Indonesia Market (Back to Java Where Wealth Resides and Flourishes) 20140205

Indonesia market Special report

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Merlissa Trisno [email protected] +62 21 2554 8821

Amie Liem +62 21 2554 8829

Robert Pranata +62 21 2554 8825

5 February 2014

Indonesia Thematics

Top 10 picks

Ace Hardware (O-PF)

BCA (O-PF)

BTN (BUY)

Indocement (BUY)

Kalbe Farma (BUY)

Pakuwon (BUY)

Perusahaan Gas (O-PF)

Sritex (BUY)

Telkom (BUY)

Wijaya Karya (BUY)

www.clsa.com

Watch Merlissa and Amie on CLSA TV

Back to Java

2 [email protected] 5 February 2014

Contents

Executive summary ............................................................................ 3

Investment thesis .............................................................................. 4

Powerful demographics ...................................................................... 9

Fruits of decentralisation ................................................................. 14

Hitting the ground, getting a feel! .................................................... 22

Stocks to own ................................................................................... 69

Company profiles

Ace Hardware ............................ 73

BCA .......................................... 77

BTN .......................................... 81

Indocement ............................... 85

Kalbe Farma .............................. 89

Pakuwon ................................... 93

Perusahaan Gas ......................... 97

Sritex ..................................... 101

Telkom ................................... 105

Wijaya Karya ........................... 109

Appendices

1: GDP by sector ................................................................................ 113

2: Reformist leaders profile ................................................................. 115

3: The rise of online traders ................................................................. 117

All prices quoted herein are as at close of business 27 January 2014, unless otherwise stated

Following the Komodo

In September 2007, our Not just Jakarta special report projected that the booming commodities industry and decentralisation would spur the countrys growth. Back then, BCA and Telkom were among our top picks and they remain so today.

Executive summary Back to Java

5 February 2014 [email protected] 3

Back to Java More than six years after our seminal Not just Jakarta report, we go Back to Java to gauge this densely populated islands development, especially outside the metropolis. Over the past few months, our intrepid team trekked across Java to see the progress first-hand. What did we find? The provinces are booming and growth should continue to outstrip that in the capital as decentralisation continues. An expanding middle class, strong credit growth and new infrastructure investment cycle will drive the expansion. Companies with a sound strategy and a strong foothold in Java ex-Jakarta will be the winners.

Forming more than half of Indonesias population with 37m households, Java is the worlds most populous island and is still adding 2m people every year. A growing middle class (driven by rapid urbanisation), widening labour cost gap (Jakarta minimum wage is double the Java average), and lower penetration of consumer products have led to an accelerating business expansion shift from Greater Jakarta to other Java regions. Eventually, money will follow the demographics and cheap labour will attract business people.

Jakartas GDP growth lagged the total of Javas provinces for the first time in 2012, although this is based on preliminary data. This is due to decentralisation efforts, which have given greater control to local governments. Some early indicators also suggest that expansion in Java ex-Jakarta regions has been accelerating, be it for investment, bank loans, cement or the retail sector. Outer Javas low base will also allow for strong growth potential in the long term.

We hit the ground over the past few months to get a feel for some of the fastest-growing cities in Java as well as commodity-exposed islands like Sumatra and Kalimantan to see the purchasing-power trend. Our team of intrepid investigators visited 13 cities and spoke with the locals to gauge the situation today. Our conclusion? The Java provinces are booming and Java ex-Jakarta growth should continue to outstrip that in the capital for some time to come. We believe the growth will flourish from West to Central and East Java in the future.

Companies with a great strategy and strong foothold in Java ex-Jakarta regions should benefit. We like retail chain Ace Hardware, banks BCA and BTN, cement producer Indocement, healthcare player Kalbe Farma, developer Pakuwon, gas distributor Perusahaan Gas, textiles firm Sritex, mobile operator Telkom and infrastructure group Wijaya Karya.

GDP by geography

Source: Statistics Indonesia (BPS)

Sumatra21%

DKI Jakarta18%

Java ex-Jakarta43%

Bali & Nusa Tenggara

3%

Kalimantan8%

Sulawesi5%

Maluku & Papua2%

Java: the pulse of Indonesia

Java ex-Jakarta accounts for 43% of GDP

Powerful demographics

Fruits of decentralisation

Hitting the ground, getting a feel!

Stocks to play the theme

Back to Java

Investment thesis Back to Java


The rise of Java regions Nations need attractive cities to attract businesses and talents. Great cities are not predestined, but rather created by designs and based on key decisions. Development of the environmental, social and cultural aspects is crucial.

Mike Harcourt, co-author of City Making in Paradise

Indonesia is big and diverse, with over 17,000 islands, 240m people and 360 ethnic groups. Since the fall of Suharto in 1998, the country has embarked on a radical experiment to prevent it from breaking apart, while gradually striving to create more attractive cities, thanks to decentralisation.

It is also encouraging to see the latest leaders elections in some of the largest cities like Jakarta, Bandung and Surabaya being won by the reformers (see their profiles in Appendix 2). Voters in Java regions are becoming more sophisticated due to growing internet penetration.

Key statistics

Province Land area (km2)

Population (2010)

GDP (2012)

2012 GDP growth (%)

GDP per-capita (US$)

Jakarta 740 9,607,787 1,103,738 6.53 9,990

West Java 34,817 43,053,732 946,861 6.21 1,912

Central Java 40,801 32,382,657 556,480 6.34 1,494

Yogyakarta 3,186 3,457,491 57,034 5.32 1,434

East Java 47,922 37,476,757 1,001,721 7.27 2,324

Banten 9,163 10,632,166 212,857 6.15 1,741

Java 138,794 136,610,590 3,878,690 6.57 2,469

Indonesia 1,904,569 237,641,326 8,241,864 6.20 3,016

Source: CLSA, BPS

With decentralisation in place, regional growth should continue to outstrip the centre, supported by a strong demographic profile, a widening minimum-wage gap and faster investment flow to the cities, albeit less so in outer Java due to soft-commodity price volatility. The Java ex-Jakarta regions should continue to expand their power and companies exposed to this will be big winners.

Powerful demographics Forming more than 50% of Indonesias population, Java is the most populous island in the world with nearly 140m people. Javas land area is one-third that of Japan but it has a larger population and is adding about 2m people every year compared with Japan, which is losing 250k people). By simple extrapolation, Javas population will be double that of Japan within 50 years.

Java (including Jakarta) has nearly 37m households in total - similar to the Philippines and Thailand combined - with West Java having the highest number. Out of Indonesias top five provinces with the largest number of households, four are located in Java.

Striving to create more attractive cities

Java adds about 2m people every year



Population by geography Minimum wage

Source: BPS

A growing middle class (driven by rapid urbanisation), widening labour cost discrepancy (Jakartas minimum wage is double the Java average), and low penetration have led to the shift from Greater Jakarta to other Java regions. Eventually, money will follow the demographics and cheap labour will attract business people (particularly labour-intensive industries).

We are already seeing some companies, such as Pan Brothers, moving their production facilities from Greater Jakarta to other Java cities. Initially, the reason to expand to Central Java was more labour availability in Central Java, not cost. But, as the minimum wage discrepancy widens, the company has preferred to expand capacity in its Central Java facility.

In 2007, the company started its Central Java operation with about 1k sewing machines, or 30% of its total capacity. Currently, the Central Java facility runs about 10k sewing machines, or 75% of the total capacity and still rising.

Fruits of decentralisation Jakartas GDP growth for the first time lagged the total of Javas provinces in 2012, though this is still based on preliminary figures. This makes sense as decentralisation has given greater control to local governments, thereby aiding the development of Javas provinces. With Suharto no longer controlling the purse strings and the economy in better shape, more central government money has flowed.

GDP growth Jakarta vs Java Infrastructure spending

preliminary figure, very preliminary figure; Source: BPS

Source: Government of Indonesia

Regional autonomy has also coincided with another long-run demographic trend: urbanisation, which consequently leads to some logistics challenges in the country. Infrastructure spending has continued to rise for both government and private sectors. Government infrastructure spending saw a 28% Cagr during 2009-12 and a chunky 52% Cagr for the private sector over the same period, which implies about 2.6% of GDP as of 2012, the highest ever.

