Lippo Karawaci. Company Update. Banking on Industrial Land, Healthcare BUY. INDONESIA EQUITY Investment Research

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1 24 October 2012 INDONESIA EQUITY Investment Research Lydia Suwandi +62 (21) BUY Target Previous Price IDR1,300 IDR1,000 IDR950 Property LPKR is the biggest listed property company by market cap. Through a merger of 8 property related companies in 2004, the company s portfolio now encompasses urban development, large-scale integrated developments, retail malls, healthcare, hotel and leisure, as well as a fee-based income portfolio. Stock Profile/Statistics Bloomberg Ticker LPKR IJ Share Capital (m) 23,078 Market Cap (IDRbn) 21, week H L Price (IDR) 1, mth Avg Vol ( 000) 40,155 YTD Returns (%) 44 Beta (x) 1.07 Shariah Compliant YES Major Shareholders (%) Pacific Asia Holding 27.0 Fidelity Magellan fund 5.3 Capital bloom investment 4.9 Public 62.8 Share Performance (%) Month Absolute Relative 1m m m m M Share Price Performance Jun Jun-12 5-Jul Jul-12 4-Aug Aug-12 3-Sep Sep-12 3-Oct Oct-12 Company Update Lippo Karawaci Banking on Industrial Land, Healthcare Maintain BUY, New TP IDR1,300/share. We raise our FY12-13f earnings forecast by 26%-23% to better reflect LPKR s consistently satisfactory performance in its residential/township and healthcare businesses. Our extended TP over the next 12 months is IDR1,300, after taking into account its: (i) conversion of around 50% residential landbank in Cikarang into industrial landbank, (ii) two new hospitals in Manado and Makassar, which are still under construction, and (iii) seven-year global notes totalling USD250m. The stock is currently trading at a 50% discount to the newly estimated net asset value (NAV) of IDR1,902, implying a PE 12-13f of x and a PBV 12-13f of Maintain BUY. FY13-14f earnings estimate raised by 26%-23%. The upward revision in earnings forecast largely stems from the company s project in Lippo Cikarang (LPCK), which saw marketing sales grow 65% CAGR from on persistently buoyant demand. Limited supply of ready-to-build land caused the industrial land price to double from IDR610k/sq m in 2011 to IDR1.3m/sq m currently. Meanwhile, strong factory demand in Cikarang has also pushed up housing demand in LPCK, lifting the residential average selling price (ASP) by 22% YTD to IDR4m/sq m. The upcoming new direct access in Km34 Cikarang Barat, which is expected to complete by November 2012, should boost the ASP further. As such, we believe our blended gross margin estimate of 49% for FY13-14f is conservative given: i) LPCK s 1H12 pre-sales of IDR1.2trn mainly come from sales of industrial land, ii) sufficient industrial landbank of 445ha to meet demand after converting 50% of its residential landbank into industrial landbank, and iii) the majority of its landbank was acquired back in the 1990s when the acquisition cost was less than USD10/sq m. Promising years ahead. Up to 1H12, all LPKR s business divisions posted satisfactory performance, beating both the company s and market expectations. 1H12 marketing sales jumped 40% y-o-y to IDR2.3trn, representing 59% of the company s preliminary FY12 target sales of IDR3.8trn. The recent launch of its last tower in Kemang Village phase I - The Bloomington saw a 70% take-up rate of the 150 units offered, fetching IDR605bn in pre-sales value. This reflects the strong ongoing demand for the company s residential projects (both landed and high-rise apartments). Hence, we expect residential and apartment sales revenue to grow by 23%-24% for FY13-14f. Positive healthcare catalysts. LPKR s 1H12 healthcare revenue surged 37% y-o-y to IDR811bn, while its EBITDA margin rose to 19% from 1H11 s 17%. The company plans to expand its healthcare operation to 27 hospitals from the current 12, with EBITDA margin expected to reach 25% by The expansion plan should be well funded as: i) the company recently issued a seven-year global bond worth USD100m, in addition to USD150m bonds issued in May this year, boosting the total facility to USD250m, ii) the company can recycle its hospitals through REIT to generate funding for new hospitals, and iii) it could receive third-party funding from selling small part of Siloam shares, which is still under discussion. FYE December (IDR bn ) FY10 FY11 FY12f FY13f FY14f Revenue 3,125 4,190 5,205 6,079 7,117 Net Profit ,088 1,259 % chg y-o-y Consensus ,080 1,351 EPS(IDR) Dividend yield, % ROAE(%) ROAA(%) PER(x) PBV(x) EV/EBITDA(x) Sources: Company and OSK research OSK Research See important disclosures at the end of this report 1

