Indonesia Initiating Coverage
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. All the companies are located within the Bekasi-Cikarang-Karawang corridor, while SSIA also has another landbank located near the new port Patimban in West Jawa. BEST is part of the same group as Alam Sutera Realty (ASRI IJ, SELL, TP: IDR260), being founded by The Nin King and family. The family owns 48.1% of BEST, while 10% is owned by Daiwa House Industry Co Ltd, and the remainder is publicly owned. DMAS is 57.3% owned by Sinarmas Land (SML SP, NR) and 25% owned by Sojitz Corp (2768 JP, NR) from Japan. Sojitz is a general trading conglomerate with a worldwide network in 50 countries and regions and listed in Tokyo Stock Exchange. SSIA is owned by the Suriadjaja family, which controls a 70.7% stake of the company. Beside the industrial estate business, the family also owns a construction company, Nusa Raya Cipta (NRCA IJ, NR), real estate development, as well as the operator of hotels ie Gran Melia Jakarta, Banyan Tree hotel in Bali and Batiqa Hotel. All industrial estate companies under our coverage have similar business models, which are mainly selling industrial estates. In terms of landbank, DMAS has the largest, with 3,140 ha including commercial and industrial areas. SSIA is second with 1,400 ha in Karawang. It has also acquired a location permit for 2,000 ha in Subang. BEST has 1,044 ha of gross landbank that is the closest to Jakarta.
Figure 5: Industrial estates’ operating metrics DMAS SSIA BEST Name Puradelta Lestari Surya Semesta Internusa Bekasi Fajar Industrial Estate Bloomberg Tickers DMAS IJ SSIA IJ BEST IJ
Market Cap (IDRbn/USDm) 13,977bn/987m 3,411bn/241m 2,354bn/166m 3M trading Liquidity (IDRbn) 15.2 23.7 4.7 RHB ratings BUY BUY BUY Main business Puradelta Lestari (Deltamas) Surya Semesta Internusa (SSIA) Bekasi Fajar is a real estate is an industrial estate owns and manages industrial developer and management developer. The company estates in the Karawang and company that develops industrial sells industrial estates, Subang area, as well as manages parks in Bekasi residential properties, and residential estates, provides commercial land, mostly in construction services through its the Bekasi area listed subsidiary Nusa Raya Cipta (NRCA IJ), and operates hotels with Mulia Group, Banyan Tree and its own brand Batiqa. Argo Manunggal Land Majority owners Sumber Arusmulia Arman Investment Utama Development Free float (%) 17.7 73.9 41.8 President Director Hongky Jeffry Nantung Johannes Suriadjaja Yoshihiro Kobi Sponsor Affiliation Sinarmas Group Suriadjaja Family The Nin King Family
FY18 Revenue (IDRbn) 1,036 3,682 963 FY18 Operating profit (IDRbn) 415 354 570 FY18 EBITDA (IDRbn) 437 375 427 FY18 Net Profit (IDRbn) 496 54 588 Recurring/Development Revenue (%) 2%/98% 31%/69% 10%/90% 6M19 Net Gearing (%) Net Cash 11% 21% 6M19 % of Foreign to Total Debt (%) 0% 34% 100% 6M19 Marketing Sales (IDRbn) 1,218 106 - 6M19 Landbank Size (Ha) 1,456 162* 1,043 6M19 Largest Land Plot (ha) 60 36 20 6M19 Land ASP (IDRm/sqm) 2 1.7 3 FY19F ROA (%) 14.0 0.7 7.0 FY19F ROE (%) 15.1 1.2 20.0 FY19F EV/EBITDA (x) 20.2 10.9 5.5 FY19F P/E (x) 18.9 65.8 5.6 FY19F P/B (x) 1.9 0.9 0.6 FY19F EPS Growth (%) 60% 43.9 14%
Note: *SSIA’s land bank excludes the estimated 1,400Ha in Subang Source: Company data, Bloomberg, RHB
See important disclosures at the end of this report 5
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Key Statistics Figure 6: Industrial estates’ company revenue forecast
(IDRbn) 4,500 4,000 4,000 3,500 3,000 2,500 2,000 1,604 1,500 1,057 1,000 500 0 DMAS BEST SSIA
Source: RHB, Company data In terms of revenue, SSIA has the largest among all industrial peers, but is mainly derived from its construction and hospitality segments. BEST and DMAS have higher concentration in industrial revenue. As DMAS booked the highest marketing sales among companies under our coverage, we believe it will recognise more industrial revenue this year.
Figure 7: Historical marketing sales
(Ha) 149 150 150 129
120 103 94 90 77
59 60 49
30
0 2013 2014 2015 2016 2017 2018 9M18 9M19 DMAS SSIA BEST
Source: Company data, RHB In term of marketing sales, DMAS is leading as it has already reached 42.5 ha of industrial land sales in 9M19. SSIA and BEST have yet to report their 9M19 marketing sales figures but we think they should not surpass DMAS.
See important disclosures at the end of this report 6
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Figure 8: Profitability comparison (FY18)
80% 72% 70%
60% 56%
50% 44% 44%
40% Gross Profit Margin Net Profit Margin 30% 27%
20%
10% 2% 0% BEST DMAS SSIA
Source: Company data, RHB
BEST booked the highest GPM among companies under our coverage due to its business model, which only relies on the industrial estate segment as well as having land price at a higher premium compared to others. SSIA’s profitability margin is the lowest because of its diversified portfolio of investments that comprises other segments ie hotel and contractor, which have smaller margins than its industrial estates margin. DMAS booked a lower GPM compared to BEST because the former also has commercial and residential areas, which have lower margins compared to industrial.
Figure 9: Companies’ FY18 ROE
12%
10% 10%
8% 7%
6%
4%
2% 1%
0% BEST DMAS SSIA
Source: Company data, RHB
In terms of ROE, in FY18, BEST generated the highest among peers due to its premium price and balance sheet structure, which is more efficient compared to DMAS and SSIA. However, DMAS also offered a high ROE with the safest balance sheet (net cash).
See important disclosures at the end of this report 7
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Pecking Order Of Stocks DMAS – superior dividend payout We initiate DMAS with a BUY and IDR382 TP, 26% upside set at 50% discount to NAV. DMAS is our preferred pick because of it has the best performing marketing sales YTD among companies under our coverage, aside its large landbank with large available plots to absorb big tenants. Although the stock price has driven up in the past one year (share price +94%) we believe that the stock price still has an upside. It has the largest land plot available of 60 ha (vs 20-30 ha of its peers). Furthermore, DMAS has a history of superior dividend payouts compared to its peers. In FY18, it paid IDR11 per share and in the two years preceeding that, dividend payout ratio was over 90%. With its strong marketing sales this year, the likelihood of a high dividend payout next year remains strong.
SSIA – Patimban to be the new star in town We initiate SSIA with a BUY and 12M TP of IDR1,085, 37% upside set at 62% discount to its SOP valuation. We believe that SSIA’s sales will ramp up after the opening of its Subang Industrial Estate near the Patimban Port by the end of this year. SSIA also has the most diversified investment portfolio with its construction segment from NRCA, and hotel business on top of its industrial estate segment. The company also has a significant recurring revenue portion of 30% from its hotels as well as service and maintenance charges from tenants of its industrial park.
BEST – undemanding valuation with the best access to Jakarta We initiate BEST with a BUY and 12M TP of IDR330, 28% upside or 65% discount to NAV. We think it has the cheapest valuation among all companies under our coverage as its marketing sales has been a laggard. Despite this, we believe the company still has a competitive advantage against DMAS and SSIA as it has the best location – being the closest to Jakarta, especially with the new infrastructure development (Jakarta Outer Ring Road (JORR) II and Jakarta-Cikampek II toll roads). We also believe that its industrial estate location is suitable for Industry 4.0 (data centre, e- commerce warehouse, etc). All in all, we believe DMAS has more near-term catalyst to be a Top BUY, while we are still waiting for BEST to book marketing sales this year to sustain its revenue next year although valuation remains the most attractive of the three companies under our coverage.
See important disclosures at the end of this report 8
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Valuation And SD Bands DMAS’s P/E, P/BV and discount to NAV band
Figure 10: DMAS’s 5-Year P/E band Figure 11: DMAS’s 5-Year P/BV band
(x) (x) +2 SD = 19.8x +3 SD = 2.2x 20
PE = 18.6x +2 SD = 1.9x 18 P/BV = 1.9x +1 SD = 17.0x 1.8 +1 SD = 1.6x 16 Mean = 14.2x Mean = 1.3x 14 1.3 -1 SD = 1.0x 12 -1 SD = 11.4x -2 SD = 0.8x 0.8 10 -2 SD = 8.6x 8
0.3
2015
2016
2017
2018
2019
2015
2016
2017 2018
Source: Bloomberg, RHB Source: Bloomberg, RHB
Figure 12: DMAS’s 5-Year discount to NAV band
Discount to NAV (%)
-50% +3 SD = 56% -55% Disc to NAV = 60% -60% +2 SD = 61%
-65% +1 SD = 67%
-70% Mean = 73% -75% -1 SD = 78% -80% -2 SD = 84% -85%
-90%
2015
2016
2017
2018 2019
Source: Bloomberg, RHB
SSIA’s P/BV and discount to NAV band
Figure 13: SSIA’s 5-Year P/BV band Figure 14: SSIA’s 5-Year discount to NAV band
(x) Discount to NAV (%)
-60% +2 SD = 62% 1.9 +2 SD = 1.7x 1.7 -65% +1 SD = 69% 1.5 +1 SD = 1.3x -70% 1.3 Disc to NAV = 72%
1.1 Mean = 0.9x -75% Mean = 75% 0.9 P/BV = 0.9x -80% -1 SD = 82% 0.7 -1 SD = 0.6x 0.5 -85% -2 SD = 89% 0.3 -2 SD = 0.2x -90%
0.1
2018 2019 2015 2016 2017
2014
2015
2016
2017
2018 2019
Source: Bloomberg, RHB Source: Bloomberg, RHB
See important disclosures at the end of this report 9
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate BEST’s P/E, P/BV and discount to NAV band
Figure 15: BEST’s 5-Year P/E band Figure 16: BEST’s 5-Year P/BV band
(x) (x) 30 +2 SD = 2.2x 2.3
25 +2 SD = 22.5x 2.0 +1 SD = 1.7x 20 1.7 +1 SD =16.3x 1.4 15 Mean = 1.1x Mean = 10.1x 1.1 10 -1 SD = 0.5x PE = 6.5x 0.8 5 P/BV = 0.5x -1 SD = 3.8x 0.5
0 0.2 -2 SD = -2.4x -2 SD = 0.0x
-5 -0.1
2014
2015
2016
2017
2018
2019
2014
2015
2016
2017
2018 2019
Source: Bloomberg, RHB Source: Bloomberg, RHB
Figure 17: BEST’s 5-Year discount to NAV band
Discount to NAV (%)
-10% -20% +2 SD = 30% -30%
-40% +1 SD = 46% -50% Mean = 61% -60%
-70% Disc to NAV = 72% -80% -1 SD = 77% -90% -2 SD = 93% -100%
2014
2015
2016
2017
2018 2019
Source: Bloomberg, RHB
Regional Peer Comparison
Figure 18: Industrial estate regional peers comparison BBG Market Name Rating Price TP Upside/ 2020F Ticker Cap Disc EPS EV/ Downside P/E P/BV Yield ROA ROE to Growth EBITDA NAV (IDR) (%) (USDm) (%) (x) (x) (%) (%) (%) (%) (%) Indonesia Industrial Estate Puradelta lestari DMAS IJ BUY 302 382 26.5 1,037 8.4 18.1 1.8 3.6 9.6 10.4 19.1 60.4 Surya Semesta SSIA IJ BUY 795 1,085 36.5 267 222.6 21.2 0.9 1.5 2.2 3.9 7.7 72.1 Internusa Bekasi Fajar industrial BEST IJ BUY 258 330 27.9 177 (22.5) 7.3 0.1 2.7 4.9 7.1 5.1 72.6 estate Sector Weighted 43.3 17.4 1.5 3.1 7.7 8.8 15.3 64.0 Average Regional Industrial (Local Currency) (%) (USDm) (%) (x) (x) (%) (%) (%) (%) (%) Estate WHA CORP PCL WHA TB BUY 4.7 5.4 15.9 2,270 19.4 16.1 2.1 2.4 5.3 12.8 20.2 N/A AMATA CORP PUB AMATA BUY 24.5 28.0 14.3 866 8.2 14.6 1.6 2.6 5.2 11.8 15.4 N/A TB FRASERS FPT TB NR 15.7 NR N/A 1,049 82.7 13.9 1.0 3.0 2.7 7.6 10.2 N/A PROPERTY ROJANA INDUS PAR ROJNA NR 6.0 NR N/A 402 -27.7 17.6 1.0 5.7 1.4 4.5 10.1 N/A TB Sector Weighted 27.7 15.4 1.7 2.9 4.4 10.7 16.1 N/A Average
Source: Bloomberg, RHB
See important disclosures at the end of this report 10
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Industry Overview
Escalating trade war resulting in manufacturing exodus from China The escalating US-China trade war has triggered a lot of concern from many global manufacturers that have factories in China due to the tariffs imposed by the US Government. A lot of factories are now relocating to ASEAN countries as a result. Based on Nikkei Research, a year into the trade war between Washington and Beijing, more than 50 global companies including Apple (AAPL US, NR) and Nintento (7974 JP, NR) have announced, or are considering plans to move production out of China. And it is not just foreign companies. Chinese manufacturers, as well as those from Japan and Taiwan are forming part of the exodus. This includes makers of personal computer, smartphones, and other electronics. Figure 19: Examples of manufacturers relocating due to the US-China trade war
Company Target Country Affected Goods Pegatron Telco Equipment Skechers India Shoes Apple Latest iPhone models Iris Ohyama South Korea Fans Komatsu Construction Equipment Toshiba Machine Injection Molding Keihin Auto Parts Sumitomo Heavy Japan Industries Robot Components G-Tekt Auto Parts Mitsubishi Electric Laser Processing Machine Casio Computer Wristwatches Ricoh Printer Thailand Citizen Watch Wristwatches Panasonic Stereos Source: Company, RHB
From the above, we believe that there are still many companies venturing outside of China despite potentially not being impacted by the trade war. On the other hand, China has been gradually opening up to overseas business since 2018, when trade tensions with the US deepened. In late June, China eased restrictions on foreign investment in seven fields, including oil and gas. It is also working to bring forward plans to open up the financial sector. However, we are unsure whether China’s efforts are enough to offset the impact of the trade war.
Who will benefit from the exodus? Global manufacturers have few options to expand their presence outside of China. Among manufacturers, the common strategy is to relocate to countries that have the least trade surplus with the US, and competitive advantage in terms of labour cost and productivity. We believe the least trade surplus with the US will be a key parameter for any company planning to relocate its factory, considering US President Donald Trump is likely to continue the trade war in order to secure a second term. From Figure 20 below, China’s trade surplus still sits around USD167bn or 41% from total US trade balance. Since the focus of President Trump is to continue this policy to make the American economy great again, we might see the trade war extending. We think that a country that will benefit from this trade war is one which has lesser trade surplus with the US, besides a vast amount of land with good infrastructure and labour force. We believe Indonesia has the potential to absorb the exodus of companies from this trade war.
See important disclosures at the end of this report 11
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Figure 20: US trade balance composition to respective countries
10% 3% 0% 1% 2% 0% 0% -3% -3% -3% -1% -10% -9% -20%
-30%
-40% -41% -50%
Source: Trading Economic As at Jun 2019, Indonesia’s trade balance is USD6bn to the USD and it has not been a threat for US trade balance compared to China and potentially, Vietnam. At the moment, President Trump has not decided to put any tariffs on exported goods from Indonesia. Therefore, there is vast opportunity for global manufacturers to relocate their factories to Indonesia.
Vietnam is basking in glory but it may need to be cautious going forward Fuelled by continuous growth, Vietnam continues to attract record FDIs, especially after the prolonged US-China trade war. The latest data from the Foreign Investment Agency (FIA) shows that FDI in Vietnam for the first five months of the year reached a 4-year high of USD16.8bn. This inflow represents an increase of 69% YoY. Around 1,363 new projects were licensed with total registered capital of USD6.5bn in Jan-May 2019 (+39% YoY). Of the 19 sectors receiving capital, manufacturing and processing came up tops with USD10.5bn or 72% of total FDI. This was followed by real estate and wholesale. As a result, Vietnam has become one of the fastest growing sources of American imports in the first quarter of the year. If Vietnam continues to grow at this rate, it might surpass the UK as one of the biggest suppliers to the US. Although the numbers are encouraging but, this might be alarming to the US as there is potential to add tariffs to products from Vietnam if the latter continues to book more surplus with the US.
What is the buzz about Vietnam? Vietnam currently enjoys its position as the star for property and industrial markets among ASEAN countries. Its strategic location, as well as participation in 13 signed FTAs including The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has led to increased investments in recent years. These agreements bind Vietnam to a multilateral rule-based trading system, and have been incredibly successful at powering Vietnam’s export story. CPTPP is a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. At the time of the signing of this agreement, the combined economies represented 13.4% of the global GDP or approximately of USD13.5trn, making CPTPP the third largest free-trade area in the world after the North American Free Trade Agreement, and European Single Market.
See important disclosures at the end of this report 12
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Figure 21: CPTPP members
Source: CPTPP
Strategic location in the Golden Triangle The Mekong Region (including) Vietnam, Thailand, Cambodia, Laos, Myanmar, and the Southern provinces of China) provides access to a market of over 250m people. Vietnam also enjoys regional connectivity with ASEAN and its strategic position of the Eastern Sea with existing transportation routes to the world.
Global trade integration Free trade agreements (FTAs) have direct impact on the movement of goods across international borders. At the moment, China has a higher total number of FTAs, while Malaysia and Vietnam on the other hand, have more multilateral trade agreements in place. In the ASEAN region, Malaysia and Vietnam have signed CPTPP, whereas Thailand, Indonesia, and the Philippines have not.
Vietnam booked strong FDI growth due to the trade war Total FDI pledged to Vietnam was nearly USD18.5bn in 1H19, equivalent to 91% of the level recorded during the same period last year. The increase in FDI inflow to Vietnam was due to the escalating trade war.
Figure 22: Vietnam FDI (cumulative)
Source: Company data
Among the 19 investment industries, processing and manufacturing remain the most attractive sectors, recording USD13.2bn, or equivalent to 71.2% of the total capital. In terms of the flow, Hong Kong took the lead among 95 countries investing in Vietnam in 1H19, with a total of USD5.3bn, accounting for 29% of the FDI, followed by South Korea and China.