Sumatra21%

Jakarta4%

Java ex-Jakarta

53%


6%

Kalimantan6%

Sulawesi7%

Maluku & Papua3%

0

500

1,000

1,500

2,000

2,500

3,000

2000 2002 2004 2006 2008 2010 2012 2014

Java ex-Jakarta

Jakarta

(Rp'000)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

2006 2007 2008 2009 2010 2011 2012

JakartaJava

(%)

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100,000

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2005 2006 2007 2008 2009 2010 2011 2012

GovernmentPrivateGDP (LHS)

(%) (Rpbn)

Jakartas GDP growth for the first time

lagged Javas total

Urbanisation, greater budget needed

for infrastructure

Money will follow demographics

Widening labour cost differential



Indonesia still has long way to go. However, thanks to decentralisation, local problems allow for local solutions. These logistics problems create more opportunities for both public and private sectors, eg, Jasa Marga is to build 200km of new toll-road sections within three years, while AKR Corp and Kawasan Industri Jababeka are developing industrial estates in East Java and Central Java, respectively.

Some early indicators also suggest that Java ex-Jakarta growth has been accelerating, be it in investment, bank loans, cement or the retail sector. Outer Javas low base will also trigger strong growth potential in the longer term, yet the short-term outlook is less rosy given the low-commodity price burden.

FDI realisation Cement growth per region (2013 YoY)

Source: BKPM

Hitting the ground, getting a feel! We hit the ground to get a feel for some of the fastest-growing cities in Java as well as commodity-exposed islands like Sumatra and Kalimantan to see the purchasing-power trend. Sumatra and Kalimantan have about 50% of employees working in the agriculture and mining industries, in contrast to Java ex-Jakarta, which has more manufacturing capability.

Our conclusion? The Java provinces are booming and Java ex-Jakarta growth should continue to outstrip the centre for some time to come. We believe the growth will flourish from West to Central and East Java in the future.

Sumatra employment by sector Java ex-Jakarta employment by sector

Source: BPS

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1Q13

2Q13

3Q13

FDI realisation (LHS)% Java ex-Jakarta

(US$m) (%)8.1

7.6

5.6

3.9

1.4

0 1 2 3 4 5 6 7 8 9

Java ex-Jakarta

Kalimantan

Jakarta

Sulawesi

Sumatra (%)

Agriculture45.9%

Mining1.7%Manufacturing

7.3%Utilities0.2%

Construction5.6%

Wholesale & retail18.4%

Transport4.1%

Finance1.9% Others

14.8%

Agriculture29.3%

Mining0.8%

Manufacturing19.1%

Utilities0.2%

Construction6.9%


Transport4.4%

Finance2.3% Others

14.5%

Logistics problems as an opportunity

Early indicators suggest stronger

growth in Java ex-Jakarta

Half of Sumatra and Kalimantan

employees work in agri and mining

Java ex-Jakarta should continue to

outgrow the centre



We provide fresh on-the-ground perspective on 13 cities spread over three key

islands. This report is not a catch-all to these themes, the island is too broad to

do it in just one report. Rather we have tried to highlight future growth potential

and better understand how these will propel the country going forward.

Our Indonesia team went out and about across Java

Source: CLSA

Stocks to own Our medium-term strategy is based on the view that Java ex-Jakarta growth

should accelerate given powerful demographics; strong bank-loan growth;

and a new investment cycle with massive infrastructure development.

Companies with great strategies and strong footholds in Java ex-Jakarta

should benefit. We also consider their penetration of provinces and the

sustainability of their strategies. We like BCA, BTN, Perusahaan Gas,

Indocement, Pakuwon, Kalbe Farma, Ace Hardware, Telkom, Wijaya Karya

and Sritex.

Stocks with Java ex-Jakarta exposure

Companies Ticker Market cap (US$m)

Rec Performance (%) PE (x) EV/Ebitda (x) ROE (%)

3M 1Y 14CL 15CL 14CL 15CL 14CL 15CL

Bank Central Asia BBCA IJ 19,764 O-PF (9) 5 16 13 na na 23 24

Telekom Indonesia TLKM IJ 17,728 BUY (1) 10 14 13 5 4 23 23

Perusahaan Gas PGAS IJ 9,042 O-PF (8) (2) 10 11 8 7 32 29

Indocement INTP IJ 6,090 BUY (1) (6) 14 12 8 7 22 21

Kalbe Farma KLBF IJ 5,196 BUY (0) 28 28 23 19 16 26 27

Pakuwon PWON IJ 1,194 BUY (2) 12 10 7 7 5 33 34

Ace Hardware ACES IJ 996 O-PF 4 (13) 23 19 16 13 24 24

Wijaya Karya WIKA IJ 922 BUY (10) 9 14 11 7 5 23 24

Bank Tabungan BBTN IJ 788 BUY (9) (43) 6 5 na na 13 16

Sritex SRIL IJ 455 BUY 9 - 11 9 7 6 15 18

Source: CLSA

Why Java should grow stronger?

Who has strong foothold and great

strategy in Java ex-Jakarta?

Fresh on-the-ground perspective on

13 cities

Did you know? Java fast facts

Lots of people Java is the worlds most populous island. Although it is only the 13th largest in the world in terms of its size, it is home to 136 million people. The population density is over 1,000 people per square kilometre. By GDP, Java comes 30th in the world, ahead of every other Asean country, assuming around US$380bn in GDP. If Java was a country, it would be the 10th largest by population.

The biggest tribe The Javanese are Indonesias largest tribe with more than 100 million people. Their ancestors are thought to have originated in Taiwan and migrated through the Philippines, reaching Java between 1,500BC and 1,000BC.

Kopi Jawa Coffee has been one of the biggest exports since the Dutch began cultivation in the 17th Century. The local Kopi Jawa is a distinct style of coffee that is very strong, black and sweet.

The birth place of presidents Every president, from Soekarno to Susilo Bambang Yudhoyono, is Javanese. BJ Habibie was the only exception, yet this was during a transition period from the New Order to the Reformation era. On many occasions, they will choose a running partner from outside Java to boost their popularity with the non-Java people. Accounting for 53% of the population, Javanese people will play an important role this year in determining the next president.

Traditional Gamelan music The 1889 Paris Exposition Universelle hosted many musical groups from exotic countries and one was the Javanese Gamelan. It was there that French composer Claude Debussy first heard a performance by the Java ensemble. Debussy was so impressed with what he heard that it influenced his later works. The piece most often quoted as an example of gamelans influence on Debussy is Pagodes, from the piece Estampes of 1903. Gamelan is a collection of mostly metallic musical instruments, with gong or bell-like sounds.

Borobudur Temple Built in the 9th Century, this is the worlds oldest Buddhist temple. Located in Magelang in Central Java, the monument is a shrine to Lord Buddha and is the countrys single most visited tourist attraction.

Lots of eruptions Situated on the Pacific Ring of Fire, Indonesia has abundant volcanoes. There are over 30 in Java alone. One of the most active is Mount Merapi, which lies 2,968 metres above sea level. In 1930, one eruption destroyed 13 villages and killed over 1,400 people.

Photos: Thomas Hirsch, Benny Lin, Gunawan Kartapranata (Wikimedia Commons)

Section 1: Powerful demographics Back to Java


Powerful demographics Forming more than half of Indonesias population, Java is the most populous island in the world with nearly 140m people. Javas land area is one-third that of Japan but it has a much larger population, with around 2m new additions every year while Japans population dropped by a record 250k people last year. Java overtook Japan in 2010 and, by simple extrapolation, Javas population will be more than double Japans within 50 years.

Java (including Jakarta) has nearly 37m households in total - similar to the Philippines and Thailand combined - with West Java home to the most households. Of the top-five provinces with the largest household numbers in Indonesia, four are located in Java with North Sumatra joining this group.

Figure 1

Map of Indonesia and Java

Source: CLSA, BPS

Figure 2 Figure 3

Population by geography Java: the most populous island in the world

Source: BPS. NT: Nusa Tenggara Source: BPS, United Nations, Japan civil registry

Jakarta

BaliJava

Serpong

Bandung

Krakatau Islands

Semarang

Yogyakarta Surakarta(Solo)

Madiun Surabaya

Malang

Indonesia

Java statsPopulation: 136 millionLand area: 138,794 km2Density: 1,064 people per km2

Sumatra21%

Jakarta4%

Java ex-Jakarta

53%


6%

Kalimantan6%

Sulawesi7%

Maluku & Papua3%

0 20 40 60 80 100 120 140

JavaHonsh

Great BritainLuzon

SumatraTaiwan

Sri LankaMadagascar

MindanaoHispaniola

BorneoSulawesiSalsetteKysh

Cuba (m)

Java is the worlds most populous island

Total Java households similar to the Philippines

and Thailand combined

Back to Java



Figure 4

Java vs Japan population

Source: World Bank, CLSA (assuming 16m additional people for every 10 years in Java)

Indeed, Java has eight cities with populations over a million, with Medan and Palembang (Sumatra) as well as Makassar (Sulawesi) joining this group. Jakarta is the second-most crowded city in the world, behind Salsette (India), as anyone who has experienced Jakarta traffic can attest. Despite being densely populated, unemployment in Java (ex-Jakarta) still hovers at a manageable level of 6.6%, much lower than Jakartas 9.9%.

