IS INDONESIA’S LIPPO IN TROUBLE?

INDONESIANS HAVE SEEN NOTHING quite like it. The Lippo Karawaci development 30 km west of Jakarta has hundreds of houses, two apartment towers, three high-rise office buildings, a hospital - and the country's largest shopping center, the 200,000-sq-m Super Mall. Korea's Hyundai is building two more condominiums, one 62 floors high, the other 47 stories. There is a country club with a swimming pool and other amenities. A school has three other swimming pools and a horse-riding facility. Cables pipe 23 television channels into every home. When developer Lippo Land pre-sold units in the township, says estate manager Gordon Benton, there were long queues of buyers. Resale prices, he claims, are now up 250%.

Except that few are making offers. High interest rates and a glut in the high end of the property market are dampening demand. And only about 500 families - a fifth of what the whole development can accommodate - live in Karawaci. Key problems: the long commute to Jakarta and heavy traffic. Then there are security concerns. Some 3 million people, most of them poorly paid workers, make their homes in the surrounding Tangerang area. Benton has assembled a small army of Karawaci guards. "We have to teach them things like community policing," he says, complaining of the "brutalization" they went through in the military. The landscaping, he adds, is designed to "keep the crap out of sight" - the low-cost housing around Karawaci.

Will retailers set up shop in the $125-million Super Mall? Will Lippo make money on the partially completed Carita Bay Resort in West Java? How about the just-announced $100-million township project in Ujung Pandang in Sulawesi? For that matter, will the Hong Kong real-estate operations ride out the property slump in the British-run territory? Profits for the Hong Kong-based holding company Lippo Limited in the first half of 1995 are down 62% from the same period last year. Lippo Bank, Indonesia's tenth-largest commercial bank, has $3 billion in assets, but analysts say it may not be able to rescue Lippo Land if things go sour. "It has some excellent visions but a poor sense of timing," says an executive with the group. "Jakarta will not be ready for [its projects] for another five to eight years."

Tell that to the Riady family. Lippo founder Mochtar Riady, 66, says there are no problems at all. "Whenever you do something different, you're always going to have people who agree and not agree with you," his eldest son James, 39, told Asiaweek. In Hong Kong, younger brother Stephen, 35, declared: "When we build, people say we build so big. In Indonesia, the middle-income group has been formed. This is the [right] time for us." Mochtar had left day-to-day operations to his two sons after a heart by-pass operation in 1990. But in a move that may signal the founder's worries about his empire, Mochtar has been taking a more active part in Lippo affairs, particularly in re-emerging as the family spokesman.

Last week, Lippo Land released its annual report for the year ending June 1995 - on the last day of the deadline set by stock market authorities. (All listed companies must publish their reports no later than four months after the end of their fiscal year.) It reported profits of $13.8 million - up 46% from last year but less than the expected $17.6 million. Analysts zeroed in on the company's liabilities, which topped $477 million, up 992% from fiscal 1994. These include long-term debts of $174 million and $48 million in convertible bonds. Assets grew 651% to $1 billion. Part of that, however, comprises unsold properties. A senior Lippo Land executive who recently quit claims few units have been sold since July, if any.

He is one of some 30 managers who have left the Lippo Group in the past few months. James, who is in charge of Indonesian operations, denies the departures were the result of cost-cutting. One of those to be sacked, American marketing executive Michael Farley, jumped to his death from the 16th floor of a Karawaci office tower in September. A former Peace Corps volunteer and USAID worker, Farley, 47, had a history of manic depression. Among important players no longer with the group: Lippo Land CEO Ken Winn, off to Bali to look after his own interests, Filipino property specialist Nestor Padilla, who took over from Winn for just two months, and ace Lippo Securities salesman John Mitton, now with Global Asset Management in Hong Kong.

If not to save on salaries, why the exodus? James cites personal reasons. Sources say his management style may be one of them. Known for his evangelistic Christianity, James has yet to establish a reputation as a leader who listens to advice. While Mochtar says he backs Karawaci and the other ventures, the eldest son is said to have pushed some of them without marketing studies. Not that James, who holds a commerce degree from the University of Melbourne, admits there is a problem. "We believe strongly in Indonesia's economy," he says. "In a short time, the country will achieve GDP per capita of $1,000." Average income is currently $780.

