Category: Reflection

There must be something in the water in Indonesia. Because in the span of just three years, the country managed to produce four unicorns – startups the have reached at least US $1 billion in valuation.

Young people creating new businesses at scale is relatively new in Indonesia, as for decades, Indonesia’s formal economy was dominated by few incumbents. After the country’s independence in 1945, cronyism ruled as the prosperity of individuals remained highly dependent on personal relations with leading members of the government.

The shift from oligarchy to unicorn maker is remarkable, driven by the unique combination of a supportive government, the public’s increased access to technology, and the youth’s growing desire to launch their own business ventures.

Power in the Hands of Few
During the era of President Soeharto, the South East Asian nation saw the rise of politically connected companies who, together, came to control most of the formal economy.

Despite deregulations that had monopolies and privileges revoked in the late nineties, the political and economic systems of Indonesia still have features of an oligarchy today.

In 2014, for example, the four largest privately-held Indonesian conglomerates that have assets listed on the Indonesia Stock Exchange (IDX) are the Astra Group, Salim Group, Lippo Group, and Sinar Mas Group. Combined, all listed companies controlled by these four groups accounted for 17.50% of total market capitalisation on the IDX.

In addition, with 25.84% of total market cap, state-controlled listed companies (SOEs) also remained dominant players in the country’s economy.

Because of all these factors, middle-class hopes for a stable income and secure future have typically rested on a job as civil servant, which guarantees life-long employment and an early pension – not exactly an environment that cultivates innovation. However, things are now changing in Indonesia.

Tech Offering Opportunities to Many
Not only is the country’s current president, Jokowi, the first president who doesn’t belong to the traditional political, religious, or military elite; Indonesia’s tech scene is also rapidly transforming the playing field for aspiring entrepreneurs.

Young entrepreneurs are breaking through barriers on the back of tech, connectivity, and a supportive government. The proliferation of smartphones and the creation of digital applications has enabled young entrepreneurs to by-pass the existing SOE- and conglomerate-dominated market structures and spawned four unicorns in just three years’ time.

We’re talking about ride-hailing company Go-jek, travel site Traveloka, and market places Bukalapak and Tokopedia. New unicorns are expected to rise in the underdeveloped education and healthcare sectors, with the potential to leapfrog Indonesia’s development.

With Help from The Government
This, of course, could not have happened without a supportive government. While governments in other countries like Hong Kong prohibited ride-hailing companies under the pressure of incumbents, the Indonesian government resisted such pressures and tried to balance the needs of both the public and the drivers.

To further support Indonesia’s digital ecosystem, the government also developed several programmes. These include SMEs Go Online; Farmers and Fisherman Go Online; and Nexticorn, which aims to provide start-up founders with access to suitable investors. The government also pledged to strengthen its e-commerce roadmap and digital certification this year.

76 year old muslim scholar, Jokowi’s Vice President-elect, Maruf Amin mentioned that Indonesia soon will have a decacorn (a start-up valuation with over US$ 10bn).
Source: Tribunnews

The role of Indonesia’s government has shifted from being just a regulator, to now more of a facilitator.

Looking to the Future
The success of tech in the country has inspired many, initiating a positive feedback loop. In economic literature, entrepreneurs not only bring new goods to the market, but also generate information about the profitability of new activities. And in Indonesia, the four mentioned unicorns have fueled optimism over the digital economy, inspiring the Indonesian youth and attracting investors in the process.

Mobile commerce start-ups now rank as the best companies to work for among millennials. In addition, according to a 2018 survey by IDN Research Institute, a staggering 69.1% of millennials want to be entrepreneurs. And according to the Ministry of Cooperatives and SMEs, Indonesia’s entrepreneurship ratio doubled from 1.55% in 2014 to 3.1% in 2017.

All of this means good news for aspiring entrepreneurs with innovative ideas looking to launch, as well as existing business owners hoping to expand. For us as investors this implies that we need to carefully consider the vulnerability of indonesia’s incumbent conglomerates and SOE’s, as well as the opportunities that Indonesia’s youth are bringing to the table.

Indonesian Millennial Superheroes: William Tanuwijaya (Tokopedia), Diajeng Lestari (HijUp), Jonathan Sudharta (Halodoc), and Nadiem Makarim (Go-jek)
Source: Kalimat.id, Moneysmart.id, Otcdigest.id, vbprofiles.com

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Counting our blessings
One day in San Francisco, a rare taxi trip took an interesting turn. If I had not spoken to the cab driver, a Russian man, I would not have heard his captivating story.

He was one of many who were attracted to the idea of moving to America, the land of opportunity. In the year 2000, he was so convinced that Russia was a lost cause, that he left his prestigious job as a pilot in Russia and took his wife and 14-year-old son to the USA to pursue his lifelong dream of becoming a computer programmer.