2 Healthcare - the rising star Healthcare segment is increasingly crucial to LPKR s overall business as its contribution continues to improve. Healthcare revenue grew by 37% y-o-y to IDR811bn in IH12, outpacing the 25% revenue growth in its core residential/township business amounting to IDR1.1trn over the same period. The company s aggressive nationwide expansion saw its Siloam Hospitals growing from the initial four in 2007 to 13 hospitals by year-end (including two hospitals currently under construction in Bali and Palembang), with the total number of beds soaring from 574 to 1,395 during the period. The strong growth reflects the under-serviced nature of Indonesia s healthcare sector. World Health Organization (WHO) reported that in order to fulfill the requirement of 20 beds per 10,000 population, Indonesia will need 350,000 new beds over the next 15 years, 70% of which is expected to be filled by private hospitals. To capitalise on the country s social transformation, LPKR plans to quadruple its Siloam s division to 25 hospitals within 2-3 years with an average of 200 to 300 beds per hospital. Assuming an investment cost of around USD40m per hospital (including land cost), the company will need around USD500m capex for this expansion plan. Exhibit 1: LPKR s healthcare revenue growth outpaces property business s 45% Healthcare (LHS) Property (RHS) 70% 40% 35% 30% 25% 60% 50% 40% 20% 15% 10% 5% 30% 20% 10% 0% 0% 3M10 6M10 9M10 12M10 3M11 6M11 9M11 12M11 3M12 6M12 Exhibit 2: Siloam s number of beds from f in Units 1,600 1,400 1,395 1,200 1, f OSK Research See important disclosures at the end of this report 2

3 Exhibit 3: Expanding EBITDA margin from healthcare business in IDR bn EBITDA % margin % % 18% % 17% % % % 50 12% 12% H11 1H12 10% Where does the money come from? To ramp up the launch of its hospital expansion as well as retail mall business, the company recently issued new USD100m seven-year global senior notes, which is a re-opening of its existing USD150m 2019 global senior notes. This expands the facility to USD250m. The coupon was fixed at 7% and rated B1 by Moody s, BB- stable by S&P and BB- stable by Fitch. The bond issue should raise the company s FY12f debt-to-equity ratio to 63%, from 42% in FY11. Nonetheless, we deem the risks as manageable on the back of strong sales from its property development projects coupled with increasing contribution from its healthcare business. Company s coupon rate of 7% is also way below recent USD bond issuance by KIJA s 5-year tenor bonds worth USD175m with 11.75% coupon rates or ASRI s 5 years Eurobond worth USD150m with 10.75% coupon rates. In addition, LPKR s ability to recycle its properties through REITs should generate sufficient funding to support its expansion plan. We expect the asset sales, which include two hospitals and a hotel to First REITs as well as two malls to LMIRT (Lippo Malls Indonesia Retail Trust), to be completed by year-end. First REIT s combined purchase consideration totals SGD142.9m, which comprises: i) a hospital in Manado and Aryaduta Manado Hotel at consideration of SGD83.6m, funded by a combination of debt and proceeds from a proposed private placement exercise to be carried out by Bowsprit Capital Corporation Limited (LPKR s whollyowned subsidiary), and ii) the purchase of a SGD59.3m hospital in Makassar which will be financed by a drawdown of committed debt. Assuming an investment cost of USD40m per hospital, we expect a potential one-time gain of around IDR200bn (amortised over 15 years) from this transaction. However, this has not been included in our forecast. After several delays, LMIRT has entered into conditional sale and purchase agreements as of 23rd Oct 12 to acquire two LPKR s malls: i) Pejaten Village, a six level retail mall located in city of Jakarta with NLA 41,847 sq m and occupancy rate 95.2% and ii) Binjai Supermall, a three level mall located in Binjai, North Sumatera with NLA 23,022 sq m and occupancy rate 91.4%. We have yet take this transaction into account, as this transaction is sitll subject to minority interest approval. Nonetheless, from the press release, we might expect LPKR to get IDR985.5bn from this transaction but no further information has been revealed regarding the LPKR s potential gain from the proposed price. Exhibit 4: LMIRT proposed acquisition OSK Research See important disclosures at the end of this report 3

