Indonesia Cement Sector - 30Sep2016 · cement products under “Tiga Roda” brand. Semen Indonesia...

ed-CK / sa- MA, PY

Nobody’s position is sacrosanct Recent stock rallies unwarranted fundamentally

Oversupply conditions continue to impact

incumbent cement producers

Reiterate negative view on cement sector with

FULLY VALUED calls for both INTP and SMGR

Recent rally not backed by fundamentals. Cement stocks have piggybacked the overall buoyant mood over Indonesia’s macro outlook and the tax amnesty programme; JCI surged 13% since early June 2016 while INTP and SMGR rallied 11% and 17%, respectively, within the same timeframe. Despite this, we believe that such rallies are unwarranted fundamentally and we are reiterating our negative call on incumbent cement producers with 13-19% downside from the current level. Oversupply conditions worsening. The monthly recovery in August domestic cement sales volume was seasonal after the Moslem holiday period, as 8M16 domestic sales volume of 39.1m tonnes (+5.9% y-o-y) only met 61% of our full-year forecast. Sulawesi and Sumatra areas remain the heavy lifters in growth terms, continuing last year’s trend. Given the stream of new capacities coming in between now and 2018 and the modest expected growth in domestic cement consumption in the same timeframe, the excess capacity should reach uncharted territory of c.33m tonnes. The supply-demand imbalance and the aggressiveness of new entrants (especially the deep pocketed ones) have resulted in incumbent cement producers losing market share. The market share for the outside “Big 3” producers reached an all-time high of 18.7%. Will government step in to address oversupply situation?

Current chatter about the possibility of a government plan to limit investment in the cement sector 3-5 years down the road (through revision of its Investment Negative List) to address the oversupply situation should provide a reprieve and potential upside risk for cement stocks, when and if it materialises. Reiterate our negative view on cement sector.

We revise down both INTP and SMGR earnings assumptions by 3.4%-20.5% for FY16/17F, considering the weaker cement sales volume, limited room for ASP growth (due to intense competition) and higher coal price assumptions. At the same time, we roll forward our target prices, by pegging FY17F earnings to the average of their mean forward PE (for the past 10 years). Our target prices (INTP at Rp14,750 & SMGR at Rp9,150) imply 13-19% downside for both companies. We prefer SMGR to INTP in light of the former’s market leader position, diversified presence in key market areas and more attractive EV/tonne valuation of c.US$190 (vs replacement cost of US$150).

JCI : 5,432.00

Analyst Edward Tanuwijaya +62 2130034932 [email protected]

STOCKS

Source: DBS Vickers, Bloomberg Finance L.P. Closing price as of 29 Sep 2016 Indocement Tunggal P. : Indocement was established in 1975. The company expanded heavily in the 90’s, prior to Heidelberg Cement Group becoming its majority shareholder in 2001. The company trades cement products under “Tiga Roda” brand.

Semen Indonesia : Semen Gresik was established in 1957 as a state-owned cement producer before changing its name to Semen Indonesia recently. In 1995, the company completed the acquisitions of Semen Padang and Semen Tonasa. It is currently the largest player in the ma

Oversupply conditions for Indonesia’s cement industry

Source: Cement companies, DBS Vickers INTP & SMGR performance vs JCI – YTD

Source: Bloomberg Finance L.P., DBS Vickers

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INTP SMGR JCI Index

DBS Group Research . Equity 30 Sep 2016

Indonesia Industry Focus

Indonesia Cement Sector

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

Rp US$m Rp 3 mth 12 mth Rating

Indocement Tunggal P. 18,150 5,134 14,750 7.6 11.4 FULLY VALUEDSemen Indonesia 10,575 4,820 9,150 13.1 16.2 FULLY VALUED

Industry Focus


Decent but uninspiring domestic sales volume growth

August domestic volume sales reached the YTD monthly high at 5.952m tonnes (+64.7% m-o-m, +11.4% y-o-y), which represents a wild positive swing after a low number in July with just 3.615m tonnes (lowest monthly sales since Aug 2013). Despite this encouraging recovery in monthly domestic sales volume, the 8M16 domestic sales volume of 39.051m tonnes (+5.9% y-o-y) only formed 61% of our full-year forecast. To meet our FY16F domestic sales volume of 63.659m tonnes (+5.4% y-o-y), the monthly domestic sales volume has to average 6.15m tonnes for the next four months. Domestic cement sales volume

Source: DBS Vickers Domestic cement demand trend

Source: DBS Vickers Continuing the trend seen since last year, Sulawesi and Sumatra did the heavy lifting in terms of domestic cement consumption. As of 8M16, Sulawesi (now contributing 8.7% of nationwide cement demand) and Sumatra (now contributing 21.5% of nationwide cement demand) saw 22.1% and 8.7% y-o-y growth, respectively, while cement demand in Java (the main market with 54.5% of nationwide cement demand) only grew 2.3% y-o-y.

Demand distribution by region

Source: DBS Vickers Historical and expected demand per region

Source: DBS Vickers Meanwhile, as highlighted in our previous report (Indonesia Cement Sector: Challenges for wily veterans to cement their grip), growth acceleration in infrastructure development, coupled with slower property pre-sales growth, will result in the sales proportion of the bulk segment heading towards an uncharted level (currently at 23.8%). We expect bulk segment sales to grow at a 10.2% CAGR between 2015 and 2018, while forecasting only 4% growth for the bag segment within the same period.

Share of bulk and bag cement sales in Indonesia

Source: DBS Vickers

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Domestic cement sales achieved

Domestic cement sales forecast

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m tonnes

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Industry Focus


The long-term multiplier effect from the much-heralded infrastructure development to property pre-sales will remain a key positive catalyst for bag cement demand, but not in the near term. Bag and bulk cement demand growth

Source:DBS Vickers ASP to remain weak, given oversupply situation

In our estimates, the cement production capacity is expected to reach 96.3m tonnes by end of this year (a 24% increase from last year). We forecast another 8.6m tonnes additional capacity in the next two years. Given the modest expected demand growth in the same timeframe, the supply-demand balance will remain skewed. The excess capacity will reach 33m tonnes by the end of 2018, in our estimation. (See chart on page 1) This, coupled with the aggressiveness of new entrants (especially those with deep pockets and strong financial positions) to gain market share with disruptive pricing, has caused ASP to decline over time. The market share of cement producers outside the “Big 3” reached an all -time high of 18.7%. “Big 3” domination unravelling?

