Lippo Plots Hong Kong, China Expansion --- Indonesian Group Sees Opportunities in Approach to 1997 Handover

Lippo Plots Hong Kong, China Expansion --- Indonesian Group Sees Opportunities In Approach to 1997 Handover

Hong Kong -- Lippo Group of Indonesia is looking forward to what other investors in Hong Kong fear -- 1997.

"Because of 1997, opportunities come," says James Riady, the group's Jakarta-based deputy chairman. "Because of 1997, things get possible."

He believes the British colony's traditional finance-sector pillars aren't investing aggressively, and that Hong Kong has "opened up for local players and newcomers."

Lippo isn't a newcomer to Hong Kong -- Mr. Riady's father, Mochtar, first set up a venture in the colony in 1969 -- but the group aims to enter the ranks of big players. With upbeat views about how China will be governed and can become a market, Lippo has been mapping plans for a larger presence in Hong Kong and a sizable foothold in China.

The group seems keen to bring to Hong Kong the kind of aggressive expansion that has been its trademark in Indonesia in recent years. In Jakarta, Lippo's active self-promotion and occasionally questioned style of presenting information has irked some businessmen and analysts. Lippo, one Jakarta securities analyst says, "has a better profile offshore than at home."

In Hong Kong, Lippo's local subsidiary, Hongkong Chinese Bank, is trying to buy a majority stake in Bank of Credit & Commerce International's Hong Kong unit. Last month, Hong Kong's High Court approved a conditional plan for the sale, which now hinges on Lippo's completing an examination of the BCCI unit's books and getting certain liability guarantees from BCCI's chief owner, the government of Abu Dhabi, as well as assurances from major depositors to defer withdrawals. If the arrangement works out, Hongkong Chinese Bank would become the colony's sixth-largest retail bank in terms of branches, absorbing the BCCI unit's substantial credit-card business and 25 branches.

Bankers say the acquisition might give Lippo good entree to China. BCC Hong Kong's closure stranded many big mainland-Chinese depositors. There is speculation that a major bank in China may be a partner in Lippo's bid. Such a partnership would enhance Lippo's strategy of pushing its financial-services network into China. In expanding into Hong Kong retail banking, where competition is keener but margins are wider than in commercial or wholesale sectors, Lippo aims to reduce its funding costs by enlarging its depositor base. "I think it's a sensible strategy for the long term," says John Mulcahy, a director at Peregrine Brokerage Ltd. He adds that it may take two to three years for Lippo to establish a name for itself and move firmly into the broader lending market.

Another Lippo unit in Hong Kong last week teamed up with Alexander & Alexander Services Inc. of the U.S. in a risk-management and insurance-broking venture. From its Hong Kong base, Lippo's insurance arm is planning acquisitions to become a force in insurance in Asia.

Bank analysts in Hong Kong view Lippo's moves as further confirmation of the colony's overall economic health, and of the strength of the banking sector in particular. "The economic fundamentals say Hong Kong is booming," says K.C. Kwok, chief economist at Standard Chartered Bank, pointing to the rapid rise in property and stock prices in recent years. "And there's no reason to expect that the economic fundamentals will change." He concedes, however, that the political uncertainty surrounding the reversion to Chinese sovereignty in 1997 could cloud the outlook, and it is there that Lippo seems most optimistic.

While other companies in Hong Kong may be wondering where to go when they leave, Lippo is seeing which areas in the colony it can move into and expand. "1997 is a tremendous opportunity, not a threat," says Keith Prothero, managing director of Lippo Insurance Group (Asia) Ltd. "I wish it was tomorrow."

With 1997, in Mr. Riady's view, China will move toward Hong Kong's economic system, and not the other way around. And he doesn't see why people should hesitate about 1997. "If you feel comfortable investing in China now, why not Hong Kong?"

Although Lippo's optimism isn't shared by many, it is consistent with the group's brassy bullishness on the Jakarta home front. And while the group's strong promotional activities and hard-sell haven't sat well with some Indonesian bankers and foreign securities analysts, the strategy has made Lippo a household name in major Indonesian cities.