See important disclosures at the end of this report 13
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate
Regional minimum wage In terms of minimum wage, Vietnam wages are also considered cheaper than Indonesia but in actual fact, Vietnam is not the cheapest among certain countries in ASEAN, and South Indonesia. Additionally, we believe that Indonesia’s minimum wage is also quite competitive compared to Vietnam. There is a perception that Vietnam’s productivity is considerably higher compared to other countries due to the communist ideology in the country, aside from having a similar culture to China’s labour market.
Figure 23: Regional country minimum wage comparison
Countries USD per month Bangladesh 63 - 94 Cambodia 61 - 182 China 107-348 Indonesia 120-285 Malaysia 215-263 Myanmar 60-90 Phillipines 100-300 Srilanka 55-90 Thailand 100-300 Vietnam 100-180 Source: Trading Economics
However, despite Vietnam’s cheaper wages compared to Indonesia in terms of competitiveness, Indonesia fares better than Vietnam. In the 2018 Global Competitiveness Report published by the World Economic Forum, Indonesia ranked 45 while Vietnam was at 77. The Global Competitiveness Index measures national competitiveness defined as the set of institutions, policies and factors that determine the level of productivity. The improvement of Indonesia competitiveness was due to major reforms done under President Jokowi. Although, there are still policies yet to be reformed, but we think that in President Jokowi’s second term, there will be a giant leap in terms of his pro-business policy with new regulations to further boost Indonesia’s FDI. In terms of competitiveness, Indonesia still lags behind Thailand, but is ahead of Vietnam and Sri Lanka.
Figure 24: Ease of doing business comparison
Source: world economic forum
Ease of doing business According to the latest annual World Bank Survey on the ease of doing business (2019), many of ASEAN countries have improved their overall rankings. However, there is still a lot to be done to improve the ease of doing business in ASEAN countries, including Indonesia. Based on the recent presentation by former Minister of Industry Airlangga Hartanto, the Government will continue to reform all areas of bureaucracy to improve the ease of doing business in Indonesia. For example, countries that implemented compliance processes have achieved higher overall rankings. Two of the more developed countries in the region – Malaysia, and Thailand – scored very well and are on a different metrics (political risk). Vietnam ranked the highest among comparable countries and has benefited from a stable political system.
See important disclosures at the end of this report 14
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate
Figure 25: Non cost factors among selected ASEAN countries compared to China
Source: World Bank, BMI (2018, 2019)
President Jokowi to stimulate FDI
In the figure above, we see that Indonesia and Vietnam are gradually approaching Thailand, Malaysia, and China. We believe that the second term of President Jokowi will continue to drive Indonesia’s ranking. The single submission programme for new investments in Indonesia, reformation at every level of the Government, and more stable politics in the next five years will definitely improve Indonesia’s ease of doing business.
New incentives by President Jokowi to improve FDI
In the latest state budget, President Jokowi revised a combination of tax incentives to attract investments; Super Deductible tax: tax reduction of up to 100% given to industries involved in vocational education programmes or in research and development activities o Vocational development (deduction of up to 200%); o Labour intensive industry (deduction of up to 60%); o Research and development (deduction of up to 300%).
Investment allowance: tax reduction up to 100% for investment above IDR500bn in high labour-intensive industries
New tax holiday incentives o Five years of tax holiday for investment from USD7m to USD36 m; o Seven years of tax holiday for investment from USD36m up to USD180 m; o 10 years of tax holiday for investment from USD180m to USD540m; o 15 years of tax holiday for investment from USD540m to USD1.4bn; o 20 years of tax holiday for investment more than USD1.4bn.
Reduction of corporate tax to 20% (currently 25%) but will only commence in 2021 The Government believes that by bringing more FDI, Indonesia can revive its manufacturing sector to improve its current account deficit. The rebuilding of its industrialisation can have direct impact on the production sector, regain its net exporter position, improve the country’s financial strength, enhance government spending, enhance investment, and build a robust economy by providing a better labour market as the result of more industries coming to the Indonesian market.
See important disclosures at the end of this report 15
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Figure 26: Indonesia PMI Index (2016 – 2019)
54 52 50 48 46 44 42
40
Jul-17 Jul-18 Jul-19
Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19
Jan-17 Jun-17 Jan-18 Jun-18 Jan-19 Jun-19
Mar-17 Mar-18 Mar-19
Feb-17 Feb-18 Feb-19
Nov-16 Dec-16 Nov-17 Dec-17 Nov-18 Dec-18
Sep-16 Aug-17 Sep-17 Aug-18 Sep-18 Aug-19
May-18 May-19 May-17
Source: Company data, RHB
From the latest reading, in Aug 2019, Indonesia PMI drop to below 50 (from 49.6 to 49.0) due to a drop in demand coming to third quarter Despite lower global demand mainly due to the trade war, we think when the global trade war ends, Indonesia will still have the potential to expand its manufacturing sector.
Figure 27: Industrial sectors that are eligible for tax holiday No Sectors 1 Metal Industry 2 Pharmacy and Biotech 3 Aviation Component Industry 4 Machinery 5 Ship Building 6 Automotive 7 Inorganic Chemical 8 Robotics 9 Petrochemical 10 Electronics and Telematics 11 Oil & Gas Refinery Industry 12 Electromedical 13 Train Industry 14 Power Plant Industry 15 Organic Chemical 16 Agro Industry (Pulp Base) Source: RHB, Ministry of Industry Indonesia
Figure 28: Indonesia sector prioritisation matrix
Source: Ministry of Industry
See important disclosures at the end of this report 16
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate
Based on this explanation from the Ministry of Industry, textile & apparel, automotive, and electronic will continue to be the top priority sector. We believe that this is in line with manufacturers that purchase land from industrial estate companies. Suzuki, Wu-Ling, Toyota, Honda, have relocated their factories to Indonesia. Indonesia has become a hub for auto manufacturers due to its location and strong domestic auto consumption, beside serving the export market.
Long-awaited labour law reform Indonesia is desperately in need to reform its labour law, which has been a concern for investors to invest in Indonesia. The law has been a hurdle due to its burdening compensation for termination of employment, or severance pay. The current law states the amount of compensation for termination of employment is as follows: (Article 156) Four types of compensation: i. Severance pay – Article 156 (2): given from employers to employees as a result of termination of employment. The amount differs, depending on length of employment (Figure 31) ii. Length of service pay – Article 156 (3): given from employees as a reward for employees based on years of service, also depending on length of employment (Figure 32) iii. Compensation of rights pay – Article 156 (4): given to compensate for annual leaves, transportation expense allowances, medical allowances, etc. (Article 157) The monthly wage used in the calculation for the severance and length of service pay includes: i. Main wage/basic wage; ii. All forms of allowances and subsidies given to employee and family.
In which the calculation is using the following assumptions: In cases of daily wages, the basic wages is 30 days x daily wage; In cases of wage based on production unit, basic wage is the average daily wage of the last 12 months x 30 days; In cases of wages based on weather/season, basic wage is the average monthly wage of the last 12 months.
Figure 29: Severance payment amount Figure 30: Length of service payment amount
Length of employment Amount of severance pay Length of employment Amount of length of service pay
<1 year 1-month wage 6-9 years 3-months wages 1 year 2-months wages 9-12 years 4-months wages 2 years 3-months wages 12-15 years 5-months wages 3 years 4-months wages 15-18 years 6-months wages 4 years 5-months wages 18-21 years 7-months wages 5 years 6-months wages 21-24 years 8-months wages 6 years 7-months wages >24 years 10-months wages
7 years 8-months wages >8 years 9-months wages
Source: Law no 13 of 2003, chapter 7 article 156
This means that in the event of a company wants to relocate from Indonesia, it may possibly pay up to nearly two years of wages for all of its employees, one of the most expensive in the world. Once this reform is done, as promised by President Jokowi, we believe FDI inflow will surge.
See important disclosures at the end of this report 17
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Investment realisation in 2Q19 Data from the Indonesian Investment Coordinating Board (BKPM) showed that FDI from Jan-Jun 2019 was still lagging at 4% YoY compared to DDI of 16.4%. On a quarterly basis, FDI in 2Q rose 9.6% while DDI grew 18.6%. We believe the lag in FDI inflow is due to the impact of the elections this year, and slow global growth. However, as the tax holiday was revised only in Aug 2019, we think it will take some time for more FDI to be realised.
Figure 31: DDI and FDI realisation comparison
Source: BKPM
See important disclosures at the end of this report 18
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Java continues to be the hotspot for FDI and DDI Based on the data from BKPM, the highest realisation of DDI and FDI is located in Java. If we break down FDI and DDI regionally, Jakarta is the favourite city for FDI, while regionally, West Java was ranked No 1 in 2Q19. Therefore, we believe that industrial estates in West Java and around Greater Jakarta will benefit from the massive FDI inflow.
Figure 32: FDI and DDI based on region
Source: BKPM
Current state of Indonesia’s industrial estates Indonesia’s industrial estate companies with landbank are mainly centred in West Java, namely in Bekasi, Karawang, and Cikarang – which is also the focus of the majority of global manufacturers. Outside West Java, there are numerous industrial estates in Banten, Batam, Jawa Tengah, and Jawa Timur. Most of the manufacturers in the West Java industrial estates are related to the auto and electronics industries with their respective supply chains. Jawa Tengah and Jawa Timur are more popular with the textile and food & beverage (F&B) manufacturers. Based on a recent discussion with former Industry Minister Airlangga, he was optimistic that West Java will be continue to be the centre of industrialisation, especially the auto industry and its supply chain, while in East Indonesia, industrial estates are usually located closer to the ports and more commodity focused ie coal and palm oil.
See important disclosures at the end of this report 19
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate
Figure 33: Industrial estates in Indonesia
Source: RHB
Figure 34: Industrial estates in West Java
Source: RHB, Company
Figure 35: Distance of the industrial estates from key locations (in km)
Distance with Existing Access No Company Name CBD Priok Port Soetta 1 Bekasi Fajar 30 43 64 2 Jababeka Industrial Estate 38 51 72 3 Lippo Cikarang 40 52 73 4 Puradelta Lestari 42 54 75 5 Suryacipta City of Industry 60 72 93 Source: RHB
Aside from the companies in Figure 36, there are nine other industrial estate companies located within the Bekasi-Cikarang-Karawang corridor. Based on the Ministry of Industry data, there are more than 14,000 ha of industrial estate available within this corridor.
See important disclosures at the end of this report 20
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Figure 36: Industrial estates within Bekasi-Karawang-Cikampek corridor (ha) Available No Location Name Operator land PT Kawasan Industri Terpadu Indonesia 1 Kawasan Industri Terpadu Indonesia China China 205 2 Bekasi International Industrial Estate PT Hyundai Inti Development 200 3 Greenland International Industrial Center PT Pura Delta Lestari Tbk (DMAS) 1,430 4 Kawasan Industri Lippo Cikarang PT Lippo Cikarang Tbk (LPCK) 1,000 5 Kawasan Industri Indotaisei PT Indotaisei Indah Development 700 6 Kawasan Kujang Cikampek PT Kawasan Industri Kujang Cikampek 140 7 Kawasan Mitrakarawang PT Mitra Karawang Jaya 439 8 Karawang International Industrial City PT Maligi Permata Industrial Estate 1,389 9 Suryacipta Industry City PT Surya Semesta Internusa Tbk (DMAS) 1,400 10 Mandala Prima PT Mandalapratama Permai 3,052 11 Podomoro Industrial Park PT Agung Podomoro Tbk (APLN) 342 12 Artha Industrial Hills PT Bumi Anugerah Makmur 3,625 13 Kawasan Industri GT park PT Bintang Puspita Dwikarya 404 14 Karawang New Industry City PT CFLD Karawang New Industry City 205
Total 14,531 Source: RHB
Auto industry dominates the Bekasi-Cikarang-Karawang corridor This area, located close to the Jabodetabek area and also serves as the door to serve Greater Jakarta, has become the main hub for the auto industry and its supply chain. Auto manufacturers include Honda, Toyota, Suzuki, Wuling, Mitsubishi Motors and potentially, Hyundai. Figure 37: Auto manufacturers that have factories in Bekasi-Cikarang-Karawang corridor
Source: RHB
We believe it is unlikely global car manufacturers will relocate to new areas such as Patimban as most of their respective supply chains are already located at the Bekasi- Cikampek-Karawang corridor. Additionally, the new Jakarta Second Outer Ring Road (JORR II) (Tanjung Priuk-Bekasi) should benefit all the factories located in the area.
Massive infrastructure development around the area The rapid development of infrastructure development in Bekasi-Cikarang-Karawang corridor has resulted in toll roads within the area become congested. As such, an infrastructure revamp is needed as more manufacturers set up their factories in that area. This is also one of the drawbacks from potential clients that want to buy industrial estates.
In the past two years, traffic around the Jakarta-Cikampek area has worsened due to development. However, we think that the construction of the Trans Java, Jakarta-Cikampek toll road, which should be completed by Dec 2019, will help to alleviate traffic conditions.
See important disclosures at the end of this report 21
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate
The other potential catalyst is JORR II, spanning approximately 100 km connecting Tanjung Priok and Cikampek. The Cibitung and Cilincing stretch of the toll road is targeted to be fully operational by end-FY19, – its exit is located close to the Bekasi Fajar Industrial Estate. Besides JORR II, there is the elevated Southern Jakarta-Cikampek toll road currently under construction. With all the infrastructure being put in place in this area, we believe it would be highly beneficial for manufacturers to set up their factories here.
Figure 38: Map of infrastructure development
Source: RHB, Company
Besides manufacturing, data centre demand should pick up Besides auto manufacturers and their supply chain, data centres could be the next big thing at Indonesia’s industrial estate. Our ground checks revealed that there are more inquiries coming from data centres and technology-related companies. Considering Indonesia’s demographic, as well as rising internet and mobile penetration in Indonesia, the demand for data centres is huge. In recent years, many corporates have switched to cloud-based infrastructure to reduce opex and keep up with technology advancements.
Google Cloud stated that it will open their first data centre in Indonesia in 2020. This centre will be the hub for cloud computing in South-East Asia. Data centres do not require large plot compared to the manufacturing industry. PT Data Center Infrastructure already has a data center that sits on a 4.5 ha of industrial plot in Bekasi Fajar Industrial Estate.
Amazon Web Service has also indicated its interest to enter the Indonesian market by developing its cloud centre in Indonesia. Although there has been no confirmation date, but we believe it will be located in one of the industrial estates. The typical Amazon data centre ranges between 150,000-215,000sqft (around 1.5-2.5 ha). Going forward, we expect more data centres to be open in Indonesia as the country has the potential as a hub for technology considering its bonus demography. This will help spur industrial estates’ marketing sales in the future.
Industrial estates’ marketing sales to pick up From the three listed companies under our coverage, we believe there is potential for marketing sales to pick up. Reforms by President Jokowi, the relocation of companies due to the US-China trade war, tax holiday incentives for FDI, and better infrastructure development should attract more manufacturing and data centres to Indonesia. Marketing sales have likely bottomed out last year, and we have already seen improvement in 1H19 despite slowing down in 2H19. We believe that next year should be a better year for industrial estates, with the end of the overhang from the elections, and greater clarity on the policy reforms.
See important disclosures at the end of this report 22
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate Figure 39: Historical marketing sales of the three companies under our coverage
(Ha) 149 150 150 129
120 103 94 90 77
59 60 49
30
0 2013 2014 2015 2016 2017 2018 9M18 9M19 DMAS SSIA BEST
Source: Company data, RHB
Land sales and leasing activity Karawang region has the most industrial users as no new industrial estates will be developed in Bekasi due to land scarcity. The only industrial estates left in Bekasi is within Bekasi Fajar Industrial Estate area. At the moment, it has around 700 hectares of landbank available for sale and if investors are interested to invest in the closest industrial estate to Jakarta, we think Bekasi Fajar Industrial Estate will be benefit. Outside the Karawang area, there are still few industrial estate players that should be able to generate marketing sales during 2019.
Land prices Based on the Colliers report, land prices in Bogor, Tangerang, and Serang have been relatively stable QoQ. However, areas in Karawang and Bekasi have slightly dropped in response to slower sales. Two newly operating industrial estates in Karawang have set their price target of USD140-150 per sqm – much lower than the already established price in that region of USD170-180 per sqm.
Figure 40: Greater Jakarta industrial land prices
Source: Colliers
Labour costs The Karawang and Bekasi areas have the highest minimum wage in Indonesia at IDR4.1- 4.2m (c.USD300). This is mainly due to the concentration of factories located in the industrial estates, mostly along the Jakarta Cikampek toll road (passing by both Bekasi and Karawang). Based on our conversations with BEST and DMAS, more companies with less dependence on hard labour have been shifting away from the area (ie textile industry). Alternatively, more existing companies are investing in automation to reduce labour costs. The shift does not mean a reduced number of business in these industrial estates. Rather, it is a shift to less labour-intensive industries such as data centres and warehouses. This is reflected in recent inquiries that are increasingly coming from data centres from various countries and warehouses from fast moving consumer goods (FMCG) or e-commerce players.