Figure 5

Population over a million

City Province Population (m) Jakarta Jakarta 9.6 Surabaya East Java 2.8 Bandung West Java 2.4 Bekasi West Java 2.3 Tangerang Banten 1.8 Depok West Java 1.7 Semarang Central Java 1.5 South Tangerang Banten 1.3 Source: BPS

Figure 6 Figure 7

Unemployment rate Indonesias urbanisation rate

Source: BPS Source: UN

0

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Java population Japan population(m people)

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Bali & NT

Maluku & Papua

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Indonesia

Java ex-Jakarta

Jakarta

(%) 0

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Java population overtook Japan in 2010

Java has eight cities with populations over a million

Jakarta is second-most crowded city in the world



In 2008, for the first time ever, half of the world population lived in cities. For Indonesia, it was in 2010 when half of the countrys population lived in urban areas. The figure was 13% in 1990. By 2050, up to three-quarters of the worlds population will be urbanised and most of the incremental growth will be in Asian second-tier cities, according to the UN.

Figure 8

Minimum wage

Source: Government of Indonesia

A growing middle class (driven by rapid urbanisation), widening labour cost discrepancy, and low penetration of consumer products have led to the business expansion shift from Greater Jakarta to other Java regions. Eventually, money will follow the demographics and cheap labour will attract business people (particularly labour-intensive industries).

Indonesia in maps Back in September 2009, we published our Unveiling the Komodo report, which aimed to illustrate Indonesias economy through maps. Through graphical representations, the report shows the countrys demographics, the industries, the services, the natural resources, the transport infrastructure, the finance networks as well as the popular tourist areas.

Beyond its ethnic and cultural diversity, Indonesia is blessed with an abundance of natural resources. Globally, it is the largest thermal-coal exporter and palm-oil producer, and the third-largest natural-gas exporter. It also boasts the worlds biggest gold mine. But many of these assets are located in remote regions, far from the modern world. Our maps and charts provide investors with a better understanding of the global significance of such commodities.

0

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Java ex-Jakarta Jakarta(Rp'000)

Gap has widened, leading to the shift from greater Jakarta

In 2010, half of Indo population lived in

urban areas

Money will follow the demographics



Figure 9

Minimum wage in selected cities

Provinces/Cities (Rp000/month) 2013 2014

East Java

Surabaya 1,724 2,165

Malang, Batu 1,317 1,601

Kediri 1,128 1,165

Madiun, Ngawi, Magetan, Nganjuk, Ponorogo 927 1,047

Provincial average 1,140 1,315

Central Java

Semarang 1,130 1,230

Solo, Sragen, Klaten 884 1,184

Cilacap 888 978

Pemalang, Pekalongan 950 1,044

Provincial average 914 1,067

West Java

Bandung 1,424 1,825

Bogor 2,002 2,242

Cirebon 1,082 1,220


Banten

Tangerang 2,201 2,443

Cilegon 2,200 2,443

Serang 1,939 2,166


DI Yogyakarta

Yogyakarta 1,065 1,173

Jakarta

DKI Jakarta 2,200 2,440

Java (ex-Jakarta) average 1,167 1,366

Source: CLSA, Government of Indonesia

Already, we see some companies, such as Pan Brothers, moving their production facilities from Greater Jakarta to other Java cities. Established in 1980 in Tangerang, Greater Jakarta, it is Indonesias largest garment manufacturer employing about 18,500 employees.

In 2007, the company started its Central Java operation with about 1,000 sewing machines or about 30% of the firms total capacity. This facility now operates with about 10,000 sewing machines or 75% of the total capacity and is still expanding. Meanwhile, the Tangerang production facility did not see any expansion.

Initially, the reason for expanding to Central Java was down to more labour availability, not cost. In terms of labour skill (productivity), the company claims that Central Javas labour productivity was low at first and eventually caught up; they just needed a learning period. Going forward, it will focus its expansion on the Central Java facility due to cost advantages and will leave the Tangerang facility as it is.

Textile company moving its production facility

Labour availability is key concern

Jakarta minimum wage is doubled than

Java average



Figure 10

Pan Brothers sewing machine expansion

Source: Company

Indeed, low penetration is also a key attraction to invest in Java regions as it still offers huge room to grow. Data from cement and retailers suggest that penetration is at least about three times higher in the Jakarta region, as measured by sales/GDP ratio and home-improvement spending per capita.

Figure 11 Figure 12

Cement consumption per capita (2012) Retailers sales to GDP ratio (2012)

Source: CLSA, Company, Indonesia Cement Association (ASI)

Figure 13

Home-improvement spending per capita

Source: CLSA, Company

8,450

11,75013,250

16,250

20,625

25,000

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(unit)

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(kg/person)

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MitraAdiperkasa

Ramayana MatahariDept Store

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HomePro(Bangkok)

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Ace Hardware(Jakarta)

Ace Hardware(Java ex-Jakarta)

Ace Hardware(ex-Java)

(US$)

Pan Brothers expansion will be more towards its

Central Java facility

Low penetration, as measured by cement

and retail data

Java is still underpenetrated

Java ex-Jakarta has the lowest cement

consumption per capita

Section 2: Fruits of decentralisation Back to Java


Fruits of decentralisation With decentralisation in place, we see greater opportunity for Indonesia to create more attractive cities (see Section 3 for in-depth discussion on these cities). In fact, Jakartas GDP growth for the first time lagged that for the total of Javas provinces in 2012, although this is still based on preliminary data.

This makes sense, in our view, as decentralisation has given greater control to local governments, thereby aiding the development of Javas provinces. The country has developed quickly since the end of Suhartos dictatorship in 1998. With Suharto no longer controlling the purse strings and the economy in better shape, more central government money has flowed to the outer provinces. See our July 2012 report, Otonomi daerah, for more.

Figure 14

GDP growth Jakarta vs Java

preliminary figure, very preliminary figure. Source: CLSA, BPS

Figure 15 Figure 16

Province GDP growth (2012) Government budget spending on regions

Source: BPS APBN-P, RAPBN; Source: Government of Indonesia

4.0

4.5

5.0

5.5

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6.5

7.0

2006 2007 2008 2009 2010 2011 2012

Jakarta Java(%)

6.56.2 6.3

7.3

5.8

4.8

6.2

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8

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rta

Wes

t Ja

va

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tral

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a

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a

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atra

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iman

tan

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a

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11% 3-year Cagr

16% 3-year Cagr

GDP growth for Jakarta lagged total

Javas provinces

More opportunity to create attractive cities

More money from central government



As the nation needs more attractive cities to lure businesses and talent, it is encouraging to see that the latest leaders elections in some of the largest cities like Jakarta, Bandung and Surabaya won by the reformers (see Appendix 2 for their profiles). Definitely, voters in Java are becoming more sophisticated due to growing internet penetration.

Figure 17

Joko Widodo Figure 18 Ridwan Kamil

Figure 19 Tri Rismaharini

Source: DKI Jakarta Source: Ridwan Kamil (Wikimedia) Source: JayaGood (Wikipedia)

At the Jakarta gubernatorial election in 2012, Joko Widodo - better known as Jokowi - won the contest despite scepticism over the trustworthiness of the electoral process. Jokowi received 42% of the votes in the first round and because no candidates achieved more than 50%, Jakarta conducted a second round of voting, whereby Jokowi won 54% of the votes.

Figure 20 Figure 21

Jakarta gubernatorial election 2012 (first round) Internet penetration (% of population)

Source: KPU Jakarta Source: Euromonitor

Logistics: Challenge yet opportunity Regional autonomy has also coincided with another long-run demographic trend: urbanisation. Over time, this will lead to greater budgets needed for infrastructure and education. For sure, logistics is the key challenge to penetrate into the Indonesian market, yet there is opportunity for incumbents with vast distribution network to maintain their competitiveness.

The logistics challenge serves as a great entry barrier in the short term, with Indonesia logistics costs one of the highest in the region. The nations total logistics costs account for 27% of GDP, with transport expenses contributing about 50% of the cost.

