Indonesia Industrial Estate
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Initiating Coverage Indonesia 30 October 2019 Property | Industrial Estate Indonesia Industrial Estates Overweight Ready For Industrialisation 4.0; Initiate With O/W Stocks Covered 3 Ratings (Buy/Neutral/Sell): 3 / 0 / 0 Last 12m Earnings Positive Revision Trend: Initiating coverage of the sector with OVERWEIGHT. Industrial estates Stocks Target Price have seen a pick-up in marketing sales following the end of the election Puradelta Lestari (DMAS IJ) – BUY IDR382 overhang. The increase in marketing sales should continue from the potential Surya Semesta Internusa (SSIA IJ) IDR1,085 increase in FDI after reforms in Jokowi’s second presidential term, exodus of – BUY global manufacturing from China from the US-China trade war, and growth in DDI. Although stocks have rallied YTD, we still see some upside coming from Bekasi Fajar Industrial Estate IDR330 better-than-expected marketing sales performance. Initiate with pecking (BEST IJ) – BUY order: DMAS>SSIA>BEST. Positive momentum for FDI. Industrial estate stocks have been enjoying a Analysts good run this year due to expectations of higher marketing sales, with the elections now over, and exodus of global manufacturers into Indonesia. We Andre Benas have yet to see the impact of the trade war in Indonesia, but we believe there +6221 5093 9847 will be a higher inflow of FDIs after President Joko Widodo’s recent [email protected] inauguration, as he has promised more reforms to attract foreign funds. Labour law reforms are a key catalyst for the sector, and this should translate to higher marketing sales for all industrial estate companies. Ghibran Al Imran +6221 5093 9842 Indonesia to be a manufacturing powerhouse. The manufacturing industry [email protected] accounted for 19% of Indonesia’s 2Q19 GDP – one of the economy’s primary movers. To improve Indonesia’s CAD, the Government plans a structural reform to shift from commodity exports to value-added manufactured goods Marketing sales of companies under coverage exports. In order to do so, it will facilitate through key policy directives in 2019- (Ha) 149 150 2024 that will include improvement in productivity, competitiveness in 150 manufacturing exports, and strengthening upstream industries, on top of tax 129 120 incentives, and the promised labour law reform. 103 Good infrastructure, better logistics. Infrastructure will remain a focus for 94 90 President Jokowi’s second term. We think good infrastructure development is 77 59 a strong factor for investors. New toll roads in Jakarta-Cikampek, and the 60 49 Patimban Port are some from many examples of new infrastructure development that can improve logistic costs in Indonesia, which in turn, 30 should benefit industrial estate players with access to the said infrastructure. 0 Pick-up in FY19F marketing sales. The positive developments in Indonesia, 2013 2014 2015 2016 2017 2018 9M18 9M19 DMAS SSIA BEST mainly the better political conditions with less uncertainties post-elections, and better outlook on necessary reforms have brought a turnaround in the Source: Company data, RHB industrial estate sector. Puradelta Lestari and Surya Semesta Internusa have booked outstanding marketing sales with 9M19 numbers already exceeding Share prices relative to JCI (YTD) FY19 initial guidance. 100% DMAS is leading with 42.5ha of land sales for 9M19, when combined with its 89.9% commercial land sale is equivalent to IDR1.6trn – above its FY19 initial 76.5% guidance of IDR1.25trn. SSIA booked marketing sales of 15.6ha, equivalent 80% to IDR260bn and above its 15ha target. Although Bekasi Fajar Industrial 59.0% Estate booked only 1ha, inquiries have been picking up. We believe 60% marketing sales of industrial estates will return to 2013-2014 levels, if positive policies are put in place such as tax incentives and labour reforms starting in 40% 2020F. 24.0% 20% DMAS > SSIA > BEST. DMAS is our Top Pick as it has the strongest marketing sales due to its ample landbank in Cikarang with a valuable price. 0% DMAS Sector Weighted SSIA BEST We also like SSIA due to its potential in the new Subang area, as well as BEST due to its undemanding valuation and owning landbank at the most Source: Bloomberg, RHB; Note: As at 29 Oct 2019 strategic location. Disc TP % Upside P/E (x) P/BV (x) Yield (%) Company Rating to (IDR) (Downside) Dec-20F Dec-20F Dec-20F NAV Puradelta 1.8 3.6 60.4 BUY 382 26.5 18.1 Lestari Surya Semesta BUY 1,085 36.5 21.2 0.9 1.5 72.1 Internusa Bekasi Fajar BUY 330 27.9 7.3 0.1 2.7 72.6 Industrial Estate Source: Bloomberg, RHB; Note: As at 29 Oct 2019 See important disclosures at the end of this report 1 Indonesia Industrial Estates Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Table Of Contents Investment Summary 3 Operating Matrices 5 Key Statistics 6 Pecking Order Of Stocks 8 Valuation And SD