The second he stepped foot on ‘the land of the free’, he took a coding class at a local college. Because of his limited ability to speak English, he became a taxi driver to earn some money in the meantime.

Unfortunately for him, by the time he graduated college in 2001, the dot-com bubble had burst. Even if he had other skills, the prospects for a 40-year-old newly graduated programmer looked unattractive when other choices were abundant.

As the sole breadwinner, he had no choice but to continue driving taxis. To this day.

This man has every reason to feel as if the world is unfairly against him.

Firstly, because now, after experiencing first-hand the dot-com bubble burst, the taxi industry is being challenged by services such as Uber and Lyft. He estimated 40K Uber and Lyft cars compared to 2K taxis available in SF.

Secondly, he left his prestigious position as a pilot, and must work long hours driving a cab.

Thirdly, many of his friends who remained in Russia are doing very well. He probably felt guilt and regret leaving Russia just to face major changes in the industries that he has been working in.

But this man is a happy chatty one. Instead of focusing on what went wrong, he focuses on what went right in his life.

Apparently, his son inherited his interest in coding. His son graduated from a coding school and now works at a tech company in Palo Alto, as an engineer.

There is no trace of bitterness from this man, even when telling me about his successful friends in Russia. Rather he is grateful for his son’s opportunities.

We can choose to be happy or not by focusing on counting our blessings instead of focusing on the ‘mistakes we made in life’.

The choice is ours and I want to start counting my blessings again.

Tech start-up, prepared for a wild ride?
We recently attended two (separate) start-up events in Jakarta and were amazed by the enthusiasm and energy of the start-up participants.

In contrast to just a few years ago when Heyokha started, hope and optimism now abound. Simply hard not to share the buoyancy as the young (and not so young too) talents are encouraged by the success of Gojek, Traveloka, Tokopedia, and Bukalapak. Some brave souls even decided to sell their businesses to fund their start-ups’ dreams and ideas.

We are obviously very pleased to see the development on the ground in the tech space in Indonesia. Nevertheless, many start-up founders seem to have the idea that the tsunami of money to fund start-up ideas will go on forever.

At one of the events, we noticed a lack of enthusiasm at the ‘How to control your tech expenses” presentation and overwhelming enthusiasm at the “Road to IPO” presentation. While we respect many founders’ shoot-for-the-moon attitude, we also think the startup’s “less exciting” aspects, such as managing expenses, are just as important.

One obvious challenge for the start-up industry is the extreme volatility as described by the story of the Russian cab driver above. This volatility will only be exacerbated by the ongoing reversal of the wall of money from the world’s central banks.

One fine example of how liquidity factors affect tech valuations is the case of Sea Limited (SE US). Sea is the only listed tech play in Southeast Asia with two significant business arms: Garena, a game publisher/developer and Shopee, an e-commerce platform.

Sea’s market cap at the moment is only US$ 3.9bn, which is close to Garena’s (before they rebranded to Sea Limited and Shopee was only a tiny part of the total business) Series D in 2016 (US$3.75bn). This means that the market is not attaching any value to its e-commerce business, Shopee. If we were to value Garena at 15x EV/EBITDA (a slight discount to NetEase), Garena alone would be worth US$ 4.4bn which means Shopee valuation would be negative –US$300mn!

Meanwhile, Indonesia’s leading e-commerce company, Tokopedia recently raised funding at a US$ 7bn valuation. If we were to use the same multiple which is approximately 1x EV-to-GMV, Shopee alone would be valued at US$ 10bn. We are not advocating that one or the other is mispriced, rather highlighting that the huge difference in valuations is largely attributable to a difference in liquidity in the private and public market at this point in time.

We are also not forecasting a tech sector reckoning to follow in the private tech space, but simply want to remind ourselves that it is not always sunshine and rainbows in the tech start-up world. The life of the Russian taxi driver in San Francisco above bears testament to life in tech. Count our blessings but be prepared for the worst.

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Recently, the Indonesian seed maker BISI International (BISI), faced headwinds due to weather disruptions. With inadequate production and inventory levels, the company had little inventory to sell, almost entirely erasing net profit during the first half of 2018. Consequently, the stock price declined following the earnings result announcement.

“In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”
-Benjamin Graham-

As illustrated by the chart below, BISI has near-zero corn seed inventory since the past year as production capacity can’t keep up with the strong demand growth. This explains the company’s earnings volatility in recent quarters; sales volume has been entirely dependent on production, whereas production volume is highly dependent on weather.