Joko Widodo42%

Fauzi Bowo34%

Hidayat Nur Wahid12%

Faisal Basri5%

Alex Noerdin5%

Hendarji Supanji

2%

0

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2007 2008 2009 2010 2011 2012

(%)

Encouraging to see reformists win leaders

elections in big cities

Joko Widodo won in 2012 in Jakarta after a second

round of voting

Greater budget needed for infrastructure

Logistic costs account for 27% of GDP

Reformers in Java cities



Figure 22 Figure 23

Logistic costs as % to GDP Logistic costs breakdown as % to GDP

Source: World Bank

Jakartas Tanjung Priok port, for example, has a dwelling time of 8.7 days, compared to five days in Thailand and 1.2 days in Singapore due to border administration issues, business practices and poor road infrastructure. Consequently, terminal handling charges in Indonesia is the highest after Hong Kong.

Research by The Asia Foundation and University of Indonesia in 2008 found that the operational cost of trucks in Indonesia was 34 cents per kilometre, 50% higher than average cost for all of Asia.

Figure 24

Logistic cost increment and fuel price

Source: Center for Logistics and Supply Chain Studies

What does our on-the-ground check show? In our latest Komodo report, our roving analyst Amie Liem took a road trip from Jakarta to Central Javas Semarang. From her adventure, we conclude that it is very slow for people to move things from one place to another.

The average speed is 58km/hour versus 97km/hour in China and 110km/hour in America; Amies Jakarta-Semarang-Klaten-Jakarta trip used more than 315.5km of

toll roads, or 42% of Indonesias total toll-road network, spending over 20 hours in total and traversing more than half of Jasa Margas toll roads.

Visit clsa.com to see more of our on-the-ground Komodo reports from Amie.

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4.8 4.85.0

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Increasing dwelling time in Tanjung Priok port

Logistic cost is highly correlated with fuel price



Figure 25 Figure 26

Dwelling time in Tanjung Priok port Infrastructure spending

Source: JICT Source: Government of Indonesia

Indonesia definitely has long way to go. However, thanks to decentralisation, local problems allow for local solutions. These logistic problems are gradually being addressed.

The logistics challenge has lifted infrastructure spending for both government and the private sector. Government infrastructure spending jumped by a 28% Cagr during 2009-12 and a chunky 52% Cagr for private firms, which implies about 2.6% of GDP as of 2012, the highest ever.

Opportunity for public . . . Indonesian toll-road operator Jasa Marga, for example, plans to develop close to 200km new section within the next three years, or about an additional 30% on top its current portfolio.

Figure 27

Jasa Margas toll-road plan

Expected Completion Toll road Section Province Length (km) 4Q 2013 JORR W2 North Kb Jeruk-Meruya Jakarta 1.8 JORR W2 North Meruya- Joglo Jakarta 1.5 Nusa Dua-Ngurah Rai-Benoa Bali 10.0 Semarang-Solo (Stage 1: Sec 2) Ungaran Bawen Central Java 12.3 1Q 2014 Gempol-Pandaan East Java 13.6 Bogor Outer Ring Road Kd Halang-Kd Badak Greater Jakarta 2.0 2Q 2014 Gempol-Pasuruan Gempol-Rembang East Java 13.9 JORR W2 North Joglo-Ciledug Greater Jakarta 2.35 JORR W2 North Ciledug-Ulujami Greater Jakarta 2.05 Surabaya-Mojokerto Krian-Mojokerto East Java 18.5 3Q 2014 Surabaya-Mojokerto Sepanjang-WRR East Java 4.3 4Q 2014 Surabaya-Mojokerto WRR-Driyorejo East Java 5.1 Surabaya-Mojokerto Driyorejo-Krian East Java 6.1 2Q 2015 Gempol-Pasuruan Rembang-Pasuruan East Java 8.1 Gempol-Pasuruan Pasuruan-Grati East Java 12.2 Kunciran-Serpong Greater Jakarta 11.2 3Q 2015 Semarang-Solo (Stage 2) Bawen-Salatiga Central Java 17.5 Semarang-Solo (Stage 2) Salatiga-Boyolali Central Java 24.4 Semarang-Solo (Stage 2) Boyolali-Solo Central Java 7.64 Cengkareng-Kunciran Greater Jakarta 14.2 2Q 2016 Bogor Outer Ring Road Kd Badak-Yasmin Greater Jakarta 2.2 Bogor Outer Ring Road Yasmin-Darmaga Greater Jakarta 3.0 Source: Jasa Marga

4.9

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GovernmentPrivateGDP (LHS)

(%) (Rpbn)

Local problems allow for local solution

Rising infrastructure spending, both public and

private sectors

Jasa Marga plans to build 200km new section within three years



Figure 28

Jasa Marga: Taman Mini Indonesia Indah Interchange, Jagorawi Toll Road

Figure 29

Automated toll booth at Cililitan gate, Cawang-Tomang-Cengkareng Toll Road

Source: Jasa Marga annual report

. . . as well as private companies Two large-scale industrial estate projects in Central and East Java plan to capitalise upon industrial investment in alternate locations outside Jakarta. AKR Corporindo and its joint-venture partner, the state-owned ports corporation Pelindo 3, plan to construct a 2,150-hectare estate between Gresik and Surabaya in East Java while Kawasan Industri Jababeka (KIJA) and its partner Sembcorp of Singapore plan to construct a 2,770-hectare estate in Central Java near Semarang.

To make investment attractive by export-focused industries (both local and international), each has allocated space for an adjacent port. At present, the average undeveloped industrial estate space is about 20km away from the nearest port facility. The total cost of AKRs project is estimated to be around Rp10tn (US$870m) over a 5-10-year period with the joint venture recently securing Rp3tn (US$261m) in debt commitments for phase 1.

Two partnerships in East and Central Java

Allocation for an adjacent port

Jasa Marga looking to expand



Figure 30

Industrial estate development in Java

Java Integrated Industrial Port Estate (JIIPE)

Kendal Industrial Park

Location East Java, between Gresik and Surabaya

Central Java, near Semarang

Area (ha) 2,150 2,770

Port area allocation (ha) 250 58

Total indicated investment Rp10t Rp7.8t

Target first operation 2014 2015

Estate ownership AKR 60%: Pelindo 3 40% KIJA 51%, Sembcorp 49%

Port ownership AKR 40%: Pelindo 3 60% KIJA 51%, Sembcorp 49% Source: Companies

Both estates plan to sell land in stages with about 70% of the designated area being able to be developed by industry, commencing first with heavy industry (such as metal smelting) then medium density (agriculture and fertilisers for instance) and then light commercial. The projects also have residential areas held adjacent, such as AKRs which will have 700 hectares of residential land (external to the project).

Figure 31 Figure 32

Kendal industrial estate land area JIIPE industrial estate land area

Source: Company

For these projects to be attractive, the differential in wages between the respective locations and Greater Jakarta needs to persist and the usual logistical challenges have to be overcome, including land acquisition (AKR currently has 900 hectares or about half its planned area), permits and infrastructure connection with nearby road and rail networks.

Some early indicators Within the last five years, bank loan growth in Java has been growing above 20% level, despite a high base (25% of total loan), while the latest bank loan data suggest that the growth has been accelerating in Java areas.

Mapping Batavia Our property team has produced a series of maps on properties in Jakarta. These have featured the capitals landmark properties (Batavia Reborn), industrial estates (Industrious Batavia) and retail malls (Shopping in Batavia). They provide a practical and user-friendly guide to Greater Jakartas developing landscape. Visit clsa.com to check them out.

972

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AKR and KIJA

Taking a view that wage differential should persist

Accelerating bank loan growth in Java

70% of the area is allocated for industry

Both estates to sell land in stages



Supporting the growth is domestic investment as well as foreign direct investment (FDI) which has continued to pour into Java (ex-Jakarta) regions despite the high base. FDI in Java ex-Jakarta has increased by 20% within 2007-12 Cagr and now represents about 49% of total FDI as of 3Q13 (vs. 39% in 2012).

Figure 33 Figure 34

Bank loan growth is accelerating in Java FDI breakdown (3Q13)

Source: BI Source: BKPM

Figure 35 Figure 36

FDI realisation Cagr 2007-12 FDI realisation

Source: BKPM

Domestic investment data also suggests that the growth in Java (ex-Jakarta) regions has been accelerating much faster in 2013, despite the high base. Up to 1H13, domestic investment in Java (ex-Jakarta) areas rose by 87% YoY, as compared to the national average of 50%.

Consequently, cement sales in Java (ex-Jakarta) areas has also shown a strong recovery trend, contributing about 47% of total national sales as of 2013 and showing the strongest growth of 8.1% in 2013 (versus national average of 5.5%).

