Lippo Karawaci, Building The Urban Home And Health

Lippo said it is focusing on launching more affordable housing projects to target the mid-low segment over the next five years. Its healthcare business has become a priority too, as 51% of total consolidated revenue comes from this division. Future catalysts include better gearing from the sale of Lippo’s 9% stake in its healthcare subsidiary and asset recycling through its REITs. The stock is trading at a 68% discount to NAV and 14.1x/12.3x FY16F-17F P/Es respectively. While under review now, our current call is NEUTRAL with a IDR1,320 TP.

Urban homes
Lippo Karawaci (Lippo) has announced plans to launch more affordable houses over the next five years that cater to the lower-middle income group. It initially plans to launch 2,000 units with a target sales value of ~IDR900bn-1trn. Eventually it aims to reach 10,000 units/year. The first apartments are to be built at Lippo Village, with more being developed at Lippo’s other project locations, eg Lippo Cikarang.

The company’s Urban Homes concept is to tap a large young and growing population that is expected to reach 135m in number by 2030 from 55m currently. ASPs would be ~IDR12m psm, with sizes in the from 36sqm, 45sqm and 60sqm ranges. The expected gross margin is ~30%.

Brighter outlook for healthcare
Amid weak earnings and property presales activity, Lippo’s healthcare revenue continues to show strong growth. As at 9M16, this division contributed 51% of total consolidated revenue, or equal to IDR3.8trn. Revenue from five mature hospitals increased by IDR241bn (30% of total revenue growth), while the topline from 11 developing hospitals increased by IDR568bn, ie 57% of total revenue growth.

The topline from four distinct market hospitals also increased by IDR88bn. This represented 11% of the total revenue growth. All this indicates that the potential of Lippo’s healthcare business remains plenty. This is given the severely underserved healthcare market in Indonesia.

Gearing should improve
Lippo’s net/gross gearings have respectively improved to 49-58% in 3Q16 vs 54-63% in 2Q16. This was thanks to the sale of its 9% stake in healthcare subsidiary Siloam International Hospitals (Siloam) (SILO IJ, NEUTRAL, TP: IDR9,054) to private equity firm CVC Capital Partners Ltd. The proceeds of ~IDR1.2trn are earmarked to expedite the expansion of Siloam’s hospitals.

Following that, the recent EGM approval for the Lippo Mall Kuta development should enhance Lippo’s revenue and earnings, with the proceeds probably being used for business expansion without putting pressure on its gearing levels.

Valuation
The company is currently trading at a 68% discount to our RNAV, which implies14.1x/12.3x P/Es for FY16F-17F respectively. While under review now, our current call is NEUTRAL with a IDR1,320 TP. The risks to our call are Lippo’s high exposure to high-rise developments and USD debt.