Historically, quarterly earnings have always been volatile. However, seasonally adjusted growth is very consistent on an annual basis, as illustrated by the rolling 4 quarter earnings chart below. We are seeing the same scenario this year; net profit in the single quarter of 3Q18 alone has exceeded last year’s nine months profit, fully compensating for the disruption in the past two quarters. Also, 4Q18 earnings will be helped by an increase in pesticide sales as a lagging effect from strong seed sales in the previous quarter.

Going forward, earnings volatility will become less of a concern. BISI acquired a processing facility from Monsanto in November 2017, increasing its production capacity by 60%. This will allow the company to ramp up production to maintain a healthier inventory level for times of unfavorable weather conditions.

But this is just the beginning of the story. Not only the short-term concerns are addressed, but the more important global trend and long-term outlook are also promising.

Additional corn demand from ethanol mandates

Helped by rising oil prices, we are seeing an increasing number of countries imposing higher ethanol mandates. Global ethanol production has surged by more than five-fold between 2001 and 2016 and the trend is not slowing down; many countries have medium-term targets to increase ethanol blend rates in fuel as illustrated by the chart below.

More importantly, in the past year, the two biggest economies of the world, the US and China, have announced new mandates for higher ethanol fuel content. In 2017, China announced its plan to impose 10% minimum ethanol content in fuel. Moreover, the US recently announced the plan to lift the ban on fuel with 15% ethanol content during summer months.

In total, these two mandates alone create an enormous 80mn tons of additional corn demand per year as the likely feedstock for ethanol. As a comparison, the US, as the top global producer, produces 371mn tons of corn, and Indonesia only produced 28mn tons in 2017.

Upside optionality from climate change

In the past 22 years, the increase in food production came almost entirely from yield improvement instead of farm area, mainly driven by GM seed adoption. However, there is a limit on GM seed adoption and we are seeing this rate plateau. Furthermore, climate change is weighing down crop yield.

A study by the US Proceedings of the National Academy of Sciences (PNAS) shows that for each degree Celsius increase in global temperature, corn yields are expected to decrease by 7.4%, wheat by 6%, rice by 3.2%, and soybean by 3.2%.

The top three corn and soybean exporting countries’ GMO seed adoption has now maxed out. Yield is set to be plateauing?
Source: US Department of Agriculture

Assuming that yield improvement is no longer a viable way to really increase production, then the growth should come from increased farm area or number of plantings; both suggest higher seed demand. Climate change also increases the frequency of extreme weather and the risk of food inflation.

Although we are not advocating that Indonesia will be among the top global corn exporters (since GM seed is not permitted), Indonesia is still a good candidate to become a corn exporter in the Southeast Asia market owing to the proximity compared to major corn exporters. In fact, Indonesia’s corn export has surged to $72.8mn in 10M18, from less than $1mn in 10M17.

Despite the positive developments, BISI is still under-appreciated

As the biggest corn seed producer in Indonesia, BISI will be a major beneficiary in the fast-growing industry. The company has a robust growth outlook, strong balance sheet, cash flow, and dividend generation, as well as attractive valuation.

Dividend payout ratio for the fiscal year 2017 was 74%, translating to a lucrative 6.25% yield while still maintaining a solid double-digit earnings growth outlook in the coming years.

Yet, its stock price is still under-appreciated by the market. Even after addressing concerns on earnings volatility, the stock price has not recovered. Considering its growth potential, valuation is very attractive at only 9x P/E.

The ‘what if’ question on Indonesian 2019 election

We are soon entering the 2019 election year for Indonesia. Since government policies play an important role in Indonesia’s agriculture sector, it is important to study how the industry will be impacted.

If President Jokowi manages to secure a second term, it is obvious that he will continue the reform agenda and we might even see the efforts accelerating. The infrastructure development under Jokowi administration is not yet over and we have yet to realize the full effect that it will bring.

Assuming the opposition wins, we can also safely assume that the agriculture sector will continue to grow rapidly considering the pro-agriculture policies based on the vision and mission statements. One major initiative is the target to add 2 million hectares of farmland to create food self-sufficiency.

Also specified in their mission statement is the effort to promote Indonesia’s ethanol industry, with the goal to create jobs and reduce the dependency of oil imports. This initiative will provide additional upside for corn demand as the likely feedstock for ethanol.

Hence, we can remain assured that Indonesia’s agriculture sector will continue to grow regardless of the election outcome.

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Here at Heyokha, we spend a lot of time analyzing Chinese tech and ecommerce opportunities, and most recently have focused on the disruption of the brick-and-mortar retail space by Chinese tech giants.

They have been driving innovation and vertical integration in the retail space. So, when we recently had a chance to visit Chengdu and Chongqing, we jumped at the opportunity to see some of the new retail concepts for ourselves.

Unmanned store concepts
In the heart of Chongqing, we stumbled upon a bright orange freight container that turned out to be an unmanned convenience store called “Wow!”.