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Sulawesi5%


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% Java ex-Jakarta

(US$m) (%)

FDI still grew by 20% in Java ex-Jakarta despite

high base

Positive sign from cement data



Figure 37 Figure 38

Cement growth by region (2013 vs 2012) Java (ex-Jakarta) as % to cement sales

Source: CLSA

As suggested by the data below, it seems that most retailers delivered higher same-store-sales growth (SSSg) in Java ex-Jakarta regions, including Ace Hardware and Alfamart. They claimed that outer-Java weakness was due to low commodity prices, particularly in Sumatra. Consumer staple companies like Unilever also claimed similar.

Figure 39 Figure 40

Ace Hardware Alfamart

Source: Ace Hardware Source: Alfamart

Figure 41 Figure 42

Ace Hardwares SSSg breakdown (2013) Alfamarts SSSg breakdown (2013)

Source: CLSA, Company

8.1

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Stronger same-store-sales growth in Java ex-Jakarta

Section 3: Hitting the ground, getting a feel! Back to Java


Hitting the ground, getting a feel! We hit the ground to get a feel for some of the fastest-growing cities in Java as well as commodity-exposed islands like Sumatra and Kalimantan to see the purchasing-power trend. Our conclusion? The provinces are booming and Java ex-Jakarta growth should continue to outstrip the centre for some time to come. We believe growth will flourish from the West to Central and East Java in the future.

We believe purchasing power in outer-Java regions such as Sumatra and Kalimantan will continue to be more volatile following soft commodity prices. Sumatra and Kalimantan have about 50% of employees working in the agriculture and mining industries, in contrast to Java ex-Jakarta, which has a large manufacturing base.

Figure 43 Figure 44

Sumatras employee by sector Java ex-Jakartas employee by sector

Figure 45

Region with soft commodity exposure (based on production)

Source: BPS

In the following pages, we provide our on-the-ground perspective on 13 cities spread over three key islands. While this report is not a catch-all to these themes - the island is too broad to do it in just one report - we have tried to highlight future growth potential and better understand how these will propel the country going forward.

Agriculture45.9%

Mining1.7%

Manufacturing7.3%

Utilities0.2%

Construction5.6%

Wholesale & retail18%

Transport4.1%

Finance1.9%

Others14.8%

Agriculture29.3%

Mining0.8%

Manufacturing19.1%

Utilities0.2%

Construction6.9%


Transport4.4%

Finance2.3% Others

14.5%

72.6

33.2

74.2 75.2

20.733.7

16.73.00

102030405060708090

100

Palm Coconut Rubber Coffee Cocoa Sugarcane

Tea Tobacco

Sumatra Java Kalimantan Sulawesi Others(%)

Java ex-Jakarta growth should continue to outstrip the centre

Over 70% production of palm oil, rubber and

coffee are from Sumatra

Half of employees in Sumatra and Kalimantan

working in agriculture

Visiting 13 cities spread over three key islands



Jakarta: Were jamming In musing about writing a discussion paper on Jakarta while looking over the sea in Sulawesi on the Idul Adha holiday and getting ready to sacrifice a cow for the local villagers, the word that popped in to my head to describe Jakarta today was Cosmopolitan.

The more I thought about it, I realised it was true. The number of new meeting places (including our many brand new, high-quality malls such as Grand Indonesia, Gandaria City and Lippo Mall) along with events such as Jakarta Fashion Week, the restaurants which cater to all tastes (and pockets) has dramatically changed the habits of local Jakartans and is spread rapidly with the increasing connectivity between the Big Durian and other parts of the country as evidenced by the massive increase in air travel across the archipelago.

Last year, my favourite events were the visits by three English Premier League teams (Arsenal and two other more minor teams - in my opinion - Manchester Utd and Chelsea). To put my observations in perspective, I have been visiting Jakarta since 1984, a frequent flyer since 1995 from Singapore, a property owner since 2000 by virtue of being married to an Indonesian and a resident since 2004. In my view, there is no more exciting place to live in the world, despite our many challenges.

Figure 46 Figure 47

Arsenal FC in Jakarta Gunner Cranwell at Bung Karno Stadium

Source: CLSA

One of the takeaways from our original Not just Jakarta and Enter the Komodo! themes was that increases in agricultural and commodity prices in the provinces would slow, or possibly reverse, the move from the villages to the cities and Jakarta in particular. This has not proved to be the case for a number of reasons due in part to commodity prices themselves having come off, but also due to the fact that Jakarta has become an even more attractive place to live (and work if you can get a job) over the past five years, of course with the sole exception of our notorious traffic.

Talking of traffic, there have been a number of initiatives to improve traffic flow, such as the banning of heavy trucks except from the hours of 10pm to 5am in central Jakarta, which, while it may not have done a lot for traffic, has certainly improved the atmosphere downtown. The completion of the Antasari flyover on the outskirts of Kemang has changed traffic patterns considerably, making the journey to and from work much better for residents.

The imminent completion of the Casablanca flyover will hopefully have an equally beneficial effect on the notorious bottleneck there. This will be important for the development of what I remember being described by Pak Chandra Ciputra some years ago as Jakartas future Orchard Road, with the opening of four new malls over the past three years, including Ciputra World.

Managing the notorious traffic

Near-term completion of the Casablanca flyover

Favourite events in Jakarta

Russell Cranwell MD, Head of Indonesia Corporate Finance [email protected] +62 21 2554 8833

Russell Cranwell

Jakarta



Figure 48 Figure 49

Antasari Flyover Uncompleted Casablanca Flyover

Source: CLSA

The other most notable feature of the traffic in Jakarta has been the improvement in the age and quality of the cars (and buses) on the streets, more evidence of the general upward movement of the population, which is contributing, to a degree, to the improved environment. There has certainly been no impact on traffic volumes due to the various increases in fuel prices, proving that subsidies are totally unnecessary and the monies would be better spent on adding road and other infrastructure.

It will be interesting to see over the next few years what impact the proposed MRT will have, firstly on making our famous macet or traffic jam initially significantly worse as we have seen in other places in the region such as Kuala Lumpur and Bangkok and later in improving the travel times and comfort and convenience of public transport

In our household, we have taken our own initiatives to deal with higher fuel prices and reduce pollution. The first was the purchase of a three-wheeler cycle including an integral wire shopping basket (which fits the dog too!) and, most importantly, Starbucks coffee holder, from our favourite Ace Hardware at a cost of Rp5 million, which is now used for local shopping rather than the car and also a fun way to exercise.

Figure 50

Russells three-wheeler cycle with shopping basket

Source: CLSA

Two important flyovers to reduce

notorious bottleneck

The MRT impact?

Pedal power



One of the ways we have found to deal with the traffic problems, which limits our ability to meet (clients) face to face, is to arrange meetings in locations everyone is happy to go to, such as Pacific Place Mall, which is both in the SCBD and has a wide array of meeting places.

For example, a day of meetings could include breakfast at the Ritz Carlton, coffee at Starbucks and Liberica, lunch at Potatohead or Sopra, further meetings in the offices around the mall and dinner at another of the restaurants in the area, so achieving seven or eight meetings in a day as opposed to a maximum of four going from office to office.

Figure 51 Figure 52

Liberica coffee shop Starbucks coffee

Source: Ahmad Saiful Muhajir (flickr) Source: nSeika (flickr)

This doesnt count all the informal meetings with all the other bankers doing the same thing! Efficient, saving on the environment by reducing traffic flows, but maybe not so good for the waistline (but its ok, the mall has a gym). The use of in-car Wi-Fi is beginning to take off, which is partly a result of the time we do spend in traffic and the poor signal quality generally of our wireless service operators. Incidentally this latter explains why we Jakartans each have so many mobile phones, we need at least two to have two operators and one foreign (Singapore) registered simply to ensure continuity of service.

The election of the fresh (and untainted) new governor of Jakarta, Pak Jokowi in 2012 and the acts his team has taken to push forward the Jakarta MRT and monorail and in repositioning some of the detriments to traffic flow such as the street vendors around Tanah Abang have given us great encouragement that a real focus has been given to improving the situation and I may be going against the accepted wisdom, but the traffic flows do seem on normal days (ie, not floods or APEC forums) to be better.

Another notable feature of Jakarta over the past few years has been the dramatic increase in the usage of English (not helpful to those of us who want to practice our Bahasa Indonesia). In talking to young Jakartans in hotels, malls and restaurants as well as family, a lot of this seems to have been driven by the desire to have full access to the internet, compounded by the increased availability of access to cable TV through First Media (Lippo), Indovision (MNC) and TelkomVision (Telkom).

