Riady, steady, go?

This was one of the few financial articles to try and unravel the business dealings of one of Indonesia’s biggest family conglomerates. The Riadys and Lippo Group managed to quell investors fears on a complex restructuring process in 1997. It used an impressive financial sleight of hand. On the back of this article the magazine offered me a very good job. Finance Asia April 1997.

International institutional investors rebelled when the Riady family proposed restructuring some of their Indonesian companies. The family has quelled some of investors’ fears. But others remain, writes Gerry O’Kane

There were smiles, handshakes and speeches all round at the March opening of an extravagant new trading centre in Jakarta aimed at the smaller retail investor. James Riady – deputy chairman of Indonesia’s Lippo Group and the oldest son of Mochtar Riady, Lippo’s founder – told guests how pleased he was that everyone could make it. Equipped with wall-sized trading monitors, chairs and lots of ashtrays, the ‘gallery’ was in the Lippo Securities building. The punters could walk into the next room and place orders with Lippo dealers.

James Riady

For the younger Riady, there was another reason to smile. In spite of some rough times over the past 18 months, times when his father’s business empire could have been brought to its knees, the group’s share prices that flickered across the screen in March, were at six-month highs or better. PT Multipolar, which less than a month before had bought store chain Matahari, hit Rp3,200 ($1.33) up Rp250 and Lippo Life Insurance, which held 40% of Lippo Bank, hit Rp3,075. The bank itself had risen Rp100 to Rp7,000.

It was also the most concrete proof for corporate watchers that Lippo was well on its way to fulfilling corporate plans which had been forced on it by circumstances in 1995. In January of that year, Lippo Securities’ partner, the Swiss Banking Corporation (SBC), split from its joint venture brokerage. Eleven months later, Lippo Bank faced a run on funds. By mid-1996, the Riady family faced an investor revolt over plans to bring the bank and its life insurance arm under Lippo Securities.

According to the Riadys at the time, this restructuring would place the company in a prime position to exploit the demand for better financial products from Indonesia’s 200 million consumers. It’s a market others have an eye on too.

Banks compete for retail financial services

“There’s little doubt that all of the big banks are trying to get into the retail markets,” says Susan Baker, an analyst with Jardine Fleming in Jakarta, although another comments cynically that what is said and what was done in Indonesia are two different things. Baker points out that most of the banks have traditionally concentrated on corporate finance. “But as the bigger international banks have come on the scene, there is now heavy competition for the corporate accounts,” she adds. Partly because of this, the Indonesian institutions have begun to look at the potential of retail banking.

Baker asserts this will put pressure on Lippo. Thanks to the foresight of James’ father, Lippo Bank became the epitome of retail banking in the country. It was the first with recognisable logos and incessant marketing. In many ways, it was to be first to try and grab new markets and beat its 239 banking competitors in the country.

The biggest threat to Lippo’s position, according to bankers, is Indonesia’s second-largest conglomerate, the Sinar Mas Group. Sinar Mas Multiartha (SMMA) is looking to get into the multi-finance business too. It wants to exploit the group’s entities and Indonesia’s average national gross domestic product growth of 7.5% a year, to cross-sell financial products. Like Lippo, it plans to use its banking arm as a hub for these activities. SMMA’s key profit driver is PT Bank International Indonesia, the nation’s most profitable listed bank and second-largest banking stock. And two other leading finance companies, Bunas Finanace and Dharmala Sakti Sejahtera, have recently announced they’re hitching their wagons to this lucrative star.

But according to Ray Jovanovich, director and senior portfolio manager of Indoseuz Asset Management’s Indonesia Fund in Hong Kong, who has been in that market for decade, it’s a race that will see some casualties. “Quite honestly, there are too many banks and financial houses in Indonesia and we’ll be seeing a consolidation in that sector pretty soon,” he says.

Operations are ‘smoke and mirrors’

And where does that leave Lippo in all this intense Indonesian competition? According to many analysts, all of them reluctant to be quoted, that’s a good question. “Smoke and mirrors” is how one analyst described the operations of Lippo Bank and other members of the vast Lippo Group.

Bankers, investors and analysts have been scratching their heads trying to figure out what is going on in the Riady family’s business empire. The complexity of Indonesian business is such that not everything is as it first appears. With regard to the Lippo Group, its plans for a financial supermarket are locked in to what other arms of the business are doing.