But some investors have already voted - with their feet. Lippo Land shares lost 25% of their value in September. A month earlier, its own sister company Lippo Securities placed a "sell" on the stock. "Lippo Land's high gearing skyrocketed from 102% to 188% in three months," wrote analyst Marcia Yu. "With heavy exposure to the slowing resort developments outside Jakarta, Lippo Land's net asset value is more vulnerable than those of its peers." The counter has been slowly recovering, but some analysts suspect that Lippo itself is lending a supporting hand.

The market has yet to be convinced that Super Mall will contribute a steady income stream. "People could be looking at monster traffic jams going and coming," says one analyst. "I can't see why they'll bother when there is already plenty of elite shopping in Jakarta." Given the rise of the middle class, James says the shopping center will recover its cost in five years. For his part, Mochtar says Super Mall is already 90% booked: "A few days ago, a newspaper quoted a Hero [supermarket] general manager as saying they didn't want to move [to Karawaci] because the market is not big enough. But they're already here."

Well, yes and no. There is an outlet of Indonesia's leading supermarket chain - but it is just a Hero mini-mart. Hero director Steve Sondakh told Asiaweek that the chain has informed Lippo it wants to postpone full-scale operations in Super Mall for at least a year, and that there is no problem if someone else were to take up its option. "I always try to imagine myself as a consumer," says Sondakh. "Am I willing to spend that much time in my car in my leisure hours? I don't see myself doing that." How about the 3 million low-wage people nearby that Lippo says will soon have the means to shop at Super Mall? Sondakh notes that retail centers being built near Karawaci may draw away custom from the mega-shopping center.

Despite estate manager Benton's claim that all completed Karawaci housing units were pre-sold, the Lippo Land executive who just left is dubious. "The last stage is very expensive at Rp1 million [$440] per square meter," he says. "No one is buying at that sort of price so far out of Jakarta." He is equally doubtful about the Ujung Pandang project in Sulawesi: "I just can't see why they're going there. Surabaya, Bandung [both in Java] or Medan [in Sumatra] would make much more sense." Lippo's Carita Bay Resort includes a four-story line of condominiums along one of West Java's best beaches, with 100 villas stretching back into the hills. Rivals scoff at staff claims that 40% of the units have been sold. With prices averaging $3,000 per sq m., Carita is three times more expensive than a similar development to the north.

So what's the bottom line? If all three projects bomb, Lippo Land will be in trouble, as Mochtar himself admits. But his empire is unlikely to collapse. Core company Lippo Bank remains strong. Unlike the other divisions, it has not suffered from brain drain. "There may be some sentiment if something happened to Lippo Land," says Jakarta analyst Ian MacCallum. "There would be knock-on effects, but I think the bank is above others in the sector." Agrees Michael Chambers of Singaporean stock brokerage G.K. Goh: "The bank is strong with a good consumer base." There are the inevitable rumors about its loans to other companies in the group, including Lippo Land, but there is no evidence that Lippo Bank is overextended to any one entity.

But at least two other Lippo companies are in a slump. "Multipolar scored a strong start with a computer order from Lippo Bank, but since then it has been going nowhere," says a source at the group's information technology company. Business at Lippo Securities is down after it lost Mitton, and a partnership in Indonesia with the Swiss Bank Corp. will soon end. SBC has taken over British securities house S.G. Warburg, which makes Lippo Securities a rival.

Another tough challenge is the current property downturn in Hong Kong. Lippo Limited, the Riady holding company in the territory, reported first-half earnings of only $37.7 million. "Compared to last year, it represents a decrease," says Lippo Limited chairman Stephen Riady. "But that is true of most listed companies here." He was investigated by Hong Kong's Securities and Futures Commission in 1993 for an alleged breach of takeover-and-merger rules in Lippo's attempt to acquire Asia Securities with local conglomerate Allied Group. The findings were inconclusive. Stephen denies any wrongdoing.

Hong Kong is an important part of the Lippo empire. It has interests in six major office blocks there, including Lippo Center in the Central business district. It has big stakes in four residential buildings and aims to complete three commercial developments in Wanchai district next year. Stephen has been criticized for buying 60% of upscale residential property Tregunter Towers in 1993, when property prices were at their peak. "That was a good buy," he told Asiaweek. Stephen says a subsidiary acquired the Tregunter interest at only HK$5,000 per square foot, much lower than the HK$10,000 to HK$13,000 then being asked for similar developments. "Now, the market has dropped 40% to only slightly below our cost," he says. "This is already close to the bottom."

