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Gold-digging in Indonesia: Unearthing the hidden gem

Michael Aguila, CFA

September 2023

Photo 8-30-23, 6 08 39 PM_edited.jpg

With the world's fourth-largest population, Indonesia has emerged from the pandemic with remarkable economic growth primarily driven by robust consumption. This consumption-led growth is expected to continue, thanks to tapering inflation, increasing mobility, and improving purchasing power. We recently visited Indonesia and met with half a dozen companies driving these economic trends.

We took our boots on the ground in Indonesia, and it was 37 degrees hot!

Striking gold in West Java

Golden opportunity 

One of the companies we met is a $150m jewelry and gold bar retailer and exporter. The surge in demand for gold as a safe-haven investment has propelled the company’s products, particularly micro gold and gold bars, to record levels of demand. The company has taken an aggressive approach to its omnichannel strategy, which includes extending wholesale and retail network coverage, expanding the number of jewelry stores and pawnshops, establishing partnerships with the country’s leading retailers, and making strides into the e-commerce space while concurrently developing its digital platform. 


This year, the company initiated exports to the UAE and India, with plans to expand its global reach further. With the surge in export activities, capacity utilization has notably increased, more than doubling from 2020 levels but still operating at roughly half of full capacity, leaving room to fulfill ever greater orders.

Despite consistent sales growth for several years in a row and +40% earnings growth in H1 2023 alone, the company’s stock price has remained stagnant due to an overhang caused by one of its early investors – a state military pension fund – which was selling for a long time due to its forced liquidation by the government. However, now following the divestment of this investor's entire stake and no more selling pressure on the stock, the company's shares appear well-positioned to deliver strong growth on the back of both export and domestic sales growth prospects and an attractively low 6x P/E valuation.


The earnings are projected to continue on a high growth trajectory in H2 this year – a trend management believes will continue into the following year. The recently strengthened investor relations team has been effectively communicating the company’s prospects to the market, resulting in increased analyst coverage and significant improvements in stock trading liquidity.

Meeting with the management of a $150m jewelery and gold bar retailer and exporter


Factory-hopping in Bandung

As part of our due diligence on this jewelry and gold business on the ground in Indonesia, we embarked on a three-hour journey from Jakarta to Bandung to tour three of the company’s five factories. Upon arrival, we were greeted by a pack of dogs – one of several layers of security guarding the company’s high-value inventory: a kilogram of fine gold, for instance, is valued at approximately $70,000.

One of the company's many high-value products is this 1kg gold bar worth $70,000

Our first stop was the jewelry factory, where we gained insight into the intricate production process required for crafting gold jewelry. During the tour, we couldn't help but notice the mastery of the craftsmen: this high level of skill has led to the creation of more sophisticated higher-margin jewelry, catering to the upper-class segment previously unserved by the company.

A craftsman polishing a gold jewelry piece to precise measurements

Next, we ventured to the gold bar factory, which featured a comparatively simpler production process. Here, micro gold bars are manufactured for the lower-class segment of the market, while gold bars of varying weights are cast for the middle- to upper-class segments. These finished products are precision-weighed to 1/10,000 of a gram to ensure accuracy. Demand for these bars has surged as the public has been seeking safe-haven assets amid higher inflation, providing a tailwind for the company to double its market share for gold bars from 2020 to 2022.

This machine attaches a tamper-proof seal to the micro gold bars for security

Our third factory visit was the gold refinery, a recent addition to the business that commenced operations just last year. This strategic department complements existing manufacturing operations by streamlining midstream and downstream processes while providing a secure line of supply from local producers. The vertical integration is poised to deliver advantages across the entire value chain, from refining and manufacturing to retail and distribution.

On our visit of the recently established gold refinery

The following day, the company hosted a jewelry exhibition as well as a customer event which was attended by a diverse audience of over 500 stakeholders that included wholesalers, retailers, export and distribution partners, banks, suppliers, and even a credit rating agency. This event served as a platform to showcase the company's new jewelry line and fine gold bars while acknowledging and rewarding the top customers. The expansive network of wholesalers and retailers positions the company exceptionally well to cater to the distinct preferences and needs of each market it serves.


Attending the company's grand customer gathering and product launching event

Generating traffic in a post-pandemic world

Riding the recovery wave

We met with a $350m taxi operator whose distinctly-colored blue taxis dot the streets of Jakarta. The company, like many others, faced challenges during the pandemic but is now poised to surpass its 2019 profit records thanks to a robust post-COVID recovery. In response to the saturated taxi market in the capital, the company has been strategically increasing its footprint beyond Jakarta while expanding its higher-margin non-taxi services. It even tapped into the used car market, refurbishing retired taxis for profitable resale in third-party markets. Additionally, in Bandung, the company has entered the bus rapid transit (BRT) sector, operating on a “per kilometer” revenue model rather than a “per passenger” basis.