Speaking about the gallery’s opening, the group’s investment banking director and president of Lippo Securities, Charles de Queljoe, says, “The major premise underlying all of our activities is that we believe Indonesia is on the edge of a consumer boom.” And that is probably the nub of the matter, as he adds, “People want to shop, they need life insurance and investment services, banking, you name it.”

At a glance, Lippo’s Indonesian operations cover not only the financial arena but property development, or as the company prefers to put it ‘urban development’, which includes super-malls, retail franchises, stores and housing. The list goes on. How these arms work together influences the group’s bottom line.

On the same day that the trading gallery opened, seven of the nine listed Lippo companies had risen to at least a six-month high on the Jakarta bourse. At the time Adnan Tan, the head of trading at Deutsche Morgan Grenfell in Jakarta said, “[James Riadyl has got a great concept and investors have made nothing. but money.” That’s true. Fancy corporate footwork over the past 18 months, using restructuring and rights issues has made Lippo companies the darlings of Jakarta’s climbing index.

But, according, to some analysts, that Lippo shares should look so healthy on such an important day for Riady Junior had nothing to do with miracles. Only a week earlier Lippo Securities had reported a quadrupling of trading volumes and profits of Rp40.4 billion for 1996, compared with Rp14.1 billion the year before. Property firms Lippo Land and Lippo Karawaci (an ‘urban development’ to the west of the capital) also reported half-year profit surges.

Coincidentally Lippo Securities’ head of research, Jos Parengkun, announced his favourite stocks for 1997 were Lippo Life and PT Matahari Putra Prima (bought only weeks before by another Lippo subsidiary).

Media-shy Lippo executives

Despite numerous requests from Finance Asia by fax and telephone to Lippo executives, few wanted to talk openly. In some respects it is understandable. In 1995 an Asiaweek article about the Group pointed out that, despite Lippo Land’s profit increases, analysts had zeroed in on the 20-fold increase in total debt to Rp 1 trillion. The article also claimed that Lippo Bank was highly exposed to covering this debt and other property companies in the group. There was a run on deposits and Lippo Bank saw roughly 15% of its deposits worth about $347 million withdrawn. Its share price fell by nearly 30%, while Lippo Land dropped 28%.

What can be said with certainty about the Riadys is that they do not lack vision, determination or skill. They moved quickly and, by discounting central bank certificates with Bank Indonesia and raising cash with four other local banks, the haemorrhaging was stopped. Deposits had been recovered by the end of the same year and interbank loans repaid by the end of the first quarter 1996.

According to one analyst who knows the family well, that 1995 run was a bit of a shock to Mochtar Riady, the group’s founder. Known as a master player of the stock market, he didn’t want to be in that position again and decided to restructure the group into three core businesses: property, finance and retail. “He’s learned from people like Li Ka Shing and is moving to hold strategic interests in his businesses rather than the whole lot,” explains the analyst. Hong Kong’s famed tycoon, Li ka Shing, has 5.6% of Lippo Karawachi and interests in the Lippo-controlled Hong Kong Chinese Bank.

Was guangxi a saviour?

Indeed these kinds of links with Li Ka Shing are believed to have been what saved Riady and engineered the dramatic turnaround of Lippo Bank after the 1995 run: what the Chinese call guangxi (relationships). Mochtar Riady has powerful friends. Before he started Lippo Bank, he was chosen by Liem Sioe Liong to head Bank Central Asia, part of Liem’s industry-leading Salim group.

While banking secrecy laws make it impossible to prove whether or not Lippo received help from its friends, an analysis of the bank’s quarterly results show some interesting anomalies. Lippo Bank records a surge in deposits from Rp228 billion in December 1995 to Rp600 billion in June 1996. From the period June to September 1996 this fell back to Rp157 billion. As one analyst delicately puts it, the April to June deposits “may not have been derived from a stable source,” and adds, “It raises the issue of whether the strong inflow was merely window dressing.” What fuels this speculation is that Lippo Bank did not channel this surplus cash back into the loan business, instead placing the funds in lower-yielding marketable securities and with other banks.

Of course, this may just be down to prudence on the bank’s part. It was just getting over the shock of a run on its cash and perhaps casting its eye forward to this year’s May election, felt it needed surplus funds to hand.

Liquidity problems in the property arms could be another factor. Whatever the reason, its loan-to-deposit ratio has fallen dramatically and in the eyes of many brokerages this needs to be rectified. Although in the past, the stability of the bank and its high profile meant it could offer lower deposit rates than competitors. Now consumers are demanding premium rates.

