Given the prolonged rule of Suharto's New Order regime, the political and economic systems of Indonesia still have features of an oligarchic system, i.e. power is controlled by a small group of people usually distinguished by family ties and wealth. In the past, religious or military status also played a crucial role. However, as democracy continues to develop some of these features wane, while others still exist. President Joko Widodo, for example, is the first Indonesian president who does not belong to the traditional (political, religious or military) elite.
In the corporate domain, however, Indonesia is still 'ruled' by the big conglomerates, most of which have their origin in Suharto's authoritarian New Order regime. Many of these large Indonesian conglomerates have listed several of their units on the Indonesia Stock Exchange (IDX). Therefore, it is interesting to take a brief look at these conglomerates and their listed units. Together with the state-controlled enterprises, several of which are listed on the IDX as well, these companies rule the Indonesian economy.
Year-to-date, Indonesia's benchmark Jakarta Composite Index has surged some 18 percent. Given the big role of the large conglomerates, it can be suspected that their units have outperformed this benchmark so far this year. This is indeed the case for most conglomerates. One of the basic strengths of these conglomerates is that their business is diversified across a wide range of sectors. Low dependence on a specific sector makes these conglomerates highly stable.
The table below shows that the state-owned enterprises (SOE) dominate the market capitalization on the Indonesia Stock Exchange. The central government holds majority stakes in top listed companies such as Telekomunikasi Indonesia (Telkom), Bank Rakyat Indonesia (BRI), Bank Mandiri, Perusahaan Gas Negara (PGN), and Semen Indonesia. All these companies - covering the telecommunications, banking, gas and cement sectors - are positioned within the top ten of biggest companies based on market capitalization on the IDX. The government also has majority stakes in listed construction companies Adhi Karya, Waskita Karya and Wijaya Karya that are all expected to thrive on the government's push for infrastructure development. Due to their proximity to the central government they are being awarded many contracts for infrastructure projects.
Also regarding non-listed companies, the state-owned enterprises play a crucial role in the economy of Indonesia, the biggest SOE being energy company Pertamina. Therefore, many investors, analysts and politicians would like to see more SOEs conducting initial public offerings (IPOs) on the Indonesia Stock Exchange. This move would surely boost liquidity.
Market Capitalization Largest Indonesian Conglomerates on IDX:
|Group|| Number of
(30 Dec 2015)
(9 Aug 2016)
|SOE||22||IDR 1,188.6 trillion||IDR 1,499.9 trillion||+26.2%|
|Astra Group||7||IDR 353.9 trillion||IDR 455.5 trillion||+28.7%|
|Salim Group||9||IDR 171.9 trillion||IDR 225.4 trillion||+31.1%|
|Sinar Mas Group||13||IDR 152.9 trillion||IDR 193.5 trillion||+26.5%|
|Lippo Group||14||IDR 122.9 trillion||IDR 139.1 trillion||+13.2%|
|Saratoga Group||6||IDR 61.3 trillion||IDR 84.5 trillion||+37.8%|
|MNC Group||8||IDR 63.6 trillion||IDR 76.1 trillion||+19.6%|
|Panin Group||7||IDR 33.8 trillion||IDR 37.9 trillion||+12.2%|
|Ciputra Group||4||IDR 30.9 trillion||IDR 36.7 trillion||+18.7%|
|Bakrie Group||10||IDR 32.9 trillion||IDR 34.2 trillion||+4.1%|
Source: Investor Daily
On second position in the ranking above we find the Astra Group, Indonesia's largest privately-held conglomerate. This group managed to expand its market capitalization despite having a large focus on the automotive sector. Over the past years car sales have been declining in Indonesia resulting in some pressures on the financial performance of Astra International. Furthermore, it has key units active in the palm oil business (Astra Agro Lestari) and heavy equipment (United Tractors) that both experienced a weakening performance since 2014. For long-term investors these companies remain attractive though.
Considering that Indonesia's economic growth finally started to accelerate again in the first half of 2016 after a multi-year slowdown, while the tax amnesty program could bring home trillions of rupiah and the government is eager to push for infrastructure development, Indonesia's property, retail, infrastructure sectors are believed to be the sectors that should perform well in the years to come. Although Indonesia's big conglomerates all have a diversified portfolio (and are therefore stable), those that focus on consumer goods, property, retail, infrastructure, construction and also healthcare (given the government's universal healthcare program) are expected to be in the best position to grow strongly. Meanwhile, those that have a focus on the agribusiness and mining sectors (and fields related to mining and agribusiness such as heavy equipment) may still need some patience.
Consumer goods remain the king among Indonesian sectors, particularly now the economy seems to be on an improving trend thus giving a boost to people's purchasing power. In Indonesia, household consumption accounts for about 55 percent of total economic growth (not surprising given the enormous size of the Indonesian population), reflecting the importance of this sector toward the overall economy. Although household consumption remained subdued in H1-2016, it should improve in line with the overall economic rebound and lower interest rate environment.
All conglomerates benefit from their activities in the consumer goods sector. However, one that has a particular focus on this sector is the Salim Group with its valuable units Indofood Sukses Makmur and Indofood CBP Sukses Makmur, both engaged in the manufacturing and distribution of food products (although shares of both units are currently considered expensive they still have room for growth on the long term). In times of economic turmoil or uncertainty people tend to postpone the purchase of a car or house, but food remains a top priority and basic need. This focus on the food sector makes the Salim Group very stable.
Over the past couple of years the Sinar Mas Group has seen some pressures due to its focus on the agribusiness and property sectors; both sectors have experienced a sharp slowdown in Indonesia. Although the outlook for the agribusiness sector remains weakish, the tax amnesty program of Indonesia is expected to lead to a big boom in Indonesia's property sector (according to the optimistic analysts). Bumi Serpong Damai, a property unit of the Sinar Mas Group, is one of the companies that can thrive on a rebound in the property sector due to the availability of large land-banks.
Lastly, the Lippo Group's strength is that it is highly diversified with significant investments in retail, media, and real estate but also in the banking, hospitality and healthcare industries. Two of its units that are considered to have great room for growth are property developer Lippo Karawaci and hospital operator Siloam International Hospitals. The healthcare sector of Indonesia is expected to grow strongly in the years ahead supported by the government's universal healthcare program. Other strong units of the Lippo Group are Multipolar, focused on IT services, and retailer Matahari Department Store.