The concept is backed by SF Holdings (002352 CH), a US$ 30bn Chinese logistics company listed on the Shenzhen stock exchange. Having never been in an unmanned store before, we took the opportunity to see how it works. Here is how to shop:

Step 1: Scan the QR code with your WeChat app to enter the shop;

Step 2: Pick the desired RFID-tagged items from the shelves;

Step 3: Place the items inside a basket at the payment terminal, which then causes a screen to list the items in the basket and the total price;

Step 4: Scan the QR code to pay using Alipay or WeChat pay.

Simple and Fast.

While unmanned stores may have first been envisioned by Amazon, they have become one of the latest trends in China. Several start-ups are now operating unmanned convenience stores, like BingoBox and Well Go.

Unmanned store concept in Chongqing called Wow!

Currently, BingoBox is the biggest chain, operating about 200 stores across 29 Chinese cities. It seems that investors buy the story: in January 2018, BingoBox raised US$ 80mn fund led by Fosun Capital.

New supermarket format: Yonghui Super Species
We also checked out another innovative retail concept called Yonghui Super Species. It’s operated by Yonghui Superstores (601933 CH), one of the largest Chinese supermarket chains that has both Tencent and JD.com as shareholders.

This new concept combines shopping with dining, allowing customers to choose their favourite ingredients, such as salmon or prime beef, which are then prepared for in-store dining.

Yonghui Super Species backed by JD.com and Tencent

The concept also leverages technology to enhance the shopping experience. For example, WeChat can be used to obtain product information by scanning the product QR code. The app can also be used to check-out without the need of visiting the cashier.

Products can be ordered online, and – while we haven’t tried it – in-store videos displayed the option to have the products delivered via drone.

In-store screen showcasing product delivery by drone (left) and a WeChat Pay promotion (right)

The Yonghui Super Species concept will be a key element in the company’s expansion strategy, going head to head with competition from e-commerce and Alibaba’s “New Retail” strategy that aggressively bets on the integration of online to offline commerce.

Leveraging of pop-and-mom stores by JD and Alibaba
During our stay in Chengdu, we spotted a number of JD convenience stores. With this new concept, called JD Xintonglu新通路, the company aims to bypass the multi-layer network of distributors and agents by selling the products of brand owners directly to consumers via a network of JD branded mom-and-pop stores.

Adopting a franchise model, the company plans to roll out 1mn convenience stores in the next five years.

We also came across mom-and-pop stores that serve as pick-up points for Cainiao, Alibaba’s logistics arm. We visited one of these stores in Chongqing and it seems this would be faster and cheaper to roll out as compared to smart lockers (a locker where the customer can pick up their e-commerce delivery), particularly in the suburban and rural areas.

Mom-and-pop stores in China that partnered up with JD (left) and Alibaba (right).

Interestingly, the trend of bypassing the multi-layers of distribution and leveraging on retail network as an e-commerce collection point has also started in Indonesia.

Mom-and-pop stores in Indonesia that partnered up with Alfamart (left) and Indomaret serve as collection point of Zalora (right).

Undoubtedly, the one who is able to bypass all the distributors and agents is the biggest retailer. In the case of Indonesia, that would be the minimarts. Alfamart, Indonesia’s leading minimart chain, supplies directly to these traditional shops (“warung”) at Alfamart’s purchasing price plus logistic costs.

Currently, Alfamart has partnered with more than 80,000 warungs. This collaboration has won the approval from the government and the hearts and minds of the SMEs while allowing Alfamart to gain valuable insights about spending patterns in the traditional channel.

Meanwhile, Indonesian apparel e-commerce, Zalora is leveraging on Indomaret, another Indonesian leading minimart chain, as a collection point.

First “unmanned” JD store in Indonesia
Excitingly, we also learned that JD recently opened its first unmanned convenience store in North Jakarta, Indonesia. The store is located on the third floor of PIK Avenue, a brand-new shopping mall situated in an affluent area that is popular for its great dining options.

Upon arrival, we noticed the store received great interest from mall visitors, with at least a dozen people inside the store, despite the requirement of having a JD app installed on our smartphone. This app is linked to our credit card.

The JD unmanned store in PIK Avenue, Jakarta, Indonesia

Except for the store interior design, we noticed many similarities with the Wow! Store in Chongqing. In both store concepts, identity verification and payment process are conducted through an app on our phone. Meanwhile, the products that we intend to buy are identified using RFID tags.

The major difference is in the check-out process. In the Wow! store, we need to place the products in a basket/box before it is added to our digital shopping cart. Whereas in the JD store, we simply carry the items and step into a small room called the Scanbox, saving us from the hassle of putting our products into a specific box for checkout.

