As always, this is not an investment advice on the mentioned ticker. This is for educational purposes only. Always do you own research or consult your investment advisor before making your own investment decisions.

Let’s get into this.

Part of my 2026 new year’s resolution was to get better at running. What better way for me to get better at running by forcing myself to join big running events, so that I could get my coveted 10K or HM Personal Best. One competition for me that stood out was JAKIM 2026. It looked legit as I recalled in the previous years where the competition was organised, there were plenty of road closures in Jakarta area, around the running event.

So when I saw in a running calendar event that JAKIM 2026 was open for registration, I speedily rushed to my phone and attempted to register. The registration process was awful. The instructions was vague and the website load was slow. The worst part? I have to download yet another banking app to register. So I downloaded Bale from BBTN, opened an account and… failed to register because tickets were sold out. I thought to myself, “wow running has been super popular nowadays in Jakarta” but again I thought to myself “wow this Bale app by BBTN must have gotten a lot of users from this running event” so let’s take a look at BBTN.

The app itself must be properly built because it handled large amounts of traffic quite smoothly. As people are forced to make a bank account and settle ticket payments there, I wonder how’s their Current Account / Savings Account ratio (CASA ratio). Banks love low cost funds because they are in the lending business. You’d want the cost of your funds to be low (giving people less interest) so that you can have higher spread when you lend the money out to people, giving you higher net interest margins. So if you hold super established running events and make participants bank with you as a pre-requisite to purchasing those tickets, you’d get access to cheap funds.

Quick note: CASA Ratio measures the proportion of current and savings accounts in a bank’s total deposits. Current accounts are low-cost funds (little to no interest paid), while time deposits are more expensive for banks. The higher the CASA Ratio, the cheaper the bank’s funding base — and generally, the better.

In marketing words, Running is top of funnel (TOFU) and as people get acquainted with the bank’s app and its usability, they get pushed down the funnel as they use the app more extensively for other banking services (like getting a mortgage).

So I went to look at the CASA ratio numbers since 2022 (the first time they held a JAKIM marathon was in 2023).

• Desember 2022: 48.5%

• Desember 2023: 53.7%

• Desember 2024: 54.1%

• December 2025: 48.7%

I’d say the CASA ratio growth is not too shabby, although I have seen better numbers in other banks. But given BBTN’s price to earning’s ratio about ~5 and BBTN’s price to book value which is about ~0.5, it might be interesting for me to go deeper because the bank is showing signs that it wants to stay relevant, but the market is rating it as if it is filled with super bad assets in a sunset industry. So it makes me curious as to what is BBTN’s main business. Why market seems to be quite harsh on BBTN. I don’t think there will be a right or wrong answer to this, but it is fun to explore.

Investors are forward looking

We invest today not to get the returns immediately. There is usually an underlying thesis why the company we invest today will be more valuable tomorrow. We’d be more inclined to invest if the company is poised to grow. So what are the growth drivers for BBTN?

Well, BBTN is a specialised bank that is focused on mortgages. So it really is more of like a property business but with a much faster sales cycle (you don’t have to wait for developers to build and handover to their customer for you to acknowledge sales in your books), the moment a customer takes in a mortgage, the bank gets revenue (remember, you pay the bank an interest if you take mortgages!!). For BBTN’s case, the moment a real estate developer develops their houses, they also get revenue. So they get revenue from both property buyer and real estate developer. But it also has its downside where property developer would get their money as soon as there is a buyer, BBTN has to deal with the uncertainty of home buyers defaulting on their mortgages. Then they are left with illiquid real estate assets.

But what type of property is BBTN focusing on? Affordable housing.

The core portfolio is split between subsidized (FLPP) and non-subsidized mortgages, with the former representing approximately 64% of the total loan book as of 9M25.

Who’s buying the houses? Well we have seen that millennials represent ~79% of the subsidized customer base. This demographic focus typically results in higher Loan-to-Value (LTV) stability and long-term customer retention. But because this is subsidized housing, it follows that not everyone (especially the bourgeoisies) can participate. Your monthly income cannot exceed a certain threshold, otherwise you will have to pay non-subsidised interest on your mortages. But if you do qualify, interest is super attractive and your likelihood to default is also minimised. More encouragingly, the income cap to qualify for FLPP has been raised.

FLPP Income Eligibility Criteria (Updated April 2025)

This tells us that the number of people who can qualify for this loans would also increase. Which translates to better quality loan books for the bank.

Cool, now that the bank potentially will have access to more quality borrowers qualifying for FLPP program, does the bank has enough liquidity to make the loan? Well yes, we can see that the deposit growth is outpacing loan growth. You might think is it because the Finance Minister Purbaya who placed Rp 25 Trillion into the bank? You are correct, but even if we exclude the massive government fund placement, the core deposit growth still stood at a very healthy 9.2% year on year (up to 10.0% in specific institutional/retail metrics).

So it looks like it is going to be very good for shareholders isn’t it? On the cost side we are seeing that macroeconomic factors are giving that extra “ooomph” for the bank to grow. For example, Bank Indonesia lowered its policy rate to 4.75% in Q3 2025.

On the revenue side, we are also seeing the FLPP program growing from the government’s 3 million housing program for millennials who by the way makes up a growing chunk of the population (Indonesia is experiencing a bonus demography).

Since 2015 (back then it was still one million house), BBTN is the dominant contributor to these national figures, consistently contributing ~60% of the national housing realization annually through both demand-side financing (Subsidized Mortgages/KPR) and supply-side financing (Construction Loans for developers)

According to BBTN’s sustainability data, the national achievement of the program per year is as follows:

• 2015: 699,770 units

• 2016: 805,169 units

• 2017: 904,758 units

• 2018: 1,132,621 units

• 2019: 1,257,852 units

• 2020: 965,217 units

• 2021: 632,373 units

• 2022: 875,832 units

• 2023: 878,727 units

Rest assured, BBTN is highly specialised in supporting government programs like this and supporting FLPP would require expertise in cashflow management. Which means it is likely that it will be more and more favoured vehicle to realise the government’s program into the future (2026 and so on). Now we could see that the narrative is there and the case for increase of profitability from higher net interest margin is also there.

But what’s with the market valuing the company as if the company is in a sunset industry? Are investors in IDX crypto bros who believe that blockchain and DeFi will make banks a dinosaur? Jokes aside, let’s try to find out more about potential setbacks that BBTN is facing.

So what are the setbacks

Well COVID. If you noticed during COVID years the number of units that got constructed above took a dip. But more important than that, it is reasonable to believe that COVID would affect the quality of mortgages because many people lost their jobs during that time of lock downs and ceasing of business operations.

During COVID, Bank Indonesia allowed banks to "restructure" loans. This meant a loan could be "non-paying" but still classified as "performing" on the balance sheet. This allows a company to keep booking "accrued interest" as profit even if the customer hasn't paid a single Rupiah in cash.

We see this clearly when we compared accounting profits and actual cash generation. Accounting profits was relatively stable at Rp 1.6 Trillion (ignoring the anomaly in 2019). But Cash receipts dropped from Rp 3.4 Trillion in 2019 to 1.8 Trillion in 2020. So this is already telling me that the bank was hit by a double-whammy: a collapse in new loans (seen in the construction dip) and a deterioration of the existing loan book because of COVID.

If I were in the CEO’s seat, my first priority would be to clean up the balance sheet. Bad assets should be dealt with decisively so they don’t become a structural drag on profitability for years. When Pahala N. Mansury handed over to Nixon L. P. Napitupulu, who assumed the role of Acting CEO in February 2021, the signals suggest that this is precisely what management began to focus on.

One area that reflects this effort is the Loan at Risk (LAR) coverage ratio.

A loan categorized as “at risk” (LAR) has elevated probability of becoming a Non-Performing Loan (NPL), so prudent management would increase provisions to cushion against that possibility.

Historically, throughout the 2010s, LAR coverage hovered around ~15%. Since Mr. Nixon’s appointment, it has been raised to the 19–21% range. Directionally, this is the right move — it signals greater conservatism.

However, as outside investors, we do not know whether this level of coverage is sufficient. Asset quality risk is dynamic, not static. If underlying borrower stress resurfaces, or if post-restructuring performance deteriorates, LAR coverage may need to be increased again. That would come with consequences: higher provisioning, lower near-term earnings, and potentially weaker returns on equity.

In other words, while management appears to be acting prudently, there remains uncertainty around whether current reserves are adequate for the true embedded risk in the loan book. Until that uncertainty clears, the market is unlikely to assign a premium valuation — and as investors, we must acknowledge that limitation.

For now, there seems to be quite a number of puzzle pieces that remain unresolved:

• Is the management going to be able to continue executing the program 3 juta rumah well? Is the management going to steer clear from the non-subsidized mortgages (which is known to be taking a hit nowadays due to recent layoffs)?

• Has the COVID asset quality deterioration been handled well?

• Is the management going to be able to be less reliant on time deposits as source of funds? It is heading towards that direction with the running events, Bale, and corporate initiatives but we need to see a stronger signal while there are other banks are already showing more sexy CASA numbers.

If you are an investor, how would you value this kind of company? Do you think it has enough margin of safety? Multiples wise its cheap but it feels less firm because a number of things could go wrong although the tailwind is right in front of our eyes. Especially given the fact that we are seeing signs that management has been doing the right thing. Do they deserve to be appreciated better? Or no? But regardless, we haven’t made ourselves comfortable in building a position.

I used to think Howard Marks was being a bit too simple, maybe even a little naive.

In his famous memos and talks, he often hammers home points like:

• “Macro-forecasting is not critical to good investing”

• “Disavowal of market timing”.

I thought:

Really? In a market as volatile as Indonesia, you’re just going to ignore the macro and not try to time the entry / exits?

Then, the last week of January 2026 happened.

The 2026 MSCI Fiasco: A Reality Check

The recent IHSG crash was a brutal wake-up call for many.

After the election of Thomas Djiwandono as Deputy Governor of BI, the market didn’t just stumble—it went into a full-blown “trading halt” as over-inflated “Konglo” narrative stocks melted down. The fear was real: rumors swirled that Indonesia could be downgraded to a Frontier Market, a move that would have a catastrophic domino effect on our fixed-income & currency markets as well.

Many social media influencers were still shouting “Bull Cycle!” just days before the crash.

Their logic? Indonesia’s weighting in the MSCI is only about 1.25%, so global institutions wouldn’t bother being dumped by us.

They were dead wrong. The institutions did care. The bubble didn’t just leak; it popped. Overnight, reforms were swept in, and leadership at the OJK and BEI were replaced as the government scrambled to fix the coordinated trading activities and “gorengan” actions that led to this mess.

The Report That Saw the “Pucuk”

Just six days before the crash, on January 22, we released our Recompound Monthly Report to our clients:

Excerpt of our January 2026 report to clients

Within the report, we said that we didn’t have a crystal ball.

We didn’t know the MSCI fiasco would happen exactly on January 28.

But we did see the “late-cycle” signals that Howard Marks warns about:

• Retail Participation: Share of Average Daily Trading Value (ADTV) was back at the “mania” levels of 2021.

• Narrative Chasing: Money was crowding into “Konglo” stocks where price action was driven by stories and momentum rather than actual earnings power.

• Public Euphoria: Google search interest for “saham” was printing fresh highs—a classic sign that we were super close to the “Pucuk” (peak).

  

Risk Control, Not Market Timing

When the crash hit, the IHSG dropped over 9% in a matter of days. But our portfolio’s drawdown is minimum:

This wasn’t because we “timed the market” and moved to cash at the perfect second.

It’s because we followed the Oaktree philosophy: The primacy of risk control.

We didn’t just buy “good assets” (read: stocks); we bought them well.

1. Earnings-Backed Stocks: Our holdings are positioned as cash-producing assets with high dividend yields (~9% p.a.). Dividends reduce your reliance on price momentum. When the “narrative” dies, the cash flow keeps you afloat.

2. Margin of Safety: We stayed disciplined. Even when names looked attractive, we stayed on the watchlist if the “margin of safety” was too thin.

3. Avoiding the Crowd: While retail was rushing into the trendy tickers (I won’t name names here, but it should be obvious to you), we were researching companies with stabilizing earnings quality in the real economy.

Buying Well is Your Only Protection

Who could have timed this pop beforehand?

Honestly, no idea. But you don’t need to time the pop if you aren’t holding the balloon.

As we wrote in our report: “Be a student of history, not the victim of history”.

If you buy assets with a wide Margin of Safety and strong cash flows, a broad market correction becomes an opportunity, not a thesis break.

Success in investing isn’t about being the smartest person in the room who predicts the crash. It’s about being the most disciplined person in the room who buys well enough that the crash doesn’t matter.

If you’ve been watching the IHSG lately, you’ve probably felt the FOMO.

You’ve seen the charts of certain IDX conglomerate stocks defying gravity, moving in vertical lines that make physics blush.

The common chatter in Jakarta coffee shops goes something like this: “Ah, this is just the Indonesian market being shallow. It’s a ‘bandar’ game. This doesn’t happen in sophisticated markets like the US”

To that, we say: Hell no.

If you want to describe the phenomenon into a single flowchart, this is what is essentially happening.

From the flowchart above, it is quite clear that “Konglo stocks” can be replaced with any other stocks such as digital bank stocks, sub-prime mortgages, etc.

Money flow guru can also be replaced by other gurus that pertains to the assets that are pumping. Retail can be replaced by anything that is essentially “dumb money”. People who buy stocks without a rational investment thesis.

So clearly this is not an “Indonesia problem”. It’s a human nature problem. We have seen it again and again in multiple different context that it really gets quite boring. And if you are reading this blogpost, hopefully you would “get” it and take the necessary caution.

As one investor Tiho Brkan noted, successful long term investing is the intersection of three disciplines: Philosophy, History, and Psychology.

If you want to understand why Recompound is sitting this one out, we have to look at all three.

1. HISTORY: The “Base Rates” of the 1960s

Read more

AI, Commodities, and Why We’re (Still) Betting on Indonesia

2025 rewarded narrative stocks. We think 2026 and beyond will reward real earnings, real assets, and investors who are okay looking wrong for a while in order to be right for a decade.

Before we get into that, hi there! We help busy working adults with their long term investments in IDX with time tested value investing strategy. If you are curious, click here to find out more.

Disclaimer: This is not investment advice. It’s a reflection of how we at Recompound currently think about the world. We can be wrong. Please do your own research or consult your advisor before making decisions.