Source: DBS Vickers Note: Holcim (SMCB IJ) market share excludes LaFarge Cement Indonesia for historical consistency.

All incumbent producers faced downward pressure in their ASPs, especially in the lucrative areas where competition is heating up. INTP experienced a more severe ASP decline (estimated at 6.4% below its ASP at the end of 2015) than SMGR (estimated at 2.7% below its ASP at the end of 2015). This is mainly due to more intense competition in INTP’s strongholds (i.e. West Java and East Kalimantan areas) and SMGR’s diversified presence in a few key areas. Surge in coal price – another cost to be dealt with

The recent surge in coal price (i.e. Newcastle benchmark coal price index went up 40% since early May 2016) would cause cost per tonne to increase further (given 16%-18% of cash cost is for coal/fuel) and erode cement producers margins further. Other main energy-related prices (crude oil & electricity tariff) and USD/IDR exchange rate have remained stable for some time. Energy prices trend

Source: State-owned electricity company (PLN), Ministry of Energy and Mineral Resources (ESDM), Bloomberg Finance L.P., DBS Vickers Note: The indexing used Jan 2016 price as 100 EBITDA margins vs utilisation rate

Source: Bloomberg Finance L.P., DBS Vickers

34.239.1

44.1 45.6 46.8 46.1 47.7 49.6 51.8

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Bag Bulkm tonnes

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ICP (RHS) Electricity tariff - I4 (LHS) Coal (LHS) USD/IDR (RHS)

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Capacity utilisation rate (LHS)

INTP's EBITDA margin (RHS)

SMGR's EBITDA margin (RHS)

Industry Focus


Reiterate our negative view on incumbent producers; roll

our valuation window forward

We maintain our FY16 and FY17 domestic cement sales volume assumptions of 63.7m and 67m, which imply 5.4% and 5.3% y-o-y growth, respectively. However, we revise down the domestic volume sales of both INTP and SMGR to reflect their current dwindling market share, given the intense competition in major regions. For SMGR, we cut our FY16/17F domestic sales volume by 2.7%/3.9% to 26.5m/27.9m tonnes. Besides, now we expect overall ASP in 2017 to be slightly lower than 2015 (instead of a gradual recovery from 2015). In addition, we lower our GP margin assumptions by 0.7% this year (to 38.1%) due to higher COGS (mainly from energy cost) while maintaining FY17F GP margin assumptions at 38%. All in, this results in 15.3%/15.7% cut in our FY16/17F earnings forecast for SMGR. Meanwhile, for INTP, we cut our FY16/17F domestic sales volume by 1.9%/3.6% to 17.3m/18m tonnes. In addition, we expect ASP to go down this year before recovering gradually to reach the 2015 level in 2018. On profitability, we cut our GP margins assumptions by 300bps to reflect current conditions and higher COGS (mainly from energy cost). All those changes have trickled down, resulting in 3.4%/20.5% lower earnings assumptions in FY16/17F. Note that there is a deferred tax item from asset revaluation which helped INTP earnings in FY16.

Our estimates for both INTP and SMGR are still one of the lowest in the street, reflecting our negative stance on the sector. Subsequently, we roll forward our target prices, by pegging FY17F earnings to average of their mean forward PE (for the past 10 years). Our target prices (INTP at Rp14,750 & SMGR at Rp9,150) imply 13-20% downside for both companies. At the current earnings multiple, there are no significant gaps between SMGR and INTP. Between the two, we prefer exposure to SMGR for its enviable market leader position with three established brands in the important markets (Java through Semen Gresik, Sumatra through Semen Padang and Sulawesi through Semen Tonasa) and its diversified presence throughout Indonesian islands. Both counters are trading eerily close to their replacement cost (on EV/tonne basis of around US$150). Both counters have tested the recent trough valuations sometime in 3Q15, before rebounding sharply to the current levels. INTP currently trades at 18x FY17F PE (at +0.5SD of its 10-year mean forward PE) and 11x FY17F EV/EBITDA. SMGR currently trades at 15.6x FY17F PE (at +0.5SD of its 10-year mean forward PE) and 9.5 FY17F EV/EBITDA.

Summary of assumption changes

INTP SMGR

FY15F FY16F FY17F FY15A FY16F FY17F

Domestic volume Now 16,784 17,275 18,052 25,969 26,527 27,903 ('000 tonnes) Prev 17,614 18,732 27,275 29,034

Chg (%) -1.9% -3.6% -2.7% -3.9% Revenue Now 17,798 17,252 18,372 26,948 26,970 28,876 in Rpbn Prev 19,364 21,026 29,066 31,761

Chg (%) -10.9% -12.6% -7.2% -9.1% GP margin Now 44.4% 40.8% 40.2% 39.5% 38.1% 38.0%

Prev 43.7% 43.1% 38.8% 37.9% EBITDA margin Now 33.6% 30.5% 29.3% 27.6% 24.0% 23.4%

Prev 31.5% 30.8% 25.8% 24.6% Operational profit Now 5,029 4,139 4,280 5,899 5,128 5,307 in Rpbn Prev 5,141 5,449 6,032 6,223

Chg (%) -19.5% -21.5% -15.0% -14.7% Net profit Now 4,357 4,304 3,742 4,521 3,913 4,019 in Rpbn Prev 4,455 4,705 4,621 4,770

Chg (%) -3.4% -20.5% -15.3% -15.7% TP Now 14,750 9,150

in Rp/sh Prev 14,500 8,200

Chg (%) 2% 12%

Recommendation Now FULLY VALUED FULLY VALUED

Prev FULLY VALUED FULLY VALUED

Source: DBS Vickers

Industry Focus


INTP PE Band

Source: Bloomberg Finance L.P, DBS Vickers INTP EV/EBITDA Band

Source: Bloomberg Finance L.P, DBS Vickers INTP EV/tonne

Source: Bloomberg Finance L.P, DBS Vickers

SMGR PE Band

Source: Bloomberg Finance L.P, DBS Vickers SMGR EV/EBITDA Band

Source: Bloomberg Finance L.P, DBS Vickers SMGR EV/tonne


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Industry Focus


APPENDIX

Indonesia cement producers: Demand, supply and utilisation rate dynamics

Source: Cement producers, Indonesia Cement Association (ASI), DBS Vickers, DBS Vickers Note: Utilisation rate is based on design capacities (without considering cement plant maintenance period). Cement regional peers’ valuation

