Lippo Karawaci BUY. Solid foundations for growth EQUITY RESEARCH. Tuesday, 22 May LPKR relative price to JCI Index

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1 EQUITY RESEARCH Tuesday, 22 May 2012 BUY Bloomberg Code LPKR IJ Price, Rp 790 Mkt Cap Rp bn 18,231 Target Price, Rp 930 Anindya Saraswati (62-21) ext LPKR relative price to JCI Index Rp /23/2011 6/28/2011 LPKR (LHS) 8/3/2011 9/8/ /14/ /21/2011 Relative to JCI Index (RHS) 12/27/2011 2/1/2012 3/8/2012 4/13/2012 5/21/2012 % PROPERTY SECTOR/COMPANY UPDATE Solid foundations for growth Rp997bn of marketing sales booked in the first quarter LPKR has got off to a flying start this year, recording Rp997 bn of marketing sales in the first quarter of 2012, mostly contributed by industrial land sales in Lippo Cikarang. These marketing sales amount to 26% of full year marketing sales forecast of Rp3.8 trillion - which is 21% higher than 2011 s total marketing sales. Kemang Village and Lippo Cikarang are expected to contribute the bulk of this year s marketing sales at 32.5% and 31.2% of the total, respectively. High demand for industrial land in Lippo Cikarang The high demand for industrial land has benefited LPKR, since the company has industrial land in the Cikarang area. LPKR recorded industrial land sales of 146 ha in 2011, the highest ever, with an average selling price of Rp950k per sqm. Currently, the company can sell its industrial land at a price of around Rp1.4 mn per sqm. This buoyant demand for industrial land has also pushed up land prices in the residential area of Cikarang where average selling prices are now Rp2.5-3 mn per sqm. On the back of this strong demand for industrial land, Lippo Cikarang (LPCK), the company s subsidiary, recorded a 292% increase in 2011 net profits to Rp bn. Going forward, the company will continue to undertake more land acquisition since its current industrial land bank inventory is only around 187 ha. Healthier hospitals business Revenues generated by the company s hospitals business grew 22% in 2011, reflecting the higher revenues coming from both inpatients and outpatients, up 19% and 25%, respectively. By 2015 the company hopes to have around 27 hospitals in all. This year, LPKR will begin the groundbreaking of another 7 hospitals while 6 new hospitals currently being constructed will commence operation. The first of these is Siloam General Lippo Village which started to operate in March Located beside the Siloam Hospital Lippo Village, LPKR is intended to serve the local community by providing health services at lower cost. Another new development LPKR will launch another 3 residential towers in Kemang Village and 1 in St.Moritz this year. Demand for the company s large scale development projects remains high, as reflected in the almost 100% occupancy rate at the towers which have already been launched. Besides the continued development of the company s projects in Kemang Village and St.Moritz, the company has also secured 6 ha of land in Prapanca and 1 ha in Warung Buncit, South Jakarta (near to Kemang Village), which will be high rise developments. Year to Dec Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Revenue, Rp bn 3,125 4,190 5,181 6,201 7,247 EBITDA, Rp bn 832 1,112 1,364 1,722 1,953 EBITDA growth, % Net profit, Rp bn ,025 Core profit, Rp bn ,075 1,226 Core EPS, Rp Core EPS growth, % Net gearing, % (3.7) Core PER, x PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report

2 Senior notes issuance to support capex funding LPKR has just issued US$150 million of senior notes in Hong Kong, carrying a fixed coupon at 7%. The senior notes mature in 2019, but are callable after the fourth year. We have incorporated the issuance into our calculations, and this gives rise to net gearing of 28%, meaning LPKR is more highly geared than many other property companies which are mostly net cash. Proceeds from the senior notes issuance will be used to help finance this year s capex of US$400 mn. TP raised to Rp930, BUY maintained This year, we expect the company to maintain its solid performance with revenues estimated to grow a brisk 24% to Rp5,181 bn. Furthermore, LPKR also expects Rp900 bn of potential additional revenues from selling two hospitals to FIRST REIT sometime this year. In our view, the stock is attractive given the company s bright outlook and the significant price appreciation of each of the company s projects which directly boosts the NAV. Using a discount of 40% to total NAV, we arrive at a higher Target Price of Rp930, implying FY12- FY13F PE of x. Maintain BUY. Exhibit 1. LPKR s FY11 revenues breakdown 11% 6% 30% Urban development Large Scale development Retail malls Healthcare 30% Hospitality 3% Source: Company, Danareksa Sekuritas 18% Property & portfolio Exhibit 2. Marketing sales target (Rp bn) Projects F Urban Development Lippo Village Lippo Cikarang ,301 1,200 Tanjung Bunga San Diego Hills Sub total 921 1,159 1,881 2,300 Condominium Kemang Village ,250 The St. Moritz Park View Apartments City of Tomorrow Sub total 400 1,097 1,286 1,550 Retail Inventory 1 (29) 11 - TOTAL 1,322 2,227 3,178 3,850 Source: Company 2

3 Exhibit 3. Average land price in Lippo Cikarang Source: LPCK presentation material Exhibit 4. Siloam General Lippo Village Source: Danareksa Sekuritas 3

