Reassessing Indonesia (Part 2)

The largest local groups with annual revenues of more than US$1bil include:

Salim: consumer goods, agriculture / US$7.3bil

Sinar Mas: pulp and paper, agriculture / US$4.7bil

Djarum: cigarette, Bank Central Asia, Cipta Karya Bumi Indah / US$3.7bil

Gudang Garam: cigarette, plantations, paper packaging / US$3.5bil

Bakrie: coal, Bakrie Brothers / US$3.1bil

Lippo: regional property developer, healthcare, financial services / US$2.7bil

Raja Garuda Mas: pulp & paper, plantations, energy / US$2.4bil

Triputra: coal, agro-industry, manufacturing / US$2.3bil

ABC: consumer goods, battery / US$2.1bil

Saratoga Capital: coal, Adaro, CPO, infra / US$1.9bil

Para: consumer goods, property, mining, financial services / US$1.6bil

Sampoerna: agro-industry, telecommunications, forestry and property / US$1.4bil

Ometraco: animal feed / US$1.2bil

If we were to include state owned companies, they will include:

Pertamina: energy / US$43bil

PLN: infra / US$12.7bil

PT Telkom: telecommunications / US$6.6bil

Bank Mandiri: banking / US$2.7bil

Bank BRI: banking / US$2.6bil

Bank BNI: banking / US$2.1bil

If we were to compare the Malaysian companies with annual revenues of at least US$1.8bil (RM3.4bil), they include:

1) Tenaga Nasional US$6.8bil

2) Sime Darby US$6bil (pre-merger)

3) Petronas Dagangan US$5.7bil

4) Telekom Malaysia US$5.2bil

5) Maybank US$4.4bil

6) MAS US$4.3bil

7) MISC US$3.3bil

8) UMW US$2.9bil

9) Public Bank US$2.8bil

10) Bumiputra Commerce US$2.6bil

11) IOI Corp US$2.6bil

12) Genting US$2.4bil

13) UEM World US$2bil

14) RHB Capital US$1.8bil

15) PPB US$1.8bil

The big difference is that many of the biggest companies in Malaysia are GLCs but Indonesia’s list comprises mainly entities owned and run by entrepreneurs.

The Arab Connection

Petrodollars have been making a beeline to the shores of Indonesia in recent years. There is an underlying motive to help fellow Islamic countries. Indonesia has the most populous nation in Asia following China and India, and has enormous untapped potential. The biggest investment to date is by Saudi Arabia’s Bin Laden group which invested US$4.3bil into 500,000 ha of planned rice estates in Merauke, Papua.

The world class Emaar Property (Dubai) will be building an 1,200 ha integrated resort project in Lombok, West Nusa Tenggara. The projects is estimated to be US$2.6bil. Emaar is the builder of the Burj Dubai tower, the world’s tallest building. Emaar also plans to invest in other sectors such as rice plantations in east Indonesia, power plants in South Sumatra, and a satellite town in either Purwakarta or Jonggol.

Another Dubai investor is Ras Al Kheimah Investment Authority (RAKIA) which is planning to develop a US$400mil 130 km railroad connecting Palembang and Tanjung Api-Api port in South Sumatra.

Qatar Invetsment Authority has committed US$1bil in infrastructure related projects. Another investor from the same company, Qatar Bahrain Company, has committed US$400mil to a power plant project.

Dubai Drydock and Dubai World have planned to invest US$500mil in a ship building yard.

Sensitive Treatment of Investors

However, the Indonesian government seems to have a different set of rules for its neighbours, Malaysia and Singapore. Singapore has had to deal with request to lower or eliminate stakes in one of their telecommunications holdings.

In Malaysia, Maybank’s brush with the regulators over its BII purchase looks laughable. Perhaps, the Indonesians do not want to lose so many key strategic assets to Malaysia and Singapore. It’s a bit like how Australia hates to lose to New Zealand in rugby and cricket, and well, almost everything else. Misplaced nationalistic pride? Pettiness? Venting frustrations and displeasure over the treatment of Indonesian workers in Malaysia and Indonesia (maids, construction, palm oil)?

Maybe that’s why when Arab investors buy strategic assets, there is so much less negative press. For example, Qatar Telecom has acquired a 40.8% stake in PT Indosat for US$1.8bil. Saudi Telecoms has also bought a 51% stake in PT Natrindo, another telecommunications giant which operates the country’s newest cellular phone system.

Middle East investors have been big in Malaysia over the last five years. But is the tide turning in favour of Indonesia? I think not. Malaysia is still a preferred destination as the infrastructure and business logistics are comparatively simplified and easier. Till today, Indonesia is still working out the double taxation agreement between Indonesia and Middle East governments. But the gap is closing.

The Legacy Issues

Just like Malaysia, Indonesia practises a lot of subsidy. Subsidies account for 11.7% of the government spending in 2007, (US$13.6bil or 2.1% of GDP) and are expected to rise to over 13% in 2008. Government spending on infrastructure is expected to increase ahead of next year’s elections. Indonesia plans to sell US$12.8bil bonds in 2008 to fund infrastructure and fiscal deficit.

The good news is that the ratio of government debt towards GDP in 2009 is expected to drop to 30% from 54% in 2004. President Susilo Bambang Yudhoyono said Indonesia, which had fully repaid its foreign debt to IMF, continued to enjoy an increase in its foreign exchange reserves. In July this year the foreign exchange reserves have reached over US$60bil.