The territory's property sector has yet to recover from government moves last year to cool speculation. "We believe there will be an improvement, especially in the second half of next year," says Stephen. Can Lippo see the downturn through? "A lot of our properties were bought cheaply in 1991 and 1992," he says. "We've sold some in the past two years." Adds Stephen: "We're very liquid. We have plenty of room for more loans if we want them." Long-term debt last December was less than one-sixth of shareholders' funds.

The Hongkong Chinese Bank, a subsidiary of Lippo-controlled HKCB Bank Holding Co., is certainly doing well. Lippo is looking for assets in Hong Kong and elsewhere in Asia, such as the Philippines. Notes Mochtar: "As Hong Kong moves toward its new status as a special administrative region [in 1997], its inherent economic strength will provide new avenues for expansion."

The group has been busy with spade work in China. In October last year, a subsidiary bought 40% of a 120-hectare tourist development on Meizhou island off Fujian province. Chung Po Investment Holdings, owned 60% by Lippo, is developing a commercial and retail site in Guangzhou. Chung Po has a 43% interest in another retail project in the Zhuhai Special Economic Zone. "China, Hong Kong and Indonesia have been going so well in the past few years that they have pushed up interest rates," says Stephen. "It's time for rates to come down in the next few months, or at least in the next year. When China relaxes, the first to benefit is Hong Kong."

Still, the Lippo empire seems to be retrenching. An advertising campaign for Carita Bay in Indonesia was dumped two months ago. Sources say Lippo Land cited "internal problems" for the cancellation. The group is also cashing in some assets. Hong Kong billionaire Li Ka Shing recently bought 5% of the Karawaci development. Beijing-controlled China Resources bought another 5%. James Riady says the sales brought in $57 million. Karawaci is expected to be taken out of Lippo Land and listed separately. "They look like they're selling major properties in Jakarta and Bandung," says the recently resigned Lippo Land executive. And Lippo has a valuable land bank. "We paid Rp28,000 per square meter but today the price is Rp1 million [$440]," says Mochtar. "If we can sell 10% of our land, our money has already come back."

The founder's new prominence is seen as part of the effort to show the world that nothing is amiss. Unlike other Indonesian conglomerates such as Liem Sioe Liong's Salim Group, Lippo actively courts journalists. "The way Mochtar and James handle the media is amazing," says a Lippo executive. Company officials join the Riadys in pounding home the theme of competitor jealousy as the reason for the rumored company troubles. "The greatest problem we had was in the conservatism that is rife, that lies in the education system in this country, that does not lead to innovative thinking," says Karawaci estate manager Benton. "Many people would have said, 'we know this is the right thing to do but we have never done it before and we don't want to risk our jobs.'"

But there are indications that Lippo may be mulling more traditional methods to guard its flanks. Long considered to lack significant connections to political power centers, the Riadys are said to be reaching out to the Bimantara group, owned by Bambang Trihatmodjo, second son of President Suharto. The family's present major partner, Hashim Ning, is considered a spent force. Lippo has worked with Bambang on his Sentul Highlands real estate project south of Jakarta. James has been busy networking with other influential people - including U.S. President Bill Clinton. The Hong Kong connection has already proved useful. Both Li Ka Shing and China Resources are fellow shareholders in Hongkong Chinese Bank.

Above all, there is Mochtar Riady. Born to immigrant Chinese parents in Surabaya in eastern Java, he single-handedly built up his banking and property empire. Mochtar had traveled to Jakarta in 1959 and started working in a bicycle shop. But his ambition was to be a banker, and he got the chance when he joined Bank Buana in the 1960s. He was in charge by 1966. Mochtar is credited with the rise of Liem's Bank Central Asia, now Indonesia's fifth-largest bank. He created Lippo Bank in 1982. It was the ideal foundation for empire-building. Son James says the Lippo Group is not shy about using Lippo's extensive branch network to sell insurance, securities and land.

The enormous respect Mochtar commands is helping ease worries about the group's direction. But some analysts remain leery of Lippo Land. "I wouldn't touch [the stock] with a barge pole," says one. "I think the land ventures are visionary, but this is not the right time. We view them with a mix of befuddlement and consternation." Others are more positive. Lippo Land's projects are "head and shoulders" above the competition in terms of quality, says Chambers. But that is no guarantee of profit. Only a buoyant property market and economic growth can assure Lippo of that. Mochtar Riady can help, but in the end it is his heirs, especially James, who must continue what the patriarch started.

By Keith Loveard, Jakarta With reporting by Alexandra Seno/Hong Kong