Thursday, August 15, 2013

Astra and Sinar Mas - 22-Year Performance Comparison

In the early 1990’s I wrote two reports on Indonesian business groups. They were updated in 1997 and 2007.

The reports are deep-dives into Indonesia’s largest conglomerates.   In Asia and most of world outside of the US and the UK, conglomerates are many times referred to as business groups; and designate a grouping of companies controlled by a family or other entity.

The reports examined not only companies that were listed on the stock exchange, but also looked at unlisted companies.  It looked at the key people making decisions at the group rather than company level. The reports dug into the controlling shareholder and his/her extended family, their reputation, and relationships with the government and other business groups. 

While writing and editing the report I and my colleagues would discuss who was good and bad and try to rank the groups by whom we would trust with our own money and which we would recommend to our clients. 

It was a pure subjective process.  The report was qualitative and had no valuations data, projections, or other numbers except for market cap and company ownership.  The reports themselves were more a collection of facts. Some comments were put into the text, but it was mostly factual information.  

My [1] conclusion was that there was a big divergence in the quality of controlling shareholders and that there was a wide variety of corporate structures.

Specifically we thought that the Astra International group stood out as likely being the best or one of the best, corporate citizens in Indonesia    In contrast was the Sinar Mas group came out on the other side of the spectrum.  We did not like them very much at all.  


Astra was the second largest business group in Indonesia by turnover in 1991.  In August 1991 its three listed companies accounted for 11.8% of the JSE’s market capitalization, the second largest after the Salim Group.  It had five major business lines automobiles, heavy equipment, electronics, wood based industry, and agribusiness.  A family related group called Summa, had interests in financial services, real estate and construction.   We included Summa in the report on Astra as we defined a group as companies controlled by the same family. 

Astra was founded by William Soeryadjaya in 1957. It started as a trading company working with the Sukarno government, where it imported asphalt, construction and road materials.  It is believed that Astra’s early success was due to its close connection with Ibnu Sutowo, the ex-chief of Pertamina, Indonesia’s national oil company; and perhaps IR. Suhartoyo who headed the country’s Department of Industry in the 1970s. Astra survived the downfall of both and by the mid-1970s was able to survive on its own. 

The group later expanded into property and construction, automobile assembly, heavy engineering and plantations. Several of its largest and most lucrative businesses were partnerships with Japanese companies.  The two biggest and most successful were its relationship with Toyota and Komatsu. 

At the time Astra stood out as the only Indonesian conglomerate that had established a professional management structure.  In the 1991 report I wrote, “We consider Astra to be the most ‘corporate’ group amongst all Indonesian conglomerates.  While many Indonesian conglomerates are beginning to professionalize operations, Astra has already done so.”

It was not totally professional as there were family members in leadership positions.  The founder’s brother Benyamin was a commissioner in several more important Astra subsidiaries.  Second son Edwin handled the daily activities of the group, played a role in taking Astra public, and was seen as the group’s next leader. 

Astra went a step further in hiring and giving managerial and decision-making responsibilities to both non- Chinese Indonesians as well as ethnic Chinese-Indonesians.  This was very rare at the time.  Virtually all big businesses in Indonesia at the time were controlled by Indonesian Chinese and non-family employees were typically in the same Chinese dialect group.  They were usually hired more for loyalty than competency.

Astra’s founding family also had a good reputation in Jakarta business circle.  They were considered ‘peranakan’ Indonesian Chinese.  Peranakan refers to South-East Asian ethnic-Chinese that had largely adapted the language and customs of their adapted countries.  

The group also had a good reputation amongst other investors as well as solid minority shareholder.   I wrote, “It is well respected in Indonesia and abroad.  As an example of this, the International Finance Corporation (IFC) has taken a 5.38% equity stake in the listed company and an IFC official sits on the board of PT Astra Inernational”. 

 Like many successful business groups in emerging markets, one of Astra’s key strengths was its being seen as a reliable joint venture partner.   In 1991 I wrote: “Astra has been known by foreigners as a reliable and efficient joint venture partner.  The reputation proved appealing to Toyota, which formed a joint venture, which continues to this day.  The relationship with foreigners, especially Japanese, has given Astra access to more capital than it could raise in Indonesia.” 

The group also had a fairly clean structure with a good alignment between minority and controlling shareholders.   Most of the family’s businesses were under the listed holding company, PT Astra International.    

The listcos however were not in complete alignment with the Soeryadjayas’ family interests.   Founder William Soeryadjaya financed his eldest son Edward’s Summa Group. But at the time they seemed to be operated separately. Summa was Edward’s vehicle and Astra would become younger brother’s vehicle.  I wrote in 1991 that ‘…we believe the two groups are acting independently.  William is believed to be more of a risk-taker than his father or brother Edwin.”[2][3]   

I also wrote in 1991 that the Soeryadjayas agribusiness interests were both within and outside of the listed holding company.  This was another potential conflict between family and corporate resources and attention.  

