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Indonesian rail project a big test for Wika's survival

Wijaya Karya is a member of the consortium building Indonesia's first mass rapid transit network in Jakarta. (Photo by Erwida Maulia)

JAKARTA -- On the morning of Jan. 21, a bright-red excavator dug its claws into a patch of earth in the western outskirts of Bandung as Indonesia's president, Joko Widodo, looked on with a smile. He was witnessing the launch of the country's first high-speed railway, which will connect Jakarta to the mountainous city.

     Another president -- albeit of a company not a country -- was also in attendance. But Bintang Perbowo, head of state-owned contractor Wijaya Karya, or Wika, may have been watching things unfold with a little more anxiety than the politician. After all, his career may be riding on the project.

     Wika is leading the consortium of Indonesian and Chinese state enterprises responsible for completing the 142km railway by 2018. The project has come into the international spotlight due to the intense bidding contest it sparked between Japan and China, the latter of which got the nod in September.

     Wijaya Karya's shares have been flat since Jan. 21. "It has been quite hard to determine whether this project will be profitable or not," said Bahana Securities analyst Bob Setiadi. "The details are still being discussed." 

Falling behind     

The sheer scale of the $5.5 billion project is unprecedented for Wika. But Perbowo has no time to ponder his good fortune. The deal comes as the company's earnings are faltering and rivals are quickly growing bigger.

Wijaya Karya is part of the Indonesia-China consortium working on Southeast Asia's first high-speed rail link.

     Wika's market capitalization, which stood at 17.2 trillion rupiah ($1.2 billion) as of Jan. 29, has swollen by 50% in the past two years. But the market caps of two of its state-owned competitors, Pembangunan Perumahan and Waskita Karya, have ballooned even faster, jumping 200% and 300%, respectively, in the same period, making them even more valuable than Wika. Analysts estimate that 2015 saw both companies overtake Wika in revenue and net profit as well.

     The Jakarta-Bandung railway could be just what Wika needs to turn things around. "If the project is finished, which other contractor will have this kind of experience?" asked Perbowo. "It means we open up an opportunity for Wika going forward."

     The company expects to bag orders worth 17 trillion rupiah from the first phase of the project alone, or roughly two-thirds of what Wika saw for all of last year. The project also includes township developments around at least two of the four stops between Jakarta and Bandung. The opportunities for new business are huge.

     The project also gives Wika a chance to acquire valuable technology from joint venture partner China Railway Group, one of the world's largest builders of high-speed railways. "There are many kinds of profits, not just money," Perbowo said. "It is people, too; our employees will perhaps be the only ones in Southeast Asia who possess the ability to make [high-speed railways]."

     By gaining even more advanced skills, Wika, which has already built up experience in such developing countries as Myanmar and Algeria, will be better positioned to tap more of the region's growing demand for infrastructure.

     The potential pitfalls of the project are equally large. While the project has officially kicked off without major delays, the Transportation Ministry is now questioning some documents required for the final permit. Indonesia's infamous track record of project delays has led many to believe that the completion target of 2018 is unrealistic. "I think the target is too aggressive," said Setiadi of Bahana Securities.

     After budget-spending delays disappointed markets in 2015, the government began stepping up efforts to eliminate bottlenecks for developing infrastructure. But because it is prioritizing projects in less-developed areas, the government insists that state funds will not be used for the Jakarta-Bandung railway. China Development Bank is backing 75% of the total cost, but Wika, which owns 38% of the local joint venture, needs to shell out about $300 million from its own coffers to cover construction costs. That is not far from the company's total equity as of September.

     Wika is mulling several options to raise fresh funds, but is already facing headwinds. A proposal by the state-owned enterprises ministry to inject capital into the company -- thus giving it more financing options -- has been put on hold due to opposition from parliament, which has warned that proceeds might be misused for the high-speed railway.

Indonesian President Joko Widodo attends the groundbreaking ceremony for the high-speed railway on Jan. 21. (Photo by Bobby Nugroho)

     The construction company is considering moving ahead with a rights issue, which would dilute the government's stake from the current 65%, and selling shares in some of its subsidiaries through initial public offerings. "The biggest downside of these plans is that they will receive substantially less capital than initially planned, thus they will be required to accommodate the shortfall by issuing bonds and cutting potential projects," said Aditya Sastrawinata, an analyst at brokerage Mandiri Sekuritas.

     "Even if the capital injection does not happen, we still have the rights issue scheme," Wika's spokesperson told reporters at the groundbreaking ceremony on Jan. 21. "We also have the ability to borrow from banks." Regardless of the outcome, it is quite clear Wika cannot use a single rupiah from the government to directly finance the high-speed railway project.

     The spokesperson said Wika plans to spend up to 10 trillion rupiah in 2016, a big jump from last year's 1 trillion rupiah. The rail project only partly explains the surge; the company also has power-plant and toll-road projects in the works. While such undertakings increase the prospects of long-term growth, they also give investors the chills from the perspective of short-term earnings.

     But going light on capital spending could be a mistake for company, which has been suffering from weak earnings. For the nine months ended September 2015, Wika reported a drop in revenue and net profit due to weak demand for precast concrete and delays in property sales.

Mergers ahead 

While the anemic economy has been a significant factor in the company's recent woes, tough competition from local rivals has not helped. The most notable competitor is Waskita, which received a capital injection from the government in 2015 that nearly tripled the company's equity to 8.4 trillion rupiah as of September. Flush with cash, Waskita has been able to invest heavily for expansion, including in areas where Wika had a strong foothold, such as precast concrete. The company was also appointed by the government to construct a light-rail line in Palembang, South Sumatra, where the Asian Games will be held in 2018.

     There are currently 119 state-owned companies in Indonesia, and the government plans to whittle that number down through mergers of similar entities. On Jan. 29, local newspaper Bisnis Indonesia reported that Jakarta was looking to consolidate state-owned construction companies. Wika no doubt wants to survive the cull in order to soak up the towering infrastructure demand expected to be created under Widodo's drive to modernize the archipelago.

     Merely completing the project would not be enough. Without the government's financial backing, Wika will need to pursue efficiency to carry out the project profitably.

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