Ticker Price Market Cap PE (x) EV/EBITDA (x) EBITDA margin (%) ROE

Company Code (lcl currency) (USD m) FY16 FY17 FY16 FY17 FY16 FY17 FY15

Semen Indonesia SMGR IJ 10,500 4,806.7 15.9 15.5 10.0 9.5 24.0% 23.4% 17.9%

Indocement Tunggal INTP IJ 18,300 5,199.2 15.7 18.0 11.0 11.0 30.5% 29.3% 18.0%

Holcim Indonesia * SMCB IJ 1,050 621.0 30.6 21.7 8.7 8.1 16.8% 16.6% 2.1%

Semen Baturaja * SMBR IJ 1,695 1,286.9 54.6 66.1 35.2 28.9 28.3% 30.5% 12.6%

Weighted average Indonesia 20.7 22.4 13.1 12.2 26.9% 26.4% 16.5%

Anhui Conch Cement 914 HK 21 13,526.4 12.0 10.5 6.2 5.7 29.2% 30.0% 11.1%

Asia Cement (China) Hldgs * 743 HK 2 377.9 11.5 8.5 7.7 6.8 16.2% 18.2% 1.7% China National Building Material 3323 HK 3 2,353.5 14.3 9.9 11.5 10.7 20.8% 21.7% 2.5%

West China Cement * 2233 HK 1 524.3 43.0 12.9 6.9 5.8 27.2% 31.1% nm

CR Cement * 1313 HK 3 2,536.1 13.1 10.5 7.9 7.0 18.2% 19.6% 3.7%

Weighted average China 13.3 10.4 7.1 6.5 26.4% 27.4% 8.6%

Siam Cement SCC TB 516 17,901.1 12.4 12.2 9.8 9.6 18.5% 17.9% 23.7%

Weighted average Thailand 12.4 12.2 9.8 9.6 18.5% 17.9% 23.7%

Source: Bloomberg Finance L.P, DBS Vickers Note: (*): Estimates are based on Bloomberg Finance L.P. consensus numbers Price and valuation is as of 28 Sep 2016

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Demand (000 tons) - LHS

Design capacity (000 tons) - LHS

Utilization rate - RHS

'000 tonnes

No additional capacity until 2009Demand growth in-line with GDP growth

Industry Focus


Indonesia cement producers: Historical and estimated additional design capacities (‘000 tonnes)

Company Location 2012 2013 2014 2015 2016F 2017F

Semen Indonesia (SMGR IJ)

East Java 11,600 14,000 14,400 14,400 14,400 14,400

Central Java - - - - 3,000 3,000

West Sumatra 6,330 6,400 7,300 7,300 10,300 10,300

South Sulawesi 4,620 7,300 7,800 8,300 8,300 8,300

22,550 27,700 29,500 30,000 36,000 36,000

Indocement (INTP IJ)

West Java 16,000 16,000 17,900 17,900 21,100 21,100

South Kalimantan 2,600 2,600 2,600 2,600 2,600 2,600

Central Java - - - - - -

18,600 18,600 20,500 20,500 23,700 23,700

Holcim Indonesia (SMCB IJ)

West Java 5,600 5,600 5,600 5,600 5,600 5,600

Central Java 3,500 3,500 3,500 3,500 3,500 3,500

East Java - - 1,700 3,400 3,400 3,400

9,100 9,100 10,800 12,500 12,500 12,500

Bosowa

South Sulawesi 2,300 2,300 4,000 4,000 4,000 4,000

Riau 1,200 1,200 1,200 1,200 1,200 1,200

East Java - - - - 1,100 1,100

Papua - - - - 750 750

3,500 3,500 5,200 5,200 7,050 7,050

Semen Baturaja (SMBR IJ) South Sumatra 1,250 2,000 2,000 2,000 2,000 3,850

Andalas (Lafarge) Aceh 1,600 1,600 1,600 1,600 1,600 1,600

Kupang NTT 550 550 550 550 550 550

Anhui Conch

South Kalimantan - - 1,500 1,500 1,500 1,500

West Java - - - - 2,000 2,000

Others - - - - - -

- - 1,500 1,500 3,500 3,500

Siam Cement West Java - - - - 1,800 1,800

Semen Merah Putih (Wilmar) Banten - - 750 1,750 4,250 5,750

Panasia Central Java - - - - 1,500 1,500

Puger East Java - - - 300 300 600

Jui Shin West Java - - - 1,500 1,500 1,500

Total 57,150 63,050 72,400 77,400 96,250 99,900

Source: Cement producers, DBS Vickers

Industry Focus


Company Guides

ASIAN INSIGHTS VICKERS SECURITIES ed:CK / sa:MA, PY

FULLY VALUED Last Traded Price ( 29 Sep 2016): Rp18,150 (JCI : 5,432.00) Price Target 12-mth: Rp14,750 (-19% downside) (Prev Rp14,500) Potential Catalyst: Regulations restricting cement expansion Where we differ: Having one of the lowest estimates in the street

Analyst

Edward Tanuwijaya +62 2130034932 [email protected]

What’s New 8M16 domestic sales volume is down 1.6% y-o-y

INTP’s stronghold area West Java is still

experiencing slow demand

Cut FY16/17F earnings by 3.4%/20.5%

Reiterate FULLY VALUED call with Rp14,750 TP

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 17,798 17,252 18,372 20,034 EBITDA 5,975 5,261 5,382 5,857 Pre-tax Profit 5,645 4,670 4,849 5,165 Net Profit 4,357 4,304 3,742 3,986 Net Pft (Pre Ex.) 4,357 4,304 3,742 3,986 Net Pft Gth (Pre-ex) (%) (17.6) (1.2) (13.0) 6.5 EPS (Rp) 1,183 1,169 1,017 1,082 EPS Pre Ex. (Rp) 1,183 1,169 1,017 1,082 EPS Gth Pre Ex (%) (18) (1) (13) 6 Diluted EPS (Rp) 1,183 1,169 1,017 1,082 Net DPS (Rp) 415 818 712 758 BV Per Share (Rp) 6,483 7,237 7,436 7,805 PE (X) 15.3 15.5 17.9 16.8 PE Pre Ex. (X) 15.3 15.5 17.9 16.8 P/Cash Flow (X) 13.2 13.5 14.3 13.6 EV/EBITDA (X) 9.7 11.0 11.0 10.2 Net Div Yield (%) 2.3 4.5 3.9 4.2 P/Book Value (X) 2.8 2.5 2.4 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 18.0 17.0 13.9 14.2 Earnings Rev (%): (3) (22) N/A Consensus EPS (Rp): 1,200 1,211 1,289 Other Broker Recs: B: 8 S: 9 H: 14

Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P

Diminishing bag of tricks Reiterate FULLY VALUED call. Considering its tepid 8M16 sales achievement, we cut our FY16/17F domestic sales volumes by 3.9%/4.9% to 16.6m/17.1m tonnes. Coupled with the declining ASP due to fierce competition and a higher portion of bulk contribution, this resulted in 10.9%/12.6% cut in our FY16/17F revenue estimate. The recent surge in Newcastle benchmark coal should result in more depressed margins as fuel cost made up 22% of COGS. All in, we slash our earnings estimates further by 3.4%/20.5% for FY16/17F. Experiencing decline in domestic sales. Despite the 67.1% m-o-m surge in volume sales in Aug to 1.56m tonnes, INTP’s 8M16 sales volume was down 1.6% y-o-y. INTP’s nationwide market share continued to decline to 26.3%, as compared to 27.8% at end-2015 and more than 30% before that. INTP’s main market West Java area (including Jakarta and Banten) is still experiencing a decline of 4.4% y-o-y in sales volume, severely lagging behind Sulawesi (+22.1% y-o-y) and Sumatra’s (+8.7% y-o-y) demand growth. YTD, West Java (including Jakarta and Banten) accounts for 48% of INTP’s domestic cement sales. Intense competition in West Java continues to erode margins. We estimate that 40% of the capacity in 2017 will be located in West Java. New players will sacrifice margins to gain market share as they ramp up utilisation rates, resulting in fierce competition in this area. Therefore, our EBITDA margins will trend down for the next few years. Although INTP still commands the highest EBITDA margins in the sector, the downtrend is imminent. In our current estimate, INTP’s EBITDA in 2018 will be at the same level as it was in 2015. Valuation:

Our target price of Rp14,750 is pegged to 14.5x FY17F EPS, the average of its 10-year mean forward PE (similar to 2004 levels when cement industry utilisation rates were low). Key Risks to Our View:

Regulations restricting cement expansion in Indonesia due to the oversupply situation. This would cause significant delays in new players’ greenfield cement plants and subsequently reduce the severity of competition from new players in INTP’s strongholds, and help lift utilisation rates. Recovery in property presales. Property presales have been lethargic since early 2015 after a 4-year boom (2010-2013). A sharp recovery in property presales would pose an upside risk to our cement volume sales assumptions as the property sector remains the major cement consumer in Indonesia.

At A Glance Issued Capital (m shrs) 3,681 Mkt. Cap (Rpbn/US$m) 66,814 / 5,134 Major Shareholders (%) HeidelbergCement AG 51.0 Mekar Perkasa 13.0

Free Float (%) 36.0 3m Avg. Daily Val (US$m) 2.9 ICB Industry : Industrials / Construction & Materials


Indonesia Company Guide

Indocement Tunggal P. Version 3 | Bloomberg: INTP IJ | Reuters: INTP.JK Refer to important disclosures at the end of this report

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Indocement Tunggal P.

INTP: Domestic cement sales volume

Source: Company, DBS Vickers. Note: YTD achievement in FY16 is as of 8M16.

INTP: EV/tonne getting closer to replacement cost



FY15A FY16F FY17F

Domestic volume Now 16,784 17,275 18,052

('000 tonnes) Prev 17,614 18,732

Chg (%) -1.9% -3.6%

Revenue Now 17,798 17,252 18,372

in Rpbn Prev 19,364 21,026

Chg (%) -10.9% -12.6%

GP margin Now 44.4% 40.8% 40.2%

Prev 43.7% 43.1%

EBITDA margin Now 33.6% 30.5% 29.3%

Prev 31.5% 30.8%

Operational profit Now 5,029 4,139 4,280

in Rpbn Prev 5,141 5,449

Chg (%) -19.5% -21.5%

Net profit Now 4,357 4,304 3,742


Chg (%) -3.4% -20.5%

TP Now 14,750

in Rp/sh Prev 14,500

Chg (%) 2%

Recommendation Now FULLY VALUED

Prev FULLY VALUED

Source: DBS Vickers

0

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FY16F FY17F FY18F



'000 tonnes

-2SD, 55.8

-1SD, 155.2

Ave, 254.6

+1SD, 354.0

+2SD, 453.4

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Company Guide


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Domestic cement volume driving top-line growth. We forecast industry demand to grow modestly (in line with Indonesia’s real GDP growth) for the next three years, as the country is entering a normal growth state. As the 2nd largest cement producer in the country, INTP should experience similar growth. However, we expect INTP to lose market share to new foreign players in its stronghold area. Therefore, based on our assumptions, INTP’s sales volume is expected to grow by just 2.4% CAGR over 2015-2018F, a gradual recovery after a weak 2015 and 2016. Limited price upside because of competition. We do not expect cement prices to rise significantly going forward, as the incumbents (including INTP) would be forced to defend their market share from new players, which are willing to sacrifice margins to grab market share. The skewed supply-demand imbalance will also see the utilisation rate of incumbents remaining low. We forecast a flat 0.6% CAGR in ASP/tonne between 2015 and 2018F. Shift to bulk segment will pressure margins. Accelerating the rollout of infrastructure projects and a stagnant property market should see cement players (including INTP) experience stronger growth in the bulk segment than the more profitable bag cement segment. Cost savings from efficiency fail to alleviate margin pressure. Coal price has been a wildcard so far as the recent surge has eliminated the benefits enjoyed by cement producers. Approximately 40% of INTP’s cash cost is for energy, while c.70% of its COGS has a direct link with USD. Considering this, we expect INTP’s cash cost per tonne to increase by 6.6% CAGR between 2015 and 2018. Low capacity utilisation rate will not pressure SG&A expenses (as % of revenue) further. Given the additional 4.4m tonnes capacity which came onstream in 1H16, INTP’s utilisation rate is expected to drop further to 72% in 2016 before rebounding to 74% and 78%, respectively, in 2017 and 2018. In that period, SG&A expenses will stay at around 16.8%-16.9% of revenue (vs 15% average in the past decade).