Despite these two items, Astra had very clean and minority friendly structure compared to the other groups we looked.

Sinar Mas

Sinar Mas was the third largest business group in Indonesia by turnover in 1991.  In August 1991 its four listed companies accounted for 9.6% of the JSE’s market capitalization, the third largest after the Astra and Salim Groups. 

Like Astra, it was controlled by one family; the Widjajas, whose head Eka Tjipta Widjaja was believed to have close relations to the Indonesian military.  I worte, “During the Indonesian revolution, Eka developed a relationship with the Indonesian military by supplying tea, syrup, dried meat and other necessities to the Indonesian forces.  Eka used empty army boats to transport copra around the archipelago and later to Europe.  By the end of the revolution, Eka had plantations producing coffee and rubber.”

Sinar Mas’ more formal origins were typically traced to its 1969 founding of Bimoli.  By the mid-1990s Bimoli was Indonesia’s largest cooking oil brand with an estimated 50% market share. 

Sinar Mas had eight major business lines: banking, finance and insurance; pulp and paper; real estate and property; plantations; food and consumer products; hotels and resorts; and chemicals. 

Unlike Astra, Sinar Mas did not group its varied businesses into one listed holding company.  The group’s structure and vertical integration strategy left open the possibility of transfer pricing between public and privately controlled entities.

Two Sinar Mas listed companies - Indah Kiat and Tjiwi Kimia - were both in the pulp and paper business. “Together they formed the largest fully-integrated pulp and paper manufacturing operations in Asia outside Japan”.   These two were primarily manufacturing companies.  Other companies in the group supplied raw materials and sold finished products. This left open the possibility of buying and selling products to-and-from listed companies also controlled by the Widjaja family. “The group has its own distribution companies to support its paper manufacturers and a 200,000 hectare forest concession in North Sumatra.  Other companies produce finished paper products such as notebooks and other office supplies.”

Further, the family-controlled bank meant that the group could obtain easy funding.  This likely led to poor capital allocation.  In the early 1990s, Indonesian banks were allowed to lend up to 20% of their loan book to related companies.  After BII’s downfall in the Asian Financial Crisis it was revealed that 50% of its loans were to Sinar Mas group companies. 

I did not include it in the 1991 report, but it was an open secret that In addition to his many diverse businesses, Sinar Mas’ founder, Eka Tjipta Widjaja, had a very busy family life.  He reportedly had seven wives and some 30 children. 

I did however write that many of his children from his first marriage were working and leading group companies.   In 1991 one of his daughters, Sukmawati Widjaja, was group CEO and Vice Chairman.  Not much was known about her except that her late husband, Ruby Maeloa was responsible for much of Sinar Mas’ growth in the 1970 and 1980s.   

Eka was considered ‘totok’ Chinese.  This refers to Indonesian Chinese born in China (or their Indonesian born children) who use a Chinese dialect as their primary language and do not identify themselves as Indonesians.  In 1991 I wrote, “He is a totok Chinese and seems quite traditional in his life-style.  His Indonesian has a heavy Ujung Pandang accent and he conducts meetings in Chinese when possible.  It is believed that he prefers to conduct meetings in Chinese or the Ujung Padang dialect”.

We were also told, but did not write, that outside the Widjaja family and a few trusted lieutenants, very few managers in the group had any significant decision making responsibility.   This fit the custom as previously described.

At the time there were also several rumors that Sinar Mas’ pulp, paper, plantation and /or forestry operations were breaking environmental laws.   

Quality Pays

Performance Since 1991

So how would minority investors have done by investing in Astra and Sinar Mas group companies since the September 1991 report?

I always suspected that Astra-listed companies outperformed Sinar Mas ones, but I was surprised by the extent.  In fact the divergence in performance is stunning. 

From the time of publication to now, all three Astra listed companies had positive total returns (i.e. price appreciation and dividend yield).   Astra International’s total return has been 9.5x in USD.  This includes the 1997/98 massive Rupiah depreciation.[4]   United Tractors has done better.  Inventors have been rewarded with 12.4x their money in the same 22 years.

During the same time period all three listed Sinar Mas companies have lost money for anybody that has kept shares for that long.  After 22 years a USD investor in the group’s largest listed company, Indah Kiat, has lost 56% of their investment. 

Performance Since 1998 (height of Asian financial crisis)

The performance since  August 1991 does not take into account market conditions.  It just happened to be when the report was published.  