See important disclosures at the end of this report 23
Indonesia Industrial Estates Indonesia Initiating Coverage
30 October 2019 Property | Industrial Estate
Another option is to establish industrial estates in other areas, like what DMAS is doing in Subang. The new industrial estate area in Subang still has a lower minimum wage of IDR2.7m ( Figure 41: West Java’s minimum wage per regency Province Regency Minimum Wage (IDR) Regency Minimum Wage (IDR) West Java Banjar City 1,688,217 Pangandaran Regency 1,714,673 Cianjur Regency 2,336,004 Indramayu Regency 2,117,713 Ciebon Regency 2,024,160 Bandung Regency 2,893,074 Cirebon City 2,045,422 West Bandung Regency 2,898,744 Sukabumi City 2,331,752 Sumedang Regency 2,893,074 Tasikmalaya City 2,086,529 Cimahi City 2,893,074 Bekasi Regency 4,146,126 Depok City 3,872,551 Kuningan Regency 1,734,994 Bogor City 3,842,785 Garut Regency 1,807,285 Sukabumi Regency 2,791,016 Majalengka Regency 1,791,693 Bekasi City 4,229,756 Bandung City 3,339,580 Karawang Regency 4,234,010 Bogor Regency 3,763,405 Purwakarta Regency 3,722,299 Tasikmalaya Regency 2,075,189 Subang Regency 2,732,899 Ciamis Regency 1,733,162 Source: Company data Maintenance costs The maintenance tariff in 2019 is steady as Indonesia inflation is quite low. We believe there will not be any significant increase in tariffs going forward. Figure 42 : Industrial estates’ maintenance cost comparison Source: Colliers See important disclosures at the end of this report 24 Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Puradelta Lestari (DMAS IJ) Buy Strongest Industrial Estate In The Hood; BUY Target Price (Return) IDR382 (+27%) Price: IDR302 Market Cap: USD1,036m Avg Daily Turnover (IDR/USD) 12,180m/0.87m Initiating coverage with BUY and IDR382 TP, 27% upside and c.4% yield. Analysts We believe Puradelta Lestari is the leading industrial estate firm along the Jakarta-Cikampek corridor with the most marketing sales compared to peers, Andre Benas coupled with a healthy balance sheet. We think DMAS will increase marketing +6221 5093 9847 sales, as it has better balance vis-à-vis land price and distance from Jakarta. [email protected] Despite higher valuation vs SSIA and BEST, we believe DMAS has better marketing sales. Large industrial, commercial, and residential landbank available. DMAS Ghibran Al Imran still has 1,456ha of landbank for all segments – much higher than SSIA’s and +6221 5093 9842 [email protected] BEST’s 106ha and 700ha. We believe manufacturers looking to relocate their operations near Jakarta – with land plot requirements of >5ha – will include Share Performance (%) DMAS’ landbank as among their choices, eg the company’s successful wooing YTD 1m 3m 6m 12m of SAIC-GM-Wuling. Absolute 89,9 4,1 2,0 16,2 137,8 FY19’s marketing sales has surpassed target. The firm already achieved Relative 88,5 2,8 2,3 18,4 128,6 IDR1.6trn in marketing sales as at end 3Q19, reaching 42.5ha in industrial land 52-wk Price low/high (IDR) 124 – 328 sales. In 3Q, it added 17ha of such sales from auto and furniture manufacturers. We think there will be additional marketing sales in 4Q19, Puradelta Lestari (DMAS IJ) based on market talk since last year. On top of strong marketing sales in 2019, Price Close 350 management said it has received a lot of enquiries for FY20 – which are already in its books – and it expects strong marketing sales in FY20 as well. 300 Strong dividend payout ratio. In the past three years, DMAS offered superior 250 dividend payout ratios to shareholders. During 2015-2017, the firm paid 81- 200 95% in dividend payouts – last year, it distributed 204%. We believe DMAS will continue to distribute superior dividend payouts in the coming years. 150 Unlevered balance sheet. The company has the strongest balance sheet 100 Jul-19 Oct-18 Oct-19 Apr-19 Jan-19 Feb-19 Mar-19 Jun-19 Dec-18 Sep-19 Sep-19 among all industrial estate counters under our coverage. As at 1H19, DMAS Nov-18 Aug-19 May-19 has IDR896bn in cash and is in a net cash position. Management has no plans to add more debt, as its focus still remains within the industrial estate sector, Source: Bloomberg which requires less capex than commercial and residential areas. Our call and TP is based on NAV – we apply a 50% discount to NAV. Even though the share price has rallied >89% YTD, we still believe there is upside coming from its large landbank and ability to take on larger tenants, which will be beneficial if the foreign direct investment (FDI) inflow improves. Downside risks include intensifying competition from other industrial estate players, FDI slowdown due to unfavourable regulations, and a slowing down in global economic growth. However, we expect FDI into Indonesia will continue to remain strong in the coming years, which should benefit all domestic industrial estate players. Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total turnover (IDRbn) 1,336 1,036 1,532 1,616 1,626 Recurring net profit (IDRbn) 657 496 744 803 804 Recurring net profit growth (%) (85.4) (24.5) 50.0 7.8 0.2 Recurring EPS (IDR) 14 10 15 17 17 DPS (IDR) 11.0 15.0 13.0 10.8 11.7 Recurring P/E (x) 22.2 29.3 19.6 18.1 18.1 P/B (x) 2.1 2.0 1.9 1.8 1.8 Dividend Yield (%) 3.6 5.0 4.3 3.6 3.9 EV/EBITDA (x) 21.2 31.4 19.5 18.4 18.5 Return on average equity (%) 9.1 7.0 10.1 10.4 10.1 Net debt to equity (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, RHB See important disclosures at the end of this report 25 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Financial Exhibits Asia Financial Summary 2017 2018 2019F 2020F 2021F Indonesia Recurring EPS (IDR) 14 10 15 17 17 Property – Industrial Estate EPS (IDR) 14 10 15 17 17 DPS (IDR) 11 15 13 11 12 Puradelta Lestari BVPS (IDR) 145 149 157 163 168 Weighted Avg Adjusted Shares (m) 48,198 48,198 48,198 48,198 48,198 Major shareholders (%) Sumber Arusmulia 57.28 Valuation Metrics 2017 2018 2019F 2020F 2021F Sojitz Corp 25.00 Recurring P/E (x) 22.2 29.3 19.6 18.1 18.1 P/E (x) 22.2 29.3 19.6 18.1 18.1 P/B (x) 2.1 2.0 1.9 1.8 1.8 Dividend Yield (%) 3.6 5.0 4.3 3.6 3.9 Valuation basis EV/EBITDA (x) 21.2 31.4 19.5 18.4 18.5 EV/EBIT (x) 21.9 32.9 20.2 19.0 19.2 We derive our IDR382 TP based on NAV. We apply a 50% discount to NAV. Income Statement (IDRbn) 2017 2018 2019F 2020F 2021F Total Turnover 1,336 1,036 1,532 1,616 1,626 Key drivers Gross Profit 815 581 885 941 947 EBITDA 644 436 701 743 739 i. Large landbank; Depreciation and Amortisation 20 20 23 26 28 ii. On track to surpass target sales; Operating Profit 624 415 678 717 711 iii. Strong dividend payout ratio; Net Interest 24 19 19 25 28 iv. Unlevered balance sheet. Other Income 22 80 74 88 94 Pre-Tax Profit 670 514 771 831 832 Key risks Taxation 13 18 27 28 28 i. Macroeconomic uncertainty; Net Profit 657 496 744 803 804 ii. Competition risks; iii. Regulatory risks; Cash Flow (IDRbn) 2017 2018 2019F 2020F 2021F iv. Political instability. Change in Working Capital 608 511 564 644 620 Cash Flow from Operations 695 411 655 693 611 Capex (36) (93) (80) (80) (80) Company Profile Cash Flow from Investing Activities (88) (138) (80) (80) (80) Puradelta Lestari is an industrial estate developer. The Cash Flow from Financing Activities (1,040) (313) (356) (520) (563) company sells industrial estates, residential properties, Cash at Beginning of Period 1,594 1,336 1,036 1,532 1,616 and commercial land, mostly in the Bekasi area. Net Change in Cash (434) (40) 219 93 (32) Ending Balance Cash 785 745 975 1,068 1,036 Balance Sheet (IDRbn) 2017 2018 2019F 2020F 2021F Total Cash and Equivalents 785 745 975 1,068 1,036 Tangible Fixed Assets 335 351 424 480 535 Advance for Land Acquisitions 81 32 72 75 67 Investment in Associates 52 97 97 97 97 Total Other Assets 6,217 6,275 6,485 6,664 6,875 Total Assets 7,471 7,500 8,053 8,384 8,611 Total Long-Term Debt 27 32 33 39 42 Other Liabilities 438 279 432 474 457 Total Liabilities 465 312 464 513 499 Shareholders' Equity 7,002 7,185 7,574 7,856 8,098 Total Equity 7,006 7,189 7,588 7,871 8,112 Net Debt (758) (713) (942) (1,029) (995) Total Liabilities & Equity 7,471 7,500 8,053 8,384 8,611 Key Metrics 2017 2018 2019F 2020F 2021F Revenue Growth (%) -16% -22% 48% 5% 1% Recurrent EPS Growth (%) -85% -24% 50% 8% 0% Gross Margin (%) 61% 56% 58% 58% 58% EBITDA Margin (%) 48% 42% 46% 46% 45% Net Profit Margin (%) 49% 48% 49% 50% 49% Dividend Payout Ratio (%) 95% 204% 70% 70% 70% Capex / Sales (%) 3% 9% 5% 5% 5% Interest Cover (x) (26.3) (21.5) (35.1) (28.4) (25.7) Source: Company data, RHB See important disclosures at the end of this report 26 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Investment Summary We initiate coverage with a BUY with IDR382 TP, 27% upside. DMAS is a subsidiary of Sinar Mas Land and Sojitz Corp. It has a market cap of USD1,033m and trading liquidity of USD950m per day (average daily trading volume). The company is 57%- and 25%-owned by Sinar Mas Land and Sojitz. The former is one of Indonesia’s leading and most experienced property developers, while the latter is a general trading conglomerate with a worldwide network in 50 countries and regions. Sojitz also listed on the Tokyo Stock Exchange. We like DMAS due to: i. Its large landbank for industrial, commercial, and residential use (integrated complex); ii. Is on track to surpass its FY19 marketing sales target, which can drive future revenue; iii. Its strong dividend payout ratio and unlevered balance sheet Large landbank available for industrial, commercial, and residential use. The company still has 1,456ha of landbank for all activities. This is much higher when compared to SSIA and BEST’s 137ha (Karawang only – excluding Patimban) and 706ha. We are of the view that manufacturers looking to relocate near Jakarta – with land requirements of more than 5ha – will have taken into consideration what DMAS has to offer in terms of its landbank. This can be seen by the company’s successful wooing of carmaker SAIC-GM-Wuling to set up operations within its industrial estate. FY19 marketing sales target already reached. DMAS has already achieved IDR1.6trn in marketing sales as at the end 3Q19 – reaching 42.5ha in industrial land sales. In 3Q, it added 17ha in marketing sales alone from auto and furniture manufacturers. We believe there will be another round of additional marketing sales in 4Q19 – this is based on what the market has been saying since last year. On top of strong marketing sales in 2019, management also said that it has received a lot of enquiries for FY20, which are already in DMAS’ books. Consequently, management expects strong marketing sales next year as well. Strong dividend payout ratio. In the past three years, DMAS has offered superior dividend payout ratios to its shareholders. Between 2015 and 2017, the company paid 81-95% in dividend payouts. In 2018, it distributed a dividend payout of 204%. We are of the view that DMAS will continue to distribute superior dividend payouts in the coming years. Additionally, the company has the healthiest balance sheet among peers, SSIA and BEST, and, as at Jun 2019, it was still in a net cash position. With the strong demand from many manufacturers, we believe DMAS should be able to maintain its balance sheet strength going forward. Valuation rationale. We derive our IDR382 TP based on NAV methodology – we also applied a 50% discount to NAV. We think the valuation is already stretched, taking into consideration the attention it received last year when news of a global car manufacturer relocating to its industrial estate came out. Management is confident, however, that the company is on track to achieve its FY19 target with or without this marque, as DMAS has already received a lot of enquiries for next year. See important disclosures at the end of this report 27 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Strong FY19 marketing sales DMAS’ business is dominated by industrial estate sales despite also having commercial and residential areas. As at Jun 2019, industrial revenue contributed 92% of topline, followed by residential and commercial. The company’s marketing sales reached its peak in 2015, before dropping in 2016. Figure 1: 2019 marketing sales (IDRbn) 2,000 1,800 1,718 1,800 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 dividends to shareholders. In FY18, the company had a dividend payout of 204% due to a special dividend. In the prior years, DMAS paid a dividend payout of 95% over two years. We believe the company will consistently pay dividends to shareholders, given that it is in a net cash position. Figure 2: DMAS’ dividends (IDRbn) (%) 3,000 250% 204% 2,500 200% 2,000 150% 1,500 1,109 95% 95% 81% 1,012 100% 1,000 723 627 50% 500 0 0% 2015 2016 2017 2018 Dividend (IDRbn) Dividen Payout Ratio (%) Source: Company data, RHB See important disclosures at the end of this report 28 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Leanest balance sheet among peers DMAS has been a net cash company due to its strong industrial sales revenue. At this point in time, it will continue to focus on its industrial estates, which require less capex vs its commercial and residential businesses. When compared to BEST and SSIA, DMAS has the leanest balance sheet. Figure 3: DMAS’ cash and cash equivalents (IDRbn) 1,400 1,219 1,175 1,200 1,000 896 785 800 745 600 400 200 0 2015 2016 2017 2018 2019 Source: Company data, RHB The largest industrial estate along Jakarta-Cikampek toll road DMAS – or Greenland International Industrial Centre (GICC) – is one of the largest industrial estates along the Jakarta-Cikampek corridor. It has more than 120 industrial tenants, mostly in the auto and auto-related sectors. One of the notable manufacturers is SAIC-GM-Wuling, which has invested c.USD700m in Indonesia and built a 60ha factory at GIIC. In terms of size, for now we think DMAS has the largest land plots if a global manufacturer wants to relocate its factory or factories to Indonesia. Figure 4: The GIIC industrial estate Source: Company, RHB See important disclosures at the end of this report 29 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 5: Diverse mix of customers across various sectors Source: Company, RHB Figure 6: Ownership structure of the company Source: Company data, RHB DMAS is 57% owned by Sinar Mas Land and 25% owned by Sojitz. The former is one of the leading and most experienced property developers in Indonesia, while the latter is a general trading conglomerate with a worldwide network in 50 countries and regions. Sojitz also listed on the Tokyo Stock Exchange. See important disclosures at the end of this report 30 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 7: DMAS’ tenant mix by sector Figure 8: DMAS’ tenant mix by country Other foreign 10% Others 20% Indonesia 25% Logistics 10% Auto 55% Japan 65% Consumer Related 15% Source: Company data, RHB Source: Company data, RHB Supported by shareholder Sojitz, DMAS’s tenant mix is dominated by auto companies from Japan. Japanese firms account for 65% of the 121 tenants of its industrial estate, followed by local companies – they account for 25% of the total. By sector, auto companies make up 55% of its tenants, followed by consumer-related (15%) and logistics (10%) firms. The 20% balance is made up of others. Oasis in the middle of an industrial complex Unlike BEST and SSIA, DMAS has an integrated township with residential and commercial areas. Sinar Mas Land’s expertise in developing townships, such as BSD City, Kota Legenda, and Grand City Balikpapan, make this industrial estate quite unique. DMAS’ total gross area reaches 3,181ha, in which 54% is dedicated to industrial, 24% to commercial, and 22% for residential purposes. As of Jun 2019, it has sold 1,725ha of landbank: i. 1,256ha for industrial; ii. 276ha for commercial; iii. 193ha for residential. Going forward, this area will become highly populated, and we believe the company can sell more commercial and residential land plots in future. Figure 9: Kota Deltamas’ directory map Source: Company, RHB See important disclosures at the end of this report 31 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Financial Forecasts And Key Earnings Drivers DMAS reported 1H19 revenue of IDR985bn, or 4x bigger than 1H18 revenue of IDR246bn. We think this is due to bookings from FY17’s marketing sales with some carry over from FY16. This year, the company projects marketing sales of IDR1.25trn – we believe this figure can be surpassed, given the strong enquiries DMAS has received so far this year. We believe the company’s revenue could reach IDR1.6trn on strong marketing sales at the end of last year, as well as FY19. Going forward, we expect DMAS to garner marketing sales of c.IDR1.25trn from FY20 onwards. However, should President Jokowi’s second term lead to a lot of reforms that attract more FDIs, we believe the company can boost its marketing sales. This is because DMAS still has a lot of landbank to be sold in Cikarang. As at 1H19, it still has: i. 462ha of industrial estate land; ii. 481ha of commercial areas; iii. 513ha of residential plots. Beside industrial land, parent Sinar Mas Land’s expertise in developing townships is a plus point going forward. There will be potential value added from its commercial and residential areas. At the moment, those areas have not contributed so much to the company’s financials. Figure 10: Forecast revenue (2019F- 2021F) Figure 11: DMAS’ revenue breakdown 2021F 6% 9% 83% 1% 2020F 11%5% 82% 1% 2019F 3%9% 87% 1% 0% 20% 40% 60% 80% 100% Residential Commercial Industrial Rental & Hotel Source: Company data, RHB Source: Company data, RHB Revenue growth driven by the industrial segment We expect revenue from this business will continue to make up c.80% of its topline. This is because we have not yet seen any pickups from its residential and commercial areas. High gross margins due to pick-up in revenue recognition DMAS has been able to maintain its GPMs over the past few years, as industrial estate margins are relatively high. As at Jun 2019, the company’s GPM has already expanded to 67% vs 54% last year. This was due to higher recognition from industrial and commercial land sales in FY19. In our view, if DMAS can maintain this momentum at its industrial estate, we believe the company’s blended GPM could expand to 58% by end FY19 – this is higher than last year’s 56%. With the potential of another car manufacturer expanding to Cikarang, there is a potential for DMAS to expand its margins by 2020. Growing net profit, as marketing sales continue to pick up The company’s earnings continue to grow – primarily helped by DMAS always achieving its marketing sales targets. We also believe that the company receives the most enquiries vis- à-vis its peers. This is mainly because DMAS still has the largest landbank for industrial use at a reasonable location and rational prices. Additionally, as it is a JV between Sojitz and Sinar Mas Land, both parties market the company and its offerings, as well as actively look for marketing sales. This strategy has proven to beneficial to DMAS’ marketing sales profitability. See important disclosures at the end of this report 32 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 12: Revenue (2016- 2021F) (IDRbn) 1,000 805 803 758 800 751 657 600 496 400 200 0 2016 2017 2018 2019F 2020F 2021F Source: Company data, RHB Where are we vs consensus Our earnings estimate for 2019 is 12% above consensus, as we think Street has not priced in the company’s latest marketing sales achievement of 17.2ha on top of the 25.3ha achieved in 1H19. This takes its total industrial land sales so far to 42.5ha and an additional 12.2ha of commercial land – equivalent to IDR1.6trn. Figure 13: RHB vs consensus RHB Consensus RHB vs Cons 2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F Revenue (IDRbn) 1,532 1,616 1,626 1,316 1,681 1,881 16% -4% -14% Gross Profit (IDRbn) 885 941 947 803 990 1,104 10% -5% -14% Operating Profit (IDRbn) 678 717 711 606 713 791 12% 1% -10% Net Profit 751 805 803 672 840 846 12% -4% -5% EPS 16 17 17 14 16 18 109% 104% 94% GPM (Δbps) 58% 58% 58% 61.0% 58.9% 58.7% -3.20 -0.72 -0.43 Operating Margin (Δbps) 44.2% 44.4% 43.7% 46.0% 42.4% 42.1% -1.81 1.99 1.66 Net Margin (Δbps) 49.0% 49.8% 49.4% 51.1% 49.9% 45.0% -2.09 -0.13 4.44 Source: Bloomberg, RHB See important disclosures at the end of this report 33 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Valuation Rationale We derive our IDR382 TP based on NAV methodology and applying a 50% discount to NAV. Even though the share price has rallied more than 94% YTD, we still believe there is an upside coming from DMAS’ large landbank and ability to absorb large tenants, which