4 Exhibit 5. LPKR s NAV calculation ASSETS Area Utilization Price/sqm RNAV % RNAV TOTAL Ha Ratio, % ( 000) Rp bn Own Rp bn URBAN DEVELOPMENT Lippo village % 7,758 13, ,360 Lippo Cikarang % 2,446 9, ,953 Tanjung Bunga % 4,077 8, ,141 San Diego Hills 99 60% 5,702 3, ,387 Micro suburbs Urban Development subtotal 26,086 LARGE SCALE INTEGRATED DEVELOPMENT City of tomorrow Kemang Village 1, ,070 St Moritz Others (retail space inv, land & other devt.) 1, ,811 Large Scale subtotal 3,973 RETAIL MALLS Lease mall Mall Bali Retail space inventory Retail malls subtotal 1,116 HOSPITALS 5 hospital -REIT FREIT 2,648 6 new hospitals 1, ,129 7 under construction hospitals Balikpapan hospital Jambi Hospital Hospitals subtotal 4,960 HOTELS Lippo village-reit FREIT 224 Jakarta, Medan, Pekanbaru Hotels subtotal 562 REIT units 2,435 Total Asset Value 39,131 Add: cash 2,021 Less: debt (4,794) Less: advance from customers (2,850) Est NAV 33,509 NAV/share 1,549 Target price, Rp/share 930 4

5 Financial Summary Exhibit 6. Profit and loss (Rp bn) Net Revenue 3,125 4,190 5,181 6,201 7,247 Cost of good sold 1,602 2,293 2,816 3,331 3,990 Gross profit 1,524 1,896 2,365 2,870 3,256 Operating profit ,136 1,431 1,613 Other income (loss) (8) (159) (197) Pretax profit ,151 1,272 1,416 Income tax (125) (171) (211) (239) (261) Net income ,025 Exhibit 7. Balance sheet (Rp bn) Assets Cash & cash equivalents 3,660 2,175 2,021 1,933 2,533 Investments 534 2,435 3,291 3,421 3,551 Trade receivables - net ,033 1,208 Other receivables - net Inventory - net 7,069 7,892 8,899 9,358 9,492 Land for development Fixed assets - net 1,206 1,556 2,707 3,356 3,961 Property infestation Intangible assets Other assets 1,306 1,551 1,781 2,022 2,308 TOTAL 16,155 18,259 21,726 23,376 25,469 Liabilities Loans 3,376 3,753 4,794 4,836 4,907 Trade payables The Icon Costumer s advances 1,679 2,371 2,850 3,100 3,623 Deferred income ,140 1,364 1,594 Other liabilities 1,735 1,406 2,016 2,186 2,360 TOTAL 7,976 8,850 11,269 12,042 13,150 Minority Interest Equity Capital stock 2,163 2,308 2,308 2,308 2,308 Additional paid in capital 3,245 4,044 4,044 4,044 4,044 Difference in value from restructuring Unrealized gain on securities available for sale 26 (215) (215) (215) (215) Retained earnings 2,254 2,908 3,613 4,365 5,205 Others 3 (230) Total 7,710 8,834 9,778 10,530 11,371 Total Liabilities and Shareholders Equity 16,155 18,259 21,726 23,376 25,469 5

6 Exhibit 8. Cash flow statement (Rp bn) Operating cash flow Net income ,025 + Depreciation and amortization Minority interest Operating cash flow ,214 1,371 1,550 Adjustment to working capital (1,223) (498) (158) (210) 370 Net operating cash flow (521) 375 1,055 1,161 1,920 Investing cash flow Investment (36) (2,482) (855) (130) (131) Land for development (16) Fixed asset - net (48) (423) (1,343) (895) (895) Property investation (118) - (157) (105) (105) Intangible assets (61) Net investing cash flow (142) (2,905) (2,347) (1,122) (1,207) Financing cash flow Bank loan , Equity 2, Dividend (50) (100) (142) (169) (184) Net financing cash flow 2,789 1,038 1,138 (127) (114) Changes in cash and cash equivalent 2,127 (1,493) (153) (88) 599 Beginning balance 1,533 3,660 2,175 2,021 1,933 Ending balance 3,660 2,175 2,021 1,933 2,533 Exhibit 9. Ratios (%) Gross profit Operating profit EBITDA Pretax profit Net profit Effective tax rate Debt/Equity Net gearing (3.7) ROE ROA

7 DISCLAIMER The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Danareksa Sekuritas and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. We expressly disclaim any responsibility or liability (express or implied) of P.T. Danareksa Sekuritas, its affiliated companies and their respective employees and agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, action, suits, losses, expenses, damages or costs) which may be brought against or suffered by any person as a results of acting in reliance upon the whole or any part of the contents of this report and neither P.T. Danareksa Sekuritas, its affiliated companies or their respective employees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy therein or omission therefrom which might otherwise arise is hereby expresses disclaimed. The information contained in this report is not be taken as any recommendation made by P.T. Danareksa Sekuritas or any other person to enter into any agreement with regard to any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice. 7