Having said that, the Wow! store was truly unmanned, while we counted at least six employees in the JD store. So, that’s not so unmanned for an unmanned store….

Understandably, they need some staff to assist customers as the concept of unmanned convenience store is very new in Indonesia. Nevertheless, it should be moving towards a purer unmanned model in the future.

JD’s products were competitively priced. Pringles crisps were sold for IDR 12,000, while the same product is being sold at Indomaret, one of Indonesia’s leading convenience stores, for IDR 22,500. This represents a 47% discount!

The JD store also offered a popular snack, Malkist Crackers (Malkist Rasa Abon Sapi) for IDR 7,000, 10% cheaper than Indomaret’s offer at IDR 7,800. Obviously, the attractive price could be one of JD’s marketing tools to lure customer to shop in their unmanned convenience store.

Obviously, an unmanned store also means fewer people can be employed. While we are not sure that the government will support such a non labour-friendly store, the unmanned concept nevertheless has emitted plenty of buzz. At the very least, it is a great PR exercise for JD.

Wrapping it up:
It is apparent that the Chinese tech giants are not only carving up the digital space in China and beyond, but have also set their sights on the physical retail area where they are driving both innovation and the integration of supply chains.

By having exposure/presence in physical retail, Chinese tech giants will get a better picture of the wider retail market. We believe this initiative is still largely underappreciated given that it is still in the early stage.

However, looking at the speed at which new technologies are adopted in China (i.e. e-wallet’s QR code and bike-sharing), we would monitor “New Retail” initiatives very closely.

With the presence of these Chinese tech giants in Indonesia, we would not be surprised to see a similar trend of online/offline convergence in Indonesia.

The latest move by JD in Indonesia indicates that the trend towards new retail has already begun…

Whether Indonesia will soon adopt many unmanned stores or not, the trend towards “New Retail” concept will only accelerate from here.

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On a recent trip to Tibet, Heyokha team had the opportunity to see how things are in one of China’s most remote and desolated areas. It turned out reality was quite different from what we were expecting.

Hidden on the highest plateau in the world, Tibet is known as being the home of golden monasteries and imposing mountain ranges. For most visitors Tibet’s attractions will be of a spiritual nature: secluded sceneries, chanting monks in temples and local pilgrims whispering mantras while turning their prayer wheels and prostrating themselves. It is captivating, inspiring and boundlessly photogenetic.

This is what people write about after their travels, what is posted on Instagram and it is also how Tibet is depicted in movies, etc. It is true, Tibet has such a level of piety and faith that it seems to belong to an earlier, almost ancient age. Yet, this is a one-sided view of the region that has shown double digit GDP growth (!) for the past 24 years .

Our own mystic and spiritual view of the country was eagerly satisfied by our Tibetan tour guide, who welcomed each of us with a Khata, the white Tibetan scarf that symbolises purity and compassion. We consumed all of the brochure-promised experiences, until we found ourselves dumbfounded by an otherwise perfectly mundane act. It was the sight of a monk flipping out his smartphone…

We came to realise it kind-of “troubled” us to find the supposedly traditional and spiritual Tibet being ‘polluted’ and made ‘inauthentic’ by such modernity. Of course, we realise such feelings are totally misplaced – after all, who are we to decide that Tibetans are to refrain themselves from the comforts of modern life? But experiencing that brief moment of discomfort – when reality bashes into misconception – is a valuable lesson.

Our reaction highlights that certain narratives perpetuate, even long after reality has changed. Apparently, this is a popular topic among anthropologists, some of whom are of the view that promotional efforts by both governments and the tourist industry capitalise on one-sided histories and imaginaries of countries and places, and thus keep such narratives alive.

As investors are only human, we are certainly not immune to these biased and outdated narratives in our investment decisions. The remedy for this is obviously to go see things for yourself – Heyokha style.

“You know nothing, John Snow…”

Wise words spoken by a barbarian lady to a future King.

One of the things that surprised us the most, is the extent to which Chinese tech companies managed to penetrate such remote area characterised by tradition and spirituality. Here is what caught our attention:

QR Code Stickers

We saw many shops in Tibet accepting Alipay and WeChat Pay, even the shops located in monasteries. Extrapolating from our observation that QR codes have penetrated most corners of Tibet, we think that the penetration across other Chinese rural and suburban areas must be very high as well.

As such, we feel that while online payments still “only” make-up about 20% of all payments in China, it represents not a “work in progress” but rather the population racing to catch up to a technology that is here to stay.

Food delivery apps

With altitude-induced headaches making the thought of leaving our hotel rooms a herculean challenge, food-delivery apps such as Meituan proved to be one of the most useful apps during our stay in Lhasa and Shigatse. Not only did the app give us access to delicious food, it also secured our supply line to much needed painkillers and oxygen cylinders.