2025: the year of narratives

If you only look at index levels, 2025 looks simple: “markets are at all-time highs.”

On the ground, it didn’t feel simple at all.

• Early 2025 was full of pessimism, currency worries, and gloomy headlines.

• By the second half of the year, the mood had flipped. Social media was full of green screenshots and questions from potential clients: “Should we be more aggressive? If not now, when?”

Under the surface, one type of stock dominated: narrative stocks.

By “narrative stocks” we mean businesses where:

• the story and share price have already taken off,

• but earnings (actual net profit) are still far behind.

We saw a similar movie in 2021 with digital banks. Prices went up 10–100x, the story was everywhere, earnings did not follow at the same pace, and eventually prices had to come back down.

2025 was generous to people who timed these waves perfectly.

We don’t think 2026 will be the same game.

We think the next phase will be kinder to something less glamorous but far more durable:

Earnings-based stocks – businesses where price still mostly follows profits, not just a narrative.

Especially in markets where the real economy is slowly recovering underneath the noise.

The AI revolution is real (and uneven)

Before we go deeper into AI, a quick bit of context on where we’re coming from.

• Toby used to work as a software engineer at Goldman Sachs in Singapore, developing and maintaining mission-critical trading systems for the bank’s markets business. When your code breaks there, real money is at risk.

• Budi used to work as a data scientist at GoTo Financial, building credit scoring models for their “Paylater” product. Machine learning models were literally his day job long before the current AI hype cycle.

So when we talk about AI, we’re coming at it as people who have actually shipped and maintained production systems—not just as AI tourists reading news headlines & watching podcasts.

And the simple reality is: the AI boom is no longer just a buzzword phase. You can already see it in the data.

In the chart above:

• The red line is the S&P 500, steadily grinding to new highs.

• The white line is total US job openings, which have rolled over and trended down since the launch of ChatGPT.

We’re not saying AI is the only driver of this divergence, but the pattern fits the story: corporate profits and index levels keep rising, while the demand for additional workers is flattening or falling.

That’s exactly what you’d expect if AI lets companies:

• do more with the same number of people, or

• do the same amount of work with fewer people.

In other words, AI is already showing up as a productivity boost for capital, not as a jobs boom for knowledge workers.

Who feels that pressure most? White collars !

• Consultants and other professional services

• Junior lawyers and paralegals

• Auditors, analysts, and back-office knowledge workers

• Software engineers whose work is mostly maintenance rather than system design

A lot of what used to require 100 knowledge workers can now be done by 10 very good people plus AI.

Who is less threatened in the next few years? Blue collars !

• Construction workers

• Miners

• Technicians, field engineers and operators

• Logistics, warehouse, and field staff

AI (LLMs) today mostly live in laptops, phones, and data centers — not in excavators and brick-laying robots.

And here is the twist that matters for us as investors:

AI is a great leveller for emerging markets.

A capable analyst or operator in Jakarta with access to AI tools can process information like a small team in New York and produce “global-tier” output—without Silicon Valley payroll.

So while AI is a direct threat to some white-collar jobs in rich countries, it is a productivity amplifier for capable people and companies in emerging markets.

Why we are cautious on application-layer AI, AI SaaS, and (most of) the Magnificent 7

Before we get into that, hi there! We help busy working adults with their long term investments in IDX with time tested value investing strategy. If you are curious, click here to find out more.

If AI is so powerful, why aren’t we simply putting all our money into AI software, LLM platforms, and the Magnificent 7?

Because where you stand in the value chain matters.

Read more

After reading the short editorial on the AI bubble, perhaps this video about our client handling market panic like a pro is going to pique your interest.

TL;DR

• Is AI revolutionary? Hell yeah !

• Will investors be disappointed a few years from now? Likely.

Why everyone’s excited

AI can read, write, talk, see, and code. It already helps in search, ads, customer service, medicine, software and self driving cars.

That is real, and it is big world-changing.

I mean personally as I used to be a data scientist, data exploration, analysis, visualization used to be a big chore. Now I am seeing how an AI can perform those tasks much better than me within a much shorter timeframe. Yes, without the lunch breaks.

The money firehose

The biggest tech companies are spending CapEx of hundreds of billions on AI data centers (chips, buildings, power).

Venture capital is also pouring money into AI startups.

Why this matters: Cash goes out now (to build). Profits show up later (if things work). That gap is where investors can get hurt.

What we are hearing on the field

A friend of ours who manages money in the U.S. says AI startup valuations in Silicon Valley are nuts.

Example he’s seeing: a startup with $1 million ARR getting valued at $200 million.

Amazing if the company grows into it; painful if growth slows.

What could go wrong (even if AI wins)

1. Big build, slow payback

   If customers don’t show up fast enough, those GPU farms sit under-used.

2. Accounting drag

   New hardware gets expensed over time as depreciation. If equipment wears out faster or earns less, profits fall.

3. Thin early margins

   Running giant models is expensive. If prices fall faster than costs, cloud profits get squeezed.

4. Return on capital math

   If profits grow slower than the asset base, ROIC (Return on Invested Capital) drops—even when revenue is rising.

Where earnings really come (as of today)

For Mag 7, most profits still come from the old cash engines:

• Microsoft: Office/Windows + Azure

• Alphabet (Google): Search + YouTube ads

• Amazon: AWS + Retail/Ads

• Meta: Ads (Family of Apps)

• Apple: iPhone + Services

• Tesla: Cars

These fund the AI CapEx.

If AI pays quickly → great.

If it pays slowly → free cash flow gets squeezed, depreciation rises, buybacks slow, and valuations compress.

No bust required—just meh returns.

The Mag 7 entered a mega build-out phase. Annual spend is set to more than double in just a couple of years.

Even these giants are using a sizeable chunk of their cash flow (peaking ~60%+) to fund AI. That means less leftover for buybacks, dividends, and non-AI projects—unless AI starts paying for itself quickly.

Think of this as building a nationwide highway system before the toll booths are earning much. If traffic (AI demand and pricing) arrives fast, it’s a great investment.

If it arrives slowly, profits and free cash flow might be squeezed—investors can be disappointed even while the technology changes the world.

Rough guesses: how much is AI directly contributing to Mag 7 Revenue (exc. NVDA)?

Two buckets:

• Direct AI = things customers pay for as AI (Copilot, AWS/Google AI services, FSD).

• AI-enabled = AI that quietly boosts existing lines (better ad targeting, stickier devices).

These are directional guesses based on public commentary; they’ll change as disclosures improve.

Capex booms: a caution from history

CapEx booms have almost always led to eventual collapses and a lack of returns for shareholders. This is despite benefiting consumers and the world in general.

Some of the more famous historical references include:

• The US Canal Boom of the early 1800s

• British Railway Mania of the 1840s

• The Dot com boom in the late 1990s

Maybe this time is truly different. But those are some very dangerous words…

Even a world-changing tech can deliver so-so investor returns if spending runs far ahead of profits.

This might be mind numbing. Because saying fundamental is dead and fundamental is not dead appears contradictory. Yet I think there’s merit to be accustomed with paradoxes in the real world. The examples are everywhere and I can’t help but notice it.

In physical sciences

The most fundamental theory on light presents that light exists as a duality. Light behaves as a wave and it behaves as a particle.

A German Physicist, Max Planck, showed that light energy is not released continuously, but rather, it is released in a tiny discrete packets he called quanta. This led to the concept of Planck Constant (h), which is a number that relates a light’s frequency (f) to the amount of energy that is being carried by a single unit of light (E).

But at the same time, light also exhibits in wave like property in the double slit experiment. Because as light travels through a double slit (imagine below)

Light source shining → | | → creates an interference pattern

Note: | | illustrates double slit that light passes

This experiment showcases that light behaves as a wave as it forms an interference pattern after passing a double slit. Therefore, light exhibits a contradictory nature by being a particle and a wave at the same time.

How do we reconcile the contradictory nature of being a wave and a particle at the same time? Well, it is (or at least attempted to be) reconciled by doing quantum physics, which is beyond my pay grade. But the point is, saying that light only acts as a particle or light only behaves as a wave is now accepted to be incorrect.

In running a startup

Dalton Caldwell, in the video about How Impatient should Founders be in the Pre-AGI era describes the seemingly contradicting advice: As a startup founder, you have to be both impatient and patient.

Impatient in getting the work done and making sure that progress is made. But also patient in understanding that hard problems requires time to solve. A skill requires time to be acquired and crafted. Michael even mentioned

“Look at the 20 software companies that you respect the most. Tell me which one of those blew up super fast. Which one was like they made it in a year?”

So day to day, founders should be impatient to get the ball going. But long term, founders ought to be patient because hard problems take time to solve. Sound piece of advice.

There are many more examples of truths that appear to be contradicting each other. In Islamic studies, in Al-Ghazali’s work Tahāfut al-falāsifa (incoherence of philosopher), he appears to be against Avicennian metaphysics. While later on he relied heavily on Avicennian philosophical tools in his work. Which seems contradictory.

But later on Frank Griffel argued for a resolution by distinguishing philosophy as method vs. doctrine. So Al-Ghazali rejects metaphysical conclusions that went against the revelation of the Qur’an but accepts the philosophical methods (logic, demonstration, classification of sciences) to serve the truth when properly used.

In investing

It really becomes apparent to me, at the very least, that fundamental is dead. But it is also not dead. Let’s discuss fundamental is dead first.

Fundamental is dead

We refer to the experiment that is run in UC Berkeley experimental social lab, presented by Dr Greg La Blanc. The experiment was originally designed by Prof Vernon Smith who won the Nobel prize in economics. And it was an eye-opening one in trying to discern how a bubble is formed. By definition, a bubble is formed when

The price of an asset continues to rise up far beyond its true fundamental value (or intrinsic value).

Famous bubbles in recent memory include the Dot Com bubble in 2000 and the housing bubble in 2008.

But one can argue that the existence of bubbles themselves is not a strong enough reason to say that fundamental is dead. Because the information that is available to market participants about the true fundamentals of the asset that is being traded can be different. Beauty is in the eye of the beholder.

For example, if a MacBook Pro is traded at $5,000 in the market, Toby might think that this MacBook Pro is worth $10,000. That’s why he buys at $5,000. But Budi might think that this MacBook Pro is worth $20,000. That’s why despite the price rise to $10,000, we still have a buyer, Budi, who expects the price to be traded at $20,000.

Now this experiment eliminates the uncertainty in terms of the fundamental value of the asset that is being traded. So the fundamental value of the asset is known to all market participants. No shocks, no nothing.

My dear reader, how do you think the market participants behaved?

Experiment setup

The experiment setup is as follows:

1. The fictional asset has 15 trading periods. So 15 trading days in the stock exchange if you will.

2. The fictional asset has a known fundamental value which is time period in the market multiplied by 24 lab dollars. So for example:

   1. Period 1 → value of the asset is 15 * 24 = 360 dollars

   2. Period 2 → value of the asset is 14 * 24 = 336 dollars

   3. and so on.

   4. …until the final period when value drops to 0.

3. Some participant received cash to buy assets. Some participant received asset to sell assets. This creates variation.

4. During a trading period, participants are free to input bids or offers (buy or sell) of the asset that is being traded.

5. At the end of the period, participant with the asset will get dividends ($24) that’s why the value drops all the way to 0 in day 15 . The distribution of the dividends is also known.

   

In the image above, you could see the flat line at each time period displaying the fundamental value of the asset. At the end of day 1 and 2. People are still generally timid. Only wanting to buy the asset far below its fundamental value (See price is only about $70 while the intrinsic value is at $300++). As more trading days have passed, we see that there is an increase of the asset price nearing its fundamental value as shown in the image below.

As the price now is almost equal to the fundamental value, we should be seeing that people would start to sell their assets and be more cautious of purchasing the assets beyond its fundamental value. But nope, it keeps going up.

The price starts to come down as people start to notice that the game is about to end. So they quickly sell their assets to lock in their profits as the price of the asset converges back to its fundamental value.

The best thing is, they repeat the same experiment to the same set of participants and they see similar bubble charts forming.

What does this tell me

It simply tells me that fundamentals of the asset doesn’t matter to market participants even when the fundamentals is non-contentious. They are still willing to sell assets below its fundamental value. And they are still willing to buy assets way above its fundamental value.

But when we zoom out

We know that fundamental is not dead. This is 10 year price vs earning chart of ITMG

This is 10 year price vs earning chart of BBCA (biggest non SOE bank in Indonesia)

This one is ARTO (a digital bank in Indonesia). Its price was far beyond its fundamental value and it ended up reverting back.

We also have an example of a price catching up to company earnings (TAPG). Examples are plenty.

After seeing these pictures and plenty of evidence, we can see that price tends to gravitate towards the fundamentals of the company in the long term.

Howard Marks in his recent memo Calculus of Value, mentioned that the price of an asset reflects the consensus of opinion of market participants surrounding the present and future value of the asset. But in the moment, the opinion does not has to be correct. If market participants are generally pessimistic, assets can be priced much lower compared to its intrinsic value. If market participants are generally optimistic, assets can be priced much higher compared to its intrinsic value. In the short run, price can move in any direction relative to its value.

But in the long run, he said that “value should be thought of as exerting a magnetic influence on price”. Exactly how it is illustrated in the charts I shared with you above.

Closing Remarks

If you are investing with a short time frame, it is likely that you will not consider company fundamentals (it is dead to you). But if you intend to invest with a much longer time frame, you might want to stick to the fundamentals. We happen to want to be in this game for a long, long time, so we are sticking to the fundamentals.

Now that you are aware of this paradox, you are already thinking on a level that 99.9% of investors never will. You are reflecting deeply, while the crowd is reacting emotionally.

But here’s the critical question: Why? Why is the crowd always so emotional? Why are they so obsessed with short-term stuff?

It’s because they are driven by a psychological force that is incredibly powerful. And if you don’t understand this force, you risk being pulled back into the crowd, no matter how smart you are.

So, what is this force? And more importantly, are you immune to it?

Let's find out

This is not another draw more lines post

If you skim the title, you might assume we’re about to mention yet another price-action tool.

I get it. I’ve been in the market since 2019 (~6 years).

For my first two, I traded heavily with technical indicators.

I stacked so many indicators that my screen looked like a NASA command center:

The result? My portfolio didn’t really grow.

Wins on some tickers just papered over losses on others. Frustrating is an understatement.

