Asia Pacific Equity Research 09 July 2020 Indonesia Property Looking beyond COVID-19; PWON is our top pick We assume coverage of the sector with an optimistic view, as we look beyond Indonesia COVID-19: (1) We believe the current 60% sector discount to NAV and 0.7x Property 2021E PBV price in most of the pandemic-related impact (presales delay, deferral Henry Wibowo AC of rental income), especially as the economy gradually reopens. (2) The sector (622-1) 5291 8526 would benefit from potentially higher FDI inflow due to policy reforms during [email protected] President Jokowi’s second term and relocation of the capital. (3) Benefits from a Bloomberg JPMA HWIBOWO <GO> declining interest rate and stabilizing rupiah. PWON is our top pick, given its PT J.P. Morgan Sekuritas Indonesia 50% recurring income contribution and strong balance sheet. We also like CTRA Vida M Cornelius for its pan-Indonesia presence and increasing mass-market segment contribution, (62-21) 5291-8505 and SMRA for its prominent presence in fast-growing Bekasi (an industrial city) [email protected] and potential unlocking of value from malls. We rate BSDE as Neutral on the risk PT J.P. Morgan Sekuritas Indonesia of higher concentration in Serpong (where the ASP is starting to stagnate). Cusson Leung, CFA (852) 2800-8526 COVID-19-related bad news largely priced-in, time to look beyond. We [email protected] expect 2020 presales to decline up to 25% YoY due to COVID-19, which has J.P. Morgan Securities (Asia Pacific) Limited led to postponement of project launches and construction, and also weaker Ajay Mirchandani demand sentiment. Nonetheless, we believe most of the bad news is reflected in (65) 6882-2419 the 60% discount to sector NAV (-1.5SD below the 15-year mean) as Indonesia [email protected] reopens its economy. The risk-reward profile of the sector, among the biggest J.P. Morgan Securities Singapore Private Limited cyclical laggards, is attractive. Poised to ride FDI rebound; capital relocation a bonus catalyst. We are optimistic that FDI will rise during 2021-24 from ~2% of GDP now to ~6% (i.e., close to Vietnam’s) as the gov’t initiates Omnibus Laws to jump-start policy reforms and transform Indonesia into Asia’s next manufacturing hub. We see industrial cities like Bekasi, where SMRA and PWON have a presence, as key beneficiaries. Also, we project the US$33bn plan to relocate the capital to Kalimantan from Jakarta could boost NAV by 44-80% for the four developers. Beneficiary of lower interest rates and stabilizing rupiah. Bank Indonesia has cut rates by 175bps in the past 12 months; our economists project a further 75bps cut to 3.5% by the year end. Lower rates are positive as borrowing costs fall and cheaper mortgages boost demand. Our sensitivity analysis implies every 100bps fall in rates will boost EPS 5%. Moreover, the rupiah has strengthened 15%+ since its March 2020 low to Rp14,400/US$1. This is positive in terms of construction costs, interest expenses and FX exposure, as bulk of the sector debt is denominated in USD. PWON has the lowest net gearing of 0%, followed by BSDE (20%), CTRA (30%) and SMRA (80%). For a detailed discussion of the risks to our thesis, please see p27. Equity Ratings and Price Targets Mkt Cap Price Rating Price Target Company Ticker ($ mn) CCY Price Cur Prev Cur End Prev End Date Date Pakuwon PWON IJ 1.40 IDR 420 OW N 630 Dec-21 720 Jun-20 Bumi Serpong Damai BSDE IJ 1.03 IDR 775 N n/c 830 Dec-21 1,500 Jun-20 Ciputra Development CTRA IJ 0.82 IDR 640 OW n/c 1,000 Dec-21 1,500 Jun-20 Summarecon SMRA IJ 0.61 IDR 615 OW n/c 1,000 Dec-21 1,600 Jun-20 Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 08 Jul 20. See page 79 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and 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 the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com Henry Wibowo Asia Pacific Equity Research (622-1) 5291 8526 09 July 2020 [email protected] Table of Contents Investment summary................................................................3 Capital relocation: The road to Borneo ................................12 Correlation of Property index................................................14 Impact of COVID-19................................................................16 Operating metrics...................................................................20 Stock preference ....................................................................21 Valuations and comparison with peers................................23 Downside risks .......................................................................27 Companies ..............................................................................29 Pakuwon..................................................................................30 Bumi Serpong Damai .............................................................40 Ciputra Development .............................................................52 Summarecon...........................................................................67 2 Henry Wibowo Asia Pacific Equity Research (622-1) 5291 8526 09 July 2020 [email protected] Investment summary Value emerges Positive on Indonesia Property We assume coverage of four Indonesia Property sector stocks, Pakuwon Jati (PWON with Pakuwon Jati and Ciputra IJ), Bumi Serpong Damai (BSDE IJ), Ciputra Development (CTRA IJ), and Development our most preferred Summarecon Agung (SMRA IJ).We have an optimistic view on the sector as we stocks in the sector look beyond COVID-19: We believe most of the bad news from the COVID-19 lockdown (presales delay, deferral of rental income) has been priced in at the current 60% blended discount to NAV and 0.4-0.9x 2021E PBV as Indonesia is gradually reopening its economy. The sector would be a beneficiary of potentially higher FDI inflow owing to policy reforms during President Jokowi’s second term (especially in industrial cities like Bekasi) and also gain from potential relocation of the capital. It would get a boost from a declining interest rate (which is positive in terms of both mortgages and the cost of funds) and stabilizing rupiah. We believe most of the bad news PWON is our preferred OW pick. We like its asset-light model, ~50% recurring- from the COVID-19 pandemic is income revenue contribution (a proxy to malls reopening) and strong balance sheet largely in the price at the current (we forecast the company will turn net-cash in 2020). We also like CTRA for its sector PBV of 0.7x Pan-Indonesia diversification and increasing mass-market segment contribution; and SMRA for its strong presence in the fast-growing Bekasi City and potential for value-unlocking of its malls portfolio. We rate BSDE as Neutral owing to its higher concentration in Serpong, where we think the capacity of buyers to absorb further ASP increases may be limited after an extended period of appreciation. Table 1: Indonesia Property valuation comps ADTV JPM Current JPM Upside/ Mkt cap 6M EV/EBITDA P/E PBV Yield Disc to NAV Company name Ticker rating price PT downside US$m US$m 20F 20F 21F 21F 21F 21F Pakuwon Jati PWON IJ OW 420 630 50% 1,401 2,906 8.0 9.8 8.9 0.9 1.3% -53% Ciputra Development CTRA IJ OW 640 1000 56% 823 1,697 9.8 12.1 11.2 0.6 2.5% -65% Summarecon Agung SMRA IJ OW 615 1000 63% 615 1,372 11.9 24.6 19.2 0.8 0.7% -63% Bumi Serpong Damai BSDE IJ N 775 830 7% 1,137 1,910 8.2 8.4 6.9 0.4 0.0% -58% Total/Average 3,976 7,885 9.0x 12.2x 10.4x 0.7x 1.1% -60% Source: Bloomberg, J.P. Morgan estimates. Priced at close of business 8 July 2020. Prices and price targets are in rupiah. COVID-19 bad news largely priced in, time to look beyond it Our checks with Indonesia We expect 2020 presales to decline up to 25% YoY. COVID-19 has led to property developers suggest postponement of project launches and construction, and also weaker demand April and May were the bottom sentiment. Furthermore, rental yield, especially for malls, was also under pressure of the COVID-19 impact during the lockdown period, with during the lockdown period with some payment deferrals. Nonetheless, we believe recovery since June most of the bad news is in the price at the current blended 60% discount to NAV level (-1.5SD below 15yrs mean) and 0.4-0.9x 2021E PBV. We find the risk-reward profile attractive for Indonesia’s Property sector, which has been among the biggest cyclical laggards in the current phase of reopening of the economy. 3 Henry Wibowo Asia Pacific Equity Research (622-1) 5291 8526 09 July 2020 [email protected] Indonesia Property sector is now Figure 1: Indonesia Property sector discount to NAV (15 years) trading at a 60% discount to 10% Sector (disc)/prem to NAV forward NAV, more than 1.0 SD below its 15yr mean 0% -10% -20% -30% Mean -40% -50% -60% -70% -80% -90% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Source: Bloomberg, J.P. Morgan. As of 7 July 2020. Riding on FDI wave; capital shifting a bonus catalyst President Jokowi’s Omnibus The Jokowi administration continues to have big goals to develop infrastructure Law initiative to jump-start (US$450bn), which would require FDI to finance it. The Omnibus Law initiative to policy reform could boost FDI in kick-start policy reform might have been delayed by COVID-19 but we are Indonesia.