Jakarta Stock Exchange getting more attractive<\/p>\n
JAKARTA (JP): By the end of 1994, we expect the Jakarta Stock
\nExchange (JSX) composite index to decline by about 20 percent
\nfrom 589 points in 1993. This is a sharp contrast from last year
\nwhen the market grew by 115 percent to become one of the best
\nperforming markets in Asia.<\/p>\n
The JSX has fallen from a high of 613 in January to its lowest
\npoint this year -- at 447 in December. While the highly
\nsuccessful Indosat initial public offering has brought worldwide
\nattention to the Indonesian stock market, it failed to spark off
\na broad-based rally, widely expected by investors, as a result of
\ninterest rate hikes in the U.S.<\/p>\n
The active primary market should make the Indonesian stock
\nmarket more attractive to investors by expanding market
\ncapitalization and improving liquidity in the long run. A total
\nof 47 companies have been listed on the JSX in 1994. This put the
\ntotal number of listed companies at 226 as of November, from only
\n24 companies in 1988.<\/p>\n
Total market capitalization has also increased from Rp 482
\nbillion in 1988 to Rp 103 trillion (US$48 billion) at present.
\nTotal funds tapped in 1994 were about US$4.8 billion, mostly
\nthrough rights and initial public offering (IPO) issues, a more
\nthan two-fold increase from $2.1 billion in 1993.<\/p>\n
Despite the rapid growth in recent years, the Indonesian
\nmarket is still considered small, and has much potential for
\nfurther growth, relative to its GDP, compared to other markets
\nwithin the region. Hence, we expect the Indonesian stock market
\nto become the largest in the region within the next 10 years.<\/p>\n
Upward pressure on domestic interest rates, as a result of
\nU.S. interest rate hikes throughout the year, have prompted banks
\nto increase deposit rates from an average of 12.3 percent at the
\nbeginning of 1994 to the current 14.5 percent.<\/p>\n
Total bank lending as of October 1994 stood at Rp 179.16
\ntrillion, which was a 20.8 percent increase from the end of 1993.
\nLending over 10 months in 1994 outpaced the previous year's 12-
\nmonth growth of 19.9 percent, 8.9 percent in 1992, and 16.3
\npercent in 1991. This was attributed to the private national
\nbanks, which posted a growth of 34.5 percent during the period
\nagainst 21.1 percent for foreign banks, and only 9.9 percent for
\nstate-owned banks.<\/p>\n
State banks are still struggling with bad or doubtful loans
\nwhich have reached from 20 percent to 25 percent of total
\noutstanding loans. Another concern is loans to the property
\nsector which are estimated to have grown twice that of total bank
\nloan growth. In the next 12 months, interest rates are expected
\nto rise by 1.0 percent to 1.5 percentage points, given the strong
\npossibility of further interest rate hikes in the United States.<\/p>\n
We expect banks to maintain their profit margins by adjusting
\nup their lending rates. However, lending rates will still be at
\nthe lower end of their historic scale, and given the consistent
\nstrong demand for credit, we expect similar loan growth for 1995.<\/p>\n
Banking stocks are currently trading at the fairly attractive
\n1994 P\/E (price earning ratio) of 9.0 times and 1995 P\/E of 7.7
\ntimes, compared to the market average of 18.4 times and 1995 P\/E
\nof 14.7 times. We recommend that investors focus on the more
\nliquid banking stocks, which have raised funds either through
\nrights or IPO issues in the last 12 months. These banks should be
\nable to expand their loan book at a faster rate, and achieve
\nhigher margins. These include BDNI, BII, Bank Danamon, Lippo
\nBank, Bank Tiara, and Bank Rama.<\/p>\n
Generally, the level of confidence in the property market
\nremained high throughout 1994. Investments in new property
\nprojects continue to increase with market demand. Return on
\ninvestment on property ranged between 7.5 percent and 8 percent.<\/p>\n
In June 1994, the government relaxed the plot ratios to 5:1
\nwhich allowed building heights to exceed 32 stories, this allowed
\nsome developers to increase the size of their projects.<\/p>\n