will be beneficial if the FDI inflow improves. Management is confident that it is on track to achieve FY19’s targets. DMAS has also received a lot of enquiries for FY20. Figure 14: DMAS’ NAV calculation Property Asset Landbank left (sq m) price per sq m market value ownership NAV(IDRbn) NAV/share Industrial 5,120,000 1,700 8,704 100% 8,704 181 Commercial 8,840,000 2,300 20,332 100% 20,332 422 Residential 5,140,000 1,700 8,738 100% 8,738 181 total 37,774 784 NAV after tax 35,885 745 Add cash 745 15 - Debt 0 0 - Sales advance 165 3 NAV 36,795 763 Current share price 302 NAV discount 60% Target NAV discount 50% TP 382 Source: RHB, Company data The counter is trading at 18x FY19F P/E – a premium when compared to BEST and SSIA. This is due to DMAS’ recent marketing sales performance and the superior dividend payout offered to shareholders. Figure 15: DMAS’ 5-year P/E band Figure 16: DMAS’ 5-year P/BV band (x) (x) +2 SD = 19.8x +3 SD = 2.2x 20 PE = 18.6x +2 SD = 1.9x 18 P/BV = 1.9x +1 SD = 17.0x 1.8 +1 SD = 1.6x 16 Mean = 14.2x Mean = 1.3x 14 1.3 -1 SD = 1.0x 12 -1 SD = 11.4x -2 SD = 0.8x 0.8 10 -2 SD = 8.6x 8 0.3 2015 2016 2017 2018 2019 2015 2016 2017 2018 Source: Bloomberg, RHB Source: Bloomberg, RHB Figure 17: DMAS’ 5-year discount to NAV band Discount to NAV (%) -50% +3 SD = 56% -55% Disc to NAV = 60% -60% +2 SD = 61% -65% +1 SD = 67% -70% Mean = 73% -75% -1 SD = 78% -80% -2 SD = 84% -85% -90% 2015 2016 2019 2017 2018 Source: Bloomberg, RHB See important disclosures at the end of this report 34 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Downside Risks Macroeconomic uncertainty. Macroeconomic volatility, which leads towards slowing global and domestic GDP growth, could lead to a slowdown in FDIs flowing through to Indonesia. In turn, this could impact industrial estates’ marketing sales. Competition among industrial estate peers, ie price wars, and new industrial areas can pose a risk to DMAS’ operations. Regulatory risks like the unexpected implementation of government regulations – such as a tax holiday delay for new investments – or any additional legislative regulation that can hamper investments in Indonesia, can be deemed a downside risk too. Political risks. An unstable political environment during President Jokowi’s second term could slow Indonesia’s FDI attractiveness. We have seen before and during the recent election year. See important disclosures at the end of this report 35 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Management Team Figure 18: Board of directors Name Position Description Hongky Jeffry Nantung President director Hongky Jeffry Nantung has been president director since his appointment in 2016. He started his career at Duta Pertiwi (1991-1996), before being appointed as general manager of Radjawali PDI Wisma Real Estate (1997-1998) and general manager of Excelcomindo Pratama (1998-2002). Hongky resumed his career at Duta Pertiwi and served in several positions: general manager (2002-2003), deputy director (2003-2006), director (2006-2010), and director of Property Management (2010-2012). He also served as director of Bumi Serpong Damai. Hongky currently serves as vice president director of Pembangunan Deltamas (since 2013), CEO of Commercial of Sinar Mas Land (since 2012), and director of Duta Pertiwi (2010-2015) too. He received his Bachelor’s degree of Engineering from the University of Wollongong, Australia, in 1990. Hermawan Wijaya Director Hermawan Wijaya is a director. He has served the company in this post since 2016. He started his career at Sidharta & Sidharta and Cooper & Lybrand (1989- 1990), and Hadi Sutanto and Price Waterhouse Cooper (1990-1992). Hermawan joined Duta Pertiwi in 1992 and later served as director (2003-2015). He once served as commissioner of Bumi Serpong Damai (2006-2010). Hermawan received his Bachelor’s degree of Economics from Catholic University of Atma Yaya, Jakarta, in 1990. Tondy Suwanto Independent director Tondy Suwanto is an independent director of Puradelta Lestari. He has served the company as the independent director since 2016. Tondy started his career as the Chief Accountant of Maraga Daya Woodworks (1990-1991). He was then appointed as the Internal Auditor Supervisor of Pradja Farma Hoslab (1991-1992), Senior Accountant of Riau Andalan Pulp & Paper (1992-1995), and the Finance and Accounting Manager of Indoteaktama Graha Lestari (1995-1996). Tondy then started his journey in the company with serving as the deputy director of Finance & Accounting (1996-2013). He received his Bachelor’s degree of Economics from STIE YKPN, Yogyakarta in 1990. Source: Company Figure 19: Board of commissioners Name Position Description Muktar Widjaja President commissioner Muktar Widjaja has been President commissioner of Puradelta Lestari since 2001. He also occupies the position of CEO and executive director at Sinar Mas Land, president commissioner for Duta Pertiwi, and president commissioner for Bumi Serpong Damai, among other Sinar Mas Land Subsidiaries. Muktar received an undergraduate degree from Concordia University. Teky Mailoa Vice president Teky Mailoa has been vice president commissioner of Puradelta Lestari since commissioner 2016. He is also the president director in Duta Pertiwi, vice president commissioner at Bumi Serpong Damai, and president director at Pembangunan Deltamas. Teky’s previous positions include being President Director of Puradelta Lestari, among others. He received his Master's degree from the University of Wisconsin-Madison and Bachelor's degree from Trisakti University. See important disclosures at the end of this report 36 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Name Position Description Yu Mizuike Vice president commissioner Yu Mizuike has been vice president commissioner of Puradelta Lestari since his appointment in 2019. He has been with Sojitz (previously Nissho Iwai) since 1984 in the Overseas Development Department. In his career, Mizuike was appointed to the Australian office for condominium projects (1990-1993), as well as the Singaporean and Indonesian offices for various property projects including industrial estates in Jakarta (1999- 2004). In 2004, he served in Tokyo at the Overseas Development Department and was general manager of the Overseas Industrial and Urban Infrastructure Development Department (2012-2016). Mizuike was was then appointed as Sojitz’s Deputy COO Overseas Industrial & Urban Infrastructure Development Department (2017-2018). He once served as the commissioner of the company (2016-2017) and vice president director in 2018. He obtained a degree from the Faculty of Engineering in Hiroshima University, Japan, in 1984. Hirofumi Takeda Commissioner Hirofumi Takeda has been a commissioner of Puradelta Lestari since his appointment in 2019. He is currently a general manager with Sojitz. Takeda was previously president of Sojitz Food Corp, and has served in other positions on the board of the company. Teddy Pawitra Independent commissioner Teddy Pawitra is an independent commissioner of Puradelta Lestari. He is also the president director at Swadayanusa Kencana Raharja-Supreme Learning International. He is also Professor at the University of Indonesia, Professor at Widya Mandala Catholic University (Surabaya) and member of the American Marketing Association. Teddy is also on the boards of five other companies. He received a doctorate and an undergraduate degree from Universitas Airlangga and an MBA from the University of Minnesota. Susiyati Bambang Hirawan Independent commissioner Susiyati Bambang Hirawan is an independent commissioner of Puradelta Lestari. She is also on the boards of Duta Pertiwi, Sinar Mas Agro Resources & Technology, and Bumi Serpong Damai. She is also a member of Indonesian Economists Association and Professor at the University of Indonesia. Susiyati previously held the position of president commissioner at Rekayasa Industri and director general-Finance Department of the Government of Indonesia. She received an undergraduate degree from the University of Indonesia and doctorate and graduate degrees from the University of Birmingham. Source: Company See important disclosures at the end of this report 37 Puradelta Lestari Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 20: Company milestones Year Description 1993 Incorporated as a local investment company in Indonesia. 1994 Acquired land utilisation permit to operate over 3,000ha of land in the Bekasi Regency. 1996 Changed company status to foreign capital investment company. Sojitz became a 25% shareholder of the company. 2001 Direct access from the Jakarta-Cikampek toll roads to Kota Deltamas. 2002 Launched first residential development. 2004 Bekasi Regency government centre officially relocated to Kota Deltamas. Commenced development of light industry area (Greenland Standard Factory Building or Greenland SFB). 2008 Commenced work on Greenland International Industrial Centre (GIIC). 2012 Consolidation of Pembangunan Deltamas (PDM). 2015 Listed on the IDX with the ticker "DMAS". Source: Company Figure 21: Shareholding structure Source: Company data, RHB See important disclosures at the end of this report 38 Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Surya Semesta Internusa (SSIA IJ) Buy Subang City To Spur Growth; BUY Target Price (Return) IDR1,085 (+37%) Price: IDR795 Market Cap: USD266m Avg Daily Turnover (IDR/USD) 20,909m/1.5m We initiate coverage on SSIA with a BUY and IDR1,085 TP, 37% upside on Analysts optimism of its soon-to-be opened Subang Industrial City with 2,000ha of land to be launched by end-2019. Management is optimistic in reaching 50-80ha in Andre Benas FY20 (c.IDR700bn-1.1trn), which should drive future earnings. SSIA also has +6221 5093 9847 a bigger recurring revenue contribution (30%) vs peers. The stock is currently [email protected] trading at an undemanding 72% discount to NAV – we believe share price will rally further on Subang’s opening. Exceeded FY19 marketing sales target of 15ha as at 9M19. The company Ghibran Al Imran has sold 15.6ha of land, which translates into c.IDR260bn in marketing sales +6221 5093 9842 with an ASP of USD120/sqm. This was driven by increased enquiries from both [email protected] foreign and domestic companies, especially after the election overhang. The Share Performance (%) translation into marketing sales is also supported by Surya Semesta YTD 1m 3m 6m 12m Internusa’s lower ASP compared to its peers, which set a competitive price. Absolute 59.0 8.2 0.0 18.7 69.9 Subang City of Industry, next growth driver. SSIA’s next big project is the Relative 57.6 6.8 0.3 20.9 60.7 Subang City of Industry, just a 1.5-hour drive away from Patimban Port. We 52-wk Price low/high (IDR) 430 – 855 believe, when opened, Patimban Port will be the go-to port of access for exporting goods as it has an easier access than Tanjung Priok Port – which is Surya Semesta Internusa (SSIA IJ) overwhelmed by traffic jams in Jakarta. The company has received a land use Price Close 900 permit for 2,000ha. We believe Subang will be the source of growth for SSIA, 850 as the company is targeting 50-80ha of marketing sales in FY20. 800 750 Well diversified business, significant recurring portion. Unlike BEST’s and 700 DMAS’ industrial land sale-dominated revenue stream, SSIA’s revenue is more 650 diversified. In FY18, construction contributed 71%, hotels 22%, and industrial 600 550 estates 12% (comprising 35% from land sales and maintenance & service at 500 65%). This translated to a 30% recurring revenue portion. Although this meant 450 much lower net profit margin – at only 1% compared to BEST’s 44% and 48% 400 Jul-19 Oct-18 Oct-19 Apr-19 Jan-19 Feb-19 Mar-19 Jun-19 Dec-18 Sep-19 Sep-19 Nov-18 Aug-19 for DMAS – the recurring portion provided a more stable business model. May-19 Valuation rationale. We derive our TP of IDR1,085 based on SOP, and Source: Bloomberg applying a 62% discount to NAV at +2SD from its 5-year mean. We use RNAV to value its remaining landbank, market value using the market cap of Nusa Raya Cipta (NRCA IJ, NR) for its construction business, and DCF (11.4% WACC) to value its hotel and recurring service & maintenance businesses. Risks include intensifying competition from other players, slower FDI inflow due to unfavourable regulations, and decelerating global economic growth. We expect FDI to continue to remain strong in the coming years and benefit all industrial estate players in Indonesia. Other risks include execution risks for Patimban Port and the toll road connecting it to Subang. Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total turnover (IDRb) 3,274 3,682 4,010 4,489 5,284 Net profit 1,178 38 54 175 383 Recurring net profit (IDRb) (645) 38 54 175 383 Recurring net profit growth (%) N/A N/A 43.9 222.6 118.8 Recurring EPS (IDR) 252 8 12 37 82 DPS (IDR) 11.0 19.9 9.6 11.6 25.2 Recurring P/E (x) N/A 98.5 68.5 21.2 9.7 P/B (x) 0.9 0.9 0.9 0.9 0.8 Dividend Yield (%) 1.4 2.5 1.2 1.5 3.2 EV/EBITDA (x) 2.3 12.4 11.0 7.7 5.0 Return on average equity (%) 30.1 0.9 1.2 3.9 8.0 Source: Company data, RHB See important disclosures at the end of this report 39 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Financial Exhibits Asia Financial Summary 2017 2018 2019F 2020F 2021F Indonesia Recurring EPS (IDR) (0) 8 12 37 82 Property – Industrial Estate EPS (IDR) 252 8 12 37 82 DPS (IDR) 11 20 10 12 25 Surya Semesta Internusa BVPS (IDR) 858 845 858 897 969 Weighted Avg Adjusted Shares (m) 4,670 4,670 4,670 4,670 4,670 Major shareholders (%) Armand Investment Utama 8.66 Valuation Metrics 2017 2018 2019F 2020F 2021F Persada Capital Investama 7.85 Recurring P/E (x) N/A 98.5 68.5 21.2 9.7 HPAM Ultima Ekuitas 5.47 P/E (x) 3.2 98.5 68.5 21.2 9.7 Union Sampoerna 5.40 P/B (x) 0.9 0.9 0.9 0.9 0.8 Dividend Yield (%) 1.4 2.5 1.2 1.5 3.2 Valuation basis EV/EBITDA (x) 2.3 12.4 11.0 7.7 5.0 EV/EBIT (x) 2.3 13.2 11.5 7.9 5.1 We derive our TP of IDR1,085 based on SOP, and applying a 62% discount to NAV. We used RNAV to Income Statement (IDRb) 2017 2018 2019F 2020F 2021F value its remaining landbank, market value using the market cap of Nusa Raya Cipta (NRCA IJ, NR) for its Total Turnover 3,274 3,682 4,010 4,489 5,284 construction business, and DCF (11.4% WACC) to Gross Profit 864 981 1,085 1,349 1,796 value its hotel and recurring service & maintenance EBITDA 2,050 375 425 608 925 business. Depreciation and Amortisation (21) (21) (21) (21) (21) Operating Profit 2,029 354 404 586 904 Key drivers Net Interest (187) (98) (98) (86) (69) Other Income 1,824 106 120 134 158 Our forecasts are driven by: Pre-Tax Profit 2,050 375 425 608 925 i. Marketing sales exceeding target; Taxation (457) (35) (41) (90) (173) ii. Significant recurring portion; iii. Patimban Port as a catalyst for Subang Minority Interests 63 52 54 61 71 Industrial Park. Net Profit 1,178 38 54 175 383 Recurring Net Profit (645) 38 54 175 383 Key risks Cash Flow (IDRb) 2017 2018 2019F 2020F 2021F The downside risks include: i. Macroeconomic uncertainty; Change in Working Capital (1,259) 1,258 (100) (114) (189) ii. Regulatory risk; Cash Flow from Operations 141 1,507 237 361 516 iii. Political risk; Capex (389) (126) (212) (210) (210) Cash Flow from Investing Activities (212) (334) (291) (292) (296) Cash Flow from Financing Activities (304) (946) 190 (138) (85) Company Profile Cash at Beginning of Period 1,520 1,145 1,372 1,508 1,439 Net Change in Cash (375) 227 136 (69) 135 Surya Semesta Internusa (SSIA) owns and Ending Balance Cash 1,145 1,372 1,508 1,439 1,574 manages industrial estates in the Karawang and Subang area, as well as manages residential estates, provides construction services through its Balance Sheet (IDRb) 2017 2018 2019F 2020F 2021F listed subsidiary Nusa Raya Cipta (NRCA IJ), and Total Cash and Equivalents 1,145 1,372 1,508 1,439 1,574 operates hotels with Mulia Group, Banyan Tree and Tangible Fixed Assets 3,766 3,946 4,009 4,066 4,117 its own brand Batiqa. Advance for Land Acquisitions 120 119 178 200 235 Investment in Associates 410 319 319 319 319 Total Other Assets 3,411 1,649 1,796 2,027 2,408 Total Assets 8,851 7,404 7,810 8,050 8,653 Total Long-Term Debt 1,735 986 1,314 1,758 1,439 Other Liabilities 2,640 2,033 2,048 1,662 2,247 Total Liabilities 4,375 3,019 3,362 3,420 3,686 Shareholders' Equity 4,009 3,944 4,007 4,189 4,525 Minority Interests 468 441 441 441 441 Total Equity 4,477 4,385 4,448 4,630 4,966 Net Debt 589 (386) (194) 319 (135) Total Liabilities & Equity 8,851 7,404 7,810 8,050 8,653 Key Metrics 2017 2018 2019F 2020F 2021F Revenue Growth (%) -14% 12% 9% 12% 18% Recurrent EPS Growth (%) N/A N/A 44% 223% 119% Gross Margin (%) 26% 27% 27% 30% 34% EBITDA Margin (%) 63% 10% 11% 14% 18% Net Profit Margin (%) 36% 1% 1% 4% 7% Dividend Payout Ratio (%) 51% 7% 50% 50% 50% Capex / Sales (%) 12% 3% 5% 5% 4% Interest Cover (x) 10.8 3.6 4.1 6.8 13.0 Source: Company data, RHB See important disclosures at the end of this report 40 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Investment Summary We initiate coverage on SSIA with a BUY and IDR1,085 TP, 37% upside. SSIA is a well- established property and industrial land developer founded in 1971 with property development in the Kuningan area. The company entered into the industrial estate business with the development of Suryacipta City of Industry in Karawang. SSIA has a diversified investment portfolio, including construction and hotel businesses, on top of its industrial land business providing a bigger recurring revenue portion. Its market cap is USD271m and it has a trading liquidity of USD203.7 per day. SSIA is owned by Arman Investments Utama (8.7%), Persada Capital (7.9%), Intrepid Investments (6.3%), Union Sampoerna (5.4%) and 70.7% publicly owned (remaining 1.2% treasury shares). We have a 12-month TP of IDR1,085, offering 37% upside from the current level for three main reasons: i. Its turnaround in marketing sales, has already exceeding its FY19 target, which would translate to a better-performing FY20F; ii. Subang City of Industry as the next growth catalyst, supported by Patimban Port opening; iii. Well-diversified business with significant recurring revenue portion of c.30%. Strong marketing sales pick-up in 2019, after a slowdown in 2016-2018. As at 9M19, the company has exceeded its FY19 marketing sales target of 15ha. It has sold 15.6ha of land, translating to c.IDR260bn in marketing sales with an ASP of USD120 per sqm. This was driven by increased enquiries from both foreign and domestic companies, especially after the election overhang. The translation into marketing sales is also supported by SSIA’s lower ASP compared to its peers. We believe a turnaround is happening in the industrial land sale business, and should be boosted even further once supportive reforms – such as labour law reform – are carried out by the Government. Growth coming from Subang City of Industry, supported by Patimban Port. SSIA plans to launch its second industrial estate, after its Surya Cipta Karawang estate, located in Subang. SSIA already has a 2,000ha of land use permit with c.1,000ha already owned, 70% of which will be sold as industrial land, and the remaining 30% as higher-priced commercial land. Management targets marketing sales in 2H20 will achieve 50-80ha, considering its pursuit of an anchor tenant that usually requires >50ha plot of land for initial factory opening. At a price of USD90-105 per sqm, the marketing sales target from Subang alone is equivalent to IDR630bn-1.18trn. Well diversified business. SSIA has a more diverse investment portfolio compared to peers, DMAS & BEST, with construction contributing to 71% to its revenue stream, hotels (22%), and industrial estates (12% – comprising land sales of 35%, and maintenance & service at 65%). This translates to 30% recurring revenue portion. Although this means lower net profit margin of only 1% compared to BEST (45%) and DMAS (49%), the recurring portion provides a more stable business model. Valuation rationale. We derive our TP of IDR1,085 based on SOP, and applying a 62% discount to NAV at +2SD of its 5-year mean. We use RNAV to value its remaining landbank, market value using the market cap of NCRA for its construction business, and DCF (11.4% WACC) to value its hotel and recurring service & maintenance businesses. See important disclosures at the end of this report 41 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Strong FY19 Marketing Sales Industrial estate stocks have been enjoying a good run this year, gaining as much as 23%, 75% and 124% YTD (BEST, SSIA and DMAS) due to expectations of higher marketing sales as the election is over and on an exodus of