JAKARTA -- Lippo Karawaci, the Indonesian property giant, has ceded majority ownership of the company developing its troubled $21 billion Meikarta project -- once dubbed Indonesia's Shenzhen, but which has become the focus of a major bribery investigation.
The transactions to change control will allow the group to separate losses incurred by the struggling project from its consolidated results. They have also resulted in a revaluation of its remaining stake that left Lippo Karawaci reporting significantly higher net profits for the first half of this year. Nevertheless, the group has reported a near doubling of cash outflow in the six-month period.
Lippo Karawaci revealed in its delayed second quarter financial statement this week that control of Mahkota Sentosa Utama, or MSU, had dropped from 54.37% declared at the end of March to 49.72% at the end of June.
This was done through a series of transactions, including the sale by a subsidiary of 14,000 shares to a person named Mas Agoes Ismail Ning -- sometimes spelled Masagus Ismail Ning in the statement.
Someone with the same name, Masagoes Ismail Ning, served as commissioner of PT Bank Lippo from 1996 to 2003, according to information from the Indonesian Stock Exchange.
Another transaction involved the sale of a subsidiary with a significant holding in MSU to a company based in the British Virgin Islands. As a result of these transactions, the company "lose of [sic] control on MSU," the financial statements record.
Analysts were surprised by the deconsolidation. "Meikarta was the key project," said Trung Nguyen, senior credit analyst at research company Lucror Analytics. "It was surprising to reduce ownership to below 50% and 'lose control' as the company wrote in its financial statements."
Lippo Karawaci indirectly owned MSU through its 54.37% owned subsidiary Lippo Cikarang.
Lippo Karawaci, the property arm of conglomerate Lippo Group, has come under increasing pressure over the Meikarta project, which has been tainted by controversy in recent years amid claims of unpaid bills and wages. Earlier this month, several executives and local officials were arrested in an investigation into allegations of bribery involving Meikarta. Anti-corruption officials subsequently raided the home of Lippo Group's chief executive.
A spokesperson for Lippo Group CEO James Riady said on the same day that "no documents/items [were] found or seized in relation to the case," and that "Mr. Riady remains fully committed to assisting the KPK in their efforts as is necessary."
The deconsolidation was made public in Lippo Karawaci's audited financial statement for the first half of this year filed to the Indonesian stock exchange on Wednesday, nearly a month after it was due. Lippo Karawaci has been rebuked by stock exchange officials for failing to file the report on time earlier this month.
According to the financial statement, a company called Peak Asia Investments, a subsidiary of Lippo Cikarang, "disposed 14,000 shares ownership" in MSU to Mas Agoes Ismail Ning. Lippo Cikarang then "disposed all share ownership" in Peak Asia Investments to what it describes as a third party called Hasdeen Holdings Limited for 1 Singapore dollar. MSU then issued 14,000 new shares that were bought by the Hasdeen-controlled Peak Asia Investments for 4 trillion rupiah.
Lippo Cikarang's filings for the first half of 2018 said Hasdeen Holdings is "a company established in British Virgin Islands."
The transactions came after a series of shareholder agreements in February and March 2017 that split MSU's ownership into three entities: Megakreasi Cikarang Permai, a subsidiary of Lippo Cikarang holding 49.99%; Peak, still under Lippo Cikarang but with backing from Hasdeen with another 49.99%; and Masagus Ismail Ning holding 0.02%.
Lippo Cikarang, through its financial statements, had maintained that it indirectly owned 100% of MSU up until the June 2018 filing. Lippo Karawaci had maintained that it indirectly owned 54.37% of MSU -- by virtue of owning 54.37% of Lippo Cikarang -- until the latest financial result filing.
Local media reports have speculated over whether construction of Meikarta will continue after the bribery setback, and some banks have already decided to stop extending mortgages for the project. But in a note to clients on Thursday, ratings agency S&P Global said: "We expect Lippo would support Meikarta when necessary. Given its size and reputation risk to the entire group, we believe this project could be too big to fail."
The transactions that resulted in the loss of control were described in a Notarial Deed dated May 11, 2018 -- which amended one of the investor agreements in 2017 -- approximately five months before the announcement by Indonesia's Corruption Eradication Commission, or KPK, on Oct. 15 that it had arrested and named nine people -- four affiliated with Lippo Group -- in an alleged bribery scheme related to Meikarta.
On Oct. 18, the commission announced that it had raided 10 locations, including the home of Riady, as part of its investigation.
The deconsolidation resulted in a "fair value adjustment" which helped to bump up Lippo Karawaci's net profits in the first half of this year. While operating profits plunged 74.2% to 176 billion rupiah for the six months to June 30, posted net profit rose 135% to 1.1 trillion rupiah.
Despite the net profit increase, Lippo Karawaci's operating cash outflow worsened significantly in the first half. It nearly doubled to an outflow of 1.1 trillion rupiah.
The group's deteriorating cash position has forced it to sell assets, in some cases to affiliated companies. But this has not assuaged analysts concerns over its liquidity.
"We believe Lippo will remain exposed to refinancing risk, necessitating further asset sales to bridge its funding gap," said S&P. "The company has a US$50 million (IDR725 billion) syndicated loan due in April 2019 and another US$75 million (IDR1.08 trillion) bond due in June 2020. This excludes domestic loans of IDR660 billion maturing within 12 months from June 2018, which we assumed will be rolled over."