With such a strong footprint across the various regions in China and expected growth of China’s online food and grocery delivery market, we will be keeping a close eye on Meituan Dianping’s $ 60bn planned IPO.

Bike sharing apps

2017 was the year of Bike Sharing in China. During our trip, the yellow bikes of bicycle sharing company ofo emerged everywhere, even in Tibet. To see how the company rolled out its operations to such remote areas is very impressive. The bikes are being used by all kinds of people ranging from kinds to grandpa’s and students to monks. Unfortunately, we didn’t dare to try to book and ride the bikes, anticipating further oxygen deficiencies…

Wrapping it up:
Our views will always be shaped by narratives. For us, our Tibet experience confirms that seeing things on the ground is essential in recognising what is usually not being told. While modernity in China may be associated with metropolitan cities like Shanghai and Beijing, it became clear to us that the reach of its tech giants goes all the way into the remote regions, albeit perhaps in part driven by Chinese tourism. With tech manifesting in Indonesia as well, we should not be mistaken to think that the tech revolution in Indonesia will be limited to its major cities.

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Recently, both the Indonesian Ministry of Agriculture and the Jakarta office of the US Department of Agriculture (USDA) reported on corn production and harvested area. While the numbers always show some differences due to the use of different methodologies, this time the gap widened significantly.

Corn harvested area 2014-2017: MoA vs. USDA data

Looking at the graph above, USDA data suggests a significantly lower growth of harvested area in the past four years. The gap with the Indonesian government’s data is big. In 2017, the Indoensian government reported 5.5mn ha corn harvested area, while the USDA reported 3.45mn ha. That is a gap of 2.05mn ha!

This highlights the difficulty of obtaining the right data in emerging markets, and leads us to wonder which data is more reliable in this case.

Since it would require a good amount of resources to verify the absolute levels agriculture output, we choose to focus on verifying the change in harvested area.

We believe that USDA data tend to understate the corn area expansion. Here is why.

Sanity check 1: rising farming inputs suggest higher output

Take a look at pesticide sales data, for example. We argued before that pesticides sales by commercial producers should be a fair proxy to indicate production trends in farming activities.

Unlike seed and fertiliser, pesticide is least prone to substitution effects. For example, commercial seed purchases can be substituted by seeds grown by farmers themselves, while commercial fertilisers can be substituted by organic waste.

For pesticides, however, there are hardly any substitutes. Homemade organic pesticides, for example, are barely scalable and too ineffective to save one’s farmland from becoming an all-you-can-eat buffet for insects and pests.

BISI reported +33% CAGR pesticide sales growth in the food crops area growth during the Jokowi agri reform (2014-2017) while its market share and average selling price did not change much. It is a significant acceleration from the 13% CAGR 2011-2014 before the reform kicked in.

Sanity check 2: forestry companies have added sizable intercropping area

Another set of data also indicates that USDA data is too conservative. If we look at data from SOE Forestry company Perhutani 2016 annual report, no less than 118k ha of their forestry area have been allocated for corn intercropping by the local farmers.

Separately, the SOE plantation company PTPN 2 has stated that approximately 73k ha of corn has been intercropped by local farmers in the PTPN’s palm oil areas. Young palm oil trees are not yet productive, thus planting corn as the intercrop makes sense.

The sum of 118k ha from Perhutani and 73k ha from PTPN 2 alone is 191k ha incremental corn harvested area. This is already bigger than the entire increase in corn harvested area from 2015 to 2017 based on USDA data!

Sanity check 3: conversion from other food crops

The increase in corn harvested area also could be explained by the shrinking harvested area of other food crops.

From 2014 to 2017, corn harvested areas have increased by 1.7mn ha. And the expansion is being compensated by other food crop areas shrinking by 0.7mn ha in the same period.

The explanation for the expansion in corn harvested area is mainly economics, as favourable domestic corn price has encouraged farmers to switch to corn farming.
Another reason is that some other crops have yields that are not competitive globally. For instance, Indonesian soybean production yield is only 1.5 ton/ha.

This is less than half of US yield of 3.4 ton/ha using GMO seed. In the end, soybean is more ideal for subtropical countries rather than tropical given that soybean is more drought sensitive relative to corn.

Incremental must be real

In summary, adding corn intercropping from young forest and CPO areas and conversion from other food crops already explains 0.9mn ha out of 1.7mn ha increase in corn harvested area.

The rest could easily be explained by recent village infrastructure build up. New dams, water basins, and better irrigation systems have increased the number of plantings per year.

To sum up, there is no way to know exactly which data is accurate. This gap of 2mn ha is so big that it needs closing. Simple approaches, however, suggest that the actual increase in harvested area should be closer to Indonesian government’s data.