The bank also faces one of the highest cost to income ratios in the industry, in spite of good use of technology and the waiving of the Riadys’ massive management fee in June. Before the restructure of the group’s financial arms, the Riady family received a large consultancy fee of Rp13 billion, nearly 10% of pre-tax profits of Rp137.3 billion.

In many respects it is understandable that ethnic Chinese might have bailed Riady out. While President Suharto has gone to extremes to keep the peace between Indonesia’s Chinese minority and the pribumi (native Indonesians), it is often a tense situation.

Pribumi and Chinese tensions

Suharto’s personal wealth is believed to have flourished under the astute business eye of, among others, Salim’s Liem, but that is not the same for the rest of the nation. Figures indicate that while ethnic Chinese make up less than 7% of the population, they control as much as 70% of the country’s wealth. While the average GDP per capita stands at only US$1,184, it is much higher for ethnic Chinese. The concept of the financial supermarket is aimed partly at this group, which although only a small proportion of the total population, still numbers about 19 million – double the populations of Singapore and Hong Kong combined. And both these countries have higher GDPs than most West European nations.

The strength of feeling on this issue cannot be underestimated. Only a week after James Riady was opening his retail investment gallery he was reported locked in a head-to-head battle with former minister of trade Sumitro Djojohadikusumo for control of Indonesian hotel operator PT Hotel Papatan. The president of Hotel Prapatan, Nurman Diah, was quoted in a news release as saying, “Politically it is quite sensitive that a business founded by a pribumi business family be taken over by conglomerate controlled by non-pribumi. This is bad news.” He added that James should “mind his own business”.

Given these factors, and the rumour-mongering that business in Jakarta inspires, it was unsurprising that there was mild panic among smaller investors when the Riady family announced a restructuring of the financial arms in August last year.

Fears of a Riady exit

The immediate reaction of minority and institutional investors was to suspect that the family was bailing out. Out of what, exactly? Some thought it was the banking business – because of exposure to affiliates’ property loans. Others thought it was Indonesia the Riadys were leaving, to expand their interests in Hong Kong and China. It was only in February this year, when the Riadys made the surprise announcement they had bought 50.1% in Indonesia’s largest department store chain, Matahari, that investors believed them. But the shares for sale during the restructure would come from a Riady investment company. Lippo Securities already held 4.9% of Lippo Life. Lippo Life was then to take 40.15% of Lippo Bank, again from the Riadys.

The day after the announcement not only were investors getting nervous but Indonesia’s stock market supervisory agency, Bapepam, said it wasn’t happy either. One of the agency’s directors, Herwidayatomo, announced that Lippo Bank held 11.67% of Lippo Life and Lippo Life had 9.46% of Lippo Securities. He didn’t want cross-holdings to become a part of Indonesia’s stock market structure. Questions were also raised about how smaller share-holders would benefit from the restructuring.

The Riadys’ famed crisis management abilities came into play yet again. James Riady said the family was not cashing out and that it intended to plough money back into Lippo Securities after its rights issue and maintain a controlling share. Both he and Lippo Bank president, Markus Permadi, said the move would create “tremendous synergies … creating effective financial supermarkets which will provide one-stop shopping to our more than 1.8 million strong retail customer base”.

Some analysts say they still see little “synergy” since the companies cross-sold products before the restructuring. Baker at Jardine says it was a move Lippo Securities had been waiting for since it bought SBC’s 17% stake in early 1995. “They have been wanting to expand their retail side from the institutional business since then,” she says.

But the Riadys had to sweeten the pot. To appease Bapepam, the cross-holdings were to be divested. To encourage private shareholders, they pledged to plough back proceeds from the deal and take 50% of Lippo Securities after its rights issue this year, increasing it from 19%. As a final move, they agreed not to take their 10% annual cut of Lippo Bank’s pretax earnings.

Courting controversy

The moves got the deal approved at Lippo Life’s and Lippo Securities’ meetings of independent shareholders. While the votes were 95% and 100% respectively, only some 60% of shareholders turned up. Suggestions have been made that various proxy votes were ruled out of order but this is unconfirmed. But, according to Jovanovich, while most of the institutional investors initially disapproved of the restructure, the fact that the Riadys listened to minority shareholders’ concerns boosted their reputation in the industry.