global manufacturers to Indonesia. This is in line with the company’s marketing sales achievement exceeding its initial 15ha target, with 15.6ha sold by 9M19. This is a good sign for the company and the overall industrial estate sector, as a turning point from a rather slow 2016-2018. With a better FDI outlook driven by supportive reform and regulations from President Jokowi’s administration in his second term, we believe SSIA will benefit from an overall higher marketing sales achievement. Strong marketing sales pick-up in 2019, after a slowdown in 2016-2018. As at 9M19, the company has exceeded its FY19 marketing sales target of 15ha. The company has sold 15.6ha of land. This translates to c.IDR260bn in marketing sales, with an ASP of USD120 sqm. Marketing sales this year consisted of 13.2ha for a data centre from a US company, and the remaining 2.4ha for an existing tenant expanding its facility. The company is still optimistic that it will book another sale this year. We expect it may book 20ha by the end of FY19 – back to 2014-2015 levels, before the slowdown. Combined with new bookings expected next year from Subang, marketing sales may jump in 2020. Figure 1: SSIA’s historical marketing sales and ASP SSIA’s marketing sales have picked up from its lowest in 2017 As of 9M19 the company has exceeded its initial target of 15ha in land sales Source: Company, RHB Subang As a Source Of Growth SSIA currently has one operating industrial estate, Suryacipta City of Industry located in Karawang. The company is preparing for an opening of another industrial estate located in Subang – Subang City of Industry – which is targeted to open by the end of 2019. In the coming years, we believe the Subang City of Industry will be the source of growth for SSIA. Although it is located farther away from Jakarta – at the KM 88 exit compared to its Karawang development at the KM 50 exit – we believe the Subang location will be a prime location for companies to invest in for its proximity to Patimban Port and for the lower minimum wage compared to the elevated minimum wage in the Bekasi and Karawang area. With the opening of the Jakarta-Cikampek elevated toll road by the end of the year, travel time to Subang will also be cut down and therefore, reduce costs. Strategic location, near to Patimban Port The location in Subang is very strategic, as it is near the Patimban Port, a massive port project in construction (valued at USD3.2bn, or c.IDR45trn), located in the north point of Subang, West Java. See important disclosures at the end of this report 42 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Construction will be done in three stages, with the planned capacity for its final stage at 7.5m containers (TEUs), on par with Tanjung Priok’s current capacity of 8m TEUs. At the first stage of construction, which is planned to be opened mid-2020, the port will have a capacity of 250,000 TEUs and 217,000 motor vehicles CBU. As at 1H19, construction of the container terminal reached 29%, while the car terminal reached 35% completion. We believe the port will also be the go-to port of access for exporting goods as it has an easier access than the Tanjung Priok port – which is overwhelmed by traffic jams in Jakarta. Figure 2: Master plan of Patimban Port Investment value Phase Facility Capacity Target Operation Funding source (USDm) Phase 1-1 Container terminal 250,000 Containers (TEUs) 1,306 Car terminal 217,000 Motor Vehicles (CBU) Mid-2020 JICA Phase 1-2 Container terminal 3,500,000 Containers (TEUs) 1,049 Car terminal 383,000 Motor Vehicles (CBU) 2022 Phase 2 Container terminal 1,460,000 Containers (TEUs) Public Private 562 Partnership Car terminal - Motor Vehicles (CBU) 2027 (PPP) Phase 3 Container terminal 2,290,000 Containers (TEUs) Public Private 286 Partnership Car terminal - Motor Vehicles (CBU) 2037 (PPP) Total Container terminal 7,500,000 Containers (TEUs) 3,203 Car terminal 600,000 Motor Vehicles (CBU) Source: Ministry of Transportation, RHB Figure 3: Phases of Patimban Port construction The Phase 1-1 development is targeted to be completed by mid- 2020, with a total capacity of 250,000TEUs in the container terminal and 217,000 CBU in the car terminal As of 1H19, construction of the container terminal reached 29%, while the car terminal reached 35% completion Source: Ministry of Transportation, RHB To be connected with Patimban access toll road SSIA’s Industrial City will have direct access via toll road to the Patimban Port. The toll road will span c.40km, with 8km of access road, which will cut down the travel time between the two points to 45-50 mins from the current 1.5-hour drive. Currently, the toll road project has received the recommendation from the regency, and is currently awaiting the decision from the Ministry of Public Works and Housing. Additionally, the company will join in the construction with subsidiary, NRCA, and operate the toll road in a JV with Jasa Marga (JSMR IJ, BUY, TP: 7,000). The total toll road project is valued at IDR5trn, and will take approximately two years to construct. See important disclosures at the end of this report 43 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Figure 4: Subang City of Industry location – c.48km away from Figure 5: Patimban access toll road plan Patimban Port Source: Company Source: Ministry of Public Works and Housing To be the go-to industrial area Subang will be the go-to industrial area for companies to invest in, in our view. On top of the direct access to the planned-to-be second largest port in Indonesia, Subang area is also turning into an attractive location, as Bekasi and Karawang are getting more crowded, coupled with the already-high minimum wage. For big corporations that are planning to open shop in Indonesia, finding a large plot of land in industrial estates in Bekasi and Karawang are quite difficult, as most industrial estates now have scattered land available for sale in smaller sizes, such as SSIA’s Suryacipta City of Industry in Karawang – with the largest plot at 38ha. Moreover, the minimum wage in Subang is significantly lower currently at c.IDR2.7m, 35% lower than Karawang and Bekasi’s c.IDR4.2m. Figure 6: West Java minimum wage per regency Province Regency Minimum Wage (IDR) Regency Minimum Wage (IDR) West Java Banjar City 1,688,217 Pangandaran Regency 1,714,673 Cianjur Regency 2,336,004 Indramayu Regency 2,117,713 Ciebon Regency 2,024,160 Bandung Regency 2,893,074 Cirebon City 2,045,422 West Bandung Regency 2,898,744 Sukabumi City 2,331,752 Sumedang Regency 2,893,074 Tasikmalaya City 2,086,529 Cimahi City 2,893,074 Bekasi Regency 4,146,126 Depok City 3,872,551 Kuningan Regency 1,734,994 Bogor City 3,842,785 Garut Regency 1,807,285 Sukabumi Regency 2,791,016 Majalengka Regency 1,791,693 Bekasi City 4,229,756 Bandung City 3,339,580 Karawang Regency 4,234,010 Bogor Regency 3,763,405 Purwakarta Regency 3,722,299 Tasikmalaya Regency 2,075,189 Subang Regency 2,732,899 Ciamis Regency 1,733,162 Source: West Java Regional Government Optimistic on marketing sales for 2H20 Management has set an optimistic marketing sales target for the Subang City of Industry of 50-80ha booked by 2H20. It is in the pursuit of an anchor tenant that usually requires a more than 50ha plot of land for its initial factory opening. At a price of USD90-105 per sqm, the marketing sales target from Subang alone is equivalent to IDR630bn-1.18trn. Combined with strong marketing sales from its Karawang development, we believe this will drive its FY20F-21F performance. See important disclosures at the end of this report 44 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Diversified Business Profile SSIA has a more diverse investment portfolio compared to peers, DMAS & BEST. Its construction segment contributes 71% of its revenue stream, hotels provides 22%, and industrial estates 12% (land sales 35%, maintenance & service 65%). This translates to a 30% recurring revenue portion. Though this means a low net profit margin of only 1% vs BEST and DMAS’ above 40%, the recurring portion is a more stable business model. Flagship industrial estate providing the fattest margins SSIA currently has two industrial estates, with Suryacipta City of Industry in Karawang already in operation with a total area of 1,400ha and Subang City of Industry to be opened by end-2019, with a total land permit of 2,000ha. Its revenue stream from industrial estates comes from two sources, mainly industrial land sales, and the recurring maintenance & utilities fee, with both segments contributing 35% and 65% respectively to the industrial estate business revenue, and making up 12.3% of total revenue in FY18. Although the industrial estate segment only accounted for 12% of revenue in FY18, (4.2% from industrial land sales and 7.8% from recurring maintenance & utilities), its high gross margin of 79% from industrial land sale (compared to construction segment’s 10% and hotel’s 65%) translated to a bigger chunk of gross profit contribution of 22.8%. Following the pick-up in marketing sales and the opening of Subang industrial estate, we expect FY19F- 20F revenue contribution to increase to 13.6% and 18.1%, and for gross profit, to rise 26.4% and 36.2%. Figure 7: Location of SSIA’s industrial estates Both of SSIA’s industrial estates are located along the Trans Java Toll road, with the Karawang estate located 50km from Jakarta, and Subang located 88km from Jakarta Source: Ministry of Transportation, RHB Karawang still has 162ha of landbank left, with the largest plot at 38ha in size. Assuming there is 20ha of marketing sales pa, the development may sustain its revenue stream from land sales for that area for eight years, and only collecting maintenance fees there on out. With the planned opening of its new industrial estate by the end of 2019, Subang should then sustain the company’s land sales revenue stream. See important disclosures at the end of this report 45 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Figure 8: Suryacipta Karawang’s layout Figure 9: Suryacipta Karawang’s landbank License – gross (ha) 1,400 Phase 1 and 2 gross (ha) 1,000 Industrial & Commercial land - net 793 Sold up to 30 June 2019 - net 759 Landbank – net (ha) 34 Phase 3 – gross (ha) 400 Industrial & Commercial land - net 293 Sold up to 30 June 2019 - net 165 Landbank – net (ha) 127 Total landbank – net (ha) 162 Source: Company Source: Company data Figure 10: SSIA’s tenant mix by industry Figure 11: SSIA’s tenant mix by country Others 8% Others 17% Belgium 2% Swiss 4% Packaging 1% Malaysia 4% Pharmaceuticals 3% India 5% Construction 9% Japan 53% Auto-related 60% Indonesia 24% F&B 10% Source: Company data Source: Company data Current tenants in the Karawang estate comprise auto (60%), construction (10%), packaging (9%), and others. While by country of origin, Japanese companies make up to 53% of total tenants, followed by Indonesian companies at 24% of total. Construction, run by its listed subsidiary Nusa Raya Cipta NRCA has more than 50 years of experience in high-rise building construction. Its projects are mainly hotels, apartments, hospitals, office towers, shopping centres, and structure engineering with a good track record. NRCA has achieved IDR1.73trn of new contracts, or 49.43% of its FY19 target of IDR3.5trn. NRCA is unique compared to other construction companies, because its operations do not depend on debt. NRCA’s debt-to-equity ratio is 0.16%, as at 1H19. The company has good management of trade receivables from suppliers and advance payment from customers. This is reflected in its lower days of receivables of 40 days, compared to Acset Indonusa’s (ACST IJ, BUY, TP: IDR2,250) 48 days. Most of the project terms of payment are by monthly progress, resulting in it being a cash-rich company and being able to regularly pay cash dividends to shareholders. Its focus on customer satisfaction has paid-off as new contracts were mostly acquired from repeat customers. NRCA is also participating in the Patimban toll road project, which will be operated by its parent in a JV with Jasa Marga. This is supported by its experience in the construction of the Cikopo-Palimanan toll road, which was then sold to Astratel Nusantara for IDR189.5bn. As at FY18, NRCA contributed 66% of revenue and 25% of gross profit (due to its 10% GPM). With the growing number of new contracts acquired, we believe NRCA will still contribute a huge chunk of revenue for SSIA. See important disclosures at the end of this report 46 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Figure 12: NRCA’s historical revenue Figure 13: NRCA’s customer composition – 2018 (IDRbn) 4,000 3,397 3,500 3,235 3,024 3,052 2,841 3,000 2,811 2,693 New 44% 2,500 2,000 1,526 1,500 Repeat56% 1,000 500 0 2015 2016 2017 2018 1H19 FY19F FY20F FY21F Source: Company data, RHB Source: Company data, RHB NRCA has been getting contracts from well-known property players such as Sinarmas Group, Ciputra Group, Intiland Group, Agung Podomoro Group, Tokyu Land, etc. Not only that, its strong customer profile is also loyal, we believe from NRCA’s good execution, translating to 56% of its new contracts coming from repeat customers. Well-known hotels providing recurring revenue, expanding own brand going forward SSIA currently owns two hotels which are being operated by Melia Hotels International, namely; Gran Melia Jakarta Hotel & Melia Bali Hotel, and owns one hotel being operated by Banyan Tree Holdings – Banyan Tree Unggasan Resort Bali. As at 2014, SSIA embarked on creating its own hotel brand, self-owned and self-operated under the name Batiqa hotels. There are currently eight Batiqa hotels in operation. According to management, expansion of Batiqa hotels is its priority in the hospitality segment going forward. The hospitality segment (hotels) currently accounts for 22% of revenue. With the steady growth that should come from its Batiqa franchise, we believe the hospitality segment will continue to contribute a steady revenue stream. Figure 14: SSIA’s hospitality segment revenue Figure 15: SSIA’s hotel RevPar (IDRbn) 2015 2016 2017 2018 1H19 961 1,000 912 800 840 Gran Melia (USD) 103 92 86 90 75 800 678 697 644 Melia Bali (USD) 107 119 130 153 142 600 Banyan Tree (USD) 466 448 435 388 387 400 Batiqa (IDR '000)* 357 250 277 309 279 200 0 2015 2016 2017 2018 2019F 2020F 2021F Gran Melia Melia Bali Banyan Tree Batiqa Source: Company data, RHB Note: ” Batiqa’s 2015 RevPar only accounts for Batiqa Karawang Source: Company data, RHB See important disclosures at the end of this report 47 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Financial Forecasts And Key Earnings Drivers Revenue to ramp up post Subang opening A combination of a pick-up in marketing sales in Karawang and the launch of Subang next year should drive up revenue for SSIA in the coming years. After exceeding its FY19 marketing sales target of 15ha, we believe SSIA may still be able to book a total of 20ha in 2019. Following that, the company is targeting 50-60ha of marketing sales in Subang by mid-2020. We forecast the company’s revenue to grow by a CAGR of 13% throughout 2018-2021. This is largely driven by the industrial segment, forecasted to grow by a CAGR of 91% following substantial growth after opening of Subang. The construction segment should also grow steadily, with strong growth in new contracts. We project a conservative growth of 6% CAGR for the segment. The same goes for its steady recurring portion in its hospitality and maintenance & services segments, with a CAGR of 7%, and maintaining a 25% recurring portion. Figure 16: SSIA’s marketing sales Figure 17: SSIA’s revenue (Ha) (IDRbn) 80 6,000 5,284 4,868 5,000 4,489 60 4,010 3,796 4,000 3,682 60 3,274 40 3,000 25 2,000 20 1,000 22.8 21.2 15.6 20 20 20 10.4 8.3 0 0 2.1 2015 2016 2017 2018 2019F 2020F 2021F 2014 2015 2016 2017 2018 1H19 FY19F FY20F FY21F Construction Hotel Maintenance and Utilities Industrial Estate Land Karawang Subang Source: Company data, RHB Source: Company data, RHB Figure 18: SSIA’s recurring net profit Figure 19: SSIA’s debt (IDRbn) (IDRbn) 600 2,000 1,735 1,758 383 1,574 400 1,508 302 1,439 1,439 1,500 1,372 175 1,314 200 1,145 62 54 38 986 1,000 0 589 -200 500 319 -400 0 -600 -553 (135) 2015 2016 2017 2018 FY19F FY20F FY21F (194) -500 (386) 2017 2018 2019F 2020F 2021F LTD Cash net debt Source: Company data, RHB Source: Company data, RHB We forecast SSIA’s net profit to ramp up in the next three years, driven by net margin expansion from 1% in 2018 to 1.4%, 3.9%, and 7.2% in 2019F-2021F. We believe margin expansion would cover GPM, EBIT margin and net profit margin, due to the huge growth capabilities of the industrial segment, which has the highest margin compared to other segments. The segment’s net profit margin was the highest at 26% in 2018, compared to construction’s 5% and hotels’ 2%. See important disclosures at the end of this report 48 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Where we are vs consensus Our 2019F earnings are 10% above consensus, while our 2020F-2021F earnings are 10%, 41%, and 114% above consensus. This is because we think Street has not priced in management’s marketing sales target of 50-80ha that should be recognised in 2020F- 2021F. Management’s marketing sales target in Subang is 3-4x higher than our 2019 estimate of 20ha (achievement in 9M18: 15.6 ha) in Karawang, assuming the company is able to book sales from an anchor tenant, which usually needs above 50ha in initial investment. Figure 20: RHB vs consensus RHB Consensus RHB/Cons 2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F Revenue (IDRbn) 4,010 4,489 5,284 3,944 4,351 4,765 2% 3% 11% Gross Profit (IDRbn) 1,085 1,349 1,796 1,074 1,221 1,350 1% 10% 33% Operating Profit (IDRbn) 313 481 775 291 416 528 8% 16% 47% Net Profit (IDRbn) 54 175 383 49 124 179 10% 41% 114% GPM (Δbps) 27.1% 30.0% 34.0% 27.2% 28.1% 28.3% -0.67 7.09 20.02 Operating Margin (Δbps) 7.8% 10.7% 14.7% 7.4% 9.6% 11.1% 5.95 12.14 32.55 Net Margin (Δbps) 1.4% 3.9% 7.2% 1.2% 2.9% 3.8% 8.66 36.34 92.80 Source: Bloomberg, RHB Valuation Rationale We derive our TP of IDR1,085 based on SOP, and applying a 62% discount to NAV set at +3SD from its 5-year mean. We used RNAV to value its remaining landbank, market value using the market cap of NRCA for its construction business, and DCF (WACC: 11.4%) to value its hotel and recurring service & maintenance businesses. Figure 21: SSIA’s NAV calculation Business Company Market Effective Ownership SSIA's Value Contribution to Cap (IDRbn) (%) (IDRbn) total value (%) Industrial (NAV) 9,985 100% 9,985 72.1% Construction (Based on NRCA Market Cap) 953 65% 623 4.5% Hotel (Melia) (DCF, WACC 11.4%, TG 5%) 1,706 87% 1,481 10.7% Hotel (Banyan) (DCF, WACC 11.4%, TG 5%) 439 100% 439 3.2% Hotel (Batiqa) (DCF, WACC 11.4%, TG 5%) 319 100% 319 2.3% Service & Maintenance (DCF, WACC 11.4%, TG 5%) 999 100% 999 7.2% Total NAV 13,847 + Cash FY19F 1,508 - Debt 1,742 - Cash Advances 205 SOTP (IDRbn) 13,408 # of shares (bn) = 4.705 RNAV per share 2,850 Share Price 795 Discount to Fair Value 72% TP (at 65% Discount) 1,083 Rounded 1,085 Upside 36% Source: RHB, Company data Currently SSIA is trading at a 72% discount to NAV, just slightly above its 5-year mean. We believe there is a justifiable upside to this, considering the ramp-up of marketing sales back to 2014-2015 levels, during which the counter is trading at +1-2SD from its mean. See important disclosures at the end of this report 49 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Figure 22: SSIA’s 5-year P/BV band Figure 23: SSIA’s 5-year discount to NAV band (x) Discount to NAV (%) +2 SD = 62% 1.9 -60% +2 SD = 1.7x 1.7 -65% +1 SD = 69% 1.5 +1 SD = 1.3x 1.3 -70% Disc to NAV = 72% 1.1 Mean = 0.9x -75% Mean = 75% 0.9 P/BV = 0.9x 0.7 -80% -1 SD = 0.6x -1 SD = 82% 0.5 -85% 0.3 -2 SD = 0.2x -2 SD = 89% 0.1 -90% 2014 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Source: Bloomberg, RHB Source: Bloomberg, RHB Downside Risks i. Macroeconomic uncertainty. Macroeconomic volatility, leading to slower global GDP growth – as well as for Indonesia – which could lead to slower FDI inflow for Indonesia and affect the marketing sales of industrial estates; ii. Regulatory risk. Unexpected implementation of government regulations such as delay in tax holiday for new investments, or any additional legislative regulation that can hamper investment in Indonesia; iii. Political risk. An unstable political environment during President Jokowi’s second term could dampen Indonesia’s FDI attractiveness, as we have seen before during the election year. See important disclosures at the end of this report 50 