On the residential sector, demand for landed properties was
\nstrong throughout most of 1994. Companies with the majority of
\ntheir property portfolio in real estate development, such as Jaya
\nReal Property, Modernland, and Ciputra Development, are most
\nlikely to achieve their sales projections. Most of these stocks
\nhave been able to maintain their stock prices above their IPO
\nlevel.<\/p>\n
Interest in apartments and condominiums has increased in 1994,
\nbut the market may be swamped by an additional 40,000 units
\nexpected to be completed within the next four years. With the
\nthreat of an excess supply of apartments, some projects may have
\nto be delayed or abandoned.<\/p>\n
The outlook for the office sector does not appear to be too
\nexciting due to an oversupply in the market. However, the retail
\nproperty sector remains promising as the Indonesian economy is
\nexpected to show a healthy GDP growth, supported by strong growth
\nin consumer spending and private consumption.<\/p>\n
The industrial sector also appears to be bright as more
\ndevelopers are moving into development of satellite cities
\noutside of Jakarta or other big cities across Java island.<\/p>\n
Over all, the property market outlook for Indonesia is good,
\nwith most major activities concentrated in the Greater Jakarta
\narea. However, rising interest rates, oversupply of apartments,
\nand cement shortages are expected to be the main concern which
\ncan make property counters less attractive in the short run.<\/p>\n
Cement shortage has become an annual occurrence, but in 1994
\nit was responsible for hostile and heated debates between the
\nHouse of Representatives (DPR) and the association of cement
\nproducers. Ultimately, the DPR gave only a muted response to the
\nassociation's decision to increase the local reference price.<\/p>\n
It is difficult to predict whether the industry can maintain
\nits stranglehold on the market, but the latest debacle has
\ndefinitely sparked off interest among DPR members in deregulating
\nthe industry.<\/p>\n
However, as the industry has just gotten over the shortage,
\nthere may be little incentive to implement changes to the
\nindustry in the near future.<\/p>\n
Currently, there are nine cement-producing companies in
\nIndonesia, with a total of 27 plants. This year, the national
\nproduction capacity is estimated to have increased by 12 percent
\nto approximately 23.6million tons a year, from 20.8 million tons
\nin 1993. This increase was attributed mainly to increases in the
\nproduction capacity of existing producers. We expect future
\nincreases in capacity to materialize through expansion of
\nexisting plants. Total national cement production capacity is
\nexpected to increase to around 40 million tons by 1998, while the
\nnarrowest margin between capacity and demand is expected to occur
\nin 1995. Therefore, current producers are expected to gain from
\nany price liberalization which occur before or during 1995.<\/p>\n
Investors will be watching closely at the proposed merger of
\nSemen Gresik and state-owned cement producers Semen Padang and
\nSemen Tonasa. The Ministry of Finance has given its approval for
\nSemen Gresik to do a rights issue to raise Rp 1 trillion to
\nfinance the merger and its expansion plans. By 1995, after
\nimplementing the proposed expansion plan, Semen Gresik is
\nexpected to become the largest cement producing concern, with a
\ntotal production capacity of 12.3 million tons, exceeding
\nIndocement with a capacity of 9.5 million tons.<\/p>\n
The stock performance of listed cement producers has been
\nquite disappointing this year. Their failure to meet earnings
\nexpectations in the last three years, could not justify their
\nrelatively high P\/E multiples. As a result, the market has partly
\ndiscounted the high growth expectations in 1994 and 1995.<\/p>\n
The growing middle class of Indonesia has kept the consumer
\nsector, which includes foods and beverages, cigarettes,
\nphotographic goods, retail items, as well as the distribution
\nsectors, one of the best performing sectors during the year.