After a lot of head-scratching (and a few portfolio bruises), a senior mentor shared an uncomfortable truth:

In a shallow-liquidity market like Indonesia, price action can be… pushed around easily.

No, don’t worry it’s not manipulated 😉 (sarcasm mode).

Market makers know exactly which technical indicators retail investors love, precisely because using them is much easier than doing real fundamental work—reading financial statements, public exposes, annual reports, , forecasting earnings, forecasting industry-wide growth, scuttlebutt (a.k.a cek lapangan) and valuing businesses.

That’s how many retail investors end up kena gocek (got Cristiano Ronaldo-ed). You’ve seen it:

• A stock “holds support” for months… until it doesn’t. It breaks for a few days, flushes out the support-and-resistance crowd, then rips back above the box to start moving like a rocket ship up.

• “Okay, then I’ll just buy breakouts.” Not so fast—some breakouts are designed to be fake. Price pops above the range, sucks in momentum chasers, then drops back into the box before the real rally happens.

At some point I realized:

If price is easier to be “pushed around”, then tarik-tarik garis (drawing lines) isn’t the edge, for me at least.

For me what has worked so far is to understand the crowd.

Our favorite TA indicator: psychology

We treat psychology as an indicator—specifically the emotions of the crowd.

The market doesn’t react to news. It reacts to whether the news are better or worse than what everyone already expected (fear and greed). Prices often reflect the extreme before the news catch up.

Legendary investors (Peter Lynch, Howard Marks, Warren Buffett and others) have said this for decades in one form or another: when the crowd’s emotion is peaking, the risk–reward flips. Doing the opposite of the crowd at extremes is often where the best opportunities live.

TL;DR

Our favorite “technical” indicator is not on the chart. It’s in the crowd: fear vs greed.

A recent case study: April 2025 market crash

In early April 2025, a series of headlines hit at once.

Global tariff proposals from Washington met domestic pessimism — Danantara, RUU TNI, Indonesia Gelap movement, and debates around the early Prabowo policy direction. That cocktail created a confidence shock.

Back home, IHSG hit trading halts to stem the decline. Retail sentiment tanked.

Our WhatsApp groups lit up with worried messages from clients.

And then… the rebound. From the low, IHSG jumped ~18% within roughly six weeks.

Interestingly, the bottom coincided with a spike in Google searches for “IHSG”. When everyone starts googling the index, it usually isn’t because they feel zen. It’s because they’re panicking.

What this suggests:

• News lag price. Capitulation shows up on the chart before the news headlines.

• Fear clusters. You see it in client messages, mainstream headlines, and search interest—often right near market bottom.

  • Peak pessimism (market bottom) did not happen on stage 1 - 3. It happens on stage 4.

The other side of the same pendulum: greed

The same logic applies at the top. When target prices get blasted everywhere for public consumption, it often hints at a greedy tape.

One example shows a widely discussed target followed by a deep drawdown. We’re not calling out individuals here; the point is the pattern: public, consensus it can only go up targets often mark late-cycle exuberance.

But don’t use psychology alone

This isn’t a license to bottom-fish every dip or fade every rally.

Psychology helps with timing, but fundamentals drive value.

Our process always goes back to our core framework:

👉 recompound.id/handbook/how-we-invest

We use crowd sentiment to optimize entries and exits—never to replace the real work.

How we actually read the crowd (our checklist)

When fear is peaking (high probability the market / a stock is bottoming):

1. Listen to peers. Are your friends suddenly starting to sell everything ?

2. Scan headlines. Are the news absolutist (end of X, never again Y) ?

3. Watch search interest. Do Google Trends for key tickers or the index spike ?

4. Look for market capitulation signatures. Example: Trading halts !

When greed is peaking (high probability the market/ a stock is peaking):

1. Public target-price parties. When everyone’s sharing sky-high targets on TikTok, Instagram, YouTube, Stockbit forums or WhatsApp group chats, we’d like to be more cautious.

2. Family BBQ indicator. A relative or friend who’s never invested suddenly gives you hot stock tips. Late-cycle FOMO alert.

3. One-way narratives. “This time is different,” “no pullbacks ahead,” “easy money baby !!!”

Tying it together

If price action can be pushed around, your edge likely will not come from drawing ever more perfect lines.

It comes from understanding the humans behind those candles—and then combining that read with disciplined fundamental work.

So yes, our favorite “technical analysis” indicator is… psychology.

• Buy when others are fearful—in quality names, far below its intrinsic value.

• Sell / Trim when others are greedy—especially when targets are on every social media thumbnail.

• Always within the guardrails of our framework

Observing market psychology is one of key learnings at Recompound.

If you are curious and are eager to learn more about investing that really makes money sustainably over the long run,

We have condensed all of our learnings into bite sized lessons for 30 days.

Follow this link to access it for free.

Markets move in cycles. This fundamental insight, eloquently emphasized by Howard Marks in his seminal book "Mastering the Market Cycle," reminds investors that no market remains exceptional indefinitely—not even the seemingly unstoppable U.S. stock market.

Lessons from History: U.S. Exceptionalism Isn't Permanent

Consider these surprising historical insights:

• From 2000 to 2014 (a full 14-year span), the Indonesian equity market (IHSG) astonishingly outperformed major U.S. indices, even when measured in USD terms:

  • IHSG: +435.94%

  • S&P 500 (SPX): +35.78%

  • Nasdaq (NDX): +11.88%

Contrast this with the subsequent period from 2014 to 2025, where U.S. markets reclaimed their dominance:

• IHSG: +21.7%

• SPX: +223.01%

• Nasdaq: +503.08%

Clearly, outperformance shifts over time rather than being permanently fixed.

Unfortunately, many retail investors — particularly in Indonesia — have overly focused on the exceptional U.S. market returns of the past decade, often overlooking the broader historical perspective. This narrow viewpoint could expose them to unexpected risks when the cycle inevitably shifts.

Cycles of Emerging vs. Developed Markets

Historically, the U.S. and Emerging Markets / EM (such as Indonesia) have alternated periods of outperformance:

• 1988 - 1994: EM significantly outperformed the U.S.

• 1995 - 1998: U.S. markets outperformed EM.

• 1999 - 2010: EM once again dominated U.S. stocks.

• 2011 - today: U.S. stocks have notably outperformed EM.

Why Did the U.S. Underperform from 1999-2014?

The major reason behind this extended underperformance was the massive overvaluation from the dot-com bubble era. Sky-high valuations and unrealistic expectations led to a prolonged period of stagnation, often referred to as the "lost decade."

Additionally, the 2008 Financial Crisis played a major role in exacerbating U.S. market underperformance, creating widespread economic uncertainty, significant asset price declines, and leading to a sluggish recovery that extended for several years. This crisis itself was largely fueled by greed and unrealistic expectations in the U.S. housing market, highlighting how unchecked speculative behavior can severely disrupt markets.

Key Factors Influencing Market Cycles

At Recompound, we emphasize using data-driven insights to understand where we stand in the market cycle:

1. Valuation & Retail Ownership:

Read more

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Although we are not macroeconomics experts, we do take a look at macro once in a while as a pulse check to see how the economy is doing at a glance. We don’t attempt to predict what is Indonesia’s growth rate going to be. And we don’t attempt to predict if Indonesia is going to be entering a recession. Our questions tend to be more contextual and less broad:

“Can Indonesia pay her debt?”

Let’s take a look!

Following Jokowi’s expansive administration, we saw that there is an increase in debt levels all around. Interest payment ratio to government revenue stands at 17.9% as of 2024. This has an 8% compounded annual growth rate for the past 10 years covered in more details in this article. Now the bigger issue is the following:

Rp 800T of is due around 2025 - 2027

That is a massive massive amount of money. To put it into perspective, that is around 30% of our state revenue excluding interest payments that are supposed to be paid per year. To give it another perspective, this is a debt level that is due with a ratio to state revenue that is highest since year 2000. To give a little bit of numbers (rounded off and massaged to keep it simple):

Per the table above we see that on average, the ratio between debt that is due to state revenue is less than 20%. Now in 2025, it stands at 28% which is considerably higher. This is note worthy because:

• Investors need some level of assurance that a country is not going to default on their debt

• But there is a pattern that this country keeps on increasing its debt levels, and interest payment as a consequence

For example, let’s say we have Alex who’s job is a consultant. His income rises steadily for example at a 5% annual rate. However, his debt rises even faster than his income, let’s say 8% per year. If you are Alex, how would you be able to justify your lender next time that you will be able to repay your debt if:

your increase income is less than your increase in debt levels

Chances are, you might be the debtor would want a higher interest rate overtime as Alex is deemed riskier and riskier. These risk are:

• Default

• Refinancing the loan (gali lubang tutup lubang), but with a much higher and more unsustainable interest rates. Therefore, more proportion of budget will be allocated to non-productive matters such as interest payment in future.

So let’s take a look at why the debt was huge at the first place

We think that simple answer is because of COVID. Yes, although activities nowadays have resumed to normal and we have seen corporate earnings of public companies in Indonesia recovering or even producing all time high earnings, government still needs time to deal with financial decisions that was made during the COVID era. Particularly surrounding increased loans through issuance of Rp 449 trillion worth of pandemic bonds.

Why that much loans? We could see that budget deficit in 2020 was at 58% and in 2021 was at 39%. At that time, it is very much understandable that the government was forced to take on a loan to cover its state expenses to support economic recovery.

Debt is huge, what is the plan now?

Refinancing through bilateral debt switch. The name might sound confusing but here’s how the mechanism works. Bear in mind that there are 2 entities involved in the operation namely Bank Indonesia and Indonesian Government.

Also note that we might be glossing over some details and the purpose is just to get a big picture of the plan and strategy to manage the short term maturing debt situation.

1. Bank Indonesia (BI) purchases bonds maturing in 2025 from investors.

2. Then BI swaps the bonds maturing in 2025 with bonds, maturing at a longer term period, from the Indonesian government

This is a neat solution so that Indonesian government does not have to come up with huge expenditure to service piling debt in 2025.

To illustrate it even more simply, consider the table below:

In a nutshell, the government refinances the old debt with a longer term debt. This causes the sudden outflow of money from the government to be more manageable in the short term. This operation is actually not new and has been done before in the past.

So are we out of the woods?

Although this is an important mechanism to manage maturing short term debt, we view it more of a tactical approach. What we believe that is important for us be able to analyse micro peacefully is a conducive macro environment. Therefore, metrics that we see are:

• debt to state revenue

• interest rates to state revenue

• level of foreign reserves

• GDP growth

We covered this quite extensively in the previous blogpost article offering a cautiously optimistic stance on the fundamentals of the country at large.

Closing Remarks

Therefore, while the fundamentals of the country is admittedly not as great as that before the pandemic, we’d rather not take an alarmist view on the matter regarding debt payments. Ok, now back to focusing on micro 🙂

References for further read

• https://www.djppr.kemenkeu.go.id/

• https://monitorindonesia.com/ekonomi/read/2025/02/602952/utang-jatuh-tempo-meledak-di-era-prabowo-2025-2028-sentuh-rp-3-125-triliun

• https://www.reuters.com/markets/asia/indonesia-cenbank-buy-more-govt-debt-2025-deal-over-maturing-covid-bonds-2024-12-18

• https://www.thestar.com.my/aseanplus/aseanplus-news/2024/12/29/indonesia-central-bank-finance-ministry-agree-debt-switch-for-covid-19-bonds

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The polls in the previous week requested a stock deep dive. But we are writing a deep dive for paid subscribers as there is no free lunch. So don’t forget to upgrade your subscription plan if you have not already *wink*. As a disclaimer, the deep dive is by no means to be interpreted as investment advice. It is written solely for educational purposes and you should do your own research or consult your investment advisor before making any investment decisions.

You don’t need to be a professional investor to sense where the market might be heading—sometimes, it’s as simple as listening.

The Cocktail Party Theory: What People Say Matters

Peter Lynch, one of the most successful investors of all time, managed the Magellan Fund at Fidelity from 1977 to 1990, delivering an astounding average return of 29% per year. Under his leadership, the fund grew from $18 million to $14 billion, making him a legend in the investment world.

But Lynch’s greatest insights weren’t just for Wall Street. He believed that everyday observations and conversations could offer powerful clues about market trends. One of his most famous ideas is what he called the “cocktail party theory.”

In his book One Up on Wall Street, Lynch explains:

*“If the professional economists can’t predict economies and professional forecasters can’t predict markets, then what chance does the amateur investor have? You know the answer already, which brings me to my own ‘cocktail party’ theory of market forecasting, developed over the years of standing in the middle of living rooms, near punch bowls, listening to what the nearest ten people said about stocks.”

Beating the Street - 1993*

He describes four stages:

• Stage 1: No one wants to talk about stocks. If you mention you manage a mutual fund, they quickly change the subject.

• Stage 2: People acknowledge your profession but caution you about the risks of investing.

• Stage 3: Attendees seek your advice on what stocks to buy.

• Stage 4: Everyone, including the dentist, is giving you stock tips.

This progression reflects how market sentiment shifts from skepticism to euphoria, often signaling where we are in the market cycle.

Why News Headlines Often Mislead

Howard Marks, co-founder of Oaktree Capital Management, a firm managing over $170 billion, shares a similar perspective. Marks is known for his sharp insights on risk and market cycles. His investor memos are so respected that even Warren Buffett reads them carefully.

In his book Mastering the Market Cycle, Marks argues that many investors try (and fail) to navigate markets by reacting to economic news headlines.

Marks writes:

“The future isn’t knowable, and macro forecasts are rarely useful.”

The Most Important Thing: Uncommon Sense for the Thoughtful Investor - 2011

News reports often describe what just happened, not what’s about to happen. But markets are forward-looking. Investors don’t wait for the news—they try to price it in early.

Think about it: if headlines were a reliable signal, wouldn’t it be easy to make money in markets? In reality, waiting for “good news” often means you miss the opportunity that came when everyone was fearful.

That’s why both Marks and Lynch recommend watching crowd behavior—not just reacting to what’s in the news.

Market moves on emotions

Here’s something beginners often miss: the market doesn’t just move on facts—it moves on emotions. Why? Because decision to buy and sell always use emotions.

That’s precisely why understanding crowd behavior is important. When everyone is excited and rushing to buy, prices might already be too high. When everyone is scared and selling, prices might already be low.

In investing, sometimes the best opportunities come from doing the opposite of the crowd—buying when others are fearful, and being cautious when others are euphoric.

