187-year-old Jardine faces pain in Indonesia after expansion

A near-empty road runs through the central business district in Jakarta, Indonesia

After political protests and the coronavirus crisis walloped its businesses in Greater China, Jardine Matheson Holdings Ltd., one of Hong Kong’s last remaining British trading houses, is facing a new challenge – in Indonesia.
The pandemic has hobbled the Southeast Asian nation’s $1 trillion economy, weighing on Jardine’s local automotive distribution unit and the second-biggest profit contributor, PT Astra International. The conglomerate, whose operations span property, retail, hotels and motor vehicles, has warned investors of “increasingly difficult conditions” in Indonesia, where the fatality rate from Covid-19 is the highest in the region.
Indonesia’s auto industry association almost halved its 2020 vehicle sales forecast, dimming the outlook for Astra, which sells cars and trucks from Toyota Motor Corp. to Isuzu Motors Ltd. With Indonesia’s economic growth set to cool to the slowest in almost two decades this year, Astra’s other businesses including heavy machineries and palm oil are also feeling the hardship.
“The weakness has really been a result of Covid-19 heavily impacting Southeast Asia, where Jardine has fairly meaningful exposure, most notably in Indonesia,” said Jonathan Galligan, group deputy head of research at CLSA Ltd.
For the 187-year-old “hong,” as foreign trading houses are known in Hong Kong, Indonesia marks a new front in its battle to revive growth at businesses ranging from its Mandarin Oriental hotels to Dairy Farm supermarkets. While the pandemic has also pummeled Jardine’s Hong Kong-based peers such as Swire Pacific Ltd., the continuing surge in infections in Indonesia points to unforeseeable risks in Southeast Asia, a region that accounts for about 42% of Jardine’s underlying profit.
Shares of Jardine plunged 12% last month in Singapore, their steepest since 2011, and are trading near an almost nine-year low, according to data compiled by Bloomberg. They have tumbled 32% since a controversial extradition bill introduced and later withdrawn by the Hong Kong government sparked social unrest in the semi-autonomous Chinese territory. Astra has dropped 46% in Jakarta this year, compared with a 28% drop in the local benchmark index.
Representatives for Jardine didn’t respond to requests for comments.
Founded in July 1832 in Canton as a tea and opium trader, Jardine’s fortunes have been closely linked to China’s. In 1994, Jardine moved its Hong Kong listing to Singapore, three years before Britain returned the city to China. The group’s unit Jardine Cycle & Carriage Ltd. gradually took control of Astra starting 2000, after the firm’s owners faced headwinds during the Asian financial crisis. Jardine has continued to diversify across Southeast Asia from Vietnam to Malaysia and Thailand ever since.
The group now includes engineering and construction company Jardine Pacific Ltd., automotive businesses Jardine International Motors Group and Astra, retail group Dairy Farm International Holdings Ltd., investment holding company Cycle & Carriage, property firm Hongkong Land Holdings Ltd. and hotel chain Mandarin Oriental International Ltd. Astra took a minority stake in Indonesia’s ride-hailing giant Gojek in 2018 and invested further in the company last year.
Swire Pacific, on the other hand, has been focused principally in Greater China, according to its annual report last year. For example, almost 90% of its real estate portfolio is in Hong Kong and mainland China. These two regions also contributed to 68% of its beverages division’s profit last year. The group’s shares have plunged 49% since the protests started mid-last year, while the outbreak slammed tourism and travel, paralyzing operations at its unit Cathay Pacific Airways Ltd.
The group’s underlying profit is estimated to drop an average 12% this year, according to five analysts’ forecasts compiled by Bloomberg. A weakening rupiah is another challenge the group is facing, CLSA’s Galligan said. The local currency has depreciated about 7% against the dollar this year.
Despite the headwinds, Jardine has a strong balance sheet, giving it financial power to reinvest when opportunities arise, Galligan said. The group had $7.2 billion in cash and equivalents as of end-December, compared with $6.6 billion in short-term debt.
In early March, announcing a 4% decline in its underlying profit for 2019, Jardine Executive Chairman Ben Keswick said the company’s performance for the rest of this year will depend on “the duration, geographic extent and impact of the outbreak and the measures taken to control it.”
In its home base of Hong Kong, as the government grapples with a deep recession and starts to relax restrictions imposed earlier to contain the spread of the virus, a revival of pro-democracy protests is threatening to add to Jardine’s risks.
Maxim’s Group, in which Jardine’s Dairy Farm holds 50%, became a target of angry demonstrators last year after the daughter of the caterer’s founder criticized the unrest, prompting protesters to vandalize and boycott its restaurants. With travel and tourism at a standstill, Mandarin Oriental said in April that its performance was “severely impacted,” resulting in an underlying loss of about $40 million in the first quarter.
“They have survived the World Wars and opium wars,” said Nicolas Van Broekhoven, a Singapore-based analyst at researcher Smartkarma. “You name it, they’ve come through it. They will survive this one.” MDT/Bloomberg