Lippo Karawaci: a health check for Indonesia growth

The country’s largest listed property group tells FinanceAsia that much of its success is due to a burgeoning middle class.
A Siloam Hospitals operating theatre
A Siloam Hospitals operating theatre

Finding a decent hospital in the less developed parts of Indonesia might appear a difficult prospect but building one is another matter entirely.

Joko “Jokowi” Widodo, the country’s president-elect, has made healthcare one of his priorities as Indonesia battles to provide the infrastructure and services to achieve its 2019 GDP growth target of 7%, from 5.1% currently.  

“The main challenge is that there are not too many doctors and specialists – they are concentrated in the big cities,” Ketut Budi Wijaya, president director at Lippo Karawaci, told FinanceAsia at his office in Jakarta.

Karawaci is Indonesia’s largest listed property developer but its largest growth business is hospitals and healthcare; it can therefore be considered a health check of Indonesia’s middle class growth.

According to World Bank data, the percentage of Indonesian people in poverty has fallen from 14.2% in 2009 to 11.4% in 2013, while life expectancy has risen from 67 in 2000 to 71 in 2013. Meanwhile, Nielsen expects Indonesia’s middle-income segment to double in size by 2020.

Ketut said that much of the company’s success can be put down to this growth story “because we target the middle-middle: slightly low, slightly high.”

“The rich still have the option of going to Malaysia or Singapore,” which he said were more developed than Indonesia in terms of quality of hospital service and technology.

Ketut said finding specialists in secondary cities was tough and that, before they launch a plan for a site, they search for doctors – most of who work for the government.

Government doctors generally work for state-run practices from 8am to 2pm and are allowed to have their own practice after that time.

To attract and retain this talent Karawaci offers incentives akin to a loyalty card, which can be used to utilise the company’s services, such as buying a house.

With rival private hospital operators also looking for talent, Karawaci is  flexible in terms of making time for their further education such as a PhD. “But we need more doctors,” Ketut said.

Karawaci’s rivals in real estate include Sinar Mas Land, and hospital operator Mitra Keluarga, which is of similar size and is aiming for a $300 million initial public offering of shares in 2015.  Neither group, however, is as diversified as Karawaci.

The company’s hospitals follow a model of 200 beds and an initial investment of $20 million to $25 million, with which they can be stocked with “all the necessary equipment” including MRI scanners, CT scanners and X-ray machines.

“Our challenge is to be faster and more efficient,” Ketut said. “Our average length of stay is 4.2 to 4.3 days while the best hospitals have 2.5 days.”

The group as it is today was formed in 2004 through the merger of eight property companies, although the rump has been listed in Jakarta since 1996.

Hospitals as real estate

One of the problems that blights both sides of Karawaci’s business are rising property and land prices, which make replacing land banks difficult. Ketut said this worried investors when operations were combined in 2004.

“But I explained there was a rationale behind it. Everything is related to property, even when you talk about hospitals, because the main infrastructure is the building itself. If you don’t have a good location it is difficult to get patients to it.”

Investors appear to have jettisoned their skepticism, with the share price jumping about 66% since 2010. Meanwhile, Karawaci has been no stranger to the capital markets, which has seen it launch two real estate investment trusts, tap the bond markets and spin off its Siloam Hospitals healthcare division through an IPO in Singapore in 2013. Although this was downsized due to adverse market conditions, it went on to raise $123 million.

The support is welcome: Karawaci aims to operate more than 25 hospitals by the end of 2015. It currently has 18 and will open two more by the end of the year, which clearly leaves it five short with a year to go.

“I think we will need the support from the capital markets,” Ketut (pictured below) said.

Securing land banks is an issue made more difficult due to rising land and property prices, which have risen up to 40% in the past few years. 

New cities

To help offset this, Karawaci is attempting to improve the utilisation rate of its land banks from 60% to 80% by building complete cities to maximise revenues.

Foreign investors are watching with interest, especially from Japan, the largest source of foreign direct investment into Indonesia. Some have asked Karawaci to build dormitories and houses for workers and executives, while others want Japanese schools to more greatly align educational standards with those back home.

“Outside Jakarta there are no business districts, which really bothers the Japanese,” Ketut said. “They want their workers to live close to their factories so there are no excuses to be late.”

Analysts are bullish on the outlook for the company. Bahana Securities expects full-year revenue to jump from Rp6,666 billion in 2013 to Rp11,287 billion in 2016 on the back of solid take-up in its properties.

Another brokerage firm Danareska said in a research note that the outlook was bright but that securing building permits would be a challenge.

“It takes 37 permits to set up a hospital. It doesn’t incentivise foreign investors to come to Indonesia,” Ketut said. “Sometimes we joke that this is an entry barrier for us [too].”

Karawaci is not alone in this battle given Indonesia’s gaping infrastructural deficit.

Ketut joins a long list of people unhappy with the amount spent on the fuel subsidy, while infrastructure has been largely ignored. “This is why people are angry,” he said.

He said the government needs to build toll roads to link townships, clean water facilities and also ensure electricity gets to these places.

“When Indonesia builds the infrastructure, we can build the sub-infrastructure and make people comfortable living in those areas, and of course we create jobs too,” Ketut said.

This is the growth story of Indonesia.

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