But it’s not just about buying “cheap stocks.” It’s about recognizing that when prices fall because of fear, you might be able to buy a great business at a bargain. Think of it like getting your favorite iPhone 16 Pro Max — but on a massive sale.

When prices are low, you have the chance to own profitable, high-quality companies at a fraction of their real value. But when prices are high, driven by hype and excitement, you might end up paying too much for the same business, reducing or even damaging your potential returns.

That’s why watching the crowd matters:

• When everyone is fearful and selling, they might be pushing prices lower than what a company is truly worth.

• When everyone is excited and buying, they might be driving prices higher than what the company is realistically worth.

By observing the mood and being aware of these patterns, you can avoid buying into hype—and instead position yourself to buy strong companies when they’re undervalued, not overpriced.

Just recently in April 2025, we saw a textbook example in Indonesia:

On April 8, markets were rattled when former U.S. President Donald Trump announced new tariffs on Asian imports, sparking fears of a renewed trade war. The news triggered panic across emerging markets—Indonesia’s IHSG dropped sharply and even experienced a trading halt.

But here’s what’s remarkable: that day of extreme fear marked the bottom.

From that low point, the Indonesian market went on to rebound 18% in the following weeks.

It was a classic case of a headline-induced panic bottom—proving once again that emotions often peak just as opportunity reappears.

Thought exercise: What are people around you saying now?

In the past year, Indonesia has faced plenty of challenges: global economic slowdowns, falling commodity prices, political uncertainties, layoffs, distrust towards the government, and investor outflows. The headlines have been overwhelmingly negative.

But Lynch and Marks would both ask: beyond the news, what are people around you saying?

• Are your friends staying dead silent or excitedly swapping stock tips ?

• At work, are colleagues “waiting for things to get better” or actively talking about new investment opportunities ?

• Is the stock market barely mentioned — or a hot topic in WhatsApp group chats ?

If Peter Lynch were standing next to you, listening in, what would he hear?

And how might Howard Marks interpret those conversations?

I’ll leave you with this question:

Based on the mood you’re observing—whether in Indonesian stocks, U.S. markets, or even Crypto—what stage of the cycle do you think we’re in? What kind of behavior or sentiment are you noticing around you?

Stop reacting to news headlines.

Understanding the market cycle through the crowd might not only save you money… it could make you a LOT of it.

But here’s the catch. How do I know if a company is undervalued?

I am quite sure after reading the above, you would have the following conclusion:

• Watching people is easy, I can do that

• Knowing that there are plenty of opportunities in the market is easy, I can also do that

• But how on earth do I know the fair value of the company? And how do I know that the company is sold at a discount akin to a 10.10, 11.11 or 12.12 at Shopee?

Let’s start with a toy example, which aims to be really simple illustration.

First of all, a company is of any value, because it makes money from its sales activities. Let’s say, a company sells IPhones to consumers and is making 100 every year in net profits. Meaning that considering all costs, taxes, depreciation, etc, the company makes 100.

That company who’s making 100 every year is valuable to its shareholders. Let’s say Toby owns 55% of that company and Budi owns 45% of that company. That 100, can be distributed to Toby and Budi every year, them getting 55 and 45 each respectively.

Now let’s say Wilson enters the picture and he wants to purchase the entire company from Toby and Budi. If Wilson agrees to pay 1,000 do you think he is overpaying?

On the other hand, if Toby and Budi agrees to sell at 100, do you think that Toby and Budi are underselling?

Well, if Wilson thinks that the company is super likely to be able to sell iPhones in 5 years to come, making 100 each year, he would be overpaying if he buys the company for 1,000. For 100, he would be getting the company at a bargain. How much bargain? 80% (500 - 100 / 500).

So from this example, you could already get the drift.

Let’s map this toy example into a real publicly listed company that people could buy

Is Blue Bird Tbk undervalued or overvalued?

Blue Bird is the largest taxi company in Indonesia with about 24,000 units and it is distributing healthy amounts of dividends (yield is roughly 5%).

Yet if you take a cursory look of its share price, it has dropped rather significantly (-76.28%) from it’s IPO price.

Does that mean that you get a 76.28% discount from its fair value? Let’s dive right in.

Read more

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Warning: disturbing content is shown in this article. Reader’s discretion is advised.

In case you missed it, head over to slippery slope article which is a common logical error that usually fuels erroneous and fearful arguments on people’s dinner table. Also trying something new this week, which is polls.

Fear sells. Browse social media or tune into market chatter today, and you’ll find no shortage of commentators warning that “another 1998” is around the corner. These fear-based influencers draw parallels between the late-90s Asian Financial Crisis and current events, stoking anxiety that Indonesia might relive that nightmare.

It’s true that volatile currency moves or economic dips can evoke flashbacks of 1998’s turmoil. And to be fair, the 1998 crisis was multi-causal and incredibly complex – a perfect storm of economic and political factors.

This article won’t cover every nuance, but will focus on the key contributing factors behind the 1998 meltdown, and examine whether those conditions exist today. In doing so, we’ll separate grounded facts from fear-driven fiction.

The goal of this writeup is a thoughtful, confident (but never arrogant) look at whether history is set to repeat – or if Indonesia is better prepared this time.

The 1998 Crisis: A Perfect Storm

In 1998, Indonesia experienced one of its darkest economic episodes. The Asian Financial Crisis brought the nation to its knees: the currency collapsed, banks failed, and the streets erupted in unrest. Shops were looted and fires burned in Jakarta as ordinary people panicked.

What made this crisis so severe? It turns out it was the result of several factors coming together – a “perfect storm” of policy missteps and vulnerabilities feeding on each other.

Let’s break down the key triggers that led to the meltdown.

The Collapse of a Currency Peg

One major trigger was the free-fall of the rupiah. For years before the crisis, Indonesia had effectively pegged its currency to the US dollar, keeping the rupiah in a tight trading band.

This fostered a false sense of security. Businesses gorged on U.S. dollar loans, confident the rupiah’s value would remain rock-solid. In the early 1990s, with the rupiah stable and domestic returns high, Indonesian companies racked up huge foreign debts – much of it short-term and unhedged against currency risk.

By end of 1997, Indonesia’s external debt had ballooned to around $140 billion (about two-thirds of GDP), a significant chunk of it due within a year. This was a ticking time bomb. When Thailand’s baht devaluation in July 1997 sparked regional contagion, Indonesia’s overvalued rupiah became a prime target. Foreign investors pulled out en masse, and confidence evaporated. The rupiah plunged over 80% against the dollar within months – tumbling from roughly 2,400 per USD to around 14,000 at the peak of the panic. Such a drastic collapse meant any company with dollar-denominated debt saw its debt burden skyrocket in rupiah terms, pushing many toward insolvency.

To make matters worse, Bank Indonesia hiked interest rates sharply in a desperate attempt to defend the currency and stem capital flight. At one point, interest rates soared into the high double-digits, even above 50% – a move that crushed local businesses and banks by making domestic loans prohibitively expensive. In short, a brittle currency peg, once broken, wreaked havoc: the rupiah’s crash inflated debts, strangled credit, and set off a wave of corporate failures. (sources: imf.org factsanddetails.com)

Fragile Banks and Insider Lending (Pakto 88)

Even before the currency crisis hit, Indonesia’s banking sector was dangerously fragile. A decade of loose regulation had sowed the seeds of disaster.

In October 1988, the government introduced a deregulation package known as Pakto 88 (Paket Oktober 88) that made it absurdly easy to start new private banks. The required minimum capital was set at just Rp 10 billion (around USD $5 million at the time) – effectively an open invitation for anyone with means to open a bank. And open banks they did: by the mid-1990s, Indonesia had around 240 commercial banks, nearly double the number from a few years prior.

Many of these were owned by politically connected businessmen (the Southeast Asian “godfathers” that writer Joe Studwell chronicles), who often treated the banks as their personal piggy banks. Credit was dished out recklessly, frequently to the banks’ own shareholders and their pet projects.

This insider lending boom led to a veneer of rapid growth – but beneath the surface were piles of bad loans waiting to go bust.

By 1997, cracks were already showing: some banks were technically insolvent, carrying non-performing loans that they tried to hide with creative accounting. The banking system was undercapitalized, poorly supervised, and ripe for trouble.

When the rupiah collapsed and borrowers could no longer repay their dollar loans, these weak banks were the first dominoes to fall. Liquidity dried up and bank runs began as depositors lost trust. The government initially closed 16 small banks in November 1997, hoping to stem the bleeding, but that actually spooked the public into thinking all banks might be unsafe.

By early 1998, the banking crisis was in full swing – a multitude of banks failing or being bailed out. In essence, Pakto 88’s well-intended deregulation had backfired disastrously: too many banks, too little oversight. The party of easy credit ended with a massive hangover, and taxpayers later footed the bill for a ~$50 billion bank bailout. (sources: kabar24.bisnis.com idntimes.com imf.org).

The Snowball into Socio-Political Crisis

What began as an economic collapse quickly spiraled into something much bigger. The crisis was complex and self-perpetuating: a collapsing rupiah revealed deep banking vulnerabilities; financial panic was amplified by poor policy decisions; panic gave way to widespread unrest; and political instability, in turn, worsened the economic free fall. It was a full-system failure.

By the close of 1998, the economy had contracted by a staggering 13–15%. The rupiah, once trading at Rp2,500 per dollar, had devalued to between Rp8,000 and Rp10,000. Inflation reached nearly 70%, and millions were pushed into poverty. By every metric, it was the most devastating economic crisis in Indonesia’s modern history

As inflation surged and unemployment soared, the financial crisis morphed into a socio-political breakdown.

Public frustration reached a breaking point. After more than 30 years under Suharto’s rule, trust in the government had completely eroded. Nationwide, mass protests and riots broke out—fueled in part by racial scapegoating.

In May 1998, following days of unrest and the tragic killing of student demonstrators, Suharto stepped down, marking the end of an era — and for those who lived through it, the scars remain, along with a deep sensitivity to any signs of history repeating itself.

2025: Why It’s (Hopefully) Different This Time

Given that grim history, it’s only natural to ask: Could it happen again?

The honest answer is that today’s conditions are dramatically different from 1998’s. Indonesia spent the past two decades learning hard lessons and building defenses.

Let’s compare some fundamentals from then versus now, with a data-driven approach:

Healthier Foreign Exchange Reserves & Exchange Rate Regime

In 1997, Bank Indonesia’s war chest of forex reserves was about $20 billion – not nearly enough to withstand sustained speculative attacks.

Today, reserves hover around $150 billion , a level that provides a massive buffer against external shocks. This alone is a game-changer. It means the central bank can smooth out volatility in the rupiah without quickly running out of ammo.

And speaking of the rupiah, Indonesia no longer maintains a rigid peg like it effectively did in the 90s. Since the early 2000s, the rupiah has been on a free float system.

Yes, Bank Indonesia still intervenes to prevent extreme swings, but there’s no unsustainable promise to hold a fixed value. The currency is allowed to find an equilibrium that reflects market reality.

The result? Recent episodes of rupiah weakness have been nowhere near the chaos of 1998. For instance, during global volatility in 2024, the rupiah did depreciate – even hitting ~Rp16,600 per USD at one point – but policymakers calmly managed it and the rupiah gradually.

Officials have been quick to point out that the nature of the pressure is different: today’s rupiah moves are largely driven by temporary global sentiment (stronger US dollar, etc.), not a reflection of Indonesia’s own economic health.

Indeed, compared to many peers, the rupiah’s depreciation has been relatively moderate and orderly. In 1998, by contrast, the rupiah’s collapse was a sudden free-fall fueled by a loss of confidence in the country’s fundamentals.

Bottom line: a speculative attack on the currency would face a much stronger defense today, and a floating exchange rate acts as a safety valve that didn’t exist in the 90s. (source: jombangnews.co.id)

Healthier Banking System

Perhaps the biggest improvement since 1998 is the strength of the banking sector. Post-crisis, Indonesia undertook major financial reforms. Dozens of weak banks were merged or closed, and surviving banks were recapitalized.

An independent regulator (OJK – Otoritas Jasa Keuangan) now oversees banks, and Bank Indonesia itself was made more independent and focused on safeguarding stability. The difference is stark: Back then, many banks were essentially walking zombies – undercapitalized, drowning in bad loans, and kept alive only by opaque support.

Today, Indonesian banks are much better capitalized and regulated. As of early 2024, the average Capital Adequacy Ratio (CAR) of banks stood around 26% – a very comfortable buffer above minimum requirements. (By comparison, global Basel standards often require about 8-10% minimum, so 26% is robust.) This capital cushion means banks can absorb losses far more easily without collapsing. Non-performing loans (NPLs) are also low (around 2-3% of total loans in recent years), reflecting more prudent lending.

Crucially, the era of wild insider lending is largely over – regulators enforce limits on lending to related parties and big debtors, to prevent a repeat of the 90s cronyism. Indonesia also set up a deposit insurance scheme (LPS, established in 2005) to protect depositors up to a certain amount, replacing the blanket guarantees of 1998 with a more sustainable system.

This reduces the risk of bank runs, as small depositors know their money is safe even if a bank fails. All told, the banking sector in 2025 is on far sturdier footing. It’s not immune to stress, of course – banks are exposed to economic cycles – but the likelihood of a systemic banking meltdown like in 1998 is much lower. Even in a severe scenario, authorities now have established frameworks for dealing with troubled banks (from capital injections to orderly resolution) so that confidence can be maintained.

The phrase “too big to fail” was not even in the Indonesian vocabulary in 1998; now, there’s clarity on how to handle such situations if they arise. (source: ojk.go.id)

Healthier Debt Profiles

Another big difference lies in debt profiles. In the late 90s, Indonesia’s external debt (government + private) was huge relative to the economy – as mentioned, about 2/3 of GDP in 1997. Much of that was corporate short-term debt that evaporated when the crisis hit.

Today, external debt in absolute terms is higher (around $400 billion in 2022), but Indonesia’s economy is also much larger now. That external debt is roughly one-third of GDP – about half the relative level of 1997.

Moreover, the composition has improved: a larger share of today’s external debt is long-term (such as 10-year government bonds held by foreign investors, or long-term project loans), as opposed to the hot-money short-term loans that dominated in the 90s. Corporations, having learned from 1998, are also more careful – many have hedging strategies or borrow in local currency when possible.

