Smartkarma Originals

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 eighth company that we explore is Bekasi Fajar Industrial Estate (BEST IJ), an industrial estate operator in the Cikarang, East of Greater Jakarta with an overall estate portfolio of 2,300ha. About 1,250ha is fully developed, leaving BEST with 1,051ha gross landbank (716ha net). BEST’s estate is located 30km from Central Jakarta, the closest one to the city center among other integrated industrial estates in the Cikarang Area. The company is also expanding to a new area in West Java, further East of the current estate where the minimum wage is cheaper.

BEST commanded a premium pricing versus its neighbors due to its well-established infrastructure and closer proximity to the city, port, and airport. The company continues to outperform peers in terms of margin as it stays on its core industrial estate business. Despite rising land acquisition cost, BEST benefits from a stronger USD as its land ASPs are pegged to the Dollar. Over 40% IDR depreciation since 2013 has helped BEST to maintain its gross margin at above 70%.

Indonesia is one of the key ASEAN countries that is set to benefit from the US-China trade tension. Import tariffs imposed by the US may not be enough to push the current factories to move outside of China, but the multinational companies may think to relocate their future expansion elsewhere. Our channel checks confirm that inquiries on the industrial estates have also doubled compared to the previous year.

The increased inquiry volume, driven by the domestic investment cycle and US-China trade tension is the next leg for growth in the short term. Over the medium term, growth from the new industrial estate expansion and infrastructure roll out should kick in. BEST is currently trading at 0.6x PBV and 5.5x forward PE, about 1-std below its mean. Our estimated fair value for BEST, using a mean reversion method for the PE and PB valuation, is at IDR398 per share. The fair value is equivalent to about 55% discount to NAV.

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

Tencent Holdings (700 HK) is a consensus buy with none of the 46 analysts covering it having an underperform or sell recommendation. Analysts’ optimism is supported by the share price which is up 23% YTD. While Tencent is undoubtedly a blue-chip tech company, it does not mean the shares are a slam-dunk buy. 

Global Equity Research Ltd • IPOs, M&A and TMT analyst • (Opens in a new window) ⧉

In part one of our extensive bear-case analysis on Tencent Holdings (700 HK) , we analyze a number of elements related to Tencent’s overall growth dynamics. In part two of our bear-case, written by my colleague Arun George, we specifically dig into the matters related to Tencent’s gaming division. Our key points for part one are below. 

Preamble – Where is the cash?

The transaction economy – how Tencent earns income off investees irrespective of profitability

Valuation and financials – implausible estimates and 37% downside in our alternative DCF

Bull-case rebuttal

Global Equity Research Ltd • IPO and L/S equity, 2015 Starmine top stock picker • (Opens in a new window) ⧉

• Asset Quality recognition is something of a black art with varied definitions for non-performing loans (“NPLs”).
• Firstly, we analyse what a NPL is.
• We then evaluate provisioning changes across Asia. We rank countries.
• We further analyse specific underlying NPL recognition issues in China.
• We then rank a sample of regional banks and countries by NPL recognition.
• Later, we take a look at how different systems come under NPL stress and how they cope often in a crisis environment.
• Finally, we wrap things up with some concluding insights about the cultural backdrop which defines systemic asset quality.

Creative Portfolios • Global Quantamental Bank Specialist • (Opens in a new window) ⧉

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. 

In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha. 

It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.

The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.

The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.

KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support. 

After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.

The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

The Insight is structured as follows:

• A. Key  Conclusions
• B. Report Highlights
• C.History of Electric Vehicles
• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
• F. Batteries Beyond Li-ion
• G. Supply Constraints for Key Raw Materials
• H. The Competitive Landscape

A. Key  Conclusions

Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors. 

Quite apart from the technology,  the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework. 

LightStream Research • Equity Analyst • (Opens in a new window) ⧉

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.

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

Source: Japan Analytics

There are currently 241 listed Japanese companies that can be categorised as Internet businesses. Our classification overlaps with the TOPIX-33 Information & Communication sub-Sector but is broader in that it encompasses all companies listed on all sections and exchanges but is also narrower in that we have excluded Telecommunications (including Softbank Group (9984 JP)) and Information Technology companies. We have adopted a ‘quantamental’ approach which covers the long-term and current trends for Japan’s Internet Sector as a whole, as well as eight sub-Sectors or Peer Groups and the Sectors’ leading companies by market capitalisation.  Our focus is exclusively on the locally-listed universe and is based on disclosed financial and market data. We do not provide any forecasts, other than the companies’ own forecasts and we do not attempt to make any business model or strategic judgments. Our focus is purely on financial and market performance. We do not cover unlisted and defunct companies such as Livedoor and, therefore, there is implicit survivor bias in the data. 

The broad themes that are developed in DETAIL below are grouped into six topics as follows: –

 • SUMMARY • 

 • FUNDAMENTAL OVERVIEW • 

 • SCORING – RESULTS & REVISIONS / RELATIVE PRICE • 

 • RESULTS TRENDS • 

 • VALUATION • 

• RECOMMENDATIONS •

OVERVIEW – As will be covered in greater DETAIL below, Japan has failed to evolve a substantial Internet Sector and, in many business models, has been passed by global competitors including in the home market. Although Internet Sector revenues have grown steadily and now account for close to 1% of the total for all listed companies, operating margins have declined by half in the last seven years and are now only four percentage points higher than the market average. Accordingly, as measured by our Results & Revision Score, the Sector is close to a twelve-year low. The market’s response is an unchanged Sector weight in the market composite despite the addition of 111 new companies in the last six years, and a Relative Price Score that has moved in a narrow range over that period. The Sector averages disguise the weak business and market performance of a handful of Sector leaders as well as the overvaluation of the Sector’s more successful business models, which is partly a result of a lack of alternatives. Despite the world’s most significant Internet investor – Softbank Group (9984 JP)‘s Vision Fund – being based in Japan, this fund and other global investors in Internet business have been right to give Japan a ‘pass’. 

TAP Japan Research • ‘Quantamental’ Japan equity commentary • (Opens in a new window) ⧉

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.

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉

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. 

CrossASEAN Research • ASEAN Insight Provider • (Opens in a new window) ⧉