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Management Team Figure 24: Board of directors Name Position Description Johannes Suriadjaja President Johannes Suriadjaja has been the president director of the company since 2001. He previously served as vice director president director of the company in 1996-2001. He began his career as executive management trainee at Toyota Motor Sales, USA, in 1986-1987, assistant manager – Corporate Banking at the Chase Manhattan Bank, N.A. in Jakarta in 1990-1991, and as director of Multi Investment in 1993-1996. Currently he is also serving as president director of Suryalaya Anindita International, President Director of Enercon Praradhya, president director of TCP Internusa, president director of Sitiagung Makmur, and president director of Suryacipta Swadaya, among others. He graduated with a Bachelor’s degree in Marketing Management from The American College for the Applied Arts, Los Angeles, in 1989. Eddy P Wikanta Vice Eddy Wikanta has been the president director of the company since 2006. He joined the company in 1974 as president Head of the Glodok Plaza Shopping Complex Project in Jakarta, Head of the Sumber Waras Hospital VIP Room director Construction Project in Jakarta in 1974-1975, and Head of Plaza Theatre Construction Project and the Glodok Plaza Development Project in Jakarta in 1977-1978. In 1986, he joined Nusa Raya Cipta as Project Head Coordinator, and then appointed as director in 1988, managing director in 1991, and president director from 1996 to 2012. He served as director of the company from 1996 to 2005. He served as vice president director of SCS in 2006-2013. He is also present on the board of several subsidaries of the company. He graduated with a Bachelor’s degree in Civil Engineering from Diponegoro University in 1974. The Jok Tung Finance The Jok Tung has been serving as a director of the company since 2005. He began working at the Corporate director Banking division of The Chase Manhattan Bank N.A. Jakarta, with final position as vice president in 1985-1993. Previously he served as director of Argha Karya Prima Industry in 1993-2003. He is also present on the board of several subsidiaries of the company. He obtained his Bachelor of Science degree in Finance & Business Administration from the University of Southern California, Los Angeles, in 1984. Wilson Effendy Director Wilson Effendy has been a director of the company since 2019. He previously held several key positions in Nirvana Development as CEO (2014-2015); Bekasi Fajar Industrial Estate as finance director (2011-2014); and Ucoal Sumberdaya as CFO (2010-2011). He began his career at Arthur Anderson Indonesia as senior auditor (1996-1997), continued at Pacific Gas and Electric in USA as a financial and budget analyst (1999-2000), and as a senior business financial analyst with Barclays Global Investor, USA (2000-2003). He was also at Asia Pulp & Paper, Sinar Mas Group as Head of Banking, Investor Relations and Risk Management (2003-2010). Currently, he is also serving as director of Suryacipta Swadaya, director of Surya Internusa Hotels, director of Surya Internusa Properti, and director of Surya Siti Pratama. president director of Semesta Industri Pratama and president director of Surya Centra Industri. He obtained his Bachelor’s degree in Accounting from Universitas Tarumanagara in 1996 and his Master’s in Business Administration from California State Hayward in 1999. Source: Company See important disclosures at the end of this report 51 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Figure 25: Board of commissioners Name Position Description Hagianto Kumala President commissioner Hagianto Kumala has been the president commissioner of the company since his appointment in 2008. Prior to his appointment, he served as president director of Delta Dunia Makmur since 2009 and as president director of Bukit Makmur Mandiri Utama from 2012 to 2014. Before serving as president director of BUMA, he served as president commissioner of BUMA from 2011 to 2012, and as vice president commissioner from 2009 to 2010, among other important roles. He obtained his Bachelor of Industrial Engineering degree from Bandung Institute of Technology, Indonesia, in 1974. Emil Salim Vice president commissioner Emil Salim has been the vice president commissioner of the company since his appointment in 2016. He obtained his PhD degree in economics from the University of California, Berkeley, USA. He started his career as deputy chairman of the National Development Planning Board (Bappenas) from 1968 to 1971. He was subsequently appointed as Minister of State for State Apparatus Empowerment and deputy chairman of Bappenas in 1971-1973, Minister of Transport, Telecommunication and Tourism in 1973-1978, Minister for Population and Environment in 1978-1983, Member of the Presidential Advisory Council in 2007-2009, and Chairman of the Presidential Advisory Council doubling as Environment and Economic member in 2010-Oct 2014. He also served as Professor of the Environmental Science Postgraduate Program at the University of Indonesia since 1995, and as a Member of the Indonesian Science Academy since 2005. He also serves as chairman of the Environmental Science Postgraduate Program’s Lecturers Peer Group at the University of Indonesia; and as a lecturer at the University of Indonesia’s Economic Faculty; as well as other important roles Royanto Rizal Commissioner Royanto Rizal has been a commissioner of the company since 2011. He previously also served as a commissioner in 2001-2004. He began his career as manager at Kusumanegara in 1962- 1965, director of Silga in 1965-1970, director of National Roadbuilders & Construction in 1970- 1977, director of Town & City Properties (TCP) in 1977-1993, as a director of Suryalaya Anindita International (SAI) in 1983-1998, president director of Multi Investments in 1993-1996, vice president commissioner in 1996-2001, and commissioner of Suryalaya Anindita International in 1998-2013. He is currently serving as commissioner of Siti Swadaya Permai and Jasa Semesta Utama, vice president commissioner of Nusa Raya Cipta, president commissioner of Suryalaya Anindita International, TCP Internusa, Suryacipta Swadaya, Sitiagung Makmur, Ungasan Semesta Resort, Surya Internusa Hotels, Surya Internusa Properi, Karsa Sedaya Sejahtera, BATIQA Hotel Manajemen, Surya Citra Propertindo, Karsa Semesta Prima and Enercon Paradhya International. He graduated with a Bachelor of Civil Engineering degree from Bandung Institute of Technology in 1962. William Jusman Commissioner William Jusman has been a commissioner of the company since 2008. He began his career working as a civil engineer at Wilhelm & Barelli Structural Engineering, Los Angeles, in 1980- 1982; was a structural engineer at Califa Pratama, a subsidiary of the Duta Anggada Group in 1982-1986; a director of Sinar Putra Perdana Raya, a consulting & contracting firm in 1987- 2003, director of TCP Internusa and Sitiagung Makmur (SAM) in 2004-2009, and director of Ungasan Semesta Resort (USR) in 2006-2009. Currently he also serves as a director of Union Sampoerna and president director of Union Sampoerna Triputra Persada since 2009. He graduated with a Bachelor of Science degree in Civil Engineering from California State Polytechnic University, Pomona, California, USA, in 1979, and a Master of Science degree in Civil Engineering from the University of Southern California, Los Angeles, California, USA, in 1981. Crescento Hermawan Commissioner Crescento Hermawan has been a commissioner of the company since 2019. He holds a Bachelor’s degree in Finance from the University of Toledo, Ohio. He began his career at Dianlia Setyamukti, a mining contractor company in 1996 as financial analyst. In 1997, he continued his career at Bank Universal and continued to serve at this company until 2003, with the last position as senior manager for Corporate Marketing. He is the founder of Persada Capital (2003), an investment holding company with focus on hospital, contractor, real estate and investment businesses. See important disclosures at the end of this report 52 Surya Semesta Internusa Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Steen Dahl Poulsen Commissioner Steen Dahl Poulsen has been a commissioner of the company since his appointment in 2007. He previously worked at IBM as a Computer sales executive in 1975-1980. In 1980, he established Primotex, a company with subsidiaries spread across Sweden, Finland, Poland, Lithuania, China, and Hong Kong. He obtained his Bachelor’s degree in Accounting in 1971 and MBA from the Aarhus School of Business, Aarhus University, in 1972. Source: Company Figure 26: Company milestones Year Description 1971 Was established as a property development company to develop the Golden Triangle area in Kuningan 1976 Glodok Plaza inauguration, Indonesia’s first modern shopping centre in Chinatown, Jakarta 1983 Developed Melia Bali Hotel, a 494-room, 5-star hotel in Nusa Dua, Bali 1991 Developed 1,400 hectares of industrial estate in Karawang, West Java 1994 Acquired a construction business, Nusa Raya Cipta 1996 Developed the 5-star Gran Meliã Hotel and the Graha Surya Internusa office building 1997 Listed on the Indonesia Stock Exchange 2006 Development of the ultra-high-end Banyan Tree Resort in Ungasan, Bali 2008 Consolidated its hospitality business, Suryalaya Anindita International 2010 Launched the Banyan Tree Ungasan Resort, Bali 2011 Conducted stock split in a ratio of 1 : 4 2012 - Issued IDR700bn bond - Distributed first dividend since IPO in 1997 - Invested in the Cikopo-Palimanan Toll Road 2013 IPO of Nusa Raya Cipta (NRCA IJ) at IDR850 per share 2014 - Acquired location permit of 2,000 ha in Subang, West Java - Launched first Batiqa hotel in Karawang 2015 - Joint venture with Mitsui & Co and TICON in warehousing/ factory business - Opening of Cikopo-Palimanan toll road 2017 Divestment of Cikopo-Palimanan Toll road at 3x book value Source: Company, RHB Figure 27: Shareholding structure of Surya Semesta Internusa Source: Company, RHB See important disclosures at the end of this report 53 Indonesia Initiating Coverage 30 October 2019 Property | Industrial Estate Bekasi Fajar Industrial Estate (BEST IJ) Buy Premium Land Price a Strong Catalyst; BUY Target Price (Return) IDR330 (+28%) Price: IDR258 Market Cap: USD177m Avg Daily Turnover 3,285m/0.2m (IDR/USD) We initiate coverage on BEST with a BUY and TP of IDR330, 28% upside Analysts plus c.3% yield, premised on its undemanding valuation, and the more strategic location of its industrial estate vs peers under our coverage. Currently, Andre Benas BEST is trading at 5.6x FY19F P/E, with 11% ROE. BEST offers a premium +6221 5093 9847 ASP and better profitability over its peers, DMAS and SSIA. [email protected] Best location compared to DMAS and SSIA. Bekasi Fajar Industrial Estate’s MM2100 industrial estate has the most convenient location vs peers (Putradelta Lestari and Surya Semesta Internusa). The estate is located just Ghibran Al Imran 30km from Jakarta’s central business district (CBD), 43km from Tanjung Priok +6221 5093 9842 Port and 64km from Soekarno-Hatta International Airport. When the new [email protected] Jakarta Outer Ring Road (JORR) II toll road project is finished, it will shorten Share Performance (%) the travelling time from Tanjung Priok Port. YTD 1m 3m 6m 12m Well-diversified top-tier MNC and local tenants. BEST has a well-diversified Absolute and superior tenant mix due to its competitive location. It has an established 24.0 (3.0) (19.4) (11.0) 73.2 tenant base comprising auto manufacture giants in Indonesia such as Astra, Relative 22.6 (4.4) (19.1) (8.8) 64.0 Mitsubishi, Yamaha, and Kawasaki, as well as leading fast-moving consumer 52-wk Price low/high (IDR) 137 – 338 goods (FMCG) companies. Premium price over peers. BEST commands the highest price compared to Bekasi Fajar Industrial Estate (BEST IJ) Price Close peers due to its more strategic location. As at FY18, BEST’s ASP reached 350 IDR3.0m/sqm, much higher than DMAS’ ASP of c.IDR2.0m/sqm and SSIA of 300 c.IDR1.7m/sqm. Given that its industrial estate is well-situated within the limited space in Bekasi, we think it is fair for the company to charge a higher rate. 250 BEST still has c.700ha of landbank available, of which 150ha is ready for sale while the remainder is raw landbank. 200 Soft marketing sales for now. As at 9M19, BEST booked only 1ha of 150 marketing sales compared to 6ha last year. For FY19, BEST guided 30ha of 100 marketing sales, but we think this will likely miss. Marketing sales should pick Jul-19 Oct-18 Oct-19 Apr-19 Jan-19 Feb-19 Mar-19 Jun-19 Dec-18 Sep-19 Sep-19 Nov-18 Aug-19 up in 4Q19 as the company usually books the bulk of its marketing sales in the May-19 last quarter. We believe next year will be a much stronger year for industrial Source: Bloomberg estates as there is not yet significant FDI inflow in the first half of the year. With more reformation in the country’s industrial landscape and a more investor- friendly investment climate, Indonesia should attract more FDI, and BEST obtain a piece of that pie. Healthy balance sheet and solid ROE. Although BEST only booked 1ha of marketing sales for this year, it still has a healthy balance sheet, despite being the most leveraged among peers, with a net debt to equity ratio of only 0.15x. On top of a healthy balance sheet, BEST delivered 10% ROE in FY18, higher than DMAS’ 7% and SSIA’s 1%. In our view, BEST will continue to maintain its double-digit ROE considering its premium price compared to peers. Forecasts and Valuation Dec-17 Dec-18 Dec-19F Dec-20F Dec-21F Total turnover (IDRb) 1,006 963 997 830 994 Recurring net profit (IDRb) 483 423 439 340 434 Recurring net profit growth (%) (46.3) (12.6) 3.8 (22.5) 27.5 Recurring EPS (IDR) 50 44 45 35 45 DPS (IDR) 10.0 8.7 9.1 7.1 9.0 Recurring P/E (x) 5.1 5.9 5.7 7.3 5.7 P/B (x) 0.6 0.6 0.5 0.5 0.5 Dividend Yield (%) 3.9 3.4 3.5 2.7 3.5 EV/EBITDA (x) 5.7 5.9 5.6 6.6 5.5 Return on average equity (%) 12.6 10.1 9.7 7.1 8.4 Net debt to equity (%) 16.3 15.2 7.4 2.1 (3.7) Source: Company data, RHB See important disclosures at the end of this report 54 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Financial Exhibits Asia Financial Summary 2017 2018 2019F 2020F 2021F Indonesia Recurring EPS (IDR) 50 44 45 35 45 Property – Industrial Estate EPS (IDR) 50 44 45 35 45 DPS (IDR) 10 9 9 7 9 Surya Semesta Internusa BVPS (IDR) 399 432 469 495 533 Weighted Avg Adjusted Shares (m) 9,647 9,647 9,647 9,647 9,647 Major shareholders (%) PT Argo Manunggal Land 48.13 Valuation Metrics 2017 2018 2019F 2020F 2021F DaiwaDevelopment House Industry 10.00 Recurring P/E (x) 5.1 5.9 5.7 7.3 5.7 HSBC Holdings 6.23 P/E (x) 5.1 5.9 5.7 7.3 5.7 Value Partners group 6.16 P/B (x) 0.6 0.6 0.5 0.5 0.5 Dividend Yield (%) 3.9 3.4 3.5 2.7 3.5 Valuation basis EV/EBITDA (x) 5.7 5.9 5.6 6.6 5.5 EV/EBIT (x) 5.8 6.1 5.8 6.9 5.8 We derive our IDR330 TP based on SOTP methodology and applying 65% discount to NAV (mean Income Statement (IDRb) 2017 2018 2019F 2020F 2021F of its 5-year historical range). We used DCF (12.3% WACC) for the recurring income portion which is a very Total Turnover 1,006 963 997 830 994 small part of the company revenue. Gross Profit 721 691 716 596 714 EBITDA 611 588 621 523 625 Key drivers Depreciation and Amortisation 12 11 21 24 27 Operating Profit 599 570 600 499 598 i. Strategic location; Net Interest (140) (141) (136) (137) (139) ii. High GP compared to peers; Other Income 24 1 1 1 1 iii. Healthy balance sheet with low gearing. Pre-Tax Profit 488 427 446 347 441 Taxation (5) (5) (7) (7) (8) Key risks Minority Interests 483 423 439 340 434 i. Macroeconomic uncertainty; Net Profit ii. Regulatory risk; 2017 2018 2019F 2020F 2021F iii. Political risk. Cash Flow (IDRb) (173) 584 393 349 453 Change in Working Capital 170 362 423 366 437 Cash Flow from Operations - (62) (69) (69) (69) Company Profile Capex 106 (19) 12 (69) (69) Bekasi Fajar Indsutrial Estate is a real estate Cash Flow from Investing Activities (216) 283 (156) (14) 24 developer and management company that Cash Flow from Financing Activities 442 502 1,129 1,407 1,690 develops industrial parks in Bekasi. Cash at Beginning of Period 59 626 279 283 392 Net Change in Cash 502 1,407 1,690 2,082 - Ending Balance Cash 2017 2018 2019F 2020F 2021F Balance Sheet (IDRb) 502 1,129 1,407 1,690 2,082 Total Cash and Equivalents 163 181 198 213 226 Tangible Fixed Assets 260 232 240 200 239 Advance for Land Acquisitions 123 - - - - Investment in Associates 4,671 4,749 4,781 4,798 4,858 Total Other Assets 5,719 6,290 6,625 6,901 7,405 Total Assets 1,130 1,763 1,743 1,791 1,890 Total Long-Term Debt 741 355 357 332 371 Other Liabilities 1,871 2,118 2,099 2,122 2,261 Total Liabilities 3,845 4,172 4,526 4,778 5,144 Shareholders' Equity 0 (0) - - - Minority Interests 3,848 4,172 4,526 4,778 5,144 Total Equity 628 635 335 100 (192) Net Debt 5,719 6,290 6,625 6,901 7,405 Total Liabilities & Equity 2017 2018 2019F 2020F 2021F Key Metrics 22% -4% 4% -17% 20% Revenue Growth (%) -46% -13% 4% -22% 28% Recurrent EPS Growth (%) 72% 72% 72% 72% 72% Gross Margin (%) 61% 61% 62% 63% 63% EBITDA Margin (%) 48% 44% 44% 41% 44% Net Profit Margin (%) 0% -20% -20% -20% -20% Dividend Payout Ratio (%) 0% 6% 7% 8% 7% Capex / Sales (%) 4.3 4.0 4.4 3.6 4.3 Interest Cover (x) 2017 2018 2019F 2020F 2021F Source: Company data, RHB See important disclosures at the end of this report 55 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Investment Summary We initiate coverage on BEST with a BUY and 12-month TP of IDR330. BEST is an industrial estate company, with a market cap of IDR175.94m and trading liquidity of USD170.55 per day. Our TP is derived by applying a 65% discount to its NAV (mean of its 5-year historical range), and offers a 28% upside from the current level. BEST is 48.1% owned by The Nin King & family – the same family that owns Alam Sutera Realty (ASRI IJ, SELL, TP: IDR260). Daiwa House Industry, a prominent developer in Japan, owns 10%, while the remainder is publicly owned. Three reasons why we like BEST: i. Strategic location compared to other industrial estates which allows them to charge a premium land price; ii. High GPM compared to peers; iii. Healthy balance sheet with low gearing of 18% and double-digit ROE. In FY18, BEST achieved 10% ROE, much higher than peers. The stock is trading at an undemanding valuation of 5.6x FY19F P/E, and 72% discount to NAV. Best location among DMAS and SSIA. The MM2100 is the most conveniently located industrial estate among its peers. It is located just 30km from the CBD, 43km from Tanjung Priok Port and 64km from Soekarno-Hatta International Airport. Furthermore, the completion of the new JORR II toll road project will shorten the travelling time from Tanjung Priok Port. Premium pricing among peers. Considering its strategic location, BEST charges the highest rate among its competitors in Bekasi. As at FY18, BEST’s ASP reached IDR3m per sqm – this is much higher than DMAS’ IDR2.4m per sqm and SSIA’s IDR1.7m per sqm. We think the higher price is justifiable considering its strategic location within the limited space in Bekasi. BEST’s location is suitable for many logistic players as it is closer to population centres such as Bekasi and Jakarta. The premium price translates to higher profitability for the company. As such, BEST’s GPM is among the highest among peers, at 71% in FY18. We expect they will maintain a similar profitability level going forward and may exceed it if their marketing sales volume picks up. BEST also recorded a healthy ROE of 10% in FY18 and a low gearing ratio. The company stated that they have enough cash flow to cover its operations and does not intend to take more loans in the coming future. Valuation rationale. We derive our IDR330 TP based on the SOP methodology and applying a 65% discount to NAV. We used DCF (12.3% WACC) for the recurring income portion, which comprises a very small part of revenue. The closest industrial estate to Jakarta. The MM2100 is located in the Bekasi Timur area, which is the closest industrial estate to Jakarta ie 30km from Jakarta central business district (CBD), 43km from Tanjung Priuk Port, and 64km from Soekarno-Hatta International Airport. Figure 1: MM2100 location Source: Company, RHB See important disclosures at the end of this report 56 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 2: Distance comparison with industrial peers Approximate distance with existing access (km) Listed Companies CBD Port Airport Bekasi Fajar Industrial Estate 30 43 64 (BEST) Jababeka