Domestic Sales Vol ('000 tones)

Domestic ASP/tonne (in Rp)

EBITDA margin (%)

Revenue Trend

Market share trend in domestic market

Source: Company, DBS Vickers

25%

26%

27%

28%

29%

30%

31%

32%

33%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FY16F FY17F FY18F


Company Guide


Balance Sheet:

Strong balance sheet for future expansion. INTP’s balance sheet has been impeccable with near-zero interest-bearing debt since 2008. Strong operational cash flow generation and an abundant cash position will allow INTP to self-finance its future capex. Share Price Drivers:

Positive progress in nationwide infrastructure development. Good progress and faster infrastructure budget absorption should imply better cement demand and improvement in INTP’s utilisation rate and subsequently its profitability. Cement sales. Monthly cement sales data released by the Indonesia Cement Association (ASI) is a leading indicator of INTP’s stock price direction. High dividend yield. We expect INTP to continue delivering a high dividend payout, possibly offering c.4% yield annually. Key Risks:

Further price control by government. The new government surprised the market in early 2015 by instructing state-owned cement producers to cut cement prices by 4-5% per bag. Given the competitive market, other producers had to follow suit or risked losing their market share. Further price regulation by the government will negatively affect cement producers’ profitability. Much heralded infrastructure projects' slower-than-expected rollouts. Despite gallant efforts by the government to speed up the process, infrastructure development realisation has been slower than the street's lofty expectations. Slower execution will directly affect cement demand growth and subsequently negatively affect INTP’s utilisation and profitability. Competition intensifies in Java. INTP’s dominance in Java (particularly West Java) continues to be under threat as new players start production. Its market leader status in Java has been snatched by Semen Indonesia (SMGR IJ) since 2014. Company Background

Indocement (INTP) is the most profitable cement producer (highest margins) in the sector. It sells cement under the “Tiga Roda” brand, arguably the most popular brand in Indonesia. Its sales volume is concentrated in Java (over 72%). The company registers higher margins because of its centralised production facilities and premium pricing, and a profitable Ready Mix Cement (RMC) business.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Rpbn


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Domestic Sales Vol ('000 18,189 16,784 16,607 17,166 18,029 Domestic ASP/tonne (in Rp) 997,104 953,732 925,120 943,622 971,931 EBITDA margin (%) 33.8 33.6 30.5 29.3 29.2

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Cement 18,293 16,220 15,817 16,661 17,995 Ready Mix Concrete 2,819 2,549 2,253 2,677 3,180 Aggregates 135 120 133 149 167 Other Businesses (1,251) (1,090) (951) (1,115) (1,308) Total 19,996 17,798 17,252 18,372 20,034 Operating profit (Rpbn) Cement 5,930 5,012 4,112 4,204 4,566 Ready Mix Concrete 43.0 38.6 0.0 53.5 63.6 Aggregates 2.20 6.00 26.7 22.4 25.1 Other Businesses 0.0 0.0 0.0 0.0 0.0 Total 5,975 5,057 4,139 4,280 4,655 Operating profit Margins

Cement 32.4 30.9 26.0 25.2 25.4 Ready Mix Concrete 1.5 1.5 0.0 2.0 2.0 Aggregates 1.6 5.0 20.0 15.0 15.0 Other Businesses 0.0 0.0 0.0 0.0 0.0 Total 29.9 28.4 24.0 23.3 23.2

Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 19,996 17,798 17,252 18,372 20,034 Cost of Goods Sold (10,890) (9,889) (10,207) (10,984) (12,014) Gross Profit 9,106 7,909 7,045 7,387 8,021 Other Opng (Exp)/Inc (3,227) (2,880) (2,906) (3,108) (3,366) Operating Profit 5,880 5,029 4,139 4,280 4,655 Other Non Opg (Exp)/Inc 121 27.5 35.8 44.5 55.4 Associates & JV Inc 24.5 25.3 26.3 27.4 28.5 Net Interest (Exp)/Inc 993 563 469 498 426 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 7,018 5,645 4,670 4,849 5,165 Tax (1,725) (1,289) (366) (1,107) (1,179) Minority Interest (3.1) 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 5,290 4,357 4,304 3,742 3,986 Net Profit before Except. 5,290 4,357 4,304 3,742 3,986 EBITDA 6,758 5,975 5,261 5,382 5,857 Growth Revenue Gth (%) 7.0 (11.0) (3.1) 6.5 9.1 EBITDA Gth (%) (0.4) (11.6) (12.0) 2.3 8.8 Opg Profit Gth (%) (1.6) (14.5) (17.7) 3.4 8.8 Net Profit Gth (Pre-ex) (%) 5.6 (17.6) (1.2) (13.0) 6.5 Margins & Ratio Gross Margins (%) 45.5 44.4 40.8 40.2 40.0 Opg Profit Margin (%) 29.4 28.3 24.0 23.3 23.2 Net Profit Margin (%) 26.5 24.5 24.9 20.4 19.9 ROAE (%) 22.3 18.0 17.0 13.9 14.2 ROA (%) 19.1 15.4 14.8 12.1 12.4 ROCE (%) 17.9 15.3 14.5 11.7 12.3 Div Payout Ratio (%) 93.9 35.1 70.0 70.0 70.0 Net Interest Cover (x) NM NM NM NM NM