Indonesians are very big on technology and we have been the second-largest users of BlackBerrys for a number of years. This is good news for Indonesias ability to participate in the global economy, where for good or bad, English is a prerequisite and is only likely to further encourage FDI as well as being good for the tourist industry, which perhaps with the exception of Bali, is still in its infancy.

Pacific Place as one-stop meeting point solution

Dramatic increase in the usage of English

Two ground breakings in a week

Convenient meeting points



Perhaps partly as a result of our traffic problems and the access to cable TV and YouTube etc (and of course our general weather, so the need for air conditioners), Jakartans have taken to a mall culture, especially where all needs are catered to; shopping, eating, bookshops, cinemas, childrens play areas (Kidzania at Pacific Place has to be experienced to be believed), hairdressing salons (a daily visit is entirely normal for Indonesian ladies) and of course gyms are available as well as the most important (family) Karaoke rooms. An increasing number of more middle to upper-tier brands are arriving, not just the ultra-luxury goods. For example, we recently attended the opening of the first H&M store in Gandaria City (Pakuwon) and it was packed for days!

Figure 53 Figure 54

CLSA ladies during H&M opening Posing with celebrity

Figure 55 Figure 56

Queuing up early for H&M opening H&M attracts Jakartans

Source: CLSA

The malls are not just venues for the more affluent to attend either, the increases in general earnings exemplified by the large hikes in minimum wage have allowed a broad range of shoppers to go to the malls. Many of the newer and European fusion types of restaurants-cum-bars that have opened up (many associated with the newer malls), such as Potatohead at Pacific Place, Loewys in Kuningan, Union at Plaza Senayan and most recently Odysseia (just outside the ultra-chic Galeries Lafayette, French cool) and which, according to my London-based, sophisticated foodie son and daughter-in-law has, fantastic ambiance, great food, we could really do with one of these in London.

Ultra chic restaurants

Everyone just loves malls

The crowd during first H&M opening

H&M opening in Gandaria City



Figure 57 Figure 58

Loewy Union

Figure 59 Figure 60

Hard Rock Caf (reborn) Potato Head Garage

Source: CLSA

The less well-off consumers are also catered for too, one example of which is the (now much copied) 7-11 franchise here, with its 24-hours opening, coffee, slurpy and hot dog offerings among others, which has gone from zero to 140 stores in only three years and is a huge hit with teenagers/students.

One impact of the devolution of power from the centre to the provinces through the regional autonomy programmes has been the increased demand for air travel, such that Jakartas main airport Soekarno Hatta is bursting at the seams, now processing up to 50 million passengers a years from a design capacity of 20. Hence, starting early this year, some domestic routes have been diverted to Halim Perdanakusuma airport

Figure 61 Figure 62

Busy Soekarno Hatta airport Opening ceremony of Halim airport

Source: Naif Alas (flickr) Source: CLSA

7-11 has gone from zero to 140 stores in only

three years

Increasing demand for air travel

Famous hang-out spots in Jakarta

Shifting some domestic routes to Halim airport



This has meant an influx of people from the provinces, both on commercial and political business who have recently been buying second homes, mainly apartments, no doubt adding to the property price inflation we have seen but is also having other impacts on the demand for (private) schooling for their children who would rather study here than at home. This has also incidentally increased the demand for Jakarta favourites like Starbucks to open in these peoples home cities to cater to these expat Jakartans.

For example, our home town in Sulawesi now boasts a J.Co (Indonesian doughnut and coffee shop, reputedly and bizarrely in a country which loves its sugar, less sweet than Dunkin Donut or Krispy Kreme) as well as a Solaria (a local chain of restaurants) as well as a Lippo Group hypermart in its first mall developed by the Kencana Group. This minor city, which only became a province in the past 10 years, now has five flights a day to Jakarta, by each of Garuda (2), Lion (2) and Sriwijaya. All flights have heavy load factors.

On a recent trip to Surabaya, trying to change a Garuda flight back to Jakarta, it proved impossible to get on any other flight, including business class as all flights full. This on a Sunday from a city which Garuda has 112 flights a week, implying close to 300 once the other airlines such as Lion, Sriwijaya, Air Asia Indonesia and (the newly resurrected) Mandala are included. The inevitable conclusion from this, despite the recent turmoil in the equity markets, is crisis, what crisis?

Figure 63

Garuda has plenty of flights

Source: Gunawan Kartapranata (Wikimedia Commons)

Sitting here in Jakarta, it is hard to ignore the problems with infrastructure we face on a daily basis and it is clear the new government (with parliament and presidential elections scheduled in April and July 2014 respectively) will have to deal with the subsidy issue as soon as possible in order to free up money to invest in the road, rail, water treatment, schooling, healthcare issues we face.

However, it is hard not to feel optimistic about the future given the huge progress we have seen since the Asian financial crisis in particular and the countrys ability to withstand external shocks as we saw during the global financial crisis (which was a six-month event here). I hope to have the privilege to still be here in what will by then be the dominant Southeast Asian economy by some distance and Jakarta will still be the best city to work and have fun.

Makassar now has five flights a day to Jakarta

It proved impossible to change flight schedule,

even including business class

Government has to deal with infrastructure and

subsidy issue

Still, it is hard not to feel optimistic about the future

Property price inflation


5 February 2014 sarina.lesmina/[email protected] 29

Serpong - Greater Jakarta We visited thriving Serpong in South Tangerang, a West Jakarta suburb and home to many prominent developers such as Summarecon, Bumi Serpong and Alam Sutera. The face of Serpong has changed dramatically in recent years, from just residential housing estates to a full-blown township where we are seeing a notable increase in commercial activities.

It is not a surprise that the population in South Tangerang, including Serpong, had increased by about 50% since 2007. In the past two years, the population has grown by 4.2% pa, or 57,000 people (which translates into 11,400 households); the highest population growth in Banten province; and tripled the growth of the total Indonesian population.

Figure 64

Population growth of South Tangerang

Source: BPS

From previously just landed housing, we are seeing more and more vertical development, including apartments, a rare sight previously. With the growth of population in the city we have also seen numerous facilities being added to the community such as schools, universities and hospitals etc.

Figure 65

Large numbers of high rise buildings under construction

Source: CLSA

918,783

1,051,374

1,203,099

1,303,5691,358,319

1,415,368

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

1,300,000

1,400,000

1,500,000

2007 2008 2009 2010 2011 2012

(people)

Serpong - not so flat anymore

Andreas Kongoasa [email protected] +62 21 2554 8809

Sarina Lesmina Head of Indonesia Research [email protected] +62 21 2554 8820

Serpong


30 sarina.lesmina/[email protected] 5 February 2014

Figure 66 Figure 67

Binus campus - phase 2 Alam Suteras Silkwood apartments

Source: CLSA

Serpong developers mentioned that it is not enough to just sell houses anymore - but to ensure steady demand growth for its residential projects, they have to try to boost job creation by building offices and more commercial areas.

Hence, Alam Sutera Realty launched The Prominence office, and Bumi Serpongs Green Office Park is under development with Unilever Indonesia in the process of building its headquarter in the park. The Green Park has been awarded the 1st Green Mark District in Jakarta by The Building and Construction Authority Singapore.

Figure 68 Figure 69

The Prominence office of Alam Sutera BSDE Headquarter in Green Office Park

Source: CLSA

More offices to boost job creation

Growing office development in Serpong

Binus University is being built in Serpong


5 February 2014 sarina.lesmina/[email protected] 31

Figure 70

BCA office in BSD City

Source: CLSA

Retail area is blossoming in Serpong; compared to a few years ago where only Summarecon Mall Serpong was the mall to go to. Alam Suteras 66,300m2 NLA Mall @ Alam Sutera was opened on 12 December 2012; the companys first sizable commercial property. IKEA is setting up its flagship retail space which will cover 4-5ha; slated to commercially open in 3Q14.

AEON Mall (a joint venture between AEON and Bumi Serpong) was groundbroke in August 2013; the mall is targeted to cover 160,000m2 GFA on 10ha of land in BSD City. The mall is targeted to open at the end of 2014. Some 30% of tenants are expected to be Japanese.

Hongkong Land is also partnering with Bumi Serpong to build a mixed-use development on 65ha of land in BSD City.

We also heard that Flavor Bliss, an open space food centre in Alam Sutera is a very popular place to hang out during the weekends.

Figure 71 Figure 72

Mall @ Alam Sutera IKEA under construction

Source: CLSA

More places to shop and hangout

Retail area is also blossoming in Serpong


32 sarina.lesmina/[email protected] 5 February 2014

Figure 73 Figure 74

AEON Mall BSD City (artists impression)

Kompas Gramedia convention hall (artists impression)

Source: Company

Kompas Gramedia and BSD are also developing a large convention hall (150,000m2), targeted to be completed by the middle of 2014.