After Indonesian authorities deregulated banking in October 1988, Lippo started opening branches at a breakneck pace and spending billions of rupiah to advertise itself. Deposits increased nearly sevenfold between the beginning of 1989 and March this year, making Lippobank the second-biggest private Indonesian bank in terms of deposits -- but only seventh in total assets as it has been conservative in lending.

Total assets at the end of March were 2.762 trillion rupiah ($1.4 billion), compared with 344.1 billion rupiah at the beginning of 1989.

No one can say Lippo is shy or lacking in ambition. A corporate profile it published in 1989 said the group is "characterized by a spirit of limitless horizons, unbridled creativity and a vision for the future." In the Asian business environment, it continued, Lippo Group "stands above all others as a symbol of growth and expansion without limits."

In Indonesia, group executives have learned expansion does have limits. The surging growth of its main unit, PT Lippobank, has slowed in the past year. While some businessmen say Lippo has taken solid steps to consolidate after growing rapidly, the group still is regarded by some analysts as too eager to expand -- and too anxious to promote itself.

"Many people in Jakarta are concerned about their corporate culture and their ambitions," says David Halpert, research director for a Singapore-based securities company. A Jakarta stock analyst says the group has done good things, such as hire professional managers, but he still feels Lippo is "more form than substance."

Giving the group substance is Mochtar Riady, its 62-year-old chairman and main asset. His record and skills, beyond building Lippo, have paved the way for it to get big-name partners. "In nearly every case," an Indonesian banker says, "whatever bank Mochtar touched turned to gold."

"Banking is trust and he represents trust," says James Riady. "My father has always been like a banking doctor."

Mochtar Riady has been associated with a number of banks that were either small or troubled -- or both -- and became big and strong. The best-known case is Bank Central Asia, where he teamed up with tycoon Liem Sioe Liong to build a small bank into the country's largest private one.

The one case that didn't work so well, in Arkansas, didn't damage Mochtar Riady's standing, though bankers believe it resulted in a cooling of his relations with Mr. Liem. The bankers say Mr. Liem helped the Riadys out in the case of Worthen Banking Corp., hit by bad debts and criticized by U.S. banking authorities for some loans to affiliated companies. The Riadys eventually sold their stake back to their partner, investment banker Jackson Stephens.

Some of Mr. Liem's managers weren't happy with Mochtar Riady's move in Jakarta to expand Lippobank, in which Mr. Liem has a stake, into a kind of competitor for Bank Central Asia. Mochtar Riady's equity stake in BCA has dropped in recent years to less than 4% from 17.5%, banking sources say. Mr. Liem's family still has more than a 10% share in Lippobank and a 15% share in Hongkong Chinese Bank.

While still active in business, Mochtar Riady has groomed his two sons, 34-year-old James and 31-year-old Stephen, to spearhead Lippo's expansion. James, who returned to Jakarta from the U.S. four years ago, has brought an American go-getting style to Lippo that stands out in Indonesia's low-key business environment. Stephen Riady lives in Hong Kong, where he oversees Hongkong Chinese Bank and other Lippo interests in the colony. Asked about criticism from outsiders that Lippo activities are sometimes too slick for Indonesia, James Riady replies that some activities initially viewed as "beyond the norm" were later judged "correct" and beneficial. He cites Lippobank's lottery-scheme to attract depositors. Initially criticized by some bankers as a gimmick, the idea was eventually copied by many others including government banks.

Some businessmen and securities analysts say they have been uncomfortable at times with Lippo's self-promotion. The way Lippobank advertises itself as "trusted since 1948" shows the group can stretch a point, as the name Lippobank didn't exist until 1989. Lippo Group's Bank Perniagaan Indonesia opened in 1948, but Mochtar Riady didn't step into the small and troubled institution until 1982.

While Lippo churns out a lot of information -- far more than most groups in Indonesia's generally secretive business environment -- some points are occasionally questioned. The prospectus for a public offering last June for PT Lippo Land Development says the company intended to build a Jakarta office tower with 41,000 square meters (456,000 square feet) of space. But even before the issue, the planned building was scaled down to 20,000 square meters.

Asked why the change wasn't noted, James Riady said the prospectus was prepared a year before the issue went ahead, and plans for the building simply changed, as can easily happen. He denies there was any misrepresentation about Lippo's plans and likely future assets; an information memorandum Lippo gave potential institutional investors at the same time used the revised space figure. Mr. Riady says that "proper and correct information was given out" on a road show, where Lippo displayed a 21- story model of the proposed building. (Initial plans called for a 32-story structure.)