On the government side, debt is very much under control. Indonesia’s government debt-to-GDP is around 39% as of 2024, which is considered quite prudent (for context, many developed countries are over 60-100%). In fact, Indonesia has a self-imposed fiscal rule (temporarily suspended during COVID, but now reinstated) capping the budget deficit at 3% of GDP, precisely to prevent debt from getting out of hand.

Back in the 90s, the government’s debt was relatively low before the crisis, but exploded afterward due to bank bailouts. Now, with healthy debt levels and better tax revenues, the government has fiscal room to maneuver if a crisis hits – they can spend to stimulate or support banks without immediately wrecking the national balance sheet. Another aspect is the current account balance – in the 90s, Indonesia often ran a current account deficit (meaning it relied on foreign capital inflows to finance growth). These days the current account is much closer to balance (small deficit or surplus in recent years), reducing reliance on volatile foreign funding.

All these factors make the country much less vulnerable to a sudden stop of capital. It’s like the difference between someone with high-interest credit card debt and no savings (1998 Indonesia) versus someone with a reasonable mortgage and a solid emergency fund (2025 Indonesia). One is far more likely to get into a debt spiral if income falters. (sources: imf.org macrotrends.net ceicdata.com)

Better Monetary Policy Tools and Crisis Management

In 1997-98, policymakers were caught wrong-footed, partly because they lacked the tools or institutional framework to respond effectively. That has changed. Bank Indonesia now has a clear mandate to maintain stability (inflation targeting is in place) and a more flexible toolkit. The bank can adjust interest rates proactively (not just defensively) and use macroprudential measures (like reserve requirements for banks) to cool or stimulate the economy as needed.

Importantly, the central bank and government have established protocols for crisis mitigation. For example, Bank Indonesia routinely states that it will intervene in currency and bond markets to smooth volatility, and it coordinates closely with the Ministry of Finance on maintaining market confidence. In late 2022 and 2023, when global rate hikes put pressure on emerging markets, Indonesia was able to proactively raise its interest rates, use its reserves to stabilize the rupiah, and even deploy bilateral currency swap lines – all without panic.

Contrast that with 1997, when policy responses were often delayed, reactive, and undermined by political interference. Another vital improvement: transparency. Indonesia’s economic data is now more transparent and timely, and the government openly communicates its policies, which helps prevent the rumor mill from spiraling out of control (unlike in 1998, when misinformation and lack of data fueled fear). Finally, institutions have been strengthened – for instance, an independent Financial System Stability Committee now exists to coordinate responses if financial stability is threatened, a mechanism born directly out of the lessons of 1998.

In sum, the pillars that held up the 1998 crisis (a rigid currency peg, rampant unhedged foreign debt, flimsy banks, and a governance vacuum) have either been removed or vastly reinforced. Indonesia in 2025 is certainly not perfect – it still has areas to improve (for example, boosting exports to reduce reliance on certain capital flows, or improving tax collection for more fiscal space). But it’s a far cry from the precarious position of the late 90s. A repeat of 1998 would require a similar constellation of vulnerabilities, and those just aren’t present to the same degree.

Investing in the Panic: How Lo Keng Hong made 6,000% returns from the 1998 crisis

Read more

Hi 👋 welcome to Recompound Blog - The Investment Mindshift. We help you better your mindset on investment and economics one article at a time. More: Advisory | Get to know us

This is an article for all subscribers. It seems like uncertain time is just right ahead of us because of the recently announced tariffs. Market crash, panicky investors pulling out from capital markets around the globe might very well happen. Toby wrote an article earlier on what to do during a market crash. This article is more event specific that briefly touches upon the key differences in behaviour between common investors and legendary investors during a market crash.

Disclaimer: this article is not an investment advice and shall not be construed out of context. You remain responsible of your own investing decisions.

On 2nd of April 2025, Trump announced a reciprocal tariff, shaking financial markets worldwide. In just two days, major US indices such as Nasdaq and S&P 500 plunged by -11.33% and -10.6%, respectively.

We understand it’s natural to feel anxious and worried seeing your investments might drop significantly in value overnight. You're not alone—many investors are experiencing similar feelings of uncertainty.

This article won’t delve into tariff specifics—excellent resources already cover that.

Instead, we will focus on what this means for long-term investors, particularly in Indonesia.

At the time when the article was written, the Indonesian stock market has been temporarily shielded due to the extended Idul Fitri holiday (March 28 - April 7, 2025). This unusual timing has prompted many investors, including our clients, to wonder:

• What will happen when markets reopen on April 8, 2025?

• Will Indonesian stock market mirror the US markets’ downturn, potentially dropping by around 12%?

• Should investors panic and sell all their holdings, hoping to re-enter at the "bottom"?

Historical Perspective on Indonesian Stock Market Crises

Historically, the Indonesian stock market has faced multiple crises and consistently recovered and grown stronger over time. Here’s how the Indonesian stock market performed during significant past crises:

This historical data clearly illustrates that Indonesian stock market rebounds following crises typically surpass the magnitude of the drawdowns.

But why is this the case?

1. Decision making is always emotional

Every active decision you make is always emotional. Yes, even when you want to take a shower after you finished exercising earlier; you don’t do it because bacterial build up got multiplied by two folds on your skin that increases likelihood of acne by 21.3%.

You take a shower because likely an unpleasant odour comes out from your body and you become rather uncomfortable to be around other people with that odour.

Same as selling stock during a perceived crisis. You sell your investments because of the emotional impulse that the stock market crash will jeopardise your investments forever. Therefore, you derive a sense of safety by pulling out from your investments momentarily.

2. Crisis feels like forever, but is not forever

When there is a crisis, we feel like there is a need for us to sell as we are in a rush to safeguard our capital momentarily. This is because our primal instincts tell us to pull out from our investments, first regardless of however cheap we sell our assets at.

It is akin to a person having a burning house. You probably want to sell it to another person don’t you? So that you could just cash out quickly and let the other fella deal with the burning house?

Maybe that is rational, but what if you sold the burning house at a super tiny fraction of the cost of the land? Well that can become a good deal to the buyer. Once the fire stops, they can rebuild the house and sell it at a super premium. Or even, just sell the land because you sold the property at a super cheap price.

Therefore, when you are experiencing a crisis, it feels like forever. But time and time has shown us again that we don’t really have a crisis with a forever duration. Therefore when the crisis ends, prices tend to get reevaluated to the up side.

We also know that biggest fortunes aren’t made in times of optimism - but by staying invested in moments of maximum fear

When quality assets are underestimated and abandoned, generating very high margin of safety for investments.

Consider the inspiring examples of Lo Kheng Hong, who invested in United Tractors (UNTR) amid the turmoil of the 1998 Asian Financial Crisis, and Multibreeder Adirama Indonesia (MBAI), a chicken feed producer, during the 2005 H5N1 bird flu pandemic in Southeast Asia.

It's safe to say that without these moments of crisis and his bold, contrarian actions,

we might never have known his name today.

I hope it is very clear to readers why investing is hard. Because all sorts of news and information regarding impending doom seems to point to the fact that investing is a “bad activity” in times of massive uncertainty.

However ironically, it usually gives the best opportunity to buy companies at a severely discounted price.

So, What Should Investors Do?

We’ve previously covered this topic extensively here. To summarise the key things clearly:

We would like to re-emphasize on step 3:

1. Think like a business owner. Buying a stock means owning a part of a real business. Over the long term, a stock’s price tends to align with its underlying earnings.

2. Objectively assess whether Trump’s tariffs directly impact your business’ core operations.

   1. For example, if you are a restaurant owner selling nasi padang to blue collared workers in South Jakarta area, will you be afraid of going out of business because of Trump’s tariffs? Maybe not really.

   2. Another example, if you are a wood producer in Cirebon exporting wood to the U.S., will you be anticipating a reduced demand of your produce? Certainly!

If tariffs significantly affect your business’ key revenue streams, reconsider your position. However, if the impact is minimal or non-existent—and provided you purchased your stocks with a robust Margin of Safety —then there is little reason for immediate reaction, especially if you’re still benefiting from consistent dividend cash flows.

To clarify further, here's Indonesia’s top 20 exports to the US (as of 2023):

Ask yourself:

• Do my businesses (stocks) rely heavily on exporting these products to the US?

• If yes, what portion of total revenue does this represent?

If the answer is negative or insignificant:

• Is panic necessary?

Remember, your diversified portfolio was designed precisely for situations like this—to cushion the impact of unexpected downturns.

Focus on What’s Important & Knowable

While second-order effects of tariffs are possible, many investing factors remain beyond our control, such as:

• The exact short-term market reaction when Indonesian stock market reopens on April 8.

• Precisely predicting the stock market bottom.

• Exact long-term effects of tariffs on Indonesia’s 2025 GDP growth.

These uncertainties, though significant, aren't within your control. Instead, focus your energy on aspects you can know and influence:

• The long-term sustainability and growth prospects of your invested businesses.

• Ensuring a strong margin of safety (discount) at the point of purchase.

• Maintaining proper portfolio diversification.

• Evaluating financial prudence and capital allocation effectiveness of management teams.

Successful investors like Warren Buffett and Lo Kheng Hong built their fortunes precisely by resisting the urge to panic sell during market turmoil.

Parting Remarks: does a US crash mean the whole world crashes?

When the US indices declined sharply between April 2-4, 2025, here's how global markets performed:

Contrary to widespread media-driven fear, the substantial US downturn wasn’t uniformly reflected across Asia-Pacific markets. This emphasise a crucial investment lesson:

Predicting short-term market movements is extremely difficult. Investors are better served by focusing exclusively on what's fundamentally important and knowable—the resilience and value of their chosen businesses.

Extra note: if you’re still feeling uneasy, we are happy for you to reach out to us for a personal discussion where we are more than willing to listen to any concerns you have regarding the prevailing situation.

Hi 👋 welcome to Recompound Blog - The Investment Mindshift. We help you better your mindset on investment and economics one article at a time. More: Advisory | Get to know us

This is part III of Indo Stocks that was promised in part I. If you missed the first part where I talked about weakening currency of Indonesia against USD overtime, head over using this link. If you miss the second part about market manipulation, here it is.

Now this is going to be a super real, but obvious, statement. Corruption in the Indonesian government exists. We have to accept this statement no matter how we want to frame it. I mean, it is just one chatgpt away folks.

To name a few highlights:

Orde lama - Pertamina, Indonesia's state-owned oil company, was implicated in significant financial mismanagement and corruption. The company's director at the time, Ibnu Sutowo, was accused of misusing funds and accumulating massive debts, which severely impacted the national economy.

Order baru - Suharto’s regime was marked by pervasive corruption, with estimates suggesting that he embezzled between $15 to $35 billion during his 31-year rule. This corruption permeated various sectors, involving cronyism and nepotism that benefited his family and close associates.

Reformasi - The bailout of Bank Century during the global financial crisis involved the disbursement of approximately Rp6.7 trillion (around $710 million). Investigations uncovered that the bailout funds were misappropriated, leading to public outcry and legal proceedings against several officials.

Jokowi Administration - Jiwasraya Scandal (2018): State-owned insurance company Jiwasraya was involved in a corruption case that resulted in state losses of approximately Rp16.8 trillion. Asabri Scandal (2019): Similar to the Jiwasraya case, the state-owned insurance firm Asabri was embroiled in corruption involving mismanagement and fraudulent investments, leading to estimated state losses of around Rp22.78 trillion.

Prabowo Administration - Went full circle to Pertamina facing allegations of adulterating subsidized petroleum with non-subsidized petroleum, leading to estimated state losses of approximately Rp968.5 trillion (equivalent to around $58.94 billion).

Above are famous highlights that we might probably have heard. I am sure that there are more corruption scandals that have not been surfaced or pursued yet. The key thing to ask is that, does that mean that we have to #kaburajadulu (for non-Indonesian readers: flee the country first) because the government is not trust worthy at all? Or should we even propose anarchism as an alternative to a governmental system that uses violence and taxation to exert control in a jurisdiction?

Now to answer the #kaburajadulu folks, if the reason for fleeing the country is because of the corrupt government, why now? Why not since during the SBY era? Or the Suharto era? For one, the decision to flee a country is exceptionally personal. However, I think it boils down to very practical reasons ranked in order:

1. Physically unsafe due to war or other humanitarian crisis (this is self explanatory)

2. Physically unsafe to stay in a jurisdiction due to violence against a certain ethnic, or religious groups. Check out racial genocides like:

   1. Sri Lanka,

   2. Germany,

   3. Northern Ireland,

   4. Rwanda and many more

3. Extremely corrupt government that leads to severe economic mismanagement. Misappropriation of tax payers’ money is known to cause severe economic trouble (crazy high inflation, huge unemployment, etc) which adversely impact livelihoods of many. A prominent example is Venezuelan government under the presidency of Nicolas Maduro where corruption and economic mismanagement is super pervasive. Google for more info.

4. Extremely bleak economic prospects. The difference between this point and #3 is that right now the economy is still fine. But the prospect is incredibly bad.

Evaluating the practical reasons

#1 and #2 are obvious. If there’s physical violence and is practically super unsafe in an area where you live, you might want to consider reallocating because humans (or living creatures in general) are built to survive.

#3 gets slightly tricky. How corrupt do you need the government to be to declare your intention to leave the country? How much of an economic calamity do you and your family need to experience to explore other jurisdictions for a better livelihood?

For one, the 1MDB scandal already happened in Malaysia and it is controversial as Jho Low (the mastermind) enabled misappropriation of ~$4.5 billion of funds. So much so the then Prime Minister Najib Razak was convicted and sentenced to 12 years in prison. It is gross to see government officials use taxpayers’ money for their own benefit. However, I don’t see Malaysians fleeing the country in the wake of the scandal. They were rightly so outraged about it and therefore they voted Mahatir in the subsequent election.

For Danantara, the reported amount of funds that has been misappropriated is $0 so far.

If Malaysians don’t seem to flee the country, why are Indonesians super worked up and already conclude that they have to flee the country right now?

Let’s investigate this question and see if the fear is imaginary or real.

Because no matter how we spin it, there must be a reason why people are fed up by the government and to decide to leave the country altogether. And for the #kaburajadulu folks, it seems that #4 is the reason. Hence, they might think that:

• Government is super corrupt, therefore

• Real economy is going to be super bad (or it is already bad and will be even worse in the foreseeable future), therefore

• there is no point staying in Indonesia as their livelihood is likely going to be super bad (maybe as bad as that in Venezuela)

Fear #1: Government is super corrupt

I have to admit that this point is quite tricky. Because the nature of corruption is that it is not transparent. So naturally it is difficult to get a good hand of the actual data of corruption levels. I also feel that trying to answer how corrupt the government would usually end up in an endless debate (or what we always like to say: debat kusir).

