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Lippo Karawaci (LPKR IJ) Summary

Core Content and Key Information

Lippo Karawaci (LPKR IJ) is a real estate company in Indonesia with a current share price of IDR1,030 and a revised target price (TP) of IDR1,200, representing a +17% increase. The company has a market capitalization (MCap) of USD2.1B and an average daily trading volume (ADTV) of USD8M. Maybank has upgraded its recommendation from HOLD to BUY, based on its revised TP and future growth prospects.

The target price of IDR1,200 implies a 41% discount to its RNAV of IDR2,040/share, translating to 14.9x P/E and 1.8x P/B for FY15F. The company's recent expansion plans and the development of two major projects—Millennium Village and Orange County Business District (OCBD)—are key drivers behind the upgrade.

Major Projects and Expansion Plans

Millennium Village (Lippo Village)

• Launched in May 2014, this mega project is located in Lippo Village, which has been developed since 1992.
• 132ha of prime land is allocated for the development, projected to generate USD20bn over 20 years.
• The development includes high-rise buildings for commercial and residential purposes, with a total length of 1.5km, comparable to Orchard Road in Singapore.
• Hillcrest House, a high-rise apartment project, is set for launch in 2014 with an indicative price of IDR20m/sqm.
• Pre-sales for FY14F are estimated at IDR628b, up from IDR86b previously.

Orange County Business District (OCBD) (Lippo Cikarang)

• Launched in 2014, this project aims to transform Lippo Cikarang into an integrated business and residential hub.
• It includes Grade-A office space and upscale residential properties, which are currently lacking in the Bekasi and Karawang areas.
• The project is expected to provide transportation cost savings for companies operating in the area.
• Lippo Cikarang plans to launch two apartment towers and one office tower this year.
• Pre-sales for FY14F are estimated at IDR1,873b, down from IDR2,407b previously due to weaker industrial pre-sales.

Hospitality Expansion

• Lippo Karawaci plans to expand its hotel business by building and operating 50 new hotels by 2020F, with an estimated USD350m investment.
• The company currently operates eight hotels under the Aryaduta brand.
• It plans to build 10 upscale hotels in Jakarta and 40 mid-scale hotels under a new brand.
• Two hotels are already in the pipeline for 2015F (Bali and Surabaya).
• The company aims to open 10 new hotels annually from 2016F to 2020F.

Financial Forecasts and Assumptions

• Pre-sales for FY14F-16F are revised upward by +12%, +13%, and +7%, respectively.
• New pre-sales forecasts are as follows:
  • FY14F: IDR5,653b
  • FY15F: IDR6,149b
  • FY16F: IDR6,322b
• Revenue growth is expected to continue, with forecasts for FY14F-16F as:
  • FY14F: IDR8,974b
  • FY15F: IDR10,644b
  • FY16F: IDR12,058b
• Core net profit is projected to grow from IDR1,060.2b (FY12A) to IDR2,160.6b (FY16E).
• EBITDA is expected to increase from IDR0.0 (FY12A) to IDR3,688.4b (FY16E).

Valuation and Risk Analysis

• The RNAV per share is calculated at IDR2,040, with the target price of IDR1,200 implying a 41% discount.
• Valuation ratios for FY15F:
  • Core P/E: 14.9x
  • P/BV: 1.8x
• Key risks include:
  • Execution risks: As the company expands its project size, managing large-scale developments will require more resources and control.
  • Currency volatility: 40% of building costs are in USD, and fluctuations could impact project margins.
  • Persistently high interest rates: Indonesia's central bank is expected to maintain 7.50% interest rates until 2014F, which could affect project financing.

Summary of Changes in Assumptions

Summary of Revenue Breakdown

Summary of Key Financial Metrics

Key Ratios

Summary of Risks

• Execution risks: The company's expansion into larger projects may strain its operational and managerial capabilities.
• Currency volatility: The USD/IDR exchange rate could affect project costs and profitability.
• High interest rates: A persistently high rate environment may increase financing costs and reduce project margins.

Summary of Valuation

• RNAV per share: IDR2,040
• Target price: IDR1,200 (41% discount to RNAV)
• P/E ratio (2015F): 14.9x
• P/BV ratio (2015F): 1.8x
• P/E band: Slightly below the historical +1 SD of the one-year forward P/E mean of 16.1x
• P/BV band: In line with the +1 SD of the one-year forward P/BV mean of 1.9x

Conclusion

Lippo Karawaci's strategic expansion into Millennium Village and OCBD, along with its hotel business growth plan, has led to an upgrade to BUY. The company's revised target price reflects a 41% discount to RNAV, indicating potential undervaluation. However, execution risks, currency volatility, and high interest rates remain key concerns that could affect the company's performance. The financial forecasts suggest continued revenue and profit growth, with recurring income segments supporting future earnings.