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Southeast Asia: Full Steam Ahead Despite Global Adversities
Perspective | 09 November 2012
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For most of this year, woes of the Eurozone debt crisis as well as anaemic labour market and weak consumption growth in the United States have plagued the global stock markets. Adding to the gloomy outlook, Asian giants such as China and India have also experienced a slowdown, with China coming to a soft landing as it is affected by lower export demand from the Western economies and India struggling against dampened investors’ sentiment in light of continued legislative deadlock.

Nonetheless, one bright spot continues to buck the trend. Just in our backyard, the ASEAN region continues to shine even as clouds gather, with ASEAN and the broader emerging Asia highlighted by the International Monetary Fund (IMF) to be on the fast lane of growth. In particular, ASEAN-4 (Indonesia, Malaysia, Thailand and the Philippines) is expected to power full steam ahead backed by the growing domestic consumption, which has been the front engine of the Southeast Asian growth story, as well as pro-growth government policies and rising foreign direct investment.

Positive Trends In ASEAN-4
Burgeoning Consumption

  •  Dynamic Demographics

- Population with a relatively young profile compared to aging trend experienced in most developed economies
- 60.8% – population in Indonesia aged below 35 years as of 2011

  •  Rising Affluence

- Growing middle class income group on the back of the improving employment rates which translates into greater purchasing power for more discretionary and luxury goods
- 13.7m – Indonesia’s middle class income group in 2011 with annual disposable income more than US$10,000, doubled from 6.6m in 2006

Pro-Growth Government Policies
- Redistributive measures for lower income households (e.g. transfers to low-income families in Malaysia, guaranteed rice prices for farmers in Thailand, and minimum wage hikes in Indonesia and Thailand)
- Increasing public spending
- Credit growth (under pro-investment policies in an environment of well-controlled inflationary pressures)

Rising Foreign Direct Investments
- Healthy level of business confidence (supported by government stability)
- US$117b – FDI inflow to Southeast Asia, up 26% y-o-y or 8% of the region’s total global FDI flow in 2011

Sources: compiled from Euromonitor International, Monetary Authority of Singapore & World Investment Report 2012, United Nations Conference on Trade and Development

According the Monetary Authority of Singapore (MAS), the Southeast Asian economies recorded a robust 5.6 percent year-on-year gross domestic product (GDP) growth in 2Q12 as buoyant domestic demand offset the slump in exports. Notably, in view of the three positive trends, ASEAN-4 is further expected to sustain its positive trajectory in the coming years.

Echoing the same views, IMF noted that growth in the Southeast Asian economies remain close to potential, supported by public investment and favourable bank policies. World Bank also noted that investment spending in Thailand, Malaysia and Indonesia is booming on top of the election-related spending in Malaysia and spending on reconstruction after last year’s flood in Thailand. These developments, meanwhile, have not gone unnoticed as companies in a range of industries are eager to tap into the potential of robust economic growth in ASEAN-4.

Be it the new entrants or current players in the ASEAN-4, more and more are turning to grab a slice of this pie. While newly listed firms such as Courts Asia and DeClout look to establish a stronger presence in the Southeast Asian economies, also appearing on our radar is Lippo Malls Indonesia Retail Trust which has recently expanded its stronghold in the Indonesian market. Let’s take a closer look into this pure Indonesian retail play.

Lippo’s “Shopping” Spree – An Epitome Of Indonesian Consumerism Growth
Lippo Malls Indonesia Retail Trust’s (Lippo) appears set to continue riding on the undergoing change in Indonesian consumer spending from its recent acquisition spree, where it bought six malls for $307.2 million in a month’s time with a total discount of $40.2 million. This expansionary move came at a weighted cost of debt of approximately 5.1 percent from the earlier $250 million notes issuance on 26 June 2012.However, questions were raised as the acquisitions did not come at a cheap cost. Financed by debt, the average historical after-tax property income yield of the acquired malls at around 4.5 percent (assuming 23 percent tax rate) was lower than the cost of debt. Coupled with malls that are already close to full occupancy, there seems to be little upside in the short term for rent reversions, although Palembang Square extension and Kramat Jati Indah Plaza could both potentially spring surprises as they had recently gone through asset enhancement initiatives and are not fully occupied. Furthermore, Lippo’s June 2012 pro-forma dividend per unit is projected to fall to $0.014 from $0.0147 following the acquisitions.Nevertheless, delving deeper into the acquisition purchases, we found that long-term value accretion and risk reduction are present as it allows Lippo to diversify its portfolio geographically across Indonesia as well as improve the diversification of its tenant base, thereby reducing tenant and asset concentration risks within its enlarged portfolio. The malls acquired are also located at strategic locations with sustainable retail traffic. Despite the shortcomings, we are optimistic that Indonesia’s 6.1 percent GDP forecast in 2012 will lead a wave of consumer demand which Lippo will benefit from.

 

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Lippo Malls Indonesia Retail Trust  0.230 -- --   
Business: REIT that is engaged in invs in retail ppties in Indonesia.

Insight: Apr-19, 1Q19 gross rental income slid 7.1% due to ... Read More


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