Hotel chains are also coming to Serpong with affordable choices compared to hotels in the city. There is now a Best Western, and Mercure will also open in the future.

Figure 75 Figure 76

Best Western Mercure (Alam Sutera)

Source: Company

On the weekends, there are also a lot of outdoor activities, such as biking. In fact, Serpong also recently hosted the Standard Chartered Half Marathon wherein 3,000 runners participated.

Hotel chains are coming

AEON mall, a JV between AEON and Bumi Serpong

New affordable hotel chains

Serpong has recently hosted the Standard

Chartered half marathon



Bandung - West Java West Java is the most populous province in Indonesia. Its capital, Bandung, was formerly known as the Paris of Java due to its European-style architecture. The countrys third-largest city and second-largest metropolitan area in Indonesia had a 2.4m population as of 2010.

The city is well known for its volcanoes and large tea plantations. A 54km toll road linking Bandung and Jakarta (Cipularang), completed by April 2005, has made it easier to reach the city, cutting travel time from four hours to two.

Figure 77

West Java map

Source: CLSA

Figure 78 Figure 79

Big advertisement in Cipularang Bandung GDP by sector

Source: CLSA Source: BPS

Agri0.2%

Manufacture23.5%

Electricity, Gas, & Water

Supply2.3%

Construction4.6%Trade, Hotel & Restaurant

41.2%

Transport & Communication

12.4%

Finance, Real Estate & Business

Services6.4%

Services9.3%

Cipularang toll road has cut travel time from four

hours to two

Merlissa [email protected] +62 21 2554 8821

Bandung



Nowadays, some strategic spots along the Cipularang toll road have also been used for advertising purpose. We noticed advertisements for cigarette maker, Djarum, as well as political party, Hanura (The Peoples Conscience Party), whereby the party has officially nominated its chairman Gen Wiranto and media tycoon Hary Tanoesoedibyo as President and Vice President candidates respectively for the upcoming 2014 election.

A popular weekend destination Bandung is now a popular weekend destination of Jakarta residents due to its cooler climate, food varieties, kids attraction and cheaper fashion shops located in mushrooming factory outlets in the city. More and more car-plate license of B (Jakarta) can be seen across the city, which eventually leads to worsening traffic during weekends.

Bandung is the city of fashion in Indonesia with many interesting places to shop such as Cihampelas street for jeans, Cibaduyut for shoes maniac, and ample of factory outlets/boutiques mainly in Setiabudi, Riau, and Dago areas. Textile factories on the outskirts of Bandung have opened factory outlets in the cities to sell products which are rejected or over-produced export quality items.

Figure 80 Figure 81

Cihampelas street Heritage Factory Outlet

Source: Midori (Wikimedia Commons) Source: Heritage Factory Outlet

During weekends or holidays, it is estimated that 1,000-1,500 people visit factory outlets each day.

Figure 82

Top 7 factory outlet destination Factory outlet Location Details Rumah Mode Setiabudi Jl. Setiabudi no. 41 The Secret Riau Jl. LLRE Martadinata (Riau) no. 47 The Summit Riau Jl. LLRE Martadinata (Riau) no. 61 Grande Fashion Gallery Dago Jl. Ir H. Juanda no. 118House of Donatello Setiabudi Jl. Setiabudi no. 45 Victoria Dago Jl. Ir H. Juanda no. 111Heritage Riau Jl. LLRE Martadinata (Riau) no. 63 Source: CLSA, http://hoteldibandungmurah.com

Besides fashion, Bandung is also famous for its food, be it simple traditional cuisine like Kingsleys fried tofu/meatball (batagor in Bahasa) or a caf with breath-taking view like Boemi Joglo.

For foodies, Bandung is definitely the best place to buy banana pies/brownies with some famous brands such as Kartika Sari, Prima Rasa and Amanda. We even saw some growing their business and distributing their products outside of Bandung city. Kartika Sari also has online shop (http://store.kartikasari.com/), which can also deliver to Singapore and Malaysia.

Big advertisements at strategic spots along Cipularang toll road

Popular weekend destination of Jakarta

residents

Bandung is the city of fashion

Bandung is also famous for its food

Cihampelas street is famous for jeans



Figure 83 Figure 84

Kingsleys famous fried tofu/meatball Breathtaking view from Boemi Joglo caf

Source: CLSA

Figure 85

Figure 86

Figure 87

Kartika Saris banana pie

Prima Rasas brownies

Amandas steam brownies

Source: Kartika Sari

As a parent with two kids, Bandung is such an attractive city to bring them along. The latest kids attractions include the Kampung Gajah theme park and the floating market in Lembang. Kampung Gajah has more than 20 amazing attractions and is still very affordable for most Indonesian consumers. To enter, a visitor needs to pay Rp10k (US$90) during weekday and Rp20k (US$1.80) on weekends, on top of another US$90 for car.

Figure 88

Kampung Gajah Wonderland

Source: Kampung Gajah Wonderland

During our weekend visit to the Lembang floating market, it was packed with children. My kids enjoyed the trip very much - feeding the rabbits, riding a boat and playing in the windmills, while us parents enjoyed the cooler climate and local foods.

Affordable kids attractions

Packed floating market in Lembang

Enjoying the famous culinary delights in

Bandung

Thrilling attraction for the kids



Figure 89

Floating market in Lembang, Bandung

Source: CLSA

Other significant tourist sites near Bandung include the Tangkuban Perahu volcano crater to the north.

Figure 90

Volcano crater at Tangkuban Perahu

Source: CHJL (Wikimedia Commons)

Bandungs economy is mainly built upon tourism, manufacturing, and textile/apparel among others. It has nearly 50 higher-education institutions and is among the most popular destination for education in Indonesia.

Enjoying the boat trip with the kids

Another hot tourist site



Mid/high-end retailers are more optimistic During our visit, we caught up with both mid/low retailer like Ramayana as well as mid/high-end retailers like Ace Hardware and Mitra Adiperkasa. While the store manager of Ramayana looked sceptical about the business due to higher operating cost and competition, the managers at Ace and Mitra Adiperkasa stores were excited and optimistic on business prospect going forward.

Interestingly, Aces store performance in the Istana Building Commodities Center (IBCC) was also impressive despite the competition with traditional home-improvement stores in the IBCC complex.

Figure 91 Figure 92

Aces store in Plaza IBCC Traditional DIY store in IBCC complex

Figure 93

Retailers key operational matrix Ramayana (RALS IJ) Mitra Adiperkasa (MAPI IJ) ACE Hardware (ACES IJ) Store location Cimahi Paris van Java mall

(44% occupied by Mapi) IBCC, 2nd store in Bandung

Store size (sqm) 6,000 11,500 (Sogo), from previously ~7k 7,762 (largest store in Bandung)Sales breakdown 70% department store

30% supermarket 50% domestic 50% import

60% homeware 40% lifestyle

40% men fashion, 40% women and kids, 20% shoes and bags

Consignment goods 50% 90% Less than 10% Traffic trend 1,000 people per day (weekday) 1,000 transaction per day 1,200-1,500 people (weekday) 2,000 people per day (weekend) 3,000 people per day 2,500-3,200 people (weekend) Sssg trend 5-6% Low double-digit level 8-13% Basket size Rp60-70k (US$5-6) per person Rp500k (US$45) per person Rp400k (US$35) per person Monthly sales Rp3.5-4bn (US$300-350k) Rp15bn (US$1.3m) Rp8-9bn (US$700-780k) Lebaran performance Sales can be as much as 4-5x

compared to normal months Growing by 28% YoY Some improvement compared

to previous year 2 weeks before lebaran,

store close at midnight Started increasing prices

post Lebaran Inventory turnover 5 months 3-6 months 2-3 months Best selling products T-shirt Polo house (private brand) Samuel & Kevin, Giordano for fashion Spin dry mop, CCTV Palomino for bags Pineapple water dispenser No. of employee 112 146, 1,080 including consignment staffs 186 Employee turnover Less than 5% Less than 10% Around 20% due to store relocation 10% of employee is still studying 10% of employee is still studying Minimum wage impact Not much impact on demand Not much impact on demand Not much impact on demand Wage adjustment is ~15% in 2013 Sport Station still grew double-digit despite

company introducing Planet Sport Company has complied with minimum wage

Cost efficiency strategy Turning off escalator, even during our visit at 10.30am

Increasing employee productivity Increasing coverage target per employee

Management visit 1x per year 2x per year 3x per year Source: CLSA

Mid/high retailers are still very optimistic

Impressive performance despite competition

IBCC, home to Aces second store in Bandung



We were also quite impressed with the management quality at ACE whereby CEO Prabowo Widyakrisnadi himself still made store visits three times a year. This also translates to stronger employee motivation and the fact that 10% of its staff are still studying adds to another interesting highlight of our visit.