Why? The data is the same: there is corruption by government officials. However, the belief is vastly different. “is the level of corruption acceptable?” entirely depends on your belief as illustrated in the diagram below.

For example, if you invite fictional characters: Budi, Toby and Wilson to look at the corruption perceptions index below

All three of them will agree that there exists corruption in Indonesia. And maybe it is bad because the score is below 50 (the closer you get to 100, the better you are as a country).

However, Budi will say:

“it is an uptrend since 2012 🤩 that means Indonesian government will be less corrupt!!“

Then Wilson will say:

“it seems that it is not going anywhere.. 😕”

Toby will say:

“it is a dead cat bounce! It will hit 10 soon just like Venezuela. Kabur aja dulu!! 😡”

You can imagine that the debate is pointless and there will not be any resolution. Outcome of the conversation will depend on who shouts the loudest. Therefore, notice how the underlying data is exactly the same, but the opinion that arises from that data can be vastly different depending on the prevailing narrative that is propagated.

Fear #2: Economy is going to be super bad

To be fair I don’t know how bad the economy is going to be in the future. You can ask a proper economist who can model out the macroeconomic outcome based on studied variables. But if you ask a random person on social media to predict the economy, maybe they might be biased based on the recent content they consumed.

But let’s assume that the government is suuuper corrupt. The fear is going to be about how bad the economy is going to be in the wake of a super corrupt government.

Again, I don’t claim that I can predict the future, but I do believe we can see what is the macroeconomic data like in the past when there is corruption.

So in light of fear #1 and fear #2, lets get down to the macroeconomic data where everyone will have more common ground to look at it more objectively.

Let’s dive right in. When reading the below data, it helps if you (yes you the kind reader) picture yourself as the president of Indonesia.

APBN (Indonesia’s state budget)

Recall SBY was in power in 2004 - 2014. Jokowi was in power in 2014 - 2024.

The blue bar chart is the state income and the orange bar chart is the state spending. If state spending is larger than state income then we have a surplus. If state spending is less than state income then we have a deficit.

Notice that during Jokowi’s period the deficit is much more compared to that during SBY’s period.

To put in exact nominal term,

SBY 10 year: ~Rp 91T per year

Jokowi 1st period: ~Rp 300T per year

Jokowi 2nd period: ~Rp 650T per year

Note I distinguish 1st and 2nd period of Jokowi because of COVID in 2nd period.

Yes, state spending would understandably be higher during COVID period compared to income because of the reduced economic activities and the need for the government to compensate to bring more economic stability. That’s why you could see that the the deficit in 2020 and 2021 (during massive lock downs) went as high up as 58%. Like it or not, the government experienced a force majeure during the pandemic and had to take measures to prop up the economy.

So is the deficit good or bad?

We can’t really see the data like that and conclude that it is good or bad. A budget deficit usually means a more aggressive action by the government to spur economic growth. It can, however, be a problem down the line if the state’s debt becomes too high to manage. So in view of the deficit, the key metric to look at here is debt.

Debt Situation

Debt interest payment ratio to government revenue sees an uptrend

We have to admit that this is not good. We could see that in the SBY era, the theme was more of deleveraging when he started with a higher debt interest payment ratio of 17% in 2004 and he brought it down to 7.9% in 2013.

During Jokowi’s era, he was trying to be more expansive by increasing government debt and hence interest payment also increased. Initially we think that the increase was manageable hovering at 10 - 14%.

However, he got into an accident because of COVID and the government debt payment ratio increased quite notably in the 2020s.

Side note:

If you buy a Fixed Rate or SBN and receive coupons from the government, that money you get is what contributes to the chart that you are seeing. I like to keep things more relatable so you know what we are talking about 🙂

While the debt levels relative to government income might not be in the best place, how about the debt levels relative to GDP and more importantly interest expense relative to GDP?

As seen in the chart, debt levels relative to GDP saw an increase to 39% from 26% at the start of Jokowi’s administration. But it is relatively comparable to the levels seen at the start of SBY’s administration. More importantly, interest expense to GDP ratio remains roughly stable between 4 - 6% for 20 years.

This tells us a number of things:

1. GDP growth seems to be offsetting the increased debt levels

2. More domestic debt vs foreign debt because currency depreciation can affect debt levels in Rupiah terms

Based on the debt levels alone, you might not be seeing something that is extraordinary. You would be correct in perceiving that Jokowi’s era is more expansive than Prabowo’s era. But not a doomsday scenario because you could argue that the debt levels are still manageable. If you compare this figure to let’s say Venezuela, the debt to gdp ratio over there has been consistently above 100% for the last 5 years.

But we cannot let our guard down and we have to ask ourselves:

Question #1: What is the debt used for? Is it used well?

The debt is used for building of infrastructure and arguably, it is not used very well. Let’s take a look at the graphics below.

You could see that the budget for infrastructure went up in the chart above which signifies more spending for building of infrastructure. That is why you have state owned enterprises (SOEs) building toll roads, airports etc for better economic mobility in the hopes of promoting economic growth.

However, as the chart on the right indicates, the logistic performance index worsens in terms of ranking. It used to be top 50 in 2007 and now it is only top 60 recently in 2023.

So let us be fair in saying that: no, the debt could have been used better.

We also know that many SOEs have very high levels of debt to equity ratio (DER) in their financial reports. There are cases of PT Waskita karya, PT Wijaya Karya, etc undertaking plenty of debt restructuring to address their financial strains and to ensure it’s operational sustainability. This poor GCG, I believe, leads to the chart we see above.

While we don’t know if the situation is going to worsen, there are signs that it can be better through privatisation. For example, as of the first half of 2024, Astra International controlled 396 km of toll roads and is actively seeking to add more concessions.

We also need to bear in mind that poor execution of infrastructure projects do not have to always mean that central government is severely corrupt. It is incredibly difficult to manage corruption at the grass roots levels as well. How do you deal with corruption happening at procurement level? Or financing level?

Lastly, despite the not so ideal outcome of the government spending in infrastructure, infrastructure still got built during Jokowi era, espeically toll roads. Approximately 2000km of toll roads was built which accounts for 70% of the length of the Indonesia’s toll network.

Conclusion: yes execution is meh leaning to poor. But results is not 0 and there is a way to fix this.

Question #2: What is the driver of GDP growth like?

The 20 year GDP growth rate is as follows.

We can see that the country is still growing and has roughly recovered from recession that was caused by pandemic. But this tells us nothing about the driver of growth and we have to look at other metrics to get a better picture.

I think a nice way to look at the type of GDP growth is to look at the tax revenue overtime and tax ratio to GDP as shown in the graph below.

Tax is a big part (80%) of government’s revenue and we could see that it has been growing. However, the tax ratio sees a decreasing trend from 12 - 13% during SBY’s era to around 10% in Jokowi’s era. The ratio in 2023 is 10.2% and the ratio in 2024 is 10.1% (finding data is hard).

What does this mean?

First, decreasing in tax ratio compared to GDP means that there is an increasing “informal sectors”. When we have smaller guys doing business, it follows that collecting taxes from them is more difficult. This is because if profit margins from small enterprise might only be slightly above their living expense, then the small enterprise owners would be more likely to avoid tax for survivability. This might mean that growth is less inclusive if we see an increase in informal sectors. For example, they might not be compliant to minimum wage laws and other employee benefits that are governed by law.

Second, we have seen that there is a decrease in corporate tax from 30% (in 2005 - 2008) to around 22% (in 2020 until present) in Indonesia. This is perfectly understandable given that Indonesia needs to attract foreign direct investments (FDI) as a source of growth. Therefore, the tax ratio to GDP sees a downtrend. And indeed, we can see that there is an increase in FDIs in the last 5 years which I think is good in promoting economic growth and stabilising foreign exchange.

Therefore, we could see that the driver of growth for the economic growth is likely to be growth in informal sector (which I think is not good) and growth in FDIs (which I think is good).

Closing Remarks: Is the Indo Government Trust Worthy?

I hope that this article gives you a more grounded picture of performance of Indonesia as a country for the past years. There you have it, the macroeconomic data. It could be interpreted as simple as SBY was conservative and Jokowi was aggressive in pursuing economic growth.

Or it could be interpreted as Indo government is extremely corrupt and we should flee the country. However you want to interpret it, that is the data and you conclude yourself if the Indo government is trust worthy or not.

For me, I am not saying that Indonesia’s macroeconomic performance is exceptionally stellar and brilliant, but it is also not exceptionally bad either. Especially considering that Indonesian government needs to deal with rampant corruption that hinders growth.

As things stand right now, we are definitely not as clean as the Singapore government or maybe you could be called delusional if you think that Indonesian government will be as clean as the Singapore government, ever. But I think it is vastly pessimistic to call out the Indonesian government to be as corrupt and inept as the Venezuelan government.

As investors ourselves, our job will then be to ask ourselves:

Could you find a company in Indonesia that can have a long term growth of more than 3%?

Because if you can’t find a company that could grow higher than that rate, you are better of just holding USD. If you can though, why not just invest and go for the higher returns?

What about Danantara?

Read more

Hi 👋 welcome to Recompound Blog - The Investment Mindshift. We help you better your mindset on investment and economics one article at a time. More: Advisory | Get to know us

This is part II of Indo Stocks that was promised in part I. If you missed the first part where I talked about weakening currency of Indonesia against USD overtime, head over using this link. In the middle, Budi also wrote about #kaburajadulu market crash, is it a crisis? Or an opportunity? You decide.

Before we begin, let me say that you will hate reading this article if:

• You think that market is perfectly efficient

• You think that price of a stock (or a security) cannot be controlled by an individual or a group of individuals with sufficient capital

• You think that price manipulation is impossible because it is illegal and law enforcers have done a perfect job in catching all price manipulators

If you think that any of the above is true in practice, feel free to close the article and stay tuned for the next one 👋🏿

Let us also be clear that price manipulation, especially one that harms other parties in anyway, is an immoral and unlawful act. But it is arguably not uncommon. People might think that this phenomenon only exists in Indonesia because people might think that Indonesia is gelap (dark). But what if I tell you that JP Morgan also takes part in manipulating prices of precious metals? Some of the traders even got sentenced.

So this is a very serious matter. And if it is not clear why this is illegal, this quote from the shared link above captures the essence well.

“As today’s sentencing demonstrates, the FBI and its partners remain committed to investigating and bringing to justice anyone who attempts to manipulate our financial markets for their own selfish gain. In order to maintain economic security, investors in equity and commodities markets must have confidence that exchanges are operated in a transparent and equitable manner, and that investments are free from manipulation and fraud. Today’s outcome should serve as a reminder that the FBI remains highly focused on combatting bad actors conducting sophisticated fraud schemes targeting the securities and commodities markets.”

- Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division.*

But it should not be a taboo to talk about price manipulation and pretend that it does not exist. In fact, we should really be informed about it so that we can be more aware and vigilant. For example, burglary or pickpocketing is an unlawful act. However we definitely never pretend like it does not exist. We instead spread safe guard measures to ensure that we don’t get robbed.

So how is price manipulated in the stock market?

First things first, let’s state some obvious statements.

• You manipulate price, to make a profit.

• You manipulate stock prices when you deliberately try to make a stock to be priced really low, to create a sell pressure so that people would sell their stocks to you at a cheap price.

• You manipulate stock prices when you deliberately try to make a stock to be priced really high, to create a buy pressure so that people would buy their stocks from you at an expensive price.

• Sh*t posting or pom pomming a stock on social media can be used as a tool by price manipulators to inorganically create fear or greed. But, you are not manipulating the market for having an opinion about a stock in social media, even if the opinion is nonsense (you will just look funny 🤭)

Now that the obvious is out of a way. Let’s briefly touch upon the very simple mechanics. Imagine yourself (yes, you reading the article) being the price manipulator. How would you conduct your business?

Step 1: Engage Public Companies with Business Commitments

Public companies usually have business goals or commitments that they want to achieve in the next time period. For example, they are prepping for a joint venture with another company. Or they are planning to acquire a new business unit.

Now if these business commitments succeed, then the value of the business would naturally increase. Let’s say before the execution of business commitment, your net earnings is 100. After the execution of business commitment, your net earnings is likely to be 1000. Refer to a diagram below:

Now picture Budi as an owner of the company who’s doing this business commitment.

Before Budi does this business commitment, net earnings is 100. And share price is also Rp 100.

After Budi does this business commitment, net earnings is 1000 (a whopping 10x). Do you think he wants to have the shares still to be priced at Rp 100?

Probably no 🙂 Otherwise Monish Pabrai will look to eat his company alive like what he did to a Turkish company. So naturally, you can see that there’s a “want” from Budi to ensure that his share price is not stuck at Rp 100, once he does his business commitment.

Step 2: Your Task is…

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Hi 👋 welcome to Recompound Blog - The Investment Mindshift. We help you better your mindset on investment and economics one article at a time. More: Advisory | Get to know us

P.S. I know the promised two articles on Indonesian stocks were about Indo government and manipulated stock prices, but I want to write about the Indo market from a different angle. Anywho if you missed the first part, here’s the link to the article where Toby talked about the weakening IDR. Enjoy!

The February 2025 Market Crash

As we step into March 2025, the Indonesian Composite Index (IHSG) has plunged 18% from August 2024 to February 2025.

However, if we exclude the artificially inflated conglomerate stocks (BREN, PANI, AMMN, TPIA), the broader Indonesian market has effectively returned to April 2020 levels—the depths of the COVID-19 market crash:

• KOMPAS100: -32%

  

• LQ45: -35%

  

In other words, Indonesian stocks are trading at prices last seen right after the COVID-19 bottom.

This Isn’t Our First Rodeo — And History Is on Our Side

This market downturn mirrors March 2020, when stocks collapsed before surging 57% by 2022.

As the saying goes, history doesn’t repeat, but it rhymes.

Here’s what we’re seeing:

• Widespread pessimism: Public backlash over Danantara, the Pertamina corruption scandal, mass layoffs, and viral hashtags like #IndonesiaGelap and #KaburAjaDulu reflect deep distrust.

  

• Corporate buybacks: Major companies are buying back shares—typically a strong signal of undervaluation and insider confidence.

• Regulatory shifts: The Indonesia Stock Exchange (IDX) has eased share buyback regulations, allowing companies to repurchase shares without requiring an AGM.