Industrial Estate (KIJA) 38 51 72 Lippo Cikarang (LPCK) 40 52 73 Puradelta Lestari (DMAS) 42 54 75 Surya Semesta Internusa (SSIA) 60 72 93 Source: Company data, RHB Strategic location close to Jakarta. The MM2100 is located in East Bekasi, close to Jakarta. It is the most conveniently located industrial estate compared to DMAS and SSIA, located just 30km from the CBD, 43km from Tanjung Priok Port and 64km from the Soekarno-Hatta International Airport. Furthermore, the completion of the new JORR II toll road project will shorten the travelling time from Tanjung Priok Port. Figure 3: BEST’s location surrounded by toll roads Source: Company, RHB Pure industrial estate player BEST is a pure industrial estate player, focusing only on selling industrial land plots. Unlike DMAS and SSIA, it does not sell any residential or commercial plots. The only commercial areas in BEST are for its hotel and office tower. The remaining plots are for its tenants and its industrial complex. Management’s experience and expertise are another positive factor. The owner of BEST is also the owner of ASRI, and has experience in township development in Tangerang, Jakarta. On top of that, BEST is also 10%-owned by Daiwa House Industry, Japan’s largest homebuilder. See important disclosures at the end of this report 57 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 4: Ownership structure of the company Source: Company Manufacturing ecosystem BEST has more than 350 tenants at the MM2100 – much higher than SSIA and DMAS. The estate has a well-established ecosystem, which creates closer channels between suppliers and customers. More than 37% of the tenants are related to the automotive industry, which is the bread and butter of industrial estates in the Jakarta-Cikampek area. BEST also has a very good mixture of F&B tenants such as Indofood, Mayora, Diamond, Nippon Indosari, and Ultrajaya. In terms of tenant mix by country, 57% of BEST’s tenants come from Japan, followed by Indonesia at 32%. In the industrial estate landscape, new investors will usual go where the existing ecosystem is already established. BEST and SSIA have a higher Japanese tenant concentration. Chinese investors are more skewed towards DMAS, while Koreans tend to operate in Lippo Cikarang. We believe BEST will benefit if the FDI inflow from Japan continues to be strong. Figure 5: BEST’s tenants by industry Figure 6: BEST’s tenants by country of origin Other Asia 2% Australia Europe 4% 1% Others 13% Korea 4% Equipment & Machineries 6% Automotiv e 37% IT & Electronic 7% Indonesia 32% Japan 57% Chemical 7% Warehouse & Logistc 8% Consumer Goods 12% Metal & Steel 10% Source: Company data Source: Company data See important disclosures at the end of this report 58 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Financial Forecasts And Key Earning Drivers Steady marketing sales translates to steady revenue growth BEST’s marketing sales have been steadily picking up since 2015, reaching a peak of 42ha in 2017. However, in 9M19, BEST booked only 1ha in marketing sales compared to 6ha in the previous year. Management guided 30 ha of marketing sales this year, but we think this will likely be missed. Nevertheless, we believe 4Q19 marketing sales will pick up as company usually booked bulk marketing sales during 4Q, but will still be below guidance as they have lost the majority of 9M19. At the analyst briefing, BEST said that it received many enquiries during the year up until June, but no serious commitments from potential investors. Enquiries came from a mix of local and foreign investors. Revenue has not seen any significant jump from 2015, only growing by a CAGR of 9% in 2015-2018. We expect that revenue to drop in FY20F if BEST is not able to make up for this year’s marketing sales, as we believe FY19F revenue will be supported by a carry-over from last year sales. However, if the FDI momentum should maintain by next year, we think that BEST will benefit from higher marketing sales in FY20F and FY21F. It currently has c.700ha of undeveloped land, of which 150ha is ready for sale. Figure 7: BEST’s marketing sales Figure 8: BEST’s revenue (Ha) (IDRbn) 50 1,200 42 1,006 963 997 994 40 1,000 35 824 830 31 800 687 30 20 20 20 600 18 20 400 10 200 0 0 2015 2016 2017 2018 2019F 2020F 2021F 2015 2016 2017 2018 2019F 2020F 2021F Source: Company data, RHB Source: Company data, RHB Healthy profitability As a result of BEST’s simple business model, which only focuses on selling industrial estate land, its GPM is very steady. Since 2015, BEST has maintained GPM of above 70%, reaching a peak of 74% in 2016, and 72% from then onwards. We think that its land price is considered premium among its peers and that this is good for margins. From our discussion with management, it believes that land is scarce, and it thinks investors, whom invest in Indonesia, are in for a bargain. We can see that BEST’s ASP is always above market price due to its proximity to Jakarta. With healthy profitability and moderate leverage, BEST should be able to maintain net profit margin of c.44% in FY18, and we believe this will continue going forward. See important disclosures at the end of this report 59 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 9: BEST’s profitability Figure 10: BEST’s ASP (IDRm) 80% 74% 4.0 71% 72% 72% 72% 72% 72% 3.5 3.02 2.87 60% 3.0 2.71 2.61 2.60 2.73 48% 44% 44% 43% 2.5 2.21 41% 40% 40% 31% 2.0 1.5 20% 1.0 0.5 0% 0.0 2015 2016 2017 2018 2019F 2020F 2021F 2015 2016 2017 2018 2019F 2020F 2021F Source: Company data, RHB Source: Company data, RHB Valuation Rationale We used NAV for the bulk of its industrial estate development assets. Our TP of IDR330 applies a 65% discount to NAV around its five-year historical mean. We think that the value is justified considering it has the most strategic location compared to its competitors. We also believe BEST will benefit from the FDI inflow coming into Indonesia. Figure 11: BEST’s NAV valuation Property Estates Landbank Left (Net) Price / sqm market value ownership NAV NAV/Share MM2100 150 3,000 3,900 100% 3,900 404 Raw Land bank 546 800 4,368 100% 4,408 457 Total Land Value 8,308 Total Nav After Tax 5% 7,893 818 Recurring Revenue 1,636 170 Total 9,529 988 Add Cash 1,407 - Debt -1,826 - Cash Advances -20 Net Asset Value 9,090 942 Market Price 258 Discount to NAV -73% Target Price 330 Target Discount 65% Upside 28% Source: RHB, Company Currently, BEST is trading at 5x FY19F P/E, cheaper than its peers and sector average of 15x. BEST recorded a healthy ROE of 10% in FY18, better than sector average of 8%. The high ROE is largely thanks to the premium price of its industrial estate land, which drives higher profitability, among other factors. See important disclosures at the end of this report 60 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 12: BEST’s 5-year P/E band Figure 13: BEST’s 5-year P/BV band (x) (x) 30 +2 SD = 2.2x 2.3 25 +2 SD = 22.5x 2.0 +1 SD = 1.7x 20 +1 SD =16.3x 1.7 15 1.4 Mean = 1.1x Mean = 10.1x 1.1 10 -1 SD = 0.5x PE = 6.5x 0.8 5 -1 SD = 3.8x P/BV = 0.5x 0.5 0 0.2 -2 SD = -2.4x -5 -2 SD = 0.0x -0.1 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Source: Bloomberg, RHB Source: Bloomberg, RHB Figure 14: BEST’s 5-year discount to NAV band Discount to NAV (%) -10% -20% +2 SD = 30% -30% -40% +1 SD = 46% -50% Mean = 61% -60% -70% Disc to NAV = 72% -1 SD = 77% -80% -90% -2 SD = 93% -100% 2014 2015 2016 2017 2018 2019 Source: Bloomberg, RHB Downside Risks i. Macroeconomic uncertainty. Macroeconomic volatility, leading to slower global GDP growth – as well as for Indonesia – which could lead to slower FDI inflow for Indonesia and affect the marketing sales of industrial estates; ii. Regulatory risk. Unexpected implementation of government regulations such as delay in tax holiday for new investments, or any additional legislative regulation that can hamper investment in Indonesia; iii. Political risk. An unstable political environment during President Jokowi’s second term could dampen Indonesia’s FDI attractiveness, as we have seen before during the election year. See important disclosures at the end of this report 61 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Management Team Figure 15: Board of directors Name Position Description Yoshihiro Kobi President director Yoshihiro Kobi has served as president director and independent director since 2015, and previously served as an independent director. He was general manager of the Overseas Real Estate Development Department, Marubeni Corporation, Head Office (April 2012-December 2012); president director of Megalopolis Manunggal Industrial Development (2009-2012); chief operating officer of Antartica Properities (India, 2008- 2009); deputy general manager of the Overseas Real Estate Development Department, Marubeni Corporation, Head Office (2007-2008) and president director of Megalopolis Manunggal Industrial Development (2003-2007). He graduated with a Bachelor’s degree from Osaka University of Foreign Studies, Osaka, Japan in 1982. Leo Yulianto Sutedja Vice president director Leo Sutedja has been appointed as vice president director since 2016. He currently also serves as a commissioner of Sulawesi Cotton Industry (2004-present), director of Kurabo Manunggal Textile Industry (2005-present), director of Peternakan Ayam Manggis (2011-present), director of Argo Manunggal Land Development (2013-present), commissioner of Delta Mega Persada (2014-present), commissioner of Pralon (2014- present), president commissioner of Lawe Adyaprima Spinning Mills (2015-present), and president commissioner of Alfa Goldland Realty (2015-present). He graduated with a Bachelor of Science in Computer Science from the University of Wisconsin, USA. Daishi Asano Director Daishi Asano has served as a director since 2013. He is currently a Section manager of the General Construction Division, Osaka Head Office of Daiwa House Industry. (2009- present). He previously served as a sales office manager, Nara Branch, Daiwa House Industry (2008-2009); senior chief, General Construction Sales Office, Nara Branch, Daiwa House Industry (2007-2008); senior chief, General Construction Sales Office, Kobe branch, Daiwa House Industry (2006-2007); and chief of General Construction Promotion Department, Marketing Headquarters, Daiwa House Industry (2003-2006). He graduated with a Bachelor’s degree in Education (majoring in Art) from Kyoto University in 1988. Wijaya Surya Director Wijaya Surya has been a director of the company since 2016. He is currently chief operating officer of Argo Apparel Group (2015-present). He previously served as director of Aptus Maritime, Hong Kong (2012-2015); executive director, Limin Marine and Offshore (2013-2014); head of Projects and Business Development, Arpeni Pratama Ocean Line (2008- 2012); vice president, Woori Global Markets Asia, Hong Kong (2007-2008); director of Wallem Shipbroking (HK) Ltd, Hong Kong (2006-2007); director of Daya Sakti Unggul Corporindo (2005-2006); director of Gold Bridge Shipping, Hong Kong (1998-2005); and director of Daya Shipping, Hong Kong (1995- 1996). He graduated with a degree in Business Administration from Lewis and Clark College, Oregon, USA, in 1991, and earned a Master of Science degree in Shipping, Trade and Finance from Cass Business School, London, UK in 1999. Swan Mie Rudy Tanardi Director Swan Mie Rudy Tanardi was appointed as a director of the company in 2016. She also serves as president commissioner of Pelican Makmur Abadi (2010-present); commissioner of Anugrah Karya Sentosa (2015-present), director of Argo Apparel Group, Hong Kong (2015-present); and general manager of Finance & Accounting, Argo Manunggal Group (2004-present). She previously served as managing director of Charlies Lestari Sentosa (2003-2004), where she first joined in 2001 as finance director. She was also assistant vice president director of Media Indonesia Group (1997-2001), and a senior auditor Public Accountant at Prasetio, Utomo & Co (1994-1997). She graduated with a Bachelor’s Degree in Accounting from Trisakti University, Jakarta Source: Company See important disclosures at the end of this report 62 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 16: Board of commissioners Name Position Description Marzuki Usman President commissioner and independent Marzuki Usman has served as the president commissioner commissioner and independent commissioner since 2015. He previously served as chairman of the Capital Market Executive Agency Ministry of Finance (1988-1990), chairman of the Capital Market Supervisory Agency Ministry of Finance (1990-1991), Head of the Monetary and Financial Analysis of the Ministry of Finance (1995-1998), Minister of State for Investment/Chairman of the Investment Coordinating Board (1999), and Minister of Forestry and Plantation (2001). He graduated with a Bachelor of Economics (majoring in Economics), from Gajah Mada University in 1969, and Master of Arts in Economics from Duke University, North Carolina, US, in 1975. The Nicholas Vice president commissioner The Nicholas has served as vice president commissioner since 2015. He also serves as a commissioner in Alam Sutera Realty (2015-present), vice president commissioner of China Taiping Insurance Indonesia (2013-present), president commissioner of Argo Manunggal Land Development (2013- present), president director of Argo Manunggal Triasta (2013- present), president commissioner of Peternakan Ayam Manggis (2005-present) and commissioner of Ragam Logam Industrial (1993-present). He graduated with a Bachelor of Art (majoring in International Marketing) from the University of Missouri, Columbia, US in 1991. Herbudianto Independent commissioner Herbudianto has served as a commissioner since 2015. Previously he served in the Capital Markets Supervisory Board as chief Accounting Standards and Inspection Service Business Affairs (1991-1997); chief Accountant Development (1997-2000); head of Development and Preparation of Accounting Standards (2000-2002); head of Trade Services Business, Transportation and Tourism (2002-2006); as well as the head of Corporate Assessment of Non-Financial Services (2006-2012). He graduated with Bachelor of Economics (majoring in Accounting) from Gajah Mada University, Yogyakarta. Wahyu Hidayat Independent commissioner Wahyu Hidayat has served as an independent commissioner since 2019. He graduated in 1996 with a Masters in Management (MM) from the University of Gadjah Mada, Yogyakarta. He serves as president commissioner of Nusantara Sentra Kapital (2018-present). He was president commissioner of Indonesian Central Securities Depository (2015-2018), senior advisor in Governance and Anti Money Laundering at the Financial Authority Services (OJK), (2013- 2015), head of the Internal Compliance Bureau in the Capital Market Supervisory Agency and Financial Institution (Bapepam–LK) in 2012, deputy head of the Center of Financial Transaction Reporting and Analysis (PPATK) in Administration (2008-2011), head of Bureau of Investigation, Bapepam-LK (2006-2008), and Secretary of Bapepam–LK (2004-2006). Hartono Commissioner Hartono was appointed as a commissioner in 2011. He is also a Corporate legal manager at Argo Manunggal Group (1990- present), and was previously the Legal and Human Resources Manager of PT Mulia Jaya Abadi Chemistry (1988-1990). He graduated with a Bachelor of Law from the Indonesian Christian University, Jakarta, majoring in Civil Law, in 1988, and a Master of Law from the University of Indonesia, Jakarta, in 2003. Source: Company See important disclosures at the end of this report 63 Bekasi Fajar Industrial Estate Indonesia Company Update 30 October 2019 Property | Industrial Estate Figure 17: Company milestones Year Description 1989 The company was established on 24 Aug 1989 1990 Established Megapolis Manunggal Industrial Development (MRID with Marubeni Corporation to build MM2100 Industrial City 2012 - The company conducted an IPO and its shares were listed on the Indonesian Stock Exchange on 10 Apr 2012. - The establishment of PT Bekasi Surya Pratama 2014 Established Daiwa Manunggal Logistik Properti (DMLP) under a JV with Daiwa House Industry to support logistic property business and develop supporting infrastructure and facilities 2015 The establishment of PT Best Sinar Nusantara (BSN). BSN will focus on hotel development in the company’s industrial town area 2016 Commenced operations of an international standard warehousing and logistics facility (Modern Logistic Center) in the MM2100 Industrial Town. 2017 - Opened Enso Hotel - Rebranded, changed logo and company name to BeFa 2018 Commenced operation of Befa Square Office in MM2100 in Apr 2018 Source: Company Figure 18: Shareholding structure of BEST Source: Company See important disclosures at the end of this report 64 RHB Guide to Investment Ratings RHB expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer- The use of any website to access this report electronically is done at the recipient’s own term outlook remains uncertain risk, and it is the recipient’s sole responsibility to take precautions to ensure that it is free Neutral: Share price may fall within the range of +/- 10% over the next from viruses or other items of a destructive nature. This report may also provide the 12 months addresses of, or contain hyperlinks to, websites. RHB takes no responsibility for the Take Profit: Target price has been attained. Look to accumulate at lower levels content contained therein. Such addresses or hyperlinks (including addresses or Sell: Share price may fall by more than 10% over the next 12 months hyperlinks to RHB own website material) are provided solely for the recipient’s Not Rated: Stock is not within regular research coverage convenience. The information and the content of the linked site do not in any way form part of this report. Accessing such website or following such link through the report or Investment Research Disclaimers RHB website shall be at the recipient’s own risk. RHB has issued this report for information purposes only. This report is intended for circulation amongst RHB and its affiliates’ clients generally or such persons as may be This report may contain information obtained from third parties. Third party content deemed eligible by RHB to receive this report and does not have regard to the specific providers do not guarantee the accuracy, completeness, timeliness or availability of any investment objectives, financial situation and the particular needs of any specific person information and are not responsible for any errors or omissions (negligent or otherwise), who may receive this report. This report is not intended, and should not under any regardless of the cause, or for the results obtained from the use of such content. Third circumstances be construed as, an offer or a solicitation of an offer to buy or sell the party content providers give no express or implied warranties, including, but not limited securities referred to herein or any related financial instruments. to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, This report may further consist of, whether in whole or in part, summaries, research, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, compilations, extracts or analysis that has been prepared by RHB’s strategic, joint or losses (including lost income or profits and opportunity costs) in connection with any venture and/or business partners. No representation or warranty (express or implied) use of their content. is given as to the accuracy or completeness of such information and accordingly investors should make their own informed decisions before relying on the same. The research analysts responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views This report is not directed to, or intended for distribution to or use by, any person or and opinions about any and all of the issuers or securities analysed in this report and entity who is a citizen or resident of or located in any locality, state, country or other were prepared independently and autonomously. The research analysts that authored jurisdiction where such distribution, publication, availability or use would be contrary to this report are precluded by RHB in all circumstances from trading in the securities or the applicable laws or regulations. By accepting this report, the recipient hereof (i) other financial instruments referenced in the report, or from having an interest in the represents and warrants that it is lawfully able to receive this document under the laws company(ies) that they cover. and regulations of the jurisdiction in which it is located