Declining margins to continue

Cement continues to contribute more than 90% of revenue


Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Revenue 4,547 4,011 4,912 3,929 3,813 Cost of Goods Sold (2,481) (2,253) (2,755) (2,230) (2,277) Gross Profit 2,066 1,758 2,157 1,699 1,536 Other Oper. (Exp)/Inc (782) (629) (774) (621) (663) Operating Profit 1,285 1,129 1,383 1,078 873 Other Non Opg (Exp)/Inc (13.6) 15.9 (17.7) 2.60 14.1 Associates & JV Inc 5.50 6.00 6.30 6.50 5.90 Net Interest (Exp)/Inc 170 84.9 126 143 190 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,447 1,236 1,497 1,231 1,084 Tax (337) (273) (359) (273) 388 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 1,110 963 1,138 958 1,471 Net profit bef Except. 1,110 963 1,138 958 1,471 EBITDA 1,746 1,822 2,329 1,330 1,366 Growth Revenue Gth (%) 5.1 (11.8) 22.4 (20.0) (2.9) EBITDA Gth (%) 19.2 4.3 27.9 (42.9) 2.7 Opg Profit Gth (%) 4.2 (12.1) 22.5 (22.1) (19.0) Net Profit Gth (Pre-ex) (%) (3.2) (13.2) 18.2 (15.8) 53.6 Margins Gross Margins (%) 45.4 43.8 43.9 43.2 40.3 Opg Profit Margins (%) 28.3 28.1 28.2 27.4 22.9 Net Profit Margins (%) 24.4 24.0 23.2 24.4 38.6

Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 12,144 13,814 15,193 17,090 18,888 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 655 691 1,126 1,126 1,126 Cash & ST Invts 11,256 8,656 9,184 7,874 7,217 Inventory 1,666 1,521 1,818 1,956 2,139 Debtors 2,671 2,535 2,647 2,819 3,074 Other Current Assets 494 422 434 466 509 Total Assets 28,885 27,638 30,400 31,331 32,952 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 1,695 1,622 1,557 1,672 1,824 Other Current Liab 1,565 1,066 1,084 1,136 1,204 LT Debt 76.1 61.1 61.1 61.1 61.1 Other LT Liabilities 971 1,024 1,056 1,089 1,125 Shareholder’s Equity 24,577 23,866 26,643 27,372 28,739 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 28,885 27,638 30,400 31,331 32,952 Non-Cash Wkg. Capital 1,570 1,791 2,258 2,433 2,694 Net Cash/(Debt) 11,180 8,594 9,123 7,813 7,156 Debtors Turn (avg days) 47.4 53.4 54.8 54.3 53.7 Creditors Turn (avg days) 56.0 67.7 63.8 59.6 59.0 Inventory Turn (avg days) 57.2 65.0 67.1 69.7 69.1 Asset Turnover (x) 0.7 0.6 0.6 0.6 0.6 Current Ratio (x) 4.9 4.9 5.3 4.7 4.3 Quick Ratio (x) 4.3 4.2 4.5 3.8 3.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 4,476.9 4,360.2 4,090.8 4,908.9 4,908.9 Z-Score (X) 12.2 12.4 11.9 11.3 11.3


1Q is the seasonally weakest quarter

Near-zero debt since 2008

Strong net cash position to ensure high dividend payout


Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 7,018 5,645 4,670 4,849 5,165 Dep. & Amort. 878 946 1,121 1,102 1,202 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (41.0) (232) (467) (175) (261) Other Operating CF (784) (22.1) 0.0 0.0 0.0 Net Operating CF 5,347 5,049 4,958 4,670 4,927 Capital Exp.(net) (3,405) (2,665) (2,500) (3,000) (3,000) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 6.80 (32.0) (403) 33.6 35.3 Net Investing CF (3,398) (2,697) (2,903) (2,966) (2,965) Div Paid (3,313) (4,968) (1,527) (3,013) (2,620) Chg in Gross Debt (53.1) (25.3) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (3,366) (4,993) (1,527) (3,013) (2,620) Currency Adjustments 77.3 40.3 0.0 0.0 0.0 Chg in Cash (1,340) (2,601) 528 (1,310) (658) Opg CFPS (Rp) 1,464 1,434 1,474 1,316 1,409 Free CFPS (Rp) 528 648 668 454 523


Target Price & Ratings History

Source: DBS Vickers

Analyst: Edward Tanuwijaya

Strong operational cash flow to cover future expansion capex

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

FULLY VALUED Last Traded Price ( 29 Sep 2016): Rp10,575 (JCI : 5,432.00) Price Target 12-mth: Rp9,150 (-13% downside) (Prev Rp8,200) Potential Catalyst: Regulations restricting cement expansion Where we differ: Having one of the lowest estimates in the street

Analyst

Edward Tanuwijaya +62 2130034932 [email protected]

What’s New 8M16 domestic sales volume grew slower than

industry

Remains the leader in important markets –

beneficiary of geographical diversification

Cut FY16/17F earnings by 15.3%/15.7%

Reiterate FULLY VALUED call with Rp9,150 TP

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 26,948 26,970 28,876 31,387 EBITDA 7,427 6,476 6,750 7,312 Pre-tax Profit 5,851 5,124 5,261 5,741 Net Profit 4,522 3,913 4,019 4,390 Net Pft (Pre Ex.) 4,522 3,913 4,019 4,390 Net Pft Gth (Pre-ex) (%) (18.8) (13.4) 2.7 9.2 EPS (Rp) 762 660 678 740 EPS Pre Ex. (Rp) 762 660 678 740 EPS Gth Pre Ex (%) (19) (13) 3 9 Diluted EPS (Rp) 762 660 678 740 Net DPS (Rp) 305 264 271 296 BV Per Share (Rp) 4,454 4,809 5,223 5,692 PE (X) 13.9 16.0 15.6 14.3 PE Pre Ex. (X) 13.9 16.0 15.6 14.3 P/Cash Flow (X) 8.6 12.2 11.5 10.6 EV/EBITDA (X) 8.5 10.0 9.5 8.3 Net Div Yield (%) 2.9 2.5 2.6 2.8 P/Book Value (X) 2.4 2.2 2.0 1.9 Net Debt/Equity (X) CASH 0.0 0.0 CASH ROAE (%) 17.9 14.2 13.5 13.6 Earnings Rev (%): (15) (16) N/A Consensus EPS (Rp): 734 795 878 Other Broker Recs: B: 16 S: 4 H: 13

Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P

Holding down the fort Reiterate FULLY VALUED call. Considering its muted 8M16 sales achievement, we cut our FY16/17F domestic sales volumes by 2.7%/3.9% to 26.5m/27.9m tonnes. Coupled with the declining ASP to defend market share due to fierce competition in certain areas, this resulted in 7.2%/9.1% cut in our FY16/17F revenue estimate. The recent surge in Newcastle benchmark coal should result in more depressed margins as fuel cost made up 20% of COGS. All in, we slash our earnings estimates further by 15.3%/15.7% for FY16/17F. 8M16 sales remain uninspiring. Despite the 64.8% m-o-m surge in volume sales in Aug to 2.5m tonnes, SMGR’s 8M16 sales volume grew by just 2.9% y-o-y to 16.2m tonnes. SMGR’s nationwide market share stabilised at the 41.5% range after dropping to 40.7% early this year (vs average of 43% between 2013 and 2015). Two out of three SMGR’s main markets (Sumatra and Sulawesi) remain the palpable growth areas. Sulawesi (8.7% of total domestic demand) and Sumatra (21.5% of total domestic demand) grew 22.1% and 8.7% y-o-y, respectively. Meanwhile, the main market for Indonesia’s domestic demand Java (54.5% of total domestic demand) experienced stagnation (just 2.3% y-o-y growth). Remains the market leader in important areas. SMGR (with its three established brands) currently leads in the domestic cement market with 41.5% market share, given its long and strong presence in three key regions – Java, Sumatra and Sulawesi – which account for c.85% of domestic cement sales. Each brand has quite substantial market share positioning in its area of coverage. Valuation:

Our target price of Rp9,150 is pegged to 13.5x FY17F EPS, the average of its 10-year mean forward PE (similar level it traded at in 2004 when utilisation level was low). Key Risks to Our View:

Regulations restricting cement expansion in Indonesia due to the oversupply situation. This would cause significant delays in new players’ greenfield cement plants and subsequently reduce the severity of competition from new players in INTP’s strongholds, and help lift utilisation rates. Recovery in property presales. Property presales have been lethargic since early 2015 after a 4-year boom (2010-2013). A sharp recovery in property presales would pose an upside risk to our cement volume sales assumptions as the property sector remains the major cement consumer in Indonesia. At A Glance Issued Capital (m shrs) 5,932 Mkt. Cap (Rpbn/US$m) 62,726 / 4,820 Major Shareholders (%) Govt. of Indonesia 51.0

Free Float (%) 49.0 3m Avg. Daily Val (US$m) 12.0 ICB Industry : Industrials / Construction & Materials


Indonesia Company Guide

Semen Indonesia Version 3 | Bloomberg: SMGR IJ | Reuters: SMGR.JK Refer to important disclosures at the end of this report


Company Guide

Semen Indonesia

SMGR: Domestic cement sales volume

Source: Company, DBS Vickers Note: YTD achievement in FY16 is as of 8M16.

SMGR: EV/tonne getting closer to replacement cost



FY15A FY16F FY17F

Domestic volume Now 25,969 26,527 27,903

('000 tonnes) Prev 27,275 29,034

Chg (%) -2.7% -3.9%

Revenue Now 26,948 26,970 28,876

in Rpbn Prev 29,066 31,761

Chg (%) -7.2% -9.1%

GP margin Now 39.5% 38.1% 38.0%

Prev 38.8% 37.9%

EBITDA margin Now 27.6% 24.0% 23.4%

Prev 25.8% 24.6%

Operational profit Now 5,899 5,128 5,307


Chg (%) -15.0% -14.7%

Net profit Now 4,521 3,913 4,019


Chg (%) -15.3% -15.7%

TP Now 9,150

in Rp/sh Prev 8,200

Chg (%) 12%

Recommendation Now FULLY VALUED

Prev FULLY VALUED

Source: DBS Vickers

0

5,000

10,000

15,000

20,000

25,000

30,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FY16F FY17F FY18F



'000 tonnes

-2SD, 14.0

-1SD, 124.1

Ave, 234.3

+1SD, 344.4

+2SD, 454.6

0

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Company Guide

Semen Indonesia

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Strong presence in three regions to drive top-line. SMGR leads in the domestic cement market with 43% market share, given its long and strong presence in three key regions – Java, Sumatra and Sulawesi – which account for c.85% of domestic cement sales. We expect SMGR’s sales volume to expand at a 4.4% CAGR over 2015-2018F. This is in line with our industry demand forecast, which expects modest growth (in line with Indonesia’s real GDP growth) for the next three years as the country is entering a normal growth state. Limited price upside because of competition. We do not expect cement prices to rise significantly going forward as incumbents (including INTP) would be forced to defend their market share from new players, which are willing to sacrifice margins to grab market share. The skewed supply-demand imbalance will also see the utilisation rate of incumbents remaining low. We forecast just 1% CAGR in ASP/tonne between 2015 and 2018F. Shift to bulk segment will pressure margins. Accelerating the rollout of infrastructure projects from next year onwards and a stagnant property market should see cement players (including SMGR) experience stronger growth in the bulk segment than the more profitable bag cement segment. Cost savings from efficiency fail to alleviate margin pressure. Coal price has been a wildcard so far as the recent surge has eliminated the benefits enjoyed by cement producers Approximately 40% of INTP’s cash cost is for energy, while c.65% of its COGS has a direct link with USD. Considering this, we expect SMGR’s cash cost per tonne to increase by 6.1% CAGR between 2015 and 2018. In addition, exposure to foreign debt taken for expansion in Vietnam would also directly raise interest expense and reduce earnings by 0.5% if the IDR depreciates by another 10% against the USD. Low capacity utilisation rate will not pressure SG&A expenses (as % of revenue) further. In anticipation of 6m tonnes of effective capacity coming onstream until 2017, we expect SMGR’s utilisation rate to continue to drop from 90% in 2014 to 74.7% in 2017 before rebounding to 78.7% in 2018. In that period, SG&A expenses are expected to stay at 19.5% of revenue (vs 16.7% average in the past decade).