The Corruption Eradication Commission (KPK) has carried the people’s wishes as it aggressively pursues powerful political figures, and even plans to take on the House of Representatives. KPK chairman Antasari Azhar has in the past eight months overseen arrests on corruption charges of five members of parliament, a former national police chief and ambassador to Malaysia, a senior government prosecutor, and three central bank officials, including the governor.

The Main Factor

What prompted me to write about the need to reassess Indonesia was the entrepreneurship that resides in the many mega business entities, which were mentioned earlier. A country’s economic success can be charted by sound long-term financial, social and economic policies €“ e.g. Singapore and HK. Or it can rise up thanks to an open economy and strong entrepreneurship in its people €“ e.g. HK, China.

To be fair, while the Indonesian government is headed in the right direction, it still has some way to go. What is more significant is the level of entrepreneurship that resides in the very big companies in Indonesia.

There is a big difference to a professionally trained CEO helming a big company in Singapore and someone who is building a billion dollar empire from Indonesia. It used to be that to be very rich in Indonesia, you need very strong ties to the right people. While that is still important, there has been a significant change in the way Indonesian companies have been growing over the last five years.

Was it due to the end of the Suharto-era? Was it due to a more democratic process? Are there more opportunities now for more people instead of a select few? Maybe all of the above, and throw in a suggestion that many Indonesians are just simply superb businessmen.

Let’s just examine a few of the major business groups:

* Lippo: It is not only big in Indonesia but in Asia as well. Its property arm, Lippo Karawaci, currently has US$2bil in projects and assets under management. Its strategy is to grow that to US$10bil over the next five years. Its recent major succeses include the US$880mil Kemang Village and the outstanding US$1.2bil St Moritz development in west Jakarta. In healthcare it plans to add 15 new hospitals around the country. To ensure they have things covered up the value chain, it has tied up with international institutions in Singapore, Australia and Universitas Pelita Harapan.

The company owns the largest landbank in the country, and will be developing new townships modelled after the highly successful Kemang Village and Lippo Cekarang, in Tanjong Bunga water front project in Makassar. It has two REITs in Singapore with US$900mil total in assets under management, with a target to bring that to US$5bil in 5 years.

* Salim: Helmed by Anthony Salim. Has the world’s largest instant noodle maker in Indofood Sukses Makmur, and the HK-listed First Pacific Co. Over the last three years he has increased its palm oil plantations by 224,000 ha to 387,000 ha though not all is planted with palm oil yet. Compare that with arguably Indonesia’s largest CPO planter Astro Agro Lestari which has only 300,000 ha. By 2015, Salim aims to produce 1 million tonnes of CPO a year. Salim is also the industry leader in cooking oil, margarine and flour.

* Sampoerna: Sold the country’s second largest clove cigarette maker to Altria for US$5.2bil in 2005. However, the family has quickly bounced back, redeployed the cash to acquire stakes in agriculture, telecommunications, mining and property. Its Ceria telecommunications brand saw subscribers growing from 300,000 in 2007 to more than 700,000 this year with a target of 1 million by end of 2009. Sampoerna has expanded into forestry as well, owning controlling stakes in Sumber Graha Sejahter, Sumalindo Lestari Jaya and the Singapore listed Samko Timber. In property, the company owns Sampoerna Strategic Square, a 3.2 ha development with two towers of 32 floors each.

If you wish to do business in Indonesia, you cannot go wrong by talking to Benny Subianto. Probably, the closest the country has to a version of Warren Buffett. Not many would recognise his name, but he was the founder of two monster companies in Astro Agro Lestari and United Tractors, and he also played a big role in Astra International. In 2003, Benny started his own investment firm Persada Capital Investama. PCI has interests in Interra Indo Resources, and was an early substantial shareholder in the highly successful Adaro. His current portfolio include Adaro, Kirana Megantara, Sapta Indra Sejati and Truputra Agro Persada - all corporate giants or giants to be.

I can go on and on and list the achievements of Eka Widjaja (Sinar Mas), Budi Hartono (Djarum), Aburizal Bakrie (Bakrie Brothers), Teddy Rachmat (Triputra), Chairul Tanjung (Para), Handojo Santosa (Ometraco), Eddy Katuari (Wings), Paulus Tumewu (Ramayana Lestari Sentosa), Jakonb Oetama (Kompleks Gramedia), Kartini Muljadi (Tempo Scan Pacific) and Tomy Winata (Artha Graha). They are just a handful of the many highly adventurous and risk taking businessmen, and they are very good.

If we were to compare, we will find that these Indonesian business leaders tend to do a lot more corporate deals every year. They tend to make big investments more frequently. They are also not averse to selling assets for the right price.

Many have made money from their successes in Indonesia. Many will now have their eyes to parlay their expertise to conquer parts of Asia. That is the one major thing which large Malaysian companies have been able to do much better. Can they translate their success into other countries? It would take a brave person to think that they will not succeed.

SOEs Privatisation The Kicker

There are 37 state owned enterprises slated to be privatised. Though there had been some obstacles, we will see five going for IPO soon: Krakatau Steel, Bank Tabungan Negara, National Plantation Enterprises III, IV and VII. Just imagine Tenaga and Telekom Malaysia being listed in one year. That alone would charge up its corporate scene and equity markets. Just spreading the list of 37 over five years would propel global investors interest to no end in Indonesian equities. The choices would increase and these giants would allow for good liquidity as well.

Hence if the government continues to play their cards right, the outlook for Indonesia is bright indeed over the next few years.

p/s photos: Tavia Yeung-Yi (one of the better up and coming talent)