\nIndonesia, with a huge population of 190 million, represents a
\nmassive consumer market, with a steady annual growth rate of 2
\npercent.<\/p>\n
The consumer sector was largely dominated by the listing of
\nIndofood in July this year. Expectation of a tremendous earnings
\ngrowth of 2.6 times to Rp 255 billion in net profit, has driven
\nthe share price up to 61 percent above its IPO price of Rp 6,200.
\nHowever, its disappointing third quarter results, coupled with a
\ndecline in stock market sentiment has dragged the share price
\ndown to Rp 8,150.<\/p>\n
Rising coffee prices have also hampered Mayora Indah's
\nearnings growth to 66.9 percent this year, from our previous
\nforecast of 105.9 percent. Hero, a major retail stock, showed
\ndisappointing third-quarter results, due to losses from its
\nsubsidiary Toyscity, as well as delays in opening up new stores.
\nThe poor results have also driven its share price down to its
\nlowest level this year.<\/p>\n
In 1995, the consumer sector should remain an investor
\nfavorite. It is expected to grow by an average of 20 percent,
\njustifying a sector average P\/E multiple of around 16.8 times,
\nwhich is a premium to the market average P\/E of 14.5 times.<\/p>\n
Blue-chip consumer stocks with solid earnings growth such as
\nIndofood and Mayora are still in favor despite higher-than-
\naverage P\/E ratios. Overall, strong GDP growth and lower
\ninflation rate expectations should drive consumer demand up in
\n1995, which should generate higher earnings for consumer
\ncompanies.<\/p>\n
The Indonesian pharmaceutical industry is estimated to be
\nworth around Rp 2 trillion in 1993. The industry, which is still
\nhighly fragmented, is comprised of about 224 companies, including
\n10 dominant companies. The single largest pharmaceutical company
\nis Kalbe Farma, with a market share of around 9.6 percent in
\n1993. Presently, there are nine pharmaceutical companies listed
\non the JSX, of which five are foreign multinational companies,
\nnamely Bayer, Merck Pfizer, Schering, and Squibb. The other four,
\nwhich have a significant market capitalization, are local
\ncompanies Kalbe Farma, Dankos Laboratories, Tempo Scan Pacific,
\nand Darya-Varia Laboratories. The later two companies were listed
\nthis year.<\/p>\n
The industry experienced several major changes this year, as
\nthe Good Manufacturing Practices (GMP) guidelines was finally
\nimplemented after the compliance date had been delayed several
\ntimes. Compliance with GMP guidelines is necessary for a company
\nto sell its products. GMP guidelines cover several aspects like
\nquality control in manufacturing processes and standards for
\nmaintenance of equipment. Currently, only 91 companies have met
\nthese guidelines, and 108 companies by the year's end. Companies
\nunable to comply with these guidelines are expected to merge with
\ncompliant companies to continue production.<\/p>\n
Over the last five years, the industry has been growing at an
\naverage of 15 percent per annum. According to findings by IMS
\nAudit, the industry grew by around 20 percent last year. Rising
\ndisposable incomes and increasing health awareness are the two
\nfactors that attributed to greater demand for pharmaceuticals
\nproducts. In addition to that, stronger government effort to
\nimprove health care standards also boosted demand for
\npharmaceuticals products.<\/p>\n
Annual per-capita consumption of drugs in Indonesia is still
\nrelatively low, at $4.15 last year, compared to other Southeast
\nAsian countries. In a country where health care standards and
\ndrug consumption are still low, the room for the industry to grow
\nis still vast. Overall, we expect the industry to continue
\ngrowing at a healthy rate of 16 percent to 19 percent in the
\ncoming years.<\/p>\n
The pulp and paper sector has outperformed the market this
\nyear mainly due to rising pulp and paper prices. Average pulp
\nprices have increased from $400\/ton to above $600 recently, while
\npaper prices have followed that trend.<\/p>\n
This has encouraged two other paper companies Suparma and
\nFajar Surya to float their shares to public at the end of the
\nyear to finance their facilities expansion. Towards the end of
\nthe year, market sentiment on this sector plunged as a result of