In the case of Mitra Adiperkasa, it occupied about 44% space at the Paris van Java (PvJ) Mall, designed by West Java-based architect Ir. Wawa Sulaeman, who is also the key man behind the Pondok Indah Mall 1 (South Jakarta), Kelapa Gading Mall 3 (North Jakarta), and Tunjungan Plaza Mall 3 (Surabaya, East Java).

Mitra Adiperkasas Sports Station store still grew at double-digits despite the opening of Planet Sport in the same mall. Worth noting is that the best-performing Zara and Stradivarius stores are also in PvJ Mall, which is most likely due to less competition and cannibalisation as compared to Jakarta.

Figure 94 Figure 95

Sports Station store in PvJ Mall Zara store in PvJ Mall

Source: CLSA

Some historical perspective Bandung is home to major examples of Dutch colonial architecture, mainly the tropical Art Deco style. Henri Maclaine-Pont designed the first technical university - Institut Teknologi Bandung, J. Gerber the Gedung Sate - the head office of West Java, and Albert Aalbers the DENIS bank and Savoy Homann hotel.

Figure 96 Figure 97

Institut Teknologi Bandung Savoy Homann hotel

Source: Institut Teknologi Bandung Source: Jagawana (Wikimedia Commons)

More management visit for Ace

The best performing of Zara and Stradivarius

Home of the tropical Art Deco architecture

Mitra Adiperkasas stores in Paris van Java mall

Examples of tropical Art Deco style



Figure 98

Gedung Sate

Source: Gunawan Kartapranata (Wikimedia Commons)

Also, the Pasupati Bridge which was completed in 2005, connecting the Pasteur and Surapati roads, was designed by Central Java-born architect Ir. Karsten. With a total length of 2.5km, this is the first skyline bridge which utilizes anti-earthquake technology.

Figure 99

Pasupati Bridge above residential houses in North Bandung

Source: Prayudi Setiadharma (Wikimedia Commons)

Pasupati Bridge with anti-earthquake technology

Gedung Sate, the head office of West Java

Pasupati Bridge, connecting Pasteur and

Surapati roads



Semarang - Central Java Just like in many other parts of Indonesia, Semarang - the capital of central Java - is enjoying a massive property boom. Any kind of property is doing well there. Landed residential, industrial land, landed commercial property in its CBD area, and even apartments. Yes, even apartments.

Figure 100 Figure 101

Apartment advertising Apartment boom in Semarang

Source: CLSA

Apartments in Semarang are in high demand, despite limited traffic issue in this lovely city. Apparently, one of main reasons to buy an apartment is the anticipation of FDI coming to Semarang or labour-intensive factories relocating from Greater Jakarta to Semarang.

The relocation is primarily driven to take advantage of more manageable labour costs and unions. Minimum wage in the region is close to half of the Greater Jakarta rate. And even with the lower base, wages increased by only 20% in Semarang in 2013; significantly lower than Jakartas staggering 44% hike.

Many in the city are expecting Japanese and Korean expats to move from Jakarta to Semarang in the not too distant future, along with the FDI. On the back of this, some of the apartment buyers are looking to rent out the units (delivered two years from now) to these expats.

Interview with a property agent Wuddy: How long have you been a property agent?

Property agent: 3.5 years.

Wuddy: Hows business?

Property agent: It was tough when I started 3.5 years ago. Things have been awesome in the past two years.

Wuddy: What is your best-selling product?

Property agent: Apartments in the prime area.

Wuddy: Interesting. Whats the selling price per square metre?

Property agent: Hmmmm . . . I dont know. I mean the buyers here dont think in terms of price per square metre. I showed them the floor plan and they just bought it. All they care is the unit price.

Wuddy: Ok, I hear you. Whats the hottest landed residential development and whats the price per square metre?

Property agent: Development in the hilly Candi area is the hottest for sure. Price per square metre? I just told you, people DO NOT think in square metre. If they like it, the buy it. Forget about per square metre price. You snooze, you lose. Period.

Booming apartment due to FDI anticipation

Expecting Japanese and Korean expats

Wuddy Warsono Country Head - Indonesia [email protected] +62 21 2554 8803

Semarang



Well, its clearly a great time to be in the property business in Semarang. In this supposedly cut-throat property agency business, a property agent who isnt willing to perform simple elementary school arithmetic to arrive at a per square metre price still manages to do very well.

Life is also good for property investors in the city. In prime locations, property prices have more than doubled in the past three years. In case you are curious, whats the price per square metre in the best CBD location in the Pandanaran area in Semarang, its about Rp50m (US$4.5k) per square metre.

The prospect of industrialisation in Semarang has sparked optimism and bolstered confidence. We visited the S2 lifestyle complex in Semarang. It is the most hip and stylish lifestyle centre in town with restaurants, cafs, bakeries and patisserie shop, frozen desserts shop and a fitness centre.

S2 has taken a bold approach in its unusual architectural approach. Owned by a local businessman and designed by Jakarta-based architect Handoyo Darmawan Gani, it is a contemporary three-storey building with an all-white palette and massive glass walls. Impressive looking, the food was great and the place was packed. Thrifty Semarang is clearly changing. The younger generation who have experienced Western or Jakarta lifestyles is now living a different lifestyle from their parents.


S2: Designed by Handoyo Darmawan Gani S2: one-stop lifestyle complex

Source: CLSA

It is also important to note that Semarang is not merely about cheap labour. The citys strategic location between Jakarta/West Java and East Java has encouraged some entrepreneurs to set up logistic firms there. One of the countrys most successful trucking company, Siba Surya (not listed), for example, is based in Semarang.

Under Sibas second-generation leader, Daniel Budi Setiawan, the group has recently expanded into the IT solution business. Named Siba System, the new IT firm is leveraging on their logistic-related IT capability. The building that hosts Siba System is cool and trendy and designed to allow a lot of interaction between the firms young programmers.

Strategically located for logistic purpose

S2 with all-white palette and massive glass walls

Expanding into IT business

No need to understand price per square metre

Property price in Semarang CBD is

US$4.5k psm

S2 has unusual architectural approach




Graha Siba And their trendy office in Semarang

Source: CLSA

Semarang property plays Bekasi Fajar has a property development in Semarang, accounting for approximately 10% of its NAV. Another industrial estate developer with exposure to Semarang is Jababeka.

Ciputra Property runs a very successful hotel and mall development in Semarang, which also represents about 10% of its NAV.

Busy Semarang airport In writing this report, I also become aware of the fact that there are nine Garuda flights a day from Jakarta to Semarang and we were told they were all fully booked. Budget carrier Lion Air (not listed) also flies nine times a day and its just as busy. I also learned that there are four budget airlines connecting Semarang and Indonesias second-largest city, Surabaya.

One aspect of CLSA economist Tony Naftes now classic report on Indonesia, No speeding!, is that Indonesia tried to grow very fast without putting enough attention to infrastructure spending. Infrastructure investment has not been able to keep up with strong GDP expansion and the explosion of middle-class growth.

Rising urbanisation and an expanding middle class only adds to the pressure, causing heavy congestion and overuse among the countrys public transport network.

As such, persistent flight delays that occur in many major airports across the country has also become a daily fixture at Semarang airport, thanks to surging number of domestic travellers. The combination of rapidly expanding middle class and low-cost air services has resulted in overall passenger traffic growing 11% per year over the past decade.

These days, we would feel lucky if our flight is delayed for under an hour. Even boarding your plane does not always mean much since you may have to wait as your plane queues on the runway. Not to mention the extended boarding process; nearly every flight requires bus transit to and from the runway because the airports lacks capacity to service demand.

In case you want to know what the Semarang airport looks like, please see the picture below taken one Friday afternoon.

Garuda has nine daily flights for Jakarta-

Semarang

Passenger traffic growing 11% annually

What is the property play?

Logistic company Siba group




Superpacked Semarang airport on Friday Semarang-Surabaya budget airline

Source: CLSA

The rise of the day traders in Semarang Back in 4Q10, I took the opportunity to meet some aspiring online stock traders in Semarang. They traded through the Indopremier online trading platform (IPOT). For the first time ever, online trading facilities made its way to people living in the smaller cities of Indonesia.

We also argued in the note back then that there was a growing confidence of Indonesians in ou

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Indonesia Market (Back to Java Where Wealth Resides and Flourishes) 20140205