 

 

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By Wuddy Warsono

Okay, by now I had fully accepted that I would be spending Chinese New Year’s Eve alone, in my hospital room in New York.

Since this was my first time doing so, I was tempted to read some tips on how to deal with New Year blues. Admittedly, I typed “How do you deal with loneliness on New Year’s Eve?” on Google, but then decided not to proceed. I suspected I would feel even more miserable after reading the tips.

Then, around 6 pm, someone knocked on my door. It was the lady who helps me with the laundry. Earlier today, she asked me if I wanted anything for New Year’s Eve. I told her that – me being Indonesian – nasi and mie goreng would do the trick. She didn’t respond…

Now there she was again. It didn’t take long before a familiar spicy aroma filled the room and gave away what was in her bag; nasi and mie goreng!

I asked her if she would join me for a bit and she gracefully accepted. I am sure her family was waiting for her. Yet, she was willing to spend about half an hour with me, so that I felt better. I tried to pay for the food, but the lady said she was happy to treat me. She declined the money.

Maybe all along I have been too busy, too absorbed by a demanding work schedule, to notice kind acts by strangers around me. Or maybe such kindness is rare. I really don’t know.

What I do know is this: what she did was sweet and generous, especially because she doesn’t know me. The kind act of a stranger is very contagious. I feel like being helpful to people around me, whether I know them or not. I want to “repay” the sincere kindness of this lady.

In other words, she made the world a better place, if only for a little bit, through a simple yet powerful act.

We actively look for the antidote for loneliness in our portfolio
The experience with the laundry lady inspired us and reminds us of what is really important in life. One area that we have been focusing on – and more so in the future – are investable solutions to one of the biggest endemic problems in today’s life: despair over loneliness.

Former Surgeon General Vivek Murthy summarised his experience as a doctor in an article in The Harvard Business Review: “During my years caring for patients, the most common pathology I saw was not heart disease or diabetes; it was loneliness.”

The irony is that despite technological progress and prosperity, more and more people are feeling lonely and alienated. While technology is not the only reason, it is clearly a key driver in feeding this epidemic of loneliness and social isolation. In many places, the urbanisation trend has contributed to forming a generation that is uprooted from their traditional ways.

We have been investing in what we believe are the antidotes for loneliness. One such investment is the Hong Kong based pet supply retailer Whiskers N Paws. This company has created an opportunity to get away from the hustle of Hong Kong’s busy city life and connect with others who share their love for animals.

Despite technological progress, more people are feeling lonely and alienated. Enhancing the richness of the companionship between both humans and animals brings back the sense of community, an antidote for loneliness and despair.

We trust that animals, like dogs, nurture empathy and will do a better job at that than even the most sophisticated AI aiming to simulate it. And empathy, we believe, is the ultimate antidote for loneliness and despair.

We will continue to look for more investment ideas in this area.

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Reading The New Case for Gold, we came across one very interesting chapter where the author James Rickards discussed a BBC interview with Andrea Sella, a professor of chemistry at University College London.

Prof Sella provided an in-depth review of the periodic table of the elements to explain why gold, among all the atomic structures in the known universe, is uniquely and ideally suited to be money in the physical world.

We can (rather painfully) recall the periodic table of the elements from high school chemistry class. A total of 118 elements are represented, from hydro-gen (atomic number 1) to ununoctium (# 118). Nothing physical in the known universe that is not made of one of these elements or a molecular combination. If we are looking for money, we will find it here.

Prof Sella quickly dismissed ten elements on the right-hand side of the table, including helium (He), argon (Ar), and neon (Ne). They are all gases at room temperature and would literally float away. Clearly not good as money.

Elements such as mercury (Hg) and bromine (Br) are liquid at room temperature, so they are all out. Arsenic (As) is rejected for a very obvious reason: because not everyone is convinced that money is poison. Turning to the left-hand side of the periodic table, we get twelve alkaline elements. The problem is that they dissolve or explode on contact with water. Saving money for a rainy day is a good idea, but not if the money dissolves when it rains.

The next elements to be discarded are those of Uranium (U), Plutonium (Pu), and Thorium (Th), for the simple reason that they are radioactive. Also included in this group are thirty radioactive ele-ments made only in labs that decompose moments after they are created.

Most other elements are also unsuitable as money. Iron (Fe), copper (Cu), and lead (Pb) don’t make the final cut because they rust or corrode. No one wants money that debases itself, we should leave the debasement business to the central bankers.

Aluminium (Al) is too flimsy and Titanium (Ti) is too hard to smelt. With this process of elimination, there are only eight candidates left for use as money: the noble metals. While all of them are rare, only gold and silver are available in sufficient quan-tities to make a practical money supply. The rest are too rare.