4 Anticipating the selling of Siloam s stake. LPKR confirmed the plan to sell their minority stake in Siloam Hospitals. No further information has been disclosed from the management except that they will give a full announcement by the end of this year. According to sources earlier, LPKR plans to sell a minimum 20% of unit Siloam Hospitals for USD200m-USD300m. It could sell as much as 49% of Siloam in a deal that valued the firm at more than USD1bn. The company has hired Bank of Merrill Lynch to run the auction. Some private equity firms including Blackstone Group L.P., KKR & Co L.P., Dubai s Abraaj Capital, Carlyle Group, and TPG Capital are keen to partake in Indonesia s healthcare business. We see strong growth prospects in Indonesia s healthcare industry, given that Indonesia s: i) per capita healthcare spend is low at only USD51, compared to Thailand, Malaysia and Singapore of USD164, USD353, and USD1,404, respectively, ii) allocation of healthcare funding as a percentage of GDP is relatively low at 2.3%, versus 13.4% in the US and other developed countries, iii) average number of beds per 10,000 population is only six against Singapore s 31 beds per 10,000 population, and iv) growing middle-class household will likely see a consumption shift from public to private hospitals. Exhibit 5: Indonesia s per capita healthcare spend is much lower than its neighbours (in USD) Indonesia Thailand Malaysia Singapore Source: WHO World health reports Exhibit 6: Total healthcare spend as % of GDP by country USA 13.4 Germany 10.5 China Malaysia Thailand Singapore Indonesia Source: WHO World health reports OSK Research See important disclosures at the end of this report 4

5 Exhibit 7: Hospital beds per 10,000 population by country USA 31 Germany 82 China 41 Malaysia 18 Thailand 22 Singapore 31 Indonesia Source: WHO World health reports New interchange to further boost land price in Cikarang LPKR s 6M12 pre-sales reached an astonishing IDR2.3trn, up 40% from 6M11 pre-sales of IDR1.6trn. About 54% of the sales, or around IDR1.24trn, come from the company s industrial and residential sales in Cikarang, surpassing LPCK s FY12f target pre-sales of IDR1.2trn. By 1H12, the company has sold 65ha of industrial land valued at IDR854bn. Industrial land ASP doubled from 2011 s IDR610k/sq m to IDR1.3m/sq m in the first half of this year, mainly due to limited supply of ready-to-build land in Cikarang and the surrounding area. Strong demand for factory construction in Cikarang has also lifted housing demand in LPCK. The company s 1H12 residential sales soared 44% y-o-y to IDR308bn, with 29% of the growth attributed to the land price hike to IDR5.3m/sq m, from 1H11 s IDR4.1m/sq m. With demand keep pouring into the industrial area, the company has converted 50% of its remaining residential landbank into industrial landbank. As of June 2012, the industrial and residential landbank in Cikarang stands at 445ha and 205ha respectively. While the conversion has resulted in a 50% decline in revalued net asset value (RNAV) to IDR7.4trn, or 11% of LPKR s total RNAV, we believe the company s strategy is good, given the fact that: i) the sales of industrial land plots usually fetch a higher margin of around 70%-80%, versus 40%-50% for residential sales, and ii) most of its landbank was acquired back before the 1990 s when the land cost was less than USD10/sq m, compared with the current market price of IDR250,000-IDR300,000/sq m. With the company s direct interchange nearing completion, we expect the ASP to further increase by 15%-20% next year. As such, we believe our blended gross margin estimate of 49% for FY13-14f is conservative. Exhibit 8: Breakdown of LPKR s marketing sales in IDR bn 3,500 Lippo Village Lippo Cikarang Tanjung Bunga San Diego Hills Apartment 3,000 2,500 1,286 2,000 1,500 1, , , M M12 OSK Research See important disclosures at the end of this report 5