Bands 9 Regional Peer Comparison 10 Industry Overview 11 Puradelta Lestari 25 Surya Semesta Internusa 39 Bekasi Fajar Industrial Estate 54 See important disclosures at the end of this report 2 Indonesia Industrial Estates Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Investment Summary We initiate coverage on the Indonesia industrial estate sector with OVERWEIGHT rating on the back of rising FDI inflows into Indonesia from the escalating US-China trade war, improving ease of doing business in Indonesia, continuing infrastructure development under the second term of President Jokowi, and potential labour law reform. Between 2019 and 2020 we should see a lot of changes in the industrial estate landscape as there will be more land available in new areas due to development in infrastructure as well as the escalating US-China trade war that has triggered a lot of interest from manufacturing companies to relocate their factories to Indonesia. Nonetheless, we believe all the industrial estates especially those within the Jakarta-Bekasi-Karawang area as well as the new areas near the new port in Patimban – will benefit from FDI and domestic direct investment (DDI) inflows. Beneficiary of FDI and DDI inflows Ahead of the 2019 election, marketing sales of industrial estate players have been increasing, a reversal from the lows in 2017-2018, and stabilising above USD100bn in the past three quarters. On top of that, the escalating US-China trade war has compelled several manufacturers in China to relocate to South-East Asia. Although there are still not many global manufacturers relocating to Indonesia, we believe there will be an increase in FDI inflows as more reforms – including the long-awaited labour reform promised by President Jokowi – will be put in place by the end of the year. This reform is much needed; it has been a hurdle for investors to invest in Indonesia as it required them to pay burdening severance pay. Figure 1: DDI and FDI realisation (IDRtrn) 120 100 80 60 40 20 0 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 Sep-18 Dec-18 FDI realization DDI realization Source: BKPM Indonesia to be a manufacturing powerhouse Minister of Industry, Airlangga Hartarto has stated several times that Indonesia requires structural reform, ie shifting from exporting commodities to manufacturing as its economic driver. Therefore, exporting value added goods rather than raw materials would help improve the current CAD. As at 2Q19, manufacturing industry accounted for 19% of Indonesia’s GDP. The Government expects this number to increase in the next five years. To facilitate the shift, key policy directives were issued for 2019-2024 that would include to improve productivity, competitiveness in manufacturing exports, and strengthen the strategy to boost upstream industries on top of tax incentives, and the promised labour law reform. See important disclosures at the end of this report 3 Indonesia Industrial Estates Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate DMAS as our Top Pick We initiate coverage on DMAS with a BUY, making it the first in our pecking order due to it having the best marketing sales performance this year among companies under our coverage, and availability of large sized land sales to absorb big tenants. DMAS has already achieved IDR1.6trn of marketing sales as at end-3Q19, reaching 42.5 ha of industrial land sales. In 3Q19, it added 17 ha of marketing sales from auto and furniture manufacturers. We think that there will be additional marketing sales in 4Q19. On top of the strong marketing sales in 2019, management also claimed that there have been inquiries going into FY20, thereby expecting strong marketing sales in FY20 as well. Figure 2: DMAS’ marketing sales (IDRbn) 2,000 1,800 1,800 1,718 1,631 1,600 1,503 1,408 1,400 1,200 1,072 1,000 885 800 600 400 200 0 2013 2014 2015 2016 2017 2018 2019F Source: Company data, RHB High dividend payout stock DMAS has regularly paid dividend to its shareholders. In FY18, its dividend payout was 204% due to a special dividend. In the prior two years, dividend payout was 95%. We think that DMAS will consistently pay dividend to its shareholders as it has a net cash position. Figure 3: Companies under coverage – nominal dividend per Figure 4: Companies under coverage – dividend payout ratio share (IDR) (%) 1,200 1,109 250% 1,012 204% 1,000 200% 800 723 627 150% 600 95% 95% 100% 81% 400 52% 50% 200 96 84 20% 15% 20% 12 33 45 8 5 1 20% 20% 0 0% 10% 6% 2015 2016 2017 2018 2015 2016 2017 2018 DMAS BEST SSIA DMAS BEST SSIA Source: Company data, RHB Source: Company data, RHB See important disclosures at the end of this report 4 Indonesia Industrial Estates Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Operating Matrices The table below compares all the assets and operating matrices of three industrial estate companies under our coverage: BEST, DMAS, and SSIA.