This weekly newsletter chronicles top digital themes and trends playing out in SE Asia, especially Indonesia. We will decode policy and regulatory changes affecting digital economy sectors, crunch earnings data of top players, track developments related to gig economy workers and attempt to piece together ecosystem buildouts in some of the fastest-growing, venture-backed plays. You can access the previous editions of the Vantage Point weekly posts here.
Executive Summary
- Sell-off in Indonesian banks after SVB crisis is unwarranted
- Harita Nickel a pure proxy for Indonesia’s EV theme
- Traveloka and sustainability go hand-in-hand
- Profitable Allo Bank can now command higher valuations
Sell-off in Indonesian banks after SVB crisis is unwarranted
Both in terms of their customer base and asset exposure, Indonesian banks could not be further away from Silicon Valley Bank (SVB), the startup-focussed American lender whose recent collapse sent ripples across the financial world.
Nevertheless, stocks of several Indonesian banks suffered a significant drop last week in the immediate aftermath of SVB’s implosion. Digital banks including Bank Jago, Bank Neo Commerce, and Allo Bank Indonesia, all witnessed sell-offs as they were grouped in the same basket as SVB, which is a tenuous connection.
Key Indonesian banks have less than 20% of their investments in marketable securities and 80% is parked in Indonesian government bonds. None have exposure to SVB.
The country’s digital banks have not parked any significant portion of their funds into treasury assets and certainly not US treasuries. Indonesian government bonds are far more stable and provide higher returns than US treasuries, with the 10-year Indonesian government bond yield at 7.036%.
Digital lenders have been pursuing a strategy of loan channelling to generate attractive spreads rather than placing the funds in Indonesian treasuries. The next stage will be to grow direct lending.
Indonesia is different from the US, given the low rates of banking penetration and more attractive returns, making holding large quantities of treasuries a less attractive option for banks in terms of returns.
Consequently, the recent sell-off looks like an opportunity to accumulate the shares of Indonesian banks. All major digital banks in Indonesia are all likely to be profitable in 2023. They are building solid low-cost deposit bases by collecting deposits from retail customers. Bank Jago, for instance, has a CASA ratio of 71%.
Other players currently have a higher cost of funds but they have been pulling back from their strategy of offering high-interest rates to attract more deposits.
IPO-bound Harita Nickel is a pure proxy for Indonesia’s EV theme
Trimegah Bangun Persada Tbk or Harita Nickel, a leading Indonesian nickel play, has launched an IPO on the Indonesia Stock Exchange to raise around $650 million. The book-building process is underway and ends on March 21.
Harita Nickel is a pure nickel company with both upstream and downstream capabilities and an operational track record of more than 10 years, with its operations on Obi Island, which is in the North Maluku area to the East of Sulawesi.
Based on the volume expectations for the company’s nickel mining production in 2022, Harita is set to become Indonesia’s largest pure nickel producer.
This comes at an opportune time as the country is pushing hard to become a global hub for EV batteries and potentially a producer of the vehicles themselves. While nickel is a key input to EV batteries, it is also seeing strong growth in demand from the stainless steel industry.
Harita Nickel owns and operates two nickel laterite mining projects over a total area of 5,524 hectares. It also owns two additional mining concessions for two nickel mining prospects, also on Obi Island which span a further 3,660 hectares.
The company has several significant investments in certain nickel downstream operations with its key partner, Hong Kong-listed Lygend Resources & Technology.
Harita and Lygend are jointly developing the RKEF (Rotary Kiln-Electric Furnace) project on Obi Island. Phase I of the project will have eight production lines with an annual capacity of 95,000 tonnes versus 59,000 tonne currently. HJF, which operates RKEF Phase I, is owned 40.1% by Harita, 36.9% by Lygend and 23.0% by Sarana Cipta Multiniaga.
Harita also has a 35% stake in KPS, a Lygend subsidiary that operates the RKEF Phase II project. This second project involves the construction of a new ferronickel production facility consisting of 12 production lines, which is expected to start construction in Q2 2023.
The company is also involved in the production of nickel-cobalt compounds through its 45.1% stake in HPL, which itself is a subsidiary of Lygend.
Harita has entered into long-term supply agreements with HPL up to December 2030, with an. agreement to purchase a minimum fixed annual amount of nickel ore from Harita.
Looking at the divisional breakdown, Harita now owns a minority stake in HPL, having brought down its stake by 18% in September 2021, from 63.1% to 45.1%.
The change in the stake effectively boosted Harita’s mining revenues, as sales to HPL were no longer considered to be intercompany. However, it also meant a reduction in nickel processing volumes as HPL revenue was removed.
This means that it makes more sense to look at overall revenue rather than segmental revenue when evaluating the company.
Harita Nickel remains a highly profitable company mainly driven by rising nickel prices and rapidly increasing volumes. Nickel volumes rose from 3.2 million tonne in 2021 to 6.6 million tonne in the first nine months of 2022.
The price of nickel ore continues to rise, given the ban on export from Indonesia but Harita can now recognise its sales of nickel ore to HPL, without any impact from the export ban.
Harita’s prospectus reports both reported EBIT but also adjusted EBIT, which gives a pre and post-HPL stake reduction view of the company. The adjusted EBITDA margin is a reflection of this, rising from 41.6% in 2020 to 78.6% in the first 11 months of 2022.
HPL has also adopted one of the most advanced production technologies, with the lowest cash cost among all nickel-cobalt compound production projects worldwide that were under production in 2020.