Thus, only two elements, silver and gold, left. Both are scarce but not impossibly rare. Both also have a relatively low melting point and are therefore easy to turn into coins, ingots, and jewellery. Out of these two, silver reacts with minute amounts of sulphur in the air.

Also, gold (Au) has one final attraction: it’s golden. All of the other metals are silvery in co-lour, except copper which turns green when exposed to air.

 

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In our 1Q 2017 report, we discussed how tech companies design their products to activate pleasure centres in our brain so that we get hooked. Digital drugs, so to speak.
While we worried about people’s loss of creativity and inability to do “deep work” as a consequence of these addictive and distracting products, it seems much more is at stake. And that is, the wellbeing of our young kids.

Source: https://pulptastic.com/

That is at least the message of a recent thought-provoking article written by Professor of psychology Jean M. Twenge, in which she describes unprecedented shifts in teen behaviour that are coinciding with the proliferation of smartphones (see graphs below for two examples).

In the piece, Twenge writes that it’s not an exaggeration to describe the post-millennial cohort – those born between 1995 and 2012 – as being on the brink of the worst mental health crisis in decades. Much of this deterioration can supposedly be traced to their phones.

Source: The Atlantic

Behaviour is indeed changing at an unprecedented pace and parents are probably as guilty in dealing with the “digital drugs” problem. We’ve disengaged ourselves since we’re too busy looking down at our screens. The painful reality is that we as parents are equally distracted.

In a world where kids are increasingly staying inside their semi-gilded cages and don’t have a proper chance to spread their wings, it is refreshing to share the following pictures from our extensive trip to the remote places of Indonesia.

Partly thanks to limited 3G network in the remote areas, family members are still communicating face to face and kids still have real (as opposed to digital) friends. They can’t just block each other over a disagreement.

The digital era will arrive there sooner or later, but for now, life in the remote areas is a timely reminder of the “good old days” where real contact and real friends bring joy. This is definitely one of Heyokha’s new year resolutions.

Kids in Blitar, East Java, are still playing real games outdoor instead of playing “League of Legends” in their smartphone. (right) Instead of sharing the baby picture on Instagram to harvest “likes”, this mother in Mahakam Ulu in deep Kalimantan forest brought the real baby to see relatives. (left)

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In our reports, we have been arguing that one area that’s less prone to digital disruption is the farming sector. In one of our key markets, Indonesia, the digital revolution has actually helped the sector rather than disrupting it.

With farmers having better access to information about prices of rice, corn, and chilli for example, they can maximize their selling price. Also, the agricultural reform of Indonesia’s current government has been running for about two years now. Many initiatives have been undertaken, but communicating these to the farmers is a challenge on its own.

We learned from our many trips across Indonesia that a big majority of the farmers are not really using smartphones. However, better network coverage and a big push in rural Indonesia from Chinese phone makers like OPPO is gradually changing the landscape.

We have witnessed how the Indonesian government has adapted and learned to use social media to broadcast the programs on agricultural reform. One example is the campaign to push a farmer insurance program designed to protect farmers from losses resulting from floods and pests (see add here).

There are anecdotes that this insurance program has been very effective this year since many farm-lands were affected by various kind of pests. The farmer insurance program helps to keep farmers’ planting appetite strong and helps to avoid farmers resorting to loan sharks for a “solution” to their financial woes.

What we would like to stress is that this insurance program is just one of the many components of the Indonesian agricultural reform aimed at improving farmers’ welfare. Except for rising production output and declining poverty levels in villages, new job data from The Central Statistics Agency (BPS) Indonesia also seem to indicate that the farming sector is benefitting.

Shift of workers from agri to service industry slowed down
As yet another indicator of the success of the program, we would like to point out a chart (see below) from Indonesian national labour force survey, Sakernas. The survey suggests that for the first time in a decade, workers’ shift from agriculture to service industry has slowed.

More jobs added in agri than in industry sector
Another chart (see below) from the same institution suggests that, in contrary to common belief, the number of employed workers in the agriculture sector has increased by 1mn in the period from Feb 2016 to Feb 2017. The addition is multiple times the size of addition in the manufacturing sector.

Unemployment rate in villages (=farmers) declined further
Based on data from the Indonesian statistics agency, the unemployment rate in the villages has been on the way down, from 4.35% in Feb 2016 to 4.01% in August 2017. During our trip to the villages, farmers informed us that it is generally difficult to find workers to help them during the harvest time.

We expect the trend of falling unemployment in Indonesian rural areas to continue given that various ministry-level proposals have been made aiming to incentivise people to stay and work in the villages.

No doubt that, reflecting the economic reality in the villages, a vast majority of these proposals will impact the farming area.

As the numbers are hard to argue with, we trust that investors should be more open-minded about the success of the Indonesian agricultural reform.

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