We wanted to touch base with our holdings, especially in the consumer, healthcare, auto, financial and materials sectors, get to know some companies we do not own, as well as have a better feel of consumer spending and how the domestic economy is shaping up.
Corporates: An excellent week in Indonesia where we were able to meet a wide array of companies across various sectors of importance to the local market. While concerns on discretionary spend remain at the forefront of many investors’ minds globally, it was heartening to see that Indonesia’s resilience here is also backed by tailwinds from favourable demographic trends, a characteristic that might not be so readily found in other more developed parts of the world amid rising cost inflation.
Across conversations with corporates and policymakers, it is clear that the market continues to seek innovative ways to stay globally competitive, while also leveraging on the domestic potential. Family run/owned businesses are also looking at ways to address ESG concerns more, and it is important for us as investors, particularly in a low liquidity market like Indonesia, to ensure that these conversations are constantly had in order to ensure our capital is responsibly allocated. A fruitful trip indeed!
Heading down the EV route: We managed to speak to the Deputy Minister of Maritime and Investment. With part of his purview being downstream mining and overall electric vehicle (EV) investment, our chat gave us a great overview of how the government is thinking about these areas from a policy perspective. The government is focusing on building out the EV ecosystem, particularly in the processing of nickel, with nickel downstream products now making up about 12% of the domestic economy.
Sector highlights from the trip
Consumer staples/discretionary: Our meetings with companies in this sector reflect steady consumer spending amid a growing domestic economy, particularly in the food and beverages segment given that raw material prices appear to be normalising from peak levels. There are concerns over the impact of accelerating inflation on the purchasing power of consumers which could translate into weaker revenue growth ahead.
Healthcare: A shortage in the supply of doctors is a key limiting factor for domestic healthcare spending. Each year, only 600 to 800 doctors graduate as specialists in a country with 273 million people, that is, with less than 40% of all doctors being specialists.
Our meetings with companies in this sector had heavy references to the new omnibus law, which aims to increase the supply of healthcare specialists by increasing the number of universities covering specialist programmes, shifting more responsibility from the doctors’ association to the health ministry, and easing regulations to allow more Indonesians with overseas medical degrees to practice in the country, albeit restricting this group to only select hospitals in mostly lower-tier cities. While details are still sketchy, we see the new healthcare law as boosting the sector over the longer term.
Financials: Broadly, stronger domestic economic activity is boosting the growth of domestic lenders, which are also increasingly taking to digitalisation supported by policy and changing consumer behaviour.
What we have observed through our meetings confirms our view that the size of a bank’s capital base is key in an environment of tight liquidity and where the reserve requirement ratio has remained unchanged.
Materials: Domestic nickel producers are benefiting from the development of the EV supply chain, amid growing EV demand and a global green transition.
Company highlight: Cimory - a refreshing consumer play
Appetite for growth: We invest in Cisarua Mountain Dairy (Cimory), which has a strong presence in yogurt and consumer foods, driven by a proactive and young management team who understands local consumer preferences. During the trip, we visited the first Miss Cimory centre in Jakarta that was set up in 2013. Cimory agents usually gather here once in the morning, once in the afternoon where they come to collect products and report sales figures. Cimory has over 4,000 agents across 220 centres in Java and Sumatra. It is targeting to reach 5,000 agents in 250 centres, and to expand in Kalimantan and Sulawesi.
We remain optimistic about Indonesia’s commodities-driven equity market over the medium term. Higher commodity and energy prices have bolstered the economy, enhancing government revenues and encouraging consumer spending. We expect second-order economic growth to occur due to investments into the local economy. Robust domestic demand following the post-Covid re-opening and the subsequent easing of restrictions and gradual return of tourism should continue to bolster recovery. Having said that, in the current market where macroeconomic uncertainties are mounting, the stability of the Indonesian rupiah is key. Though the rupiah has demonstrated resilience compared to global peers, it faces depreciation risks as exports fall and the current account declines. Interest rate increases from the central bank can partly offset this risk. From a portfolio perspective, our holdings have robust balance sheets and experienced management to navigate uncertainties in the market.
Beat the traffic: Our first time in Jakarta for the both of us, and the one thing that everyone locally warned us about was traffic! Thankfully, our expectations were set very low and all through the trip, we were pleasantly surprised by how manageable traffic was, overrunning our traffic buffer time only once. How important it is to have local insights on things, even traffic!
Christina Woon, Investment Director
“What really struck me again was how important stories are. When you’re on the road, it’s not just about hunting facts and finding out what is or how much; you have to talk to people to hear the context of how things came to be in order to make a call on how things may be longer- term. Indonesia is a country rich in stories and personalities, and the entrepreneurial nature of many of these personalities means there is a deeper nuance to investing here that cannot be underestimated. This week of conversations truly brought all of that to life.”
Lim Jaek Wern, Investment Analyst
“My first research trip to Jakarta was an eye-opener and brought a different perspective to due diligence from the usual zoom meetings and phone calls. Amidst savouring traditional delicacies, interacting with locals, and navigating heavy traffic, the true highlight was building relationships with management teams and seeing the companies’ facilities first hand. Having a good feel of what is happening on the ground is especially important when dealing with small-cap companies, given that information can sometimes be scarce.”
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Risk factors you should consider prior to investing:
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- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
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