I had recently made a trip to Jakarta, Indonesia. In my time there, I managed to visit the headquarters of Astra International Tbk PT. Astra International is one of the largest conglomerates in Indonesia. While it is a listed company on Indonesia’s stock market, it is also a key subsidiary of the Singapore-listed Jardine Cycle & Carriage Ltd (SGX: C07) – just over 50% of Astra International’s shares are owned by Jardine Cycle & Carriage. Most of Jardine Cycle & Carriage’s profit comes from Astra International. To the point, Astra International contributed 75% and 91% of Jardine Cycle & Carriage’s total underlying profit for…
I had recently made a trip to Jakarta, Indonesia. In my time there, I managed to visit the headquarters of Astra International Tbk PT.
Astra International is one of the largest conglomerates in Indonesia. While it is a listed company on Indonesia’s stock market, it is also a key subsidiary of the Singapore-listed Jardine Cycle & Carriage Ltd (SGX: C07) – just over 50% of Astra International’s shares are owned by Jardine Cycle & Carriage.
Most of Jardine Cycle & Carriage’s profit comes from Astra International. To the point, Astra International contributed 75% and 91% of Jardine Cycle & Carriage’s total underlying profit for 2015 and 2014, respectively. So, in order for investors to understand Jardine Cycle & Carriage, getting to know Astra International’s business is key.
I had previously shared three things about the company I learnt from its investor relations department from my visit. Here are three crucial risks to Astra International’s business that I had picked up:
1. Commodity prices
The company has big exposure to commodity prices through its heavy equipment & mining and agriculture segments.
Given the collapse of the coal market in Indonesia in recent years, Astra International has taken a strong hit in its heavy equipment & mining business. For instance, in 2015, the company saw sales of its Komatsu brand of heavy equipment shrink by 40% while revenue for its mining contracting business fell by 10%.
The movement of commodity prices is out of Astra International’s control and it is something investors need to be aware of.
Although Astra International is seen as the market leader in Indonesia in the distribution of cars and motorcycles, competition is heating up.
The multi-purpose vehicle (MPV) segment is one of the best-performing car segments in Indonesia. The company has seen very aggressive competition from competitors in recent years in the segment. Toyota, Astra International’s main brand, still has dominant market share in Indonesia- but it has seen its slice of the overall pie drop from 33.1% in 2014 to 31.8% in 2015.
Astra International can improve its sales distribution and pricing to protect its market share. But, it still has to depend on its principal – that is, Toyota – for the production of vehicles that are competitive and that can attract consumers.
3. The ASEAN Economic Community
I went into the meeting with Astra International thinking that the ASEAN Economic Community (AEC) would be a disaster for the company. The AEC is a vision by ASEAN members to create a single market community, in a somewhat similar fashion to the European Union.
Although it might still be years – or even decades – before the AEC can be fully implemented in the 10 member nations of ASEAN, I thought the idea of free trade and free flow of goods might be damaging to Astra International’s automotive distribution business.
But, according to Astra International’s investor relations team, the AEC might actually be beneficial for the company.
The company’s principal brands, such as Toyota, have set up factories in ASEAN to manufacture different products. For example, Toyota’s factories in Thailand mainly produce small sedans while the factories in Indonesia are focused on MPVs. So, if there is free trade among ASEAN’s member nations, Astra International would find it easier to export its products to other ASEAN members as well as import other products to feed into its distribution network in Indonesia.
In all, Astra International thinks the AEC is very beneficial.
Now, some of you might be thinking: “Why is this here? This isn’t even a risk!” Thing is, I highlighted this final ‘risk’ as an example of how our own perceptions of risk for a company may actually be an opportunity for said company instead.
Jardine Cycle & Carriage’s key subsidiary, Astra International, might be facing some serious risks to its current businesses. Moreover, some of the issues – such as the prices of commodities – are out of its control.
But, at the same time, the company also sees huge opportunities for itself over the long-term. There is no company that is risk-free. It is important for us as investors to know the risks and opportunities of any company we want to invest in.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Jardine Cycle & Carriage.