The company is also well positioned in terms of its capex, which has already peaked in 2022, with a rapid reduction in 2023. It also projects relatively rapid breakeven thresholds, given where the nickel price is currently. Its debt levels are also reasonable at $552 million.
There are obviously risks associated with the industry, given the potential of a slowdown in demand for stainless steel or even EVs although this does not seem likely near term.
The company is reliant on earnings from associates, which some may view as less attractive from quality of earnings perspective. There is also a complicated cross-holding structure, which renders it difficult to decode the entire picture.
These concerns will likely be eclipsed by the positive tailwind behind Indonesia’s push into the EV space, and the fact that Harita looks like a high-growth proxy to the Industry, with higher margins than its local peers, given its low cost of production.
Traveloka steps up sustainability game
Traveloka, Indonesia’s largest online travel agent, said it will roll out a number of sustainable options for tourists this year, Nikkei Asia reported.
The company last year partnered with the Global Sustainable Tourism Council (GSTC), an NGO that sets international standards in travel and tourism. The collaboration involves offering a series of training programmes on sustainable tourism for its hotel partners in Indonesia.
Traveloka offers both online and offline courses to enable its hotel partner to get certified. It is still early days for the initiative given that it only has nine GSTC-certified hotels in Indonesia. But plans are afoot to rapidly increase this number and take the programme to Thailand, Malaysia, and Vietnam this year.
Traveloka is also looking to enable users to track and monitor their emissions to help them reduce their carbon footprint. Eco-tourism is becoming popular as more and more tourists are seeking to be mindful of their impact on the environment and the communities that they touch during vacations. Hotels often charge a premium for more sustainable credentials.
Traveloka operates across six markets and works with over 200 airlines, and 1.8 million hotels, with around 55 million monthly active users.
The platform has been streamlining its services after the pandemic saw the company diversify into online groceries as well as food deliveries, both of which were shuttered as the online travel industry started to recover.
Fintech is one vertical where Traveloka has continued its expansion with its Buy Now Pay Pater services in collaboration with both Bank Rakyat Indonesia and Bank Negara Indonesia Persero.
These services include a digital credit card service that can be used not only on Traveloka but also on other e-commerce platforms. This makes sense given the very low rates of penetration of credit cards in Indonesia. Traveloka will look at rolling out the service to other markets in collaboration with financial services companies. Traveloka also provides insurance services to its customers in collaboration with insurance companies.
The company, which was profitable prior to the pandemic, slipped into the red as travel slowed to a trickle on account of movement curbs. Traveloka also went through a period of headcount reduction and cost-cutting measures during the pandemic.
It has since undergone a swift recovery helped in the short-term by an immediate pick-up in domestic tourism but is now seeing regional tourism rebound fast. Traveloka is now getting back close to pre-pandemic levels in terms of revenues, with booking this year double those of last.
Traveloka raised $300 million last year from a number of investors including Blackrock and the Indonesian sovereign wealth fund INA. It is unclear whether Traveloka is now profitable but it is probably not far off, given that it was profitable pre-pandemic.
The eventual aim for the company would be to list, either in Indonesia or potentially in the US, although it dropped the idea of a SPAC listing some time ago. The company has, however, highlighted that this is not an immediate priority.
Enhancing its sustainability and ESG credentials would help the firm to improve its attractiveness to investors when it does eventually decide to launch an IPO.
Profitable Allo Bank can now command higher valuations
Allo Bank Indonesia, one of the country’s twenty digital lenders, has recorded impressive growth in revenue and net profit for FY2022.
While net profit for the year grew 40% YoY to 270 billion rupiah ($18 million), the digital bank’s net interest income increased 221% YoY to 627.2 billion rupiah in the year. Over the past year, income from loans extended to companies jumped 259% to 610 billion rupiah and interest expenses also decreased.
Allo Bank Indonesia dispersed 6.99 trillion rupiah in loans to third parties in FY2022, up 222% YoY, with 162 billion rupiah to related parties. The bank’s assets also rose by 138% to 11.06 trillion rupiah following its successful corporate action to increase capital early last year.
Allo Bank Indonesia’s liabilities also recorded an increase of 39% YoY to 4.65 trillion rupiah, mainly supported by the company’s success in increasing customer deposits which rose by 108% to 4.4 trillion rupiah, while the bank’s equity rose by 392% YoY to 11.06 trillion rupiah.
These positive numbers suggest Allo Bank Indonesia is among the Indonesian digital lenders with the most potential.
Allo Bank Indonesia, which started in May 2022, has already gained 5 million new customers by end-2022. According to the management, it was also the most downloaded banking app in Indonesia between June and December 2022.
It is a relatively late starter versus competitors Bank Jago, PT Bank Neo Commerce, and SeaBank Indonesia but has the potential to be one of the leading digital banks in Indonesia, given its ecosystem of well-positioned shareholders, which includes CT Corp, Bukalapak, Salim Group, Grab, Carro, and Traveloka Indonesia.
The fact that the bank is already profitable stands it in good stead to command a higher valuation, especially with peers Bank Jago and Bank Neo Commerce now profitable.
Allo Bank Indonesia currently trades at 5x FY2023E price-to-book value (PBV) despite its return on equity (RoE) being less than 5%. Yet, it is more about future expectations, which could see RoE rising to more than 20% if the estimates for peers are anything to go by.
About Angus Whistler Mackintosh
Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.