The Riadys are no strangers to controversy. Most visibly, they gained a certain international notoriety when, along with close associates, executives and affiliates of the Lippo conglomerate, they donated $854,000 to the US Democratic National Committee in the course of the past six years. In March their Los Angeles-based LippoBank received its third “cease and desist” order in seven years from the Federal Deposit Insurance Corporation. Whatever the “practices” are, the FDIC is not saying yet but records show the bank has levels of non-performing loans many times larger than those of other similar-sized banks in California. According to reports in the Los Angeles Times, James Riady himself has injected $20 million of his own money over the past 10 years.

Probably the most relevant concern investors have is the state of the Riadys’ property divisions. At the end of November the Bank Indonesia Governor, Soedradjat Djiwandono, expressed concern over the rising proportion of bank loans to the property sector.

Property holdings confuse finances

Lippo Bank’s 1995 trauma was caused by concern over its exposure to its own property affiliates. Within the group are Lippo Land, Lippo Karawaci and Lippo Cikarang. In March this year, there was an unconfirmed report that the group would consolidate its property holdings. Lippo Cikarang would merge with Lippo Karawaci, providing a back-door listing and then Lippo Land would take over Karawaci. Karawaci is a large mixed development project in Tangerang, to the west of Jakarta, including schools, hospitals, housing, shopping malls and clubs. But, despite positive noises from the company, most independent observers believe Karawaci and the similar development by Cikarang are facing problems.

According to property analyst Scott Butler at Satyatama Graha Tara, an affiliate of Brooke Hillier Parker in Jakarta, the market in general is suffering but these developments even more so. “They’ve moved from trying to shift the luxury apartments, the $150,000 to $200,000 down to the $10,000 market. They’re desperate to improve cash flow and must be under a lot of pressure,” he says. Li Ka-shing and China Resources, an arm of China’s foreign trade ministry, hold nearly 6% of Karawaci but analysts say the Riadys are eager for them to take more. The word on the street is that China Resources might take up to 20% of Lippo Land after the restructure.

Senior Lippo executives frequently say how wonderfully the projects are doing. But, according to Butler, most of the office space is taken up by Lippo’s own staff. Indeed PT Matahari is to move its headquarters there and the Riadys have only recently bought more than 50% of that retail operation. Butler says even the massive shopping mall, another private company, is not doing business. Lippo claims it has some great names there: Matahari, WalMart and Pennys. But it holds the Indonesian franchises for WalMart and Pennys. “People aren’t spending money, except maybe on the fairground rides they have in the mall,” says Butler.

But things may be looking up for the Riadys on this front. Karawaci’s Rp100 billion flotation in June brought in fresh cash and after the restructure it may well sell off more to China Resources. There have also been reports that it will be selling off some 50% of the Karawaci supermall to an Australian firm.

While analysts greet all this as good news, reducing exposure to property, they remain sceptical. “Property remains [the Riadys’] Achilles heel,” says one analyst at Deutsche Morgan Grenfell. While officially analysts accept that Lippo Bank has moderated its loans to affiliates, not everyone is convinced. “I wish I knew I knew what the exposure is,” says another analyst. “For example, Lippo Land’s accounts showed a loan from Lippo Bank but the bank didn’t show it and later claimed to have sold it off to others,” he adds. And, ironically, executives at Lippo know such things happen. Priasmoro Prawiroardjo, vice-president with joint venture BNP Lippo told Asia Times, “It’s clear that the loan process in this sector is commonly engineered. Because the economy is still growing at above 6%, the unpaid loans from this sector can be hidden.”

On the other hand these kinds of project may boost its retail banking supermarket concept. By developing projects to house 60,000 people, the company is creating a market in which to sell products they should need; life insurance, short-term loans and financing. According to Jardine’s Baker, apart from plans to develop other investment galleries in Lippo Bank branches, the company is already talking about selling life insurance at Mataharis.

Digby Falkner at Deutsche Morgan Grenfell in Jakarta says people should keep an eye on the credit card business too. While Bank Bali currently has a form of Affinity card with Matahari, if contractual obligations allow, he foresees Lippo Bank moving in on that business.

And it all goes back to the beginning. To attract customers to Bank Central Asia during his time there, Mochtar Riady used a lottery. At present the Matahari group is running a lottery in exchange for personal details, phone, address and income details. “This will give them a massive marketing list and will most likely be used by the finance arms,” says Baker.

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