  

The Fundamental Picture Says Otherwise:

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Disclaimer: the content of this blog post is for informational purposes only and should not be construed as financial advice. It is the author’s opinion on one specific investment instrument (U.S. stocks) and is not a recommendation to buy, sell, or hold any securities. If you are interested in investing in U.S. stocks, we are not saying that you absolutely can or cannot make good investment returns, consider consulting your financial advisor before making any investment decisions.

Many have asked whether we will offer services for U.S. stocks.

These are completely understandable remarks, as over the past decade, U.S. stocks have significantly outperformed Indonesia’s—even when excluding the forex loss from USD to IDR.

However, after doing some research, we will not launch the service in near future. The primary reason for this decision is the extreme valuation risk currently associated with U.S. stocks, particularly over the past four years.

At Recompound, we pay heed to the investment principle Warren Buffett famously preached: “Price is what you pay, value is what you get.”

No matter how high the quality of an asset, overpaying relative to its intrinsic value will inevitably lead to poor investment returns.

Here’s Howard Marks - the Co-Chairman of Oaktree Capital Management, explaining the concept (video source: link)

Our research indicates that the U.S. stocks are considerably overvalued. In this article, we are going to outline some key insights below. However, before you go on and read the details, do bear in mind that even though the market is overvalued, it does not mean that there is no investment opportunity.

We are also not saying that you will not be able to make money from the U.S. market. What we are saying is that: for us, the risk of investing in U.S. stocks right now is too high.

With that out of the way, let’s begin.

U.S. Stock Price Performance Dominates Globally

The relative price performance of U.S. stocks compared to non-U.S. stocks is at a 75-year high. This historical perspective underscores the extent of the current overvaluation.

Some might argue, “Perhaps the U.S. stocks are overvalued for a good reason —maybe their corporate earnings are significantly stronger than the rest of the world?”

U.S. Corporate Earnings are Great, But Not Exceptional

The data tells a different story. U.S. stocks are now trading at over 22x forward earnings, compared to 14x for stocks in the rest of the world.

This is the widest valuation gap since 1995, surpassing even the dot-com bubble era of the early 2000s and the 2008 subprime mortgage crisis.

Historical Overvaluation

From a historical perspective, U.S. stocks are also relatively overvalued, particularly in the technology sector.

The current forward P/E ratios for major U.S. stocks indices like the Nasdaq 100, Russell 2000, and S&P 500 are near the top of their 20-year ranges. This indicates that U.S. stocks are expensive relative to their earnings.

Record-High Stock Ownership

Approximately 40% of the U.S. population owns stocks, the highest level since the 1950s. The chart above shows that stocks held by households and nonprofit organizations as a percentage of financial assets are at historically high levels. This suggests that a significant portion of financial assets of Americans are tied up in stocks.

If nearly everyone already owns U.S. stocks, who else will drive prices higher? 🥶

Past Performance Does Not Guarantee Future Returns

A graph from J.P. Morgan Asset Management illustrates the relationship between starting valuations and subsequent returns. Each square represents a month from 1988 through late 2014, totaling 324 monthly observations (27 years x 12). The graph reveals two critical insights:

1. Strong Relationship Between Valuations and Returns: Higher starting valuations consistently lead to lower subsequent annualized ten-year returns, and vice versa. While there are minor variations, there are no significant exceptions to this trend.

2. Today’s Valuations Are Extreme: The current P/E ratio is well into the top decile of historical observations. In the past 27 years, when investors bought the S&P 500 at P/E ratios similar to today’s multiple of 22x, their ten-year returns ranged between +2% and -2%.

How Long Will This “Overvaluation” Last?

Honestly, we don’t know—and we don’t need to know.

But here’s what we do know:

1. It is impossible to time market tops or bottoms: Trying to predict the exact peak or trough of a market is a fool’s errand. Even the most seasoned speculators have struggled with this.

2. Markets eventually revert to their intrinsic value: An overvalued market will eventually decline, just as an undervalued market will eventually rise. History has shown time and time again that valuations matter in the long run.

Staying Patient and Prudent

At Recompound, our fee structure is directly tied to our customers' portfolio growth. We only earn when our customers’ portfolio grows. This alignment of interests means that taking excessive risks is simply not an option for us. Instead, we focus on taking calculated risks and aim to win over the long term.

While this conservative approach might invite cynicism & ridicule in the short term, we are confident that it is the most sustainable and responsible way to achieve durable investment success.

Conclusion

The allure of U.S. stocks is undeniable, but we believe it is more prudent to wait for a better risk-reward scenario before entering. At Recompound, our commitment is to your long-term success—not to chasing short-term trends. We will continue to monitor the market closely and keep you informed of any developments that present attractive opportunities.

Shameless Promotion

If you are interested in learning more on what we do, please do not hesitate to have a chat with us here 😃 :

https://calendly.com/recompound/30min

Disclosure by PT Adaro Energy Indonesia Tbk (ADRO) in early September 2024 regarding the planned spin-off of its subsidiary, PT Adaro Andalan Indonesia (AAI), has been a hot topic in the capital market. Many people are weighing the pros and cons of this corporate action.

After divesting AAI, will ADRO benefit?

As ADRO shareholder, is acquiring AAI at a valuation of $2.6 billion considered cheap?

If ADRO loses AAI, where will their future profitability come from?

Is AAI's prospect still bright?

And many other pros and cons questions.

For us, this corporate action reminds us of the story of ADRO’s IPO (Initial Public Offering) back in 2008.

For context, in June 2008, the shares of PT Bumi Resources Tbk (BUMI) reached an all-time high, Rp 8,550 per share! At that time, BUMI's market cap reached Rp 166 trillion, making BUMI the largest company on the exchange and a darling among investors. It was said that many people were rushing to securities firms asking, “How do I buy BUMI shares?” instead of asking how to open a securities account.

Coal prices also reached their peak at that time, exceeding $100 per ton. The momentum and tailwinds in the coal industry were successfully leveraged by PT Adaro Energy (ADRO) to list its shares, marking the largest IPO in the history of the Indonesia Stock Exchange, worth Rp 12.2 trillion! This record was only broken 13 years later by PT Bukalapak.com Tbk (BUKA).

If we take a look back at ADRO's IPO process, there is actually something interesting: the majority of the IPO funds were allocated to increase capital and acquire shares in its subsidiary, PT Alam Tri Abadi (ATA), which would later be renamed PT Adaro Andalan Indonesia (AAI). This is the same entity that ADRO now plans to divest following its shift towards focusing on green energy.

Why did the majority of ADRO's IPO funds “have to” be used for a rights issue to PT Alam Tri Abadi?

That’s the key question

This simple question led us to many more questions, eventually culminating in a summary of the chronology and a mapping of the structure of PT Adaro Indonesia (ADRO) Group at the time. Let's discuss it one by one.

ADRO's Structure Before the IPO

Although it may seem "complicated," this is ADARO Group’s pre-IPO structure, which we’ve simplified. There are many stories to be uncovered from this structure, but let’s focus on one key part first: the position of PT Alam Tri Abadi within ADRO's structure.

PT Alam Tri Abadi was ADRO's direct entity at that time, holding several key entities such as PT Adaro Indonesia, Coaltrade, and PT Indonesia Bulk Terminal.

From this, we can deduce why around 90% of ADRO's IPO funds in 2008 were funneled into PT Alam Tri Abadi.

Let’s highlight the shareholding structure of PT Adaro Indonesia:

• PT Alam Tri Abadi - 60.22% (ADRO’s direct entity, 92.02% ownership)

• PT Dianlia Setyamukti - 5.83% (A subsidiary of PT Alam Tri Abadi, 100% ownership)

• MEC Indo Coal BV - 0.95% (Part of PT Alam Tri Abadi’s entity through ownership in Decimal Investment and its subsidiaries)

From this, we know one clear fact: ADRO already owned 66.07% of PT Adaro Indonesia shares through three entities.

So, where were the remaining 33.93% of PT Adaro Indonesia shares?

They were held by PT Viscaya Investments directly (28.33%) and 4.67% through its subsidiary, Indonesia Coal Pty Ltd.

At that time, PT Viscaya Investment was owned by three shareholders:

• Ariane Investments Mezzanine - 76.28%

• Agalia Energy Investments Pte Ltd - 23.71%

• Arif Rachmat - 0.01%

Now, Ariane Investments and Agalia Energy became the targets of PT Alam Tri Abadi's acquisition because they indirectly held the remaining shares in valuable entities such as PT Adaro Indonesia, Coaltrade, and PT Indonesia Bulk Terminal.

So, the initial question of why more than 90% of ADRO's IPO funds were "given" to ATA has been answered: PT Alam Tri Abadi was tasked with collecting the "remaining shares" by acquiring Ariane Investments and Agalia Energy.

Who owned these two entities?

Shareholders of Ariane Investments Mezzanine:

• Ariando FCM (Mauritius) Ltd - 42.31%

• Kerry Coal (Singapore) Pte Ltd - 28.85%

• Vencap Holdings (1987) Pte Ltd - 13.46%

• Goldman Sachs (Asia) Finance - 7.69%

• Citigroup Financial Products, Inc - 7.69%

Meanwhile, Agalia Energy Investments Pte Ltd was entirely owned by Agalia Capital.

Here is where things get tricky. The shareholders listed above are primarily asset management companies. As we know, asset management companies manage investors’ funds. So, who were the investors in question?

Once again, this is tricky. Were they part of ADRO’s founding consortium (Thohir Family, Subianto Family, Rachmat Family, and Saratoga)?

This answer remains somewhat unclear for us, as there is no concrete evidence, only assumptions from a few news reports published by Detik in 2005.

Feel free to form your own assumptions: did the founders hold the remaining shares, or was there another party involved?

This is quite important, considering the acquisition value of Ariane Investment & Agalia Energy reached Rp 9.9 trillion!

Jackpot?!

As for whether this corporate action was cheap or expensive, you can draw your own conclusions from ADRO's Q3 2008 financial statements.

What is clear is that this acquisition resulted in the recognition of significant goodwill.

Let’s return to the discussion about the divestment that ADRO will carry out on this entity.

Message from Budi: Before that, if you have read this far and are eager to read even further, consider subscribing to KelaSaham’s services. They offer super comprehensive educational videos for you to learn more and dig deep about value investing. If you are hungry to read quality materials about Indonesian companies such as this, head over to their registration page.

And if you sign up using my code N4E43S, I will be very happy. If you sign up without using my code, I will be equally happy as they really are great people.

Transformation of PT Alam Tri Abadi into PT Adaro Andalan Indonesia

If you read ADRO’s 2023 annual report and those from previous years, you won’t find the name PT Adaro Andalan Indonesia (AAI). While this name is “new,” the entity itself has existed for two decades, having been established at the end of 2004 as PT Alam Tri Abadi.

The name PT Alam Tri Abadi was retained until ADRO’s Q1 2024 financial statements. It was only in the Q2 2024 financial statements that the name PT Adaro Andalan Indonesia first appeared. So, this entity has been around for a long time, only its name has changed.

The divestment of PT AAI is significant and material because PT AAI holds ADRO’s “prime assets.” This claim is quite basic, as if you look at the group structure under PT AAI.

Oh, by the way, ADRO has never explicitly disclosed the structure of its group entities, but based on several ADRO disclosures, we’ve summarized it as shown in the image above. There may be a few entities we missed, but this should not change the fact that AAI holds ADRO’s prime assets.

One of these prime assets is PT Adaro Indonesia. There’s also the Balangan Coal entity, acquired in 2013, consisting of PT Semesta Centramas, PT Laskar Semesta Alam, and PT Paramitha Cipta Saran, along with PT Mustika Indah Permai. In total, the AAI Group contributed 60.8 million tons of ADRO’s 2023 production, or about 92% of ADRO’s overall production.

One entity under AAI that draws attention is Adaro Capital Limited, which was ADRO’s vehicle for acquiring Kestrel Coal, a coking coal producer, in 2018.

This is interesting because AAI's planned divestment is part of ADRO’s move to separate its thermal coal business as it focuses on green energy. Kestrel may either be sold by AAI to ADRO or to PT Adaro Minerals Indonesia (ADMR).

Previously, AAI sold 2.6 billion ADMR shares to ADRO for Rp 3.5 trillion on June 20, 2024. The profit from this ADMR share sale contributed to PT AAI's nonrecurring gain of $322.9 million.

Now, let’s move on to AAI’s divestment transaction plan.

There are several important points that we have highlighted:

• The sale of AAI shares will be offered to ADRO shareholders who are registered on a specific date. This is similar to the cum date in dividend distribution, where there is a “special” date for ADRO shareholders to subscribe to AAI shares.

• The shares will be offered based on a specific ratio. If there are no changes in the corporate actions of ADRO or AAI, the estimated ratio is 1:4.39, meaning that for every 4.39 shares of ADRO owned, shareholders are entitled to 1 share of AAI. (This is still an estimate; the final ratio will be confirmed in the prospectus).

• The third point is still somewhat confusing. The offering price to ADRO shareholders will be based on the weighted average price formed after the close of trading on AAI’s listing day on the stock exchange. In our view, AAI will first undergo an IPO, and then the shares will be offered to ADRO shareholders at the average price of AAI’s first trading day.

• Any remaining AAI shares that are not subscribed or sold will continue to be held by ADRO. This means ADRO will likely still own a certain percentage of AAI shares, but it won’t be significant or consolidated again due to ADRO's initial intention of divesting in line with its “green energy” focus.

So, is PT Adaro Andalan Indonesia (AAI) valued at $2.6 billion an attractive valuation?

Let’s wait for the official prospectus, and we’ll discuss it in another article.

Prudent capital allocation is one of the most critical factors for long-term value creation for shareholders. There are various ways for a company to allocate its capital, such as investing in its core business, acquiring new businesses, paying off debt, distributing dividends, or conducting share buybacks.

"Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value."

• Berkshire Hathaway Annual Letters 1994

Each capital allocation choice comes with its own set of benefits and risks. For example, when a company chooses to reinvest profits into its core business for expansion, there is the potential to increase future earnings. However, there is also the risk of over-expansion, which could lead to suboptimal utilization and less-than-optimal shareholder returns.

Similarly, if a company distributes all its profits as dividends, it might miss opportunities for expansion and future profit growth. This is why management needs skill and wisdom in capital allocation to achieve optimal results.

