NEED TO KNOW / July 2019

Sustainable Growth in a Fragile Market

Investor Magazine, GlobeAsia’s sister publication at BeritaSatu Media Holdings, recently released its annual ranking of Indonesia’s top-performing listed companies. This was the 20th consecutive year for the magazine to present its research and award winners with both prizes and publicity.

The research was conducted amid volatility, uncertainty and complexity in the global economy and ambiguity in the international market, compounded by challenges in the domestic market. The magazine and members of the jury concluded that the top-performing companies had shown themselves capable of making their businesses sustainable despite fragility that was also evident. Smart and proactive strategies to adapt to change have helped these companies maintain growth and show outstanding performance last year.

An escalating trade war between the United States and China, and a loosening by the US Federal Reserve of its policy on interest rates, which has put pressure on the dollar, impacted business performance over the past year. Meanwhile at home, Indonesia’s current-account deficit, which amounted to 2,98 percent of gross national income last year, combined with political tensions ahead of this year’s simultaneous presidential and legislative elections, and slowing consumption, forced the government to revise its economic growth target downward to 5,15 percent from 5,4 percent.

Amid these persisting pressures, Indonesian companies have no choice but continue growing to survive. Gunawan Tjokro, chairman of the Association of Indonesian Publicly Listed Companies (AEI), believes local businesses must respond positively to the most likely changes expected in the global economy. “China and the US are the two global economic giants that impact most economies in the world, including Indonesia, “ Tjokro said.

Despite intense external and internal pressures, some local listed companies still posted outstanding achievements in revenue, share-price stability, share liquidity, business growth over the past three years, margin growth in the same period, net operating margins, asset turnover and returns on equity, which were among the criteria Investor Magazine used to select the top performers.

From a total of 629 listed companies, the magazine selected 345, which were further narrowed down to 245 to be evaluated. While technical and fundamental aspects constituted about 50 percent of the competition and questionnaires the companies were required to complete accounted for the remainder of the judgement process, panelists also interviewed the leaders of these businesses to evaluate their growth strategies. These interviews allowed judges to not only get a view of the companies’ business strategies, but also of their involvement in community development programs.

Professor Roy Sembel, who chaired the jury, said five companies emerged as overall winners. “In the total selection process, some companies were seen managing their operations in such a way that makes them more efficient, and with innovations in the pipeline. They also put in extra effort to make their organizations leaner, develop more innovative products, while deploying technology at the center of their operations. This ensures that they can still grow amid volatility and economic turbulence,” he said.

Based on the criteria, the panel selected Indonesia’s largest private lender, Bank Central Asia (BCA), state-owned miner PT Bukit Asam, state-owned precast and ready-mix concrete producer PT Waskita Beton Precast, textile producer PT Sri Rejeki Isman (Sritex), and auto-part maker PT Selamat Sempurna as the five top-ranking companies for 2019.

Local Muscle

In view of the current global situation, prominent businessman Franky Welirang has urged the government to prioritize radical changes in its business policy to boost local economic power. It is widely known that high oil imports have hurt Indonesia’s balance trade in the previous fiscal year. The imports have clearly weakened the local currency, which in turn severely impacted state and private spending.

In response to the situation, the government has implemented some changes, including a policy to increase the proportion of biofuel in the country’s energy mix. It has set a target to increase the proportion of biofuel to at least 40 percent by next year from 20 percent currently. This policy will also create opportunities for crude palm oil producers to not only focus on cooking oil and fast-moving consumer goods, but also on replacing fossil fuels.

On an operational level, Tjokro is also pushing the government to use the local currency for bilateral trade transactions with China, which currently amount to more than $60 billion per year. “If we can settle at least a third of the total transactions in the local currency, it will help strengthen the rupiah exchange rate,” he said.

The ongoing trade war between China and the United States will also impact every company’s strategy. Indonesia’s large population has been ramping up consumption since the second quarter of this year. This is expected to close the gap left by slowing investment. Some companies even capitalized on the US-China trade war to boost their businesses.

Pressure on interest rates by the US Fed has forced BCA to increase its deposit rate to absorb rupiah liquidity. With an increase in third-party deposits, the lender can offer loans to customers to finance business expansion or provide consumer credit to boost consumption.

BCA president director Jahja Setiaatmadja believes that while the bank’s ability to provide credit remains strong, technology will play a more prominent role in future. The lender has been developing its digital banking arm since 2016, through an application programing interface to integrate different and varied applications at the same time. This made integration possible with new financial technology startups such as Go-Pay, Tokopedia, Blibli, Traveloka and Ticket.com, which all require access to payments systems for online transactions.

While coal still makes about 70 percent of its revenue, Bukit Asam has made an entry into new energy, trading and logistics. Working with state energy firm PT Pertamina, the company is developing new sources of energy, such as dimethyl ether and synthetic natural gas. It is also cooperating with PT Pupuk Indonesia and PT Chandra Asri Petrochemical to develop a downstream facility to produce fertilizers, and which will be commissioned at the end of 2022.

Waskita Beton Precast has been one of the companies that have benefited from massive government spending on infrastructure development. At 3.5 million metric tons per year, the company is currently Indonesia’s largest producer of precast concrete, in addition to several other building materials sold in 73 locations across the archipelago. Waskita Beton Precast finance director Antonius Yulianto Tyas Nugroho said the company is currently eyeing partnerships with international players to expand its reach in Asia.

While a weaker rupiah makes it difficult for some companies to import capital goods, Selamat Sempurna, one of the largest manufacturers of filters and radiators in Asia, enjoyed a huge leap in income, as 70 percent of its products are sold on the global market. The company says it currently exports to 120 countries, while more will be added to the list soon. Ang Andri Pribadi, finance director at Selamat Sempurna, says the company has bold ambitions to export its products to every country in the world within the next five years. It has already acquired distribution companies in Malaysia, Australia and Thailand for this purpose.

There is always opportunity in difficulty. Indonesian textile giant Sritex has capitalized on the ongoing trade war between the world’s two biggest economies to grab a greater share of the US market. The company successfully convinced buyers in the United States to buy products form Indonesia instead of China. “In 2018, sales in the US market grew by double digits, compared with a single digit in the year before and we are confident of making another leap this year,” said Welly Salam Sri, corporate secretary at Sritex.

The company currently sells its products in 100 countries besides Indonesia, with plans to increase its exports to 60 percent of total sales.

Professor Sidharta Utama, who also served on Investor Magazine’s jury, said the winners had shown solid fundamentals, along with smart strategies, which saw them top the list of top-performing listed companies.

esides the top-five companies on the list, winners were also selected in various sectors. Batam, Riau Islands-based electronics manufacturer PT Sat Nusapersada and Sidoarjo, East Java-based wooden furniture producer PT Integra Indocabinet each won in their respective category. Sat Nusapersada successfully convinced the Taiwan-based Pegatron Corporation, which produces Apple iPhones for the US market, to relocate its smartphone assembly operations to Indonesia. Integra Indocabinet, meanwhile, has managed to increase the proportion of its sales destined for export to nearly 70 percent.