Due to poor local market conditions, the issue drew little domestic interest, and the Indonesian allotment was taken mainly by Lippo interests. The foreign portion, however, was oversubscribed. Since listing, the stock has hardly traded, but Mr. Riady contends that all the shareholders "are extremely happy -- find me one that isn't happy."

With the Jakarta Stock Exchange's prolonged slump, Lippo's aggressively priced 1989 public issues are trading well below their offering prices. Lippobank is selling at about 5,200 rupiah a share, compared with the initial price of 15,000 rupiah.

Nonetheless, Mr. Riady says shareholders in Lippo units have done well. "We've performed better than the market," he says. On issues open to foreign buyers -- banking shares like Lippobank aren't -- "foreigners have loved us," he adds.

Lippobank's conservative lending policy and its rapid branch expansion -- to 160 currently from 28 at the end of 1988 -- makes some local bankers wonder how it can cover overheads and pay interest on the newly mobilized deposits. Mr. Riady says the keys are having liquidity, sizable deposits in checking accounts and a low loan-to- deposit ratio. "We always pay less than our peers for deposits," he says.

Mr. Riady also says that by being more choosy about loans, Lippobank's bad debts will be smaller than those of other banks whose borrowers are squeezed by Indonesia's high interest rates. "When you hear about bad debts, you don't hear about Lippobank," he says. It also helps, he adds, that basically "we're bankers to trade -- not to factories."

Trade finance will remain Hongkong Chinese Bank's main business regardless of whether its bid to acquire BCCI's Hong Kong unit succeeds, Mr. Riady says. If the BCCI purchase can be made, Hongkong Chinese Bank's retail network will expand to 40 branches from 15.

Even without a large branch network, the bank has been growing fast. Total assets grew to HK$4.86 billion (US$623.1 million) at the end of last year from HK$811.1 million in 1984. Total deposits grew to HK$4.55 billion from HK$610.5 million over the same time period.

If the BCCI purchase goes through, Hongkong Chinese Bank will play a bigger role in promoting Hong Kong investment in, and trade with, Indonesia, Mr. Riady says. He rejects suggestions that Lippo's foray into BCCI and other businesses in Hong Kong and China might be seen in Indonesia as promoting capital flight. In many cases where Jakarta business groups headed by ethnic Chinese invest abroad, they are criticized locally as lacking confidence in Indonesia.

"It's not capital flight," he says. What Lippo is doing in Hong Kong, he says, is providing services that "add to the economic development of Indonesia." He says that technology and expertise learned overseas "is all brought back to Indonesia."

In recent years, Hong Kong has become the second-largest investor in Indonesia after Japan. Mr. Riady says Lippo's Hong Kong base can help build Indonesia-Hong Kong bridges, adding: "Sometimes you can see Indonesian opportunity from Hong Kong."

Mr. Riady says Hong Kong still offers ingredients on top of free-market policies needed to do business: access to information, ample opportunities and quality of management. The last, he says, "is the only thing we lack in Indonesia."

Since Jakarta last year normalized previously frozen relations with Beijing, economic ties between the two are likely to expand. For Lippo's insurance side, China and Indonesia will be the staging grounds for more expansion in Asia.

Mr. Prothero, head of Lippo Insurance Group, says he believes that strategically China is "the most important market in Asia." He says the Lippo link with Alexander & Alexander, which already has ties with China, will help the financial-services arm of the Indonesian group move ahead in China.

Insurance-risk management, says Mr. Prothero, is a "virgin market." The Alexander Lippo joint venture will pitch to governments and businesses the idea that they boost profits by reducing the costs of insurance.

Besides banking and insurance, property is also attracting some Lippo attention in Hong Kong. Lippo Realty Ltd. has made several acquisitions this year, including a HK$880 million purchase of 15-story Sun Plaza on the colony's Kowloon peninsula. No other major purchases are planned for some time.

Over time, Lippo executives expect their bullish views on Hong Kong to be vindicated. "We're positive on Hong Kong," says Mr. Prothero. "We're a positive company."