Among all the potential capital allocations, acquiring new businesses often proves to be less successful. In his book “One Up on Wall Street”, Peter Lynch introduced the term "diworsification" to describe corporate diversification into areas unrelated to the company's core business.

One example of this can be seen with PT Gudang Garam Tbk (GGRM). GGRM is one of the largest cigarette companies in Indonesia. However, in recent years, the company has made significant investments in new businesses unrelated to its core operation, specifically in the airport and toll road sectors.

Over the past five years, GGRM's stock price has fallen by 80%. In 2019, GGRM recorded a profit of IDR 10.9 trillion, a 40% increase from the previous year. The rise in Average Selling Price (ASP), record sales volume of 95.9 billion sticks, and the absence of an excise tax increase that year acted as tailwinds for GGRM.

GGRM's strength at that time led many to overlook one crucial aspect: the company's plan to enter the airport business. This diversification would later draw criticism from many of its investors.

"When they were about to build this airport, what made me stand in awe was when Mr. Susilo, Director of Gudang Garam, said that all the money would come from him. They just needed permission from the government."

Luhut Binsar Pandjaitan, 2022

Given the 2019 profits and the ongoing dividend payments, the airport construction was considered part of the company’s CSR (Corporate Social Responsibility).

"Building an airport for IDR 10 trillion is nothing for GGRM, just the company's annual profit." That's what people said at the time.

Perhaps this statement was influenced by management's comments during the 2019 public expose: "The airport and infrastructure projects are not purely profit-driven business units."

Then COVID-19 hit. GGRM's 2020 profit still reached IDR 7.6 trillion, but management decided not to distribute dividends. But one thing was clear at that time: GGRM continued its infrastructure projects and injected an additional IDR 2.2 trillion into two of its subsidiaries, PT Surya Dhoho Investama (IDR 1.4 trillion) and PT Surya Kerta Agung (IDR 800 billion).

Years passed with the hope that conditions would recover, volumes would return to normal, and GGRM could pass on the excise tax increases to customers. However, since then, GGRM's performance has continued to decline. Although volume rebounded in 2021, GGRM's sales volume has steadily decreased since 2022.

In the recent GMS (General Meeting of Shareholders), GGRM decided not to distribute dividends from its 2023 profits, even though its profit increased from the previous year.

What’s really going on? Why is GGRM no longer distributing dividends?

In our view, one of the reasons is GGRM's capital allocation, which is currently being directed towards its infrastructure business—airports and toll roads.

Let’s first discuss the Dhoho Airport. The development of Dhoho Airport can be traced back to October 2016 when GGRM established PT Surya Dhoho Investama with an initial capital injection of IDR 100 billion. Since then, GGRM has continued to inject capital annually, reaching IDR 14 trillion!

GGRM's 2023 profit was IDR 5.3 trillion, while at the same time, GGRM injected IDR 4.1 trillion into PT Surya Dhoho Investama!

This capital injection represents 77% of the 2023 net profit! This may be one reason why GGRM is reluctant to distribute dividends; they need to allocate the profits to invest in the airport business.

Let’s assume GGRM has "finished" injecting capital into this business since Dhoho Airport has also begun operations.

What about the Kediri-Tulungagung Toll Road business?

To answer this, let's look at the total capital GGRM has injected into the two subsidiaries formed: PT Surya Kerta Agung, established in 2019 for construction activities, and the latest in 2024, PT Surya Sapta Agung Tol, as the Toll Road Business Entity (BUJT). • PT Surya Kerta Agung: IDR 1,100 billion • PT Surya Sapta Agung Tol: IDR 900 billion

So, GGRM has already injected IDR 2 trillion into this toll road business. According to various sources, the contract value and investment for the Kediri-Tulungagung Toll Road project will reach IDR 9.9 trillion, rounded up to IDR 10 trillion. So, there is still about IDR 8 trillion that GGRM needs to top up into this 44 km toll road business entity.

To verify this, we can look at the disclosure of information regarding capital increases. GGRM will conduct a rights issue in PT Surya Kerta Agung worth IDR 7 trillion, while the issued and paid-up capital of PT Surya Sapta Agung Tol is IDR 2 trillion (GGRM has only injected IDR 900 billion as of Q2 2024).

So, where will the remaining IDR 8 trillion come from?

It could come from profits or interest-bearing debt.

If it comes from profits, will GGRM forgo dividend distribution again in the coming years?

It’s possible.

The cigarette industry, increasingly pressured by the government, and GGRM's capital allocation in the coming years must be closely watched.

"We have no intention of diversifying into infrastructure as our core business. The airport and other infrastructure projects we are entering are part of our participation in the government's infrastructure development. Philosophically, we are not pursuing profit in these projects."

• GGRM Public Expose 2019

Consider the management’s words.

IDR 14 trillion for the construction of Dhoho Airport is equivalent to 23% of GGRM's equity! Coupled with around IDR 10 trillion for the toll road, that’s about IDR 24 trillion of GGRM’s capital invested in this business! Can we still overlook GGRM's diversification, thinking that its future performance will only be affected by its cigarette business?

Are you sure?

The construction of Dhoho Airport is recorded as an Intangible Asset with an acquisition cost of IDR 13 trillion. With a 50-year concession period, the amortization of the Airport Concession Rights will amount to around IDR 260 billion per year. This means that Dhoho Airport must generate a profit of IDR 260 billion per year so that GGRM doesn’t incur significant losses.

But the question is, can Dhoho Airport generate IDR 260 billion in profit per year?

To answer this, let’s look at the performance of eight operational airports in Indonesia.

From the eight airports analyzed, we can see that many airports are not profitable, as they are still operating at a loss from an operating profit standpoint—let alone covering other non-operational expenses.

Large airports like Soekarno Hatta, I Gusti Ngurah Rai, and Juanda are exceptions, as these airports can generate high operating profit margins. However, many airports are actually not profitable, as they are still operating at a loss even at the operating profit level—let alone covering other non-operational expenses.

Returning to the question, can Dhoho Airport generate IDR 260 billion in net profit?

Judging by the performance of other airports, it seems unlikely in the near future.

Intro to UNTR

What comes to your mind when you hear the name PT United Tractors Tbk (UNTR)?

Even if you have never invested in Indonesian companies before the word “Tractor” might lead you to think that this company sells Tractors!! (which is not wrong)

For those who are more familiar with Indonesian stocks, you might know these facts about UNTR:

• It’s the number 1 mining contractor in Indonesia, or

• the distributor of a very well known tractor brand Komatsu, or

• with a cooler term: “pick & shovel” company!

Yes! The branding of UNTR indeed revolves around those three things. For more than 50 years, PT United Tractors Tbk (UNTR) has been the sole distributor of Komatsu heavy equipment in Indonesia. From this distribution business, UNTR then formed a Mining Contractor business unit run through their subsidiary, PT Pamapersada Nusantara (PAMA), which later became the largest mining contractor in Indonesia.

Although UNTR is well-known as a pick & shovel company in the mining industry, there is something interesting if we look at UNTR's revenue composition in the last two years!

Side note: a "pick & shovel" company refers to a business that provides tools, services, or essential infrastructure to support a larger industry.

UNTR’s business

UNTR groups its business segments into 6 parts:

• construction machinery,

• mining contractors,

• coal mining,

• gold & other mineral mining,

• construction industry, and

• energy.

If you don’t know, UNTR is also owned by PT Astra International Tbk (ASII). Therefore, it is appropriate to refer UNTR as the subholding of ASII in the mining business.

In 2023, UNTR recorded a revenue of IDR 128.6 trillion. If we break it all down, this was contributed by three main segments:

• Mining contractors - IDR 53.9 trillion (42% of total revenue)

• Construction machinery - IDR 36.6 trillion (28% of total revenue)

• Coal mining - IDR 30.5 trillion (24% of total revenue)

UNTR's revenue from the coal mining segment has risen significantly in recent years, mainly due to the increase in coal selling prices, especially in 2022-2023. This points to the importance of the coal mining business segment.

UNTR's revenue from the coal mining segment (IDR 30.5 trillion) is catching up with the revenue from the construction machinery segment (IDR 36.6 trillion) , which is UNTR's "original" business.

If we investigate the history, UNTR is not actually a newcomer in the coal business.

In 1989, UNTR already owned a coal mine through the acquisition of a 60% stake in PT Berau Coal (which is now owned by PT Berau Coal Energy Tbk (BRAU), a part of the Sinar Mas Group).

15 years later, on July 29 2004, UNTR decided to divest PT Berau Coal to PT Armadian Tritunggal for a sale price of IDR 407 billion. The proceeds from the divestment were used to partially repay UNTR's debt at the time.

But just 3 years later, on April 30, 2007, UNTR re-entered the coal mining business by acquiring the coal mine PT Dasa Eka Jasatama through PT Pamapersada Nusantara (PAMA).

And a year later, UNTR acquired PT Tuah Turangga Agung. Six years later, PT Tuah Turangga Agung became the "parent" of UNTR's coal mining assets.

The growing size of UNTR's coal mining business makes it interesting to compare with other coal companies. How large is UNTR's coal mining segment, actually?

To answer this, let's compare it with PT Bukit Asam Tbk (PTBA), PT Indo Tambangraya Megah Tbk (ITMG), and PT Golden Energy Mines (GEMS), which are known as "pure" coal mining companies.

Sales Volume & Revenue

In terms of sales volume, UNTR lags behind the other three companies. A sales volume of 11.8 million tons in 2023 is considered "mini" when compared to GEMS, which recorded a coal sales volume of 46.8 million tons in the same year.

Similarly, in terms of revenue, UNTR also lags behind PTBA, GEMS, and ITMG. In 2023, the revenues were as follows: GEMS (IDR 44.8 trillion), PTBA (IDR 38 trillion), ITMG (IDR 36.5 trillion), and finally, UNTR (IDR 30.5 trillion).

However, total revenue is not the sole measure of profitability. What is most important is how much of that revenue becomes net profit.

This should be obvious to everyone: if I earn USD 100 million in revenue from selling iPhone, it does not mean anything if my cost is at USD 120 million. My sales is huge, but I am incurring losses.

Unfortunately, the net profit from the coal segment is not explicitly stated in UNTR’s financial statement. However, a clever way to estimate it is to look at profit before tax, then subtract the applicable tax rate of 22%.

In 2023, UNTR's total net profit for the coal segment was IDR 7.5 trillion, which is higher than PTBA's net profit of IDR 6.1 trillion. UNTR's net profit is even almost comparable to the net profit of ITMG and GEMS, who are "pure" coal mining companies.

So yes, UNTR's coal mining business is pretty darn significant and is comparable to other "pure" coal mining companies.

And guess who is the mining contractor for coal excavation for PTBA, ITMG, and several other coal mining companies?

If we look at the "supplier" for PTBA and ITMG in mining services, we will find the name PT Pamapersada Nusantara, which is essentially UNTR!

The synergy between UNTR's construction machinery business, mining contractor services, and coal mining operations makes it not just a pick & shovel company, but an integrated mining company worth considering.

However, this does not mean we recommend you to invest in UNTR, as this article only discusses a small portion of UNTR (recall that the coal mining segment’s contribution to UNTR’s revenue is 24%) and should not be used as a basis for buying or selling decisions.

The takeaway

From this UNTR case study, we want to offer a new perspective, that is, that the branding carried by a company can be just a small part of its overall business. Who would have thought that the profit generated from UNTR's coal segment (from a company that is supposedly selling tractors) could be larger than the "pure" coal companies we all know?

Therefore, it is essential to conduct your own in-depth analysis of a company rather than just following the trend. Always do your own research!

Closing Remarks (from Toby)

Hopefully you folks would have learned something from Jeffry (from kelas saham) in this post. He’s starting out his educational investment class alongside with Leo. Go check their stuff out if you fancy in learning more about investing and Indonesian companies at large.

And no, we don’t get paid by them to have this post up at Recompound blog. I just think that they are genuinely adding value to the investment community. Cheers!

Disclaimer: this is not an equity research report and it is not a buy, sell or hold recommendation on any mentioned stock. Views mentioned in this article is the authors’ views solely for the purpose of education and should not be construed as financial advice. Views presented also do not necessarily reflect the view of Recompound as a company. Purpose of this blogpost is to highlight a brief overview of our thought process of getting a better picture of a public company.

PT Total Bangun Persada Tbk. is a privately owned (non-government) construction company in Indonesia.

It specializes in building commercial high-rise & office buildings.

If you live in Jakarta, you should not be a stranger to some of their high profile projects:

• Central Park

  

• The Pakubuwono Residence

  

• Astra Tower

  

• Pondok Indah Mall 3 & Office Tower

I have to admit, the term “construction company” may not have the best reputation in Indonesia. This is understandable, considering the negative news surrounding them (especially so for state-owned ones):

At a glance, construction sector is one of the hardest-hit sectors by COVID-19 because mobility and outdoor business activities were greatly reduced. Consequently, their earnings plummeted, including those of TOTL (all figures in the table below are in billion IDR).

Fast forward to 2023, mobility and outdoor business activities recovered. TOTL was able to turn around its earnings, while most of its state-owned peers are still struggling (all figures in the table below are in billion IDR):

Same business model, different outcomes in their earnings (and consequently, their long-term stock price performance). How come?

Company Profile & Structure

Total Bangun Persada was initially established under the name PT Tjahja Rimba Kentjana on September 4, 1970.

To this day, the company has been engaged in construction business for more than 50 years. In 1981, the company restructured its business and changed its name into PT Total Bangun Persada Tbk.

They officially became public on July 25 2006.

When analyzing a company, it is of paramount importance to be familiar with the people who run the company. Specifically, we are interested in finding out TOTL’s Ultimate Beneficial Owners (UBO).

UBOs are the people who ultimately owns and controls the company. Therefore, it is very important to us that these people:

1. Have good track record

2. Are competent in running their business

3. Are fair to their minority shareholders (like us!)

As the saying goes: “Good people make good times possible” 🙂

Let’s first take a look at their shareholder composition list:

PT Total Inti Persada is the majority shareholder of PT Total Bangun Persada Tbk.

Let’s find out the controlling shareholders of PT Total Inti Persada (TOTL’s controlling shareholder):

…And here is the list of directors and commissioners of PT Total Inti Persada (TOTL’s controlling shareholder):

Let’s move up 1 more level, who are the controlling shareholders of:

• PT Bumi Permata Pratama

• PT Jaga Bangunpersada Komajaya

• PT Anugerah Kencana Jaya ?

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