6 Exhibit 9: LPCK s land price movement in IDRm/sq m 6.0 Residential Industrial M12 Exhibit 10: LPCK s new interchange OSK Research See important disclosures at the end of this report 6

7 Valuation We raise our FY13-14f earnings forecast by 26%-23% to better reflect LPKR s consistent satisfactory performance in its residential/township and healthcare businesses. We also derive a new TP of IDR1,300 for the next 12 months by applying a 30% discount to the company s new NAV of IDR1,902/share. We arrived at the new NAV after taking into account the company s: (i) conversion of around 50% of Cikarang s residential landbank into industrial landbank, (ii) two new hospitals in Manado and Makassar, which are still under construction, and (iii) seven-year global notes worth USD250m. The counter is currently trading at a 50% discount to NAV, implying a PE12-13f of x and a PBV 12-13f of Maintain BUY. Exhibit 11: Forecast changes Change of 2012f 2013f 2014f forecast Previous Current %Chg Previous Current %Chg Previous Current %Chg Revenue 4,714 5,205 10% 5,284 6,079 15% 5,856 7,117 22% Gross profit 2,160 2,513 16% 2,422 2,977 23% 2,704 3,485 29% Operating Profit 1,090 1,310 20% 1,223 1,572 29% 1,375 1,840 34% Net profit % 865 1,088 26% 1,020 1,259 23% % margin Gross margin Operating Margin Net margin Source: OSK Research Exhibit 12: NAV calculation ASSETS Area Utilization Price/sqm RNAV % RNAV Ha Ratio ('000) Rpbn Own Rpbn URBAN DEVELOPMENT Lippo village % 6,775 17, % 17,276 Lippo Cikarang % 2,447 8, % 4,633 Tanjung Bunga % 5,078 10, % 5,042 San Diego Hills 99 60% 4,898 2, % 2,909 Micro suburbs % 189 Urban Development subtotal 30,050 LARGE SCALE INTEGRATED DEVELOPMENT City of tomorrow % 426 Kemang Village 1, % 1,102 St Moritz 1, % 1,360 Simpruk % 136 Others (retail space inv, land & other devt.) 1, % 1,214 Large Scale subtotal 4,237 RETAIL MALLS Lease mall (Pejaten, Puri, PX, Binjai) % 597 Mall Bali % 318 Retail space inventory % 363 Retail malls subtotal 1,278 HOSPITALS 5 hospital -REIT FREIT 8,115 Balikpapan hospital % 180 Jambi Hospital % 130 Hospitals subtotal 8,425 HOTELS Lippo village-reit FREIT 188 Jakarta, Medan, Pekanbaru % 298 Hotels subtotal 487 REIT units 779 Total Asset Value 49,531 Add: cash 3,032 Less: debt (5,236) Est NAV 43,886 # shares 23,078 NAV/share 1,902 Discount 30% Target price 1,331 Source: OSK Research OSK Research See important disclosures at the end of this report 7

