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)

Reassessing Indonesia (Part 1)

Malaysia and Singapore have a unique relationship. We are like squabbling in-laws, but we know we cannot and will never divorce each other.

You live with the tension and exchange of barbs. The ties between Malaysia and Indonesia are quite different. The animosity at times can boil over. Grudges are harboured and allowed to fester. There is a genuine fear of, and sometimes loathing for, each other.

Most of that is at the political and policy levels. Many Malaysians and Indonesians love to visit each other’s country. Indonesia to Malaysians in general, is a bit of an underachiever. Naturally, Malaysia to Singaporeans, is also a bit of an underachiever.

It’s time to reassess Indonesia. In many ways, the country is moving in the right direction business-wise.

Recently, Qatar and Indonesia set up a US$1bil fund to invest in energy and infrastructure. Qatar is the world’s largest exporter of liquefied natural gas (LNG), while Indonesia is third. Both countries are also members of the Organisation of the Petroleum Exporting Countries (OPEC), though Indonesia has just opted out.

Qatar will contribute 85% of the funds for the new fund and Indonesia the remainder. Qatar’s state investment fund, the Qatar Investment Authority (QIA), has teamed up with Abu Dhabi state enterprise International Petroleum Investment Co in March to launch a US$2bil fund.

The QIA has also set up joint funds with Oman and Dubai.

Indonesia is pro-Western, much like Malaysia, and could be a model for a modern Muslim nation, provided nationalist Islam (not radical Islam) doesn’t become too powerful a force in Indonesian society.

Following the aftermath of the Sept 11 attacks, many were outspoken on the various failings of Muslim nations. Indonesia is a dominantly Muslim nation, with the largest Muslim population in the world, but it also has small but strong Hindu, Christian and Buddhist communities.

Malaysia has generally enjoyed a better perception in the eyes of international travellers and global investors.

Indonesia has had to contend with thorny events such as the Bali bombings and the East Timor massacre. If investors are to be influenced just by these events, they would be doing Indonesia and themselves a disservice.

There is still pockets of “nationalistic fervour” among the political voices in Indonesia.

Health Minister Siti Fadilah Supari commented in April that regional governments in Indonesia should be on their guard whenever they dealt with international investment proposals.

She said the following should be considered by provincial governors and regents in respect of foreign investment plans:

· Would the international investors take control of Indonesian resources?

· Would the foreigners be prepared to be on an equal footing with Indonesian partners, or would they adopt a lordly, colonialist stance?

· Would a particular foreign investment benefit Indonesians or harm them?

· To what extent would Indonesians gain from the investment? Foreign investors often lie about this matter.

For example, South Kalimantan’s coal needs were less than 1 million tons per year and there was an electricity shortage crisis. Yet, at the same time, 70 million tons of coal was taken out of the province and sold internationally.

Indonesia has been beset by an autocratic regime for a long time. We need to reassess the country now as the country is certainly moving away from the authoritarian system to a more democratic one.

It is still taking baby steps but press freedom and the media’s brutal honesty and bravery has paved the way for a more civil society. This is an important aspect of a decentralised power system, which accords more voice to a wider spectrum of leaders and the disenfranchised.

Meanwhile, according to an AT Kearney study of the top 25 most attractive investment destinations in the world, Indonesia ranks 21st. The rankings for 2007 are based on a survey of 1,000 CEOs around the world. In 2006, Indonesia did not make the top 25. Thanks to a well-respected Finance Minister in Sri Mulyani Indrawati, there has been significant economic liberalisation.

Quasi-monopolies have not been protected and are expected to compete with new foreign companies.

The boom in commodities over the last five years has helped the country infuse more strength into its underlying economy. Indonesia is at or near the top in palm oil, rubber, base metals, coffee and cocoa.

Sustainability of global investments

Corporate investors across all regions are concerned about the sustainability of the global economic order. Is Indonesia the flavour of the month only because of the commodities boom? I think not, as most experts can see a sea of change enveloping the country.

The commodities boom only hastens the benefits of such changes.

The country is confident enough to implement several years of mandated increases in minimum wages. While some industries may have shifted or closed operations because of these new rules, these measures have also forced investors and businesses to move up the value-add curve.

There has also been a decentralisation of budgetary systems, which has allowed local leaders to better manage resources and spending to their localities.

Over the last three years, Indonesia has managed to enjoy more stability politically, in its currency and in economic viability. This lessens the discount on businesses in valuation models, thus resulting in better confidence among foreign investors going forward.

Corruption is still a problem but one can easily see a more transparent era for Indonesia. More bigwigs have been hauled up and tainted politicians have lost their seats with greater frequency.

Major business entities

Since beginning of 2007, there has been more than US$20bil in mergers and acquisitions and capital raising, which drove the corporate sector to new levels.

The corporate sector is no longer dominated by seasoned players from the Suharto era. If you put the top business groups next to Malaysia, the latter pales in comparison.

The Salim group tops the ladder with US$7.3bil (RM24.8bil) in revenues annually and is in agriculture, distribution, property management, financial services and telecommunications in Indonesia, Hong Kong, China and Singapore.

Next is the Sinar Mas group with revenues of US$4.77bil (RM16.2bil), which was forced to sell Bank Internasional Indonesia (BII) following the 1997 financial crisis but has since rebuilt itself in banking with the acquisition of Bank Shinta.

The Sinar Mas group can be said to have been most affected by the 1997 financial implosion as their Asia Pulp & Paper had a staggering debt load of US$14bil. Following years of negotiations and restructuring, the company has thrived. It is also the biggest national player in palm oil, with land bank of more than 1 million hectares.

I could go on and on, but a summary of local companies with annual revenue of at least US$1bil each would be better for now (major assets/annual revenues):

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, palm oil, infrastructure/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

Khazanah Nasional Bhd has a hefty profile in Indonesia. The businesses under Khazanah has an annual revenue of US$1.8bil. Its stakes include those in Bank Lippo, Bank Niaga, Excelmindo Pratama and infrastructure joint ventures (JVs).

Surprisingly, Temasek’s holdings in Indonesia has only a total annual revenue of US$1.5bil. It has stakes in Bank Danamon, BII, and various property and energy JVs.

Still, the key point here is the number of business entities that have substantial revenues. How many Malaysian businesses have combined revenue of more than RM3.4bil annually? Size matters, especially when they are headed in the right direction with the proper masterplan.

State-owned enterprises (SOEs)

The government has also planned to privatise a number of SOEs, which in itself is a grand plan to better manage resources, inject competition and promote efficiency in government. All in, 37 SOEs have been identified for privatisation and/or restructuring. There has been some delay in that certain factions of the government have been delaying the process.

Last year, 10 SOEs were scheduled for privatisation. However, only five are now ready to go to IPO this year: Krakatau Steel, Bank Tabungan Negara, and National Plantation Enterprises III, IV and VII. Needless to say, intense lobbying by the affected SOEs and maybe even “vested interests” must have been a large part of the delay.

Still, it’s hard to deny that the country is moving in the right direction.

p/s photo: Son Ye Jin