\ndisclosures that highly leveraged Indah Kiat, Tjiwi Kimia and
\nInti Indorayon suffered huge financial losses in a series of
\ninterest rate swaps.<\/p>\n
However, the companies later announced that the losses will be
\nabsorbed by the controlling shareholders of the respective
\ncompanies: Sinar Mas group and Raja Garuda Mas group. Therefore,
\nthe losses will reportedly not affect company earnings. We
\nbelieve some pulp and paper stock have been oversold, and expect
\nthis sector to recover by early next year.<\/p>\n
The forestry sector is dominated by Barito Pacific and newly
\nlisted Sumalindo Lestari. This sector has been performing poorly
\ndue to falling plywood prices. Average plywood prices have
\ndropped from $450\/cu.m to a low of $350\/cu.m. Apkindo, the
\nPlywood Producers Association, took it in its stride as the body
\nthat oversees the plywood trade. Indonesian plywood exports faced
\nserious competition from Malaysian producers, as well as
\ndecreasing demand in major buying countries such as China and
\nJapan.<\/p>\n
In 1995, we expect at least three timber companies: Artika
\nOptima Inti, Surya Dumai, Kiani Lestari, to seek a public
\nlisting. Under guidelines introduced recently, timber companies
\ndo not require the Minister of Forestry recommendation letter for
\npublic listings, but must be assessed by Societe Generale de
\nSurveillance (SGS) for their business viability and ability to
\nsustain the manufacturing capacity with their existing forest
\nconcessions.<\/p>\n
Indosat made its debut as the first Indonesian company to list
\nits shares in Indonesia and New York with an IPO of 362.4 million
\nshares; making it the largest Indonesian offering to date. As a
\nresult of the dual listing, Indosat share price on the JSX
\nfollows closely to the price movement on the NYSE. In December,
\nCitra Marga, an inner Jakarta toll-road operator, offered 122
\nmillion shares to the public to raise Rp 317.2 billion. In the
\nsame month, Bukaka Teknik Utama, a job shop manufacturer of
\ninfrastructure products, offered 40 million shares which raised
\nRp 128 billion.<\/p>\n
The government has stated that Indonesia must invest about $50
\nbillion in infrastructure development over the next five years.
\nTo meet this objective, the government realized that it could not
\ndepend on conventional loans to finance its development plans. We
\nexpect the government to tap private capital, through direct or
\nindirect investments, to finance infrastructure-related
\ndevelopment.<\/p>\n
Therefore, next year we can expect several major
\ninfrastructure companies like Telkom, State Electricity Company,
\nand Jasa Marga to seek funding through the capital market.<\/p>\n
We expect the Indonesian economy to continue to grow at a
\nhealthy rate of 6.8 percent in 1994 and 7.0 percent in 1995,
\nsupported by strong private consumer sector growth and
\nmanufacturing production.<\/p>\n
An inflation rate of about 9.5 percent for 1994 is higher than
\nearlier expectations mainly due to rising prices in rice and
\nsugar caused by drought, electricity tariff hikes and cement
\nshortages.<\/p>\n
The economy is showing no signs of overheating, and we expect
\ninflation to ease steadily to about 8.9 percent next year. The
\ngradual increase of oil price should boost export revenues, as
\noil and gas contribute about one third of exports, which should
\nstabilize Indonesia's trade balance in 1994 and 1995.<\/p>\n
The market has strong support at the 450 level. As in previous
\nyears, the market is expected to move sideways in the next few
\nweeks as trading activities will be minimal during the festive
\nseason between late December and early January. Assuming no
\nsurprises from the U.S. central bank, the stock market should
\nbegin a gradual recovery by the second quarter as companies begin
\nto announce their annual results, reflecting the positive key
\neconomic indicators of Indonesia.<\/p>\n
-- Research Department of PT Sigma Batara<\/p>\n
Window A: The performance of listed cement producers have been quite
\ndisappointing.<\/p>\n
Window B: The pharmaceutical industry will grow by 16-19 percent in the
\ncoming years.<\/p>",
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