What about a lucky investor who bought Astra International at the depths of the Asian Financial Crisis and had the fortitude to hold until now?

Astra International hit an all time low during the week of 9 October 1998.  Since then a USD investor would have been rewarded with a return of 207x (or 20,714.5%).  An investment in United Tractors would have done even better returning 1,172x (117,160.0%) over those same 15 years.

The return from the Sinar Mas listed companies was much lower since 1998.  The best was from Tjiwi Kimia.  It returned 72%. A holder of Indah Kiat shares would have lost money.

2002 to Now

I cheated a bit in the above analysis.  I selected a time period when Indonesian domestic oriented stocks were facing a very bleak future, and Astra’s share price was at an all-time low.   

In contrast exporters – such as Indah Kiat and Tjiwi Kimia - stood to benefit from the declining Rupiah. 

Both companies share price performed well during the Asian financial crisis.  For instance, between its December 1997 through and its May 1999 peak Indah Kiat shares price rose by 3.2x.[5] hitting a peak price of rp4,425.  It is now trading at Rp1,230 down 72% in 14 years.
But how would have investor done if we used the same criteria to select the date as we did for Astra?   How would an investor have done if they got into Sinar Mas’ largest listed company at its historic low, and would this have been better than buying shares of the quality group companies? 

Even here Astra vastly outperformed.  Between May 2002 and August 2013 Indah Kiat’s total return was 79.1%.  Astra International’s was more than 12x.   In fact, Astra group companies outperformed by a factor of 6x to 34x, depending on how one pairs the group’s six listed.

Moving On

There are more items to explore.  The comparison is hardly apples-to-apples as the industries that the listed Astra companies are involved in are very different than from the listed Sinar Mas ones.  Besides there are likely additional time periods when Sinar Mas group company shares outperformed Astra company shares.

There is also the sleep-at-night factor.  This is basically how much one worries about their investments.  Since 1991 investors would have lost a lot of sleep with any Indonesian investment, especially during the Asian financial crisis.

But I suspected one would have lost much more sleep if they had held any of the three listed Sinar Mas companies:
  • Both Indah Kiat and Tjiwi Kimia’s shares appear to have been suspended in 1991. 
  • Their parent company, Asia Pulp and Paper (APP) was behind the largest corporate default in history before Worldcom.  It defaulted on some US$12-14bn. 
  • APP’s NYSE shares fell some 98% from its IPO price and were later delisted. 
  • APP and other Sinar Mas companies have been the subject of numerous environmental group criticism.  

Last Thoughts

I’ve been researching business groups off and on since my first Indonesian group report was published 1990.  In the past it has always been a labor of love.  After finishing each one I’ve felt very powerful.  I know who controls what; understand how minority investor interests may be compromised; and have fact-based opinions on which controlling shareholders are good and bad for outside investors. 

What I particularly like about this research is that I look at data points, ask questions and root-out information that others bypass.  This helps me to generate non-consensus investment ideas.  It gives me the courage to buy companies when others are selling and valuations are attractive.

To try to explain this I wrote a short piece where I dubbed my research methodology Research Alpha.  My "Research Alpha" focuses on people, structure and valuation. This is in contrast to bank research that tries to forecast earnings and take a myopic view of a company.   I call this Research Beta (write-up on this is here). 

I used this "Research Alpha" methodology during a personal trip to Greece (write-up is here), in several investments in Asia, and when interviewing hedge fund managers when I was a fund-of-funds professional. 

[1] Much of this blog refers to “A Guide to Indonesian Business Groups”, published in September 1991 by Crosby Research.   Michael McGaughy researched and wrote most of the materials. John Niepold and Alex Wreksoremboko, who were also working at Crosby Research in Indonesia, contributed to the report.   Richard Borsuk, then Asian Wall Street Journal’s chief Indonesian reporter edited and provided feedback on the report. As per company policy at the time, none were credited for their work and no author name(s) appear on the report. 

[2]  A year after the 1991 edition of “A Guide to Indonesian Business Groups” was published, William Soerydjaya lost control of Astra.  He sold the family’s controlling stake in order to rescue his eldest son’s Summa Bank, which had suffered from a credit crisis and finally collapsed.  William Soerydjaya personally guaranteed all Summa Bank deposits using his stake in Astra.  All depositors received their money back with interest, without using any government or outside support. 

[3] After Astra, Edwin Soeryadjaya founded Saratoga Inestama Sedaya, which has sizeable stakes in JSE listed Adaro Energy and Tower Bersama Infrastructure.   Edwin regularly appears on the Indonesian Forbes rich list.

[4] The 1991 report listed the Rupiah at Rp1,951 to US$1. When this was blog was written in mid-August 2013, the exchange rate was Rp10,309 to US$1. 

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