8 Financials Exhibit 13: Balance Sheet FYE December (IDRbn) f 2013f 2014f Cash and cash equivalents 3,660 2,175 3,454 3,032 2,330 Trade accounts receivable ,147 1,340 1,569 Inventories-net 7,069 7,892 9,263 10,676 12,498 Prepaid taxes & expenses Fixed assets - net 1,206 1,556 1,874 2,168 2,476 Other asset 3,161 5,408 5,382 5,451 5,585 TOTAL ASSETS 16,155 18,259 21,500 23,110 24,976 Loans 3,376 3,753 5,224 5,236 5,249 Trade payables Accrued expenses & Tax payable Customers' advances 1,706 2,414 2,988 3,483 4,070 Deferred income Other liabilities Total Liabilities 7,976 8,850 11,076 11,781 12,607 Minority Interest Capital Stock 2,163 2,308 2,308 2,308 2,308 Additional paid in capital 3,245 4,044 4,044 4,044 4,044 Others 48 (425) (186) (186) (186) Retained earnings 2,254 2,908 3,683 4,587 5,628 Total Equity 7,710 8,834 9,848 10,753 11,794 TOTAL LIABILITIES & EQUITY 16,155 18,259 21,500 23,110 24,976, OSK Research Exhibit 14: Profit and loss FYE December (IDRbn) f 2013f 2014f Revenues 3,125 4,190 4,190 5,205 6,079 COGS 1,602 2,293 2,293 2,691 3,102 Gross profit 1,524 1,896 1,896 2,513 2,977 OPEX ,203 1,405 Operating profit ,310 1,572 EBITDA 832 1,058 1,058 1,493 1,779 Total Other Income (Expense) (8) (5) (29) Profits of associated companies Profit before tax ,308 1,546 Total Tax Expense-Net (125) (171) (171) (260) (304) Profit before Minority ,048 1,242 Minority Interest (69) (106) (106) (131) (154) Net profit ,088, OSK Research Exhibit 15: Cash flow FYE December (IDRbn) f 2013f 2014f Operating cash flow (521) 307 (150) 15 (164) Investing cash flow (142) (2,585) (348) (438) (503) Financing cash flow 2, ,568 (171) (205) Total cash flow movement 2,127 (1,486) 1,280 (423) (702) Beginning cash balance 1,533 3,660 2,175 3,454 3,032 Ending cash balance 3,660 2,175 3,454 3,032 2,330, OSK Research OSK Research See important disclosures at the end of this report 8

9 OSK Research Guide to Investment Ratings 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-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investor or Accredited Investor, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd ( DMG ). All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published and printed by :- PT OSK NUSADANA SECURITIES INDONESIA Kuala Lumpur Hong Kong Singapore Malaysia Research Office OSK Research Sdn. Bhd. 6 th Floor, Plaza OSK Jalan Ampang Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) Hong Kong Office OSK Securities Hong Kong Ltd. 12 th Floor, World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) Singapore Office DMG & Partners Research Ptd Ltd 10 Collyer Quay #09-08 Ocean Financial Centre Singapore Tel : +(65) Fax : +(65) Jakarta Shanghai Phnom Penh PT OSK Nusadana Securities Indonesia Plaza CIMB Niaga, 14th Floor, Jl. Jend. Sudirman Kav.25, Jakarta Selatan 12920, Indonesia. Tel : (6221) Fax : (6221) Shanghai Office OSK (China) Investment Advisory Co. Ltd. Room 6506, Plaza 66 No.1266, West Nan Jing Road Shanghai China Tel : +(8621) Fax : +(8621) OSK Indochina Securities Limited No. 263, Ang Duong Street (St. 110), Sangkat Wat Phnom, Khan Daun Penh, Phnom Penh, Cambodia. Tel: (855) Fax: (855) Bangkok OSK Securities (Thailand) PCL 191, Silom Complex Building 16th Floor, Silom Road,Silom, Bangrak, Bangkok Thailand Tel: +(66) Fax : +(66) OSK Research See important disclosures at the end of this report 9