Kong back in 1955 and within less than a decade shifted its operations to Singapore.  Its business portfolio includes property development and investments as well as hotel and retail businesses in Malaysia and China.

The company’s total assets exceed S$3.6 billion, with current net assets totaling S$1.7 billion and a market capitalization of S$1.2 billion. According to the company’s annual report, revenue from its property business reached S$626.7 million last year, up 93% from S$324.6 million in 2009. The group’s property business contributed more than three quarters of the company’s total revenue of S$821.9 million last year.

Despite being hit by the global slowdown in 2009, all is well in the city state with the economy growing by 14.5% last year. Meanwhile the Ministry of Trade & Industry (MTI) has projected that economic growth will reach between 4% and 6% this year.

Defying global trends, Indonesia’s strong growth throughout and following the crisis has not gone unnoticed by investors. Predicted to grow by 6.5% this year, Cheng acknowledges that Wing Tai should have been paying more attention to Southeast Asia’s largest economy.

“We missed the opportunity [to tap the Indonesia market],” admits Cheng of Indonesia’s strong growth over the past two years. He lauds the country’s economic development, pointing to its healthy capital markets and political stability, but says his company has been more focused on the property markets of Hong Kong, Malaysia and China.

“I need to know more about Indonesia, including Jakarta and all the other cities because it is important as a developer to know about the people, the culture and the policy,” he admits. “I don’t have that knowledge at the moment. Over the years and once I have this knowledge I will be able to do something good for Indonesians, as well as for myself and my company,” he says.

Cash-rich Indonesians 

It could be that the tide is turning sooner that Cheng implies — Indonesia is already a very important market for the Singapore-based company, contributing more than half of its overseas sales. “About 55% of Helios’ market is overseas and more is coming from Indonesians,” says Len Siew Lian, Wing Tai Holdings’ general manager for property.

Wing Tai’s two latest apartment projects — The Light and Helios residences — located side by side in Singapore’s 09 district on Cairnhill Road, have attracted the attention of several cash-rich private Indonesian investors.

Len Siew Lian says there are no restrictions on foreigners purchasing condominiums in Singapore and many Indonesians invest for their children. “Indonesians have no problem paying cash,” she notes, adding that the maximum payment period in Singapore is 70 years minus the buyer’s age.

“Indonesian buyers usually choose to pay cash or complete payment in 10 years,” she says, adding that most purchase for personal use.

With land prices in Singapore tripling over the past five years, from $600 per sq ft in 2006 to $2,000 per sq ft in 2011, the properties attract an elite market.  By comparison, land prices in Jakarta’s CBD are Rp17.5 million per sq m, bearing in mind the different measurement system.

Helios Residences is a high-end condominium consisting of 140 units of between 1,280 and 2,002 sq ft, while the three penthouse units are larger. The project was started in 2007 and is due for completion next year.

“Each project usually takes between four and five years to complete,” explains Len Siew Lian, adding that each unit is sold for more than S$4 million. The price tag doesn’t deter Indonesian buyers, who are prepared to pay big dollars for property just five minutes’ walk from Singapore’s popular Orchard Road shopping district and nearby Mount Elizabeth Hospital.

Based on the Singapore first quarter residential report released by global real estate consultant Cushman & Wakefield, the private residential market has encountered “drastic government measures” to cool soaring market sentiments and rising prices within the period.

This included lowering the loan-to-value ratio from 70% to 60% for owners with more than one home loan, as well as significant hikes in stamp duty.  These measures have had some effect, with price rises slowing by 1.8% in the second quarter, from an average 2.5% in the first quarter. “Prices of luxury, high-end non-landed private homes increased by 1.5% and 1.8% respectively,” the report noted.

GlobeAsia was privy to a sneak peek into Wing Tai’s latest luxury project Le Nouvell Ardmore, currently being built at Singapore’s prestigious Claymore Hill.  Named after its architect, the 33-story tower building includes 43 exclusive units of more than 3,800 sq ft.
“When we build, it is for someone. Architecture is a gift,” says Pritzker Prize winner Jean Nouvel. The French architect’s distinctive aesthetic taste is both simple and elegant, says Cheng, who has known Nouvel for years. “We share the same passion for details and something original,” he adds.

Inspired by the Rubik’s cube, the Le Nouvel Ardmore maximizes views and space. The luxury buildings also boast the work of Japanese interior designer Koichiro Ikebuchi and French lighting designer Hervé Descottes. The smallest residence in the building, at 3,800 sq ft, has a not-so-humble price tag of S$17 million.

“It is not about the price,” emphasizes Cheng. “I think it is more important to take pride in what we do, foresee vision that is long-lasting, not just in value but also in des

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