Hence, despite the introduction of recurring royalty expenses and government measures aimed at improving Jakarta’s air quality, the company which trades at 11x P/E remains confident in achieving double-digit earnings growth this and next year, in part thanks to actively adding electric vehicles to its fleet. 

Meeting with the management of a $350m taxi operator

Taking a (different kind of) toll

We took a taxi operated by the company we met earlier to get to our meeting with a $2b toll road operator. As we queued up at its toll booths, it was evident that this partially state-owned enterprise (SOE) is making a strong post-pandemic recovery. The company, now free from the shackles of pandemic-induced movement restrictions, is registering impressive traffic volume growth mirroring Indonesia’s GDP growth of 5-6%. However, the true star of the show here is the tariff increases, already in effect across most of its toll roads. These tariff adjustments are sure to bolster profitability, all while the company's stock is trading at two standard deviations below historical valuations at a modest 10x P/E.


In a landscape where many SOEs grapple with debt repayment issues following President Jokowi’s infrastructure drive, this toll road operator stands out with its multiple cash-generating assets that provide ample financial coverage for interest and debt obligations. Additionally, the company has embraced a more prudent approach to its capital expenditures, selectively undertaking projects that integrate with its existing toll roads. These projects are executed in stages, minimizing the need for additional debt accumulation.

Meeting with the management of a $2b toll road operator

Retooling for the future

We met with an $800m home improvement retailer that faced challenges during the pandemic, as lockdowns compelled traditional retailers to shut their doors. However, with restrictions having been eased the company is witnessing a remarkable resurgence in foot traffic at its stores, a phenomenon we personally observed during our visit to one of their locations. To bolster this recovery, the company has undergone a transformation, shifting from being a conventional hardware store selling third-party products to a home improvement and lifestyle destination offering a range of sophisticated, high-margin, proprietary products. In addition to this shift, the company has aggressively expanded its presence in the online and digital marketplaces, embracing an omnichannel approach.


The company has also launched brand campaigns and introduced new store formats, targeting a younger demographic, most of which is new homeowners. This strategic pivot has elevated the business along the value chain, now predominantly serving the middle and upper-class segments, which tend to be less vulnerable to the impacts of inflation.  This positioning sets the business apart from its competitors, many of whom are traditional hardware companies primarily focused on serving the lower-class segment.

Meeting with the management of an $800m home improvement retailer

Digging the industrial estates 

Land assets near Jakarta are hot!

We conducted on-site due diligence on a $100m industrial holding which operates in three sectors: hospitality, construction, and property development. The first two sectors are clearly thriving in the ongoing post-pandemic recovery, while the property development business has been viewed negatively by investors due to its slow attraction of new tenants. However, the company recently launched a promising mixed-use industrial hub near Jakarta spanning 2,700 ha, which we visited in a 37 degrees heat. The site was chosen primarily for its cost advantages in labor and land, and sits strategically near a deep sea port which is anticipated to become the country’s primary export gateway.


Currently, the company is developing the initial 400 hectares and anticipates strong sales in the coming quarters, driven by a growing number of inquiries, particularly from Chinese conglomerates seeking pan-Asian expansion opportunities. However, many investors and customers are still adopting a cautious "wait-and-see" stance, waiting for the groundbreaking of the toll road that will provide direct access to this site by linking the main toll expressway with the deep sea port; until the government formally starts construction of this road the land assets in this industrial park are of little interest to prospective tenants.

Conducting due diligence on the industrial estate of a $100m industrial holding

Signing deals with China 

We met with a $2b holding company whose industrial port estate we visited during our previous trip to Asia. Since our last visit, the company has surpassed its projected land sales for the year, mainly due to the successful closure of a substantial deal with a Chinese commodity company. With several additional deals currently under discussion and strong government backing for local downstream industries, the company anticipates a twofold expansion in its industrial estate business, benefitting its utilities division. This growth is poised to make a significant contribution to the company's bottom-line in the coming years given the higher-margin nature of the industrial estate segment. Furthermore, the company's chemical distribution segment has been on an upward trajectory, buoyed by an upswing in Indonesia's mining activity, increased demand, and seasonality trends.

Meeting with the management of a $2b holding company

Until next time!

The companies we met on our trip to Indonesia operate in different industries and were affected by the pandemic in different ways, but most have two things in common: they're cheap (on average 10x PE) and they're growing strongly (over 20% earnings growth). 


We look forward to our future visits to Indonesia, the country with one of the highest-yielding demographic dividends in the world, to find more compelling bottom-up investment opportunities.

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