or other applicable laws and (ii) acknowledges and agrees to be bound by the limitations contained herein. Any failure The contents of this report is strictly confidential and may not be copied, reproduced, to comply with these limitations may constitute a violation of applicable laws. published, distributed, transmitted or passed, in whole or in part, to any other person without the prior express written consent of RHB and/or its affiliates. This report has All the information contained herein is based upon publicly available information and been delivered to RHB and its affiliates’ clients for information purposes only and upon has been obtained from sources that RHB believes to be reliable and correct at the the express understanding that such parties will use it only for the purposes set forth time of issue of this report. However, such sources have not been independently above. By electing to view or accepting a copy of this report, the recipients have agreed verified by RHB and/or its affiliates and this report does not purport to contain all that they will not print, copy, videotape, record, hyperlink, download, or otherwise information that a prospective investor may require. The opinions expressed herein attempt to reproduce or re-transmit (in any form including hard copy or electronic are RHB’s present opinions only and are subject to change without prior notice. RHB distribution format) the contents of this report. RHB and/or its affiliates accepts no is not under any obligation to update or keep current the information and opinions liability whatsoever for the actions of third parties in this respect. expressed herein or to provide the recipient with access to any additional information. Consequently, RHB does not guarantee, represent or warrant, expressly or impliedly, The contents of this report are subject to copyright. Please refer to Restrictions on as to the adequacy, accuracy, reliability, fairness or completeness of the information Distribution below for information regarding the distributors of this report. Recipients and opinion contained in this report. Neither RHB (including its officers, directors, must not reproduce or disseminate any content or findings of this report without the express permission of RHB and the distributors. associates, connected parties, and/or employees) nor does any of its agents accept any liability for any direct, indirect or consequential losses, loss of profits and/or The securities mentioned in this publication may not be eligible for sale in some states damages that may arise from the use or reliance of this research report and/or further or countries or certain categories of investors. The recipient of this report should have communications given in relation to this report. Any such responsibility or liability is regard to the laws of the recipient’s place of domicile when contemplating transactions hereby expressly disclaimed. in the securities or other financial instruments referred to herein. The securities Whilst every effort is made to ensure that statement of facts made in this report are discussed in this report may not have been registered in such jurisdiction. Without accurate, all estimates, projections, forecasts, expressions of opinion and other prejudice to the foregoing, the recipient is to note that additional disclaimers, warnings subjective judgments contained in this report are based on assumptions considered to or qualifications may apply based on geographical location of the person or entity receiving this report. be reasonable and must not be construed as a representation that the matters referred to therein will occur. Different assumptions by RHB or any other source may yield The term “RHB” shall denote, where appropriate, the relevant entity distributing or substantially different results and recommendations contained on one type of research disseminating the report in the particular jurisdiction referenced below, or, in every product may differ from recommendations contained in other types of research. The other case, RHB Investment Bank Berhad and its affiliates, subsidiaries and related performance of currencies may affect the value of, or income from, the securities or companies. any other financial instruments referenced in this report. Holders of depositary receipts backed by the securities discussed in this report assume currency risk. Past RESTRICTIONS ON DISTRIBUTION performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either Malaysia directly or indirectly, may fall or rise against the interest of investors. This report is issued and distributed in Malaysia by RHB Investment Bank Berhad (“RHBIB”). The views and opinions in this report are our own as of the date hereof and This report does not purport to be comprehensive or to contain all the information that a is subject to change. If the Financial Services and Markets Act of the United Kingdom prospective investor may need in order to make an investment decision. The recipient of or the rules of the Financial Conduct Authority apply to a recipient, our obligations this report is making its own independent assessment and decisions regarding any owed to such recipient therein are unaffected. RHBIB has no obligation to update its securities or financial instruments referenced herein. Any investment discussed or opinion or the information in this report. recommended in this report may be unsuitable for an investor depending on the investor’s specific investment objectives and financial position. The material in this report is general Thailand information intended for recipients who understand the risks of investing in financial This report is issued and distributed in the Kingdom of Thailand by RHB Securities instruments. This report does not take into account whether an investment or course of (Thailand) PCL, a licensed securities company that is authorised by the Ministry of action and any associated risks are suitable for the recipient. Any recommendations Finance, regulated by the Securities and Exchange Commission of Thailand and is a contained in this report must therefore not be relied upon as investment advice based on member of the Stock Exchange of Thailand. The Thai Institute of Directors Association the recipient's personal circumstances. Investors should make their own independent has disclosed the Corporate Governance Report of Thai Listed Companies made evaluation of the information contained herein, consider their own investment objective, pursuant to the policy of the Securities and Exchange Commission of Thailand. RHB financial situation and particular needs and seek their own financial, business, legal, tax Securities (Thailand) PCL does not endorse, confirm nor certify the result of the Corporate and other advice regarding the appropriateness of investing in any securities or the Governance Report of Thai Listed Companies Securities (Thailand) PCL does not investment strategies discussed or recommended in this report. endorse, confirm nor certify the result of the Corporate Governance Report of Thai Listed Companies. This report may contain forward-looking statements which are often but not always identified by the use of words such as “believe”, “estimate”, “intend” and “expect” and statements that an event or result “may”, “will” or “might” occur or be achieved and other similar expressions. Such forward-looking statements are based on assumptions made and information currently available to RHB and are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement to be materially different from any future results, performance or achievement, expressed or implied by such forward-looking statements. Caution should be taken with respect to such statements and recipients of this report should not place undue reliance on any such forward-looking statements. 65 Indonesia While the RHBIB Group will ensure that there are sufficient information barriers and This report is issued and distributed in Indonesia by PT RHB Sekuritas Indonesia. This internal controls in place where necessary, to prevent/manage any conflicts of interest research does not constitute an offering document and it should not be construed as to ensure the independence of this report, investors should also be aware that such an offer of securities in Indonesia. Any securities offered or sold, directly or indirectly, conflict of interest may exist in view of the investment banking activities undertaken by in Indonesia or to any Indonesian citizen or corporation (wherever located) or to any the RHBIB Group as mentioned above and should exercise their own judgement Indonesian resident in a manner which constitutes a public offering under Indonesian before making any investment decisions. laws and regulations must comply with the prevailing Indonesian laws and regulations. Malaysia Save as disclosed in the following link (RHB Research conflict disclosures – Oct 2019) Singapore and to the best of our knowledge, RHBIB hereby declares that: This report is issued and distributed in Singapore by RHB Securities Singapore Pte 1. RHBIB does not have a financial interest in the securities or other capital market Ltd which is a holder of a capital markets services licence and an exempt financial products of the subject company(ies) covered in this report. adviser regulated by the Monetary Authority of Singapore. RHB Securities Singapore 2. RHBIB is not a market maker in the securities or capital market products of the Pte Ltd may distribute reports produced by its respective foreign entities, affiliates or subject company(ies) covered in this report. other foreign research houses pursuant to an arrangement under Regulation 32C of 3. None of RHBIB’s staff or associated person serve as a director or board the Financial Advisers Regulations. Where the report is distributed in Singapore to a member* of the subject company(ies) covered in this report person who is not an Accredited Investor, Expert Investor or an Institutional Investor, *For the avoidance of doubt, the confirmation is only limited to the staff of RHB Securities Singapore Pte Ltd accepts legal responsibility for the contents of the research department report to such persons only to the extent required by law. Singapore recipients should 4. Save as disclosed below, RHBIB did not receive compensation for investment contact RHB Securities Singapore Pte Ltd in respect of any matter arising from or in banking or corporate finance services from the subject company in the past 12 connection with the report. months. 5. RHBIB did not receive compensation or benefit (including gift and special cost Hong Kong arrangement e.g. company/issuer-sponsored and paid trip) in relation to the This report is issued and distributed in Hong Kong by RHB Securities Hong Kong production of this report. Limited (興業僑豐證券有限公司) (CE No.: ADU220) (“RHBSHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) Thailand and Type 4 (advising on securities) regulated activities. Any investors wishing to RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected purchase or otherwise deal in the securities covered in this report should contact parties and/or employees, may have, or have had, interests and/or commitments in RHBSHK. RHBSHK is a wholly owned subsidiary of RHB Hong Kong Limited; for the the securities in subject company(ies) mentioned in this report or any securities related purposes of disclosure under the Hong Kong jurisdiction herein, please note that RHB thereto. Further, RHB Securities (Thailand) PCL may have, or have had, business Hong Kong Limited with its affiliates (including but not limited to RHBSHK) will relationships with the subject company(ies) mentioned in this report. As a result, collectively be referred to as “RHBHK.” RHBHK conducts a full-service, integrated investors should exercise their own judgment carefully before making any investment investment banking, asset management, and brokerage business. RHBHK does and decisions. seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect Indonesia the objectivity of this research report. Investors should consider this report as only a PT RHB Sekuritas Indonesia is not affiliated with the subject company(ies) covered in single factor in making their investment decision. Importantly, please see the this report both directly or indirectly as per the definitions of affiliation above. Pursuant company-specific regulatory disclosures below for compliance with specific rules and to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations regulations under the Hong Kong jurisdiction. Other than company-specific disclosures thereof, what constitutes as affiliated parties are as follows: relating to RHBHK, this research report is based on current public information that we 1. Familial relationship due to marriage or blood up to the second degree, both consider reliable, but we do not represent it is accurate or complete, and it should not horizontally or vertically; be relied on as such. 2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned; United States 3. Affiliation between 2 companies whereby one or more member of the Board of This report was prepared by RHB and is being distributed solely and directly to “major” Directors or the Commissioners are the same; U.S. institutional investors as defined under, and pursuant to, the requirements of Rule 4. Affiliation between the Company and the parties, both directly or indirectly, 15a-6 under the U.S. Securities and Exchange Act of 1934, as amended (the controlling or being controlled by the Company; “Exchange Act”). Accordingly, access to this report via Bursa Marketplace or any other 5. Affiliation between 2 companies which are controlled, directly or indirectly, by the Electronic Services Provider is not intended for any party other than “major” US same party; or institutional investors, nor shall be deemed as solicitation by RHB in any manner. RHB 6. Affiliation between the Company and the main Shareholders. is not registered as a broker-dealer in the United States and does not offer brokerage services to U.S. persons. Any order for the purchase or sale of the securities PT RHB Sekuritas Indonesia is not an insider as defined in the Capital Market Law discussed herein that are listed on Bursa Malaysia Securities Berhad must be placed and the information contained in this report is not considered as insider information with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all prohibited by law. Insider means: other securities discussed herein must be placed with and through such other a. a commissioner, director or employee of an Issuer or Public Company; registered U.S. broker-dealer as appointed by RHB from time to time as required by b. a substantial shareholder of an Issuer or Public Company; the Exchange Act Rule 15a-6. This report is confidential and not intended for c. an individual, who because of his position or profession, or because of a distribution to, or use by, persons other than the recipient and its employees, agents business relationship with an Issuer or Public Company, has access to inside and advisors, as applicable. Additionally, where research is distributed via Electronic information; and Service Provider, the analysts whose names appear in this report are not registered or d. an individual who within the last six months was a Person defined in letters a, b qualified as research analysts in the United States and are not associated persons of or c, above. Auerbach Grayson AG or such other registered U.S. broker-dealer as appointed by RHB from time to time and therefore may not be subject to any applicable restrictions Singapore under Financial Industry Regulatory Authority (“FINRA”) rules on communications with Save as disclosed in the following link (RHB Research conflict disclosures – Oct 2019) a subject company, public appearances and personal trading. Investing in any non- and to the best of our knowledge, RHB Securities Singapore Pte Ltd hereby declares U.S. securities or related financial instruments discussed in this research report may that: present certain risks. The securities of non-U.S. issuers may not be registered with, or 1. RHB Securities Singapore Pte Ltd, its subsidiaries and/or associated companies be subject to the regulations of, the U.S. Securities and Exchange Commission. do not make a market in any issuer covered in this report. Information on non-U.S. securities or related financial instruments may be limited. 2. RHB Securities Singapore Pte Ltd, its subsidiaries and/or its associated Foreign companies may not be subject to audit and reporting standards and regulatory companies and its analysts do not have a financial interest (including a requirements comparable to those in the United States. The financial instruments shareholding of 1% or more) in the issuer covered in this report. discussed in this report may not be suitable for all investors. Transactions in foreign 3. RHB Securities, its staff or connected persons do not serve on the board or markets may be subject to regulations that differ from or offer less protection than trustee positions of the issuer covered in this report. those in the United States. 4. RHB Securities Singapore Pte Ltd, its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer covered in this report or any other DISCLOSURE OF CONFLICTS OF INTEREST relationship that may create a potential conflict of interest. 5. RHB Securities Singapore Pte Ltd, or person associated or connected to it do RHB Investment Bank Berhad, its subsidiaries (including its regional offices) and not have any interest in the acquisition or disposal of, the securities, specified associated companies, (“RHBIB Group”) form a diversified financial group, securities based derivatives contracts or units in a collective investment scheme undertaking various investment banking activities which include, amongst others, covered in this report. underwriting, securities trading, market making and corporate finance advisory. 6. RHB Securities Singapore Pte Ltd and its analysts do not receive any compensation or benefit in connection with the production of this research report As a result of the same, in the ordinary course of its business, any member of the or recommendation RHBIB Group, may, from time to time, have business relationships with or hold positions in the securities (including capital market products) or perform and/or solicit investment, advisory or other services from any of the subject company(ies) covered in this research report. 66 Hong Kong The following disclosures relate to relationships between RHBHK and companies covered by Research Department of RHBSHK and referred to in this research report: RHBSHK hereby certifies that no part of RHBSHK analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. RHBHK had an investment banking services client relationships during the past 12 months with: -. RHBHK has received compensation for investment banking services, during the past 12 months from: -. RHBHK managed/co-managed public offerings, in the past 12 months for: -. On a principal basis. RHBHK has a position of over 1% market capitalization of: -. Additionally, please note the following: Ownership and material conflicts of interest: RHBSHK policy prohibits its analysts and associates reporting to analysts from owning securities of any company covered by the analyst. Analyst as officer or director: RHBSHK policy prohibits its analysts, and associates reporting to analysts from serving as an officer, director, advisory board member or employee of any company covered by the analyst. RHBHK salespeople, traders, and other non-research professionals may provide oral or written market commentary or trading strategies to RHB clients that reflect opinions that are contrary to the opinions expressed in this research report. KUALA LUMPUR JAKARTA RHB Investment Bank Bhd PT RHB Sekuritas Indonesia Level 3A, Tower One, RHB Centre Revenue Tower 11th floor, District 8 - SCBD Jalan Tun Razak Jl. Jenderal Sudirman Kav. 52-53 Kuala Lumpur 50400 Jakarta 12910 Malaysia Indonesia Tel : +603 9280 8888 Tel : +6221 5093 9888 Fax : +603 9200 2216 Fax :+6221 5093 9777 HONG KONG BANGKOK RHB Securities Hong Kong Ltd. RHB Securities (Thailand) PCL 12th Floor, World-Wide House 10th Floor, Sathorn Square Office Tower 19 Des Voeux Road 98, North Sathorn Road, Silom Central Bangrak, Bangkok 10500 Hong Kong Thailand Tel : +852 2525 1118 Tel: +66 2088 9999 Fax : +852 2810 0908 Fax :+66 2088 9799 SINGAPORE RHB Securities Singapore Pte Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore 049315 Tel : +65 6533 1818 Fax : +65 6532 6211 67