Domestic Sales Volume

Domestic ASP/tonne

EBITDA margin

Revenue Trend

Market share trend in domestic market


40%

41%

42%

43%

44%

45%

46%

47%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FY16F FY17F FY18F


Company Guide

Semen Indonesia

Balance Sheet:

Exposure to USD debt. SMGR has exposure to foreign debt which it took on to expand into Vietnam in 2013. As of end-Dec 2015, foreign debt made up about one-third of SMGR’s total long-term debt. Further weakness in the IDR will inflate SMGR’s debt position. Reasonably strong balance sheet provides buffer for future expansion. SMGR has been in a net cash position in the past decade (except in 2012 when it took on new loans for the TLCC acquisition). The aggressive expansion plan starting from 2015 should push SMGR into a net debt position but it is still very low (i.e. less than 10% net gearing). Share Price Drivers:

Positive progress in nationwide infrastructure development. Good progress and faster infrastructure budget absorption should imply better cement demand and improvement in SMGR’s utilisation rate and subsequently its profitability. Cement sales. Monthly cement sales data released by the Indonesia Cement Association (ASI) is a leading indicator of SMGR’s stock price direction. Expect lower dividend payout. SMGR has distributed 45-55% of net profits over 2006-2013. Following recent talk of cutting dividends from state-owned enterprises (SOE) to spur infrastructure development, we expect lower dividend payouts and yields going forward. Key Risks:

Further price control by government. The new government had surprised the market early this year by instructing state-owned cement producers to cut cement prices by 4-5% per bag. Further price regulations could hurt profitability. Slower-than-expected much heralded infrastructure project rollout. Despite gallant efforts by the government to speed up the process, project rollouts have been slower than the street's lofty expectations. Slower execution will directly affect cement demand growth, and consequently, hurt SMGR’s utilisation and profitability. Additional risks from overseas expansion. SMGR’s vision to expand overseas presents potential country and political risks. SMGR has expanded into Vietnam (after acquiring a stake in Thang Long Cement Company in 2013) and is eyeing neighbouring countries such Myanmar and Bangladesh. Company Background

Semen Indonesia (SMGR) is the largest cement producer in Indonesia with over 40% market share. It has production facilities on three key islands (Java, Sumatra and Sulawesi) and solid distribution channels, which enables it to command high market shares throughout Indonesia.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Rpbn


Company Guide

Semen Indonesia

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Domestic Sales Volume 26,354 25,969 26,527 27,903 29,526 Domestic ASP/tonne 947,077 984,233 964,548 983,839 1,013,354 EBITDA margin 30.7 27.6 24.0 23.4 23.3

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Cement 26,335 25,958 25,930 27,784 30,241 Others 652 990 1,040 1,091 1,146 Total 26,987 26,948 26,970 28,876 31,387 Operating profit (Rpbn) Cement 7,078 5,751 4,972 5,143 5,570 Others (124) 149 156 164 172 Total 6,954 5,899 5,128 5,307 5,742 Operating profit Margins

Cement 26.9 22.2 19.2 18.5 18.4 Others (19.0) 15.0 15.0 15.0 15.0 Total 25.8 21.9 19.0 18.4 18.3

Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 26,987 26,948 26,970 28,876 31,387 Cost of Goods Sold (15,388) (16,302) (16,699) (17,903) (19,377) Gross Profit 11,599 10,646 10,270 10,973 12,009 Other Opng (Exp)/Inc (4,645) (4,747) (5,142) (5,666) (6,267) Operating Profit 6,954 5,899 5,128 5,307 5,742 Other Non Opg (Exp)/Inc 202 46.2 100 100 100 Associates & JV Inc 31.9 34.3 38.4 43.1 48.2 Net Interest (Exp)/Inc (96.8) (129) (142) (189) (149) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 7,091 5,851 5,124 5,261 5,741 Tax (1,517) (1,326) (1,161) (1,192) (1,301) Minority Interest (7.7) (4.0) (50.0) (50.0) (50.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 5,566 4,522 3,913 4,019 4,390 Net Profit before Except. 5,566 4,522 3,913 4,019 4,390 EBITDA 8,295 7,427 6,476 6,750 7,312 Growth Revenue Gth (%) 10.1 (0.1) 0.1 7.1 8.7 EBITDA Gth (%) 2.4 (10.5) (12.8) 4.2 8.3 Opg Profit Gth (%) (0.3) (15.2) (13.1) 3.5 8.2 Net Profit Gth (Pre-ex) (%) 3.6 (18.8) (13.4) 2.7 9.2 Margins & Ratio Gross Margins (%) 43.0 39.5 38.1 38.0 38.3 Opg Profit Margin (%) 25.8 21.9 19.0 18.4 18.3 Net Profit Margin (%) 20.6 16.8 14.5 13.9 14.0 ROAE (%) 24.7 17.9 14.2 13.5 13.6 ROA (%) 17.1 12.5 10.0 9.6 9.8 ROCE (%) 19.9 15.0 12.1 11.6 11.7 Div Payout Ratio (%) 40.0 40.0 40.0 40.0 40.0 Net Interest Cover (x) 71.8 45.8 36.1 28.1 38.4


Cement contributes 98% of SMGR’s revenue

Expect margins to decline as competition intensifies


Company Guide

Semen Indonesia

Quarterly / Interim Income Statement (Rpbn)

FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Revenue 6,300 6,475 7,833 6,021 6,449 Cost of Goods Sold (3,854) (3,967) (4,700) (3,596) (3,887) Gross Profit 2,446 2,508 3,133 2,425 2,563 Other Oper. (Exp)/Inc (1,137) (1,199) (1,333) (1,191) (1,233) Operating Profit 1,309 1,309 1,800 1,234 1,330 Other Non Opg (Exp)/Inc (4.5) 58.1 (15.4) 23.4 27.8 Associates & JV Inc 6.50 7.90 13.2 10.5 5.70 Net Interest (Exp)/Inc (13.8) (70.5) (49.2) (24.5) (32.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,297 1,304 1,749 1,243 1,331 Tax (297) (290) (432) (193) (390) Minority Interest (4.8) (1.7) 6.20 (16.5) (9.8) Net Profit 995 1,013 1,323 1,034 931 Net profit bef Except. 995 1,013 1,323 1,034 931 EBITDA 2,034 2,417 3,329 1,646 2,134 Growth Revenue Gth (%) (0.6) 2.8 21.0 (23.1) 7.1 EBITDA Gth (%) 9.9 18.8 37.7 (50.6) 29.7 Opg Profit Gth (%) (11.7) 0.0 37.6 (31.5) 7.8 Net Profit Gth (Pre-ex) (%) (16.4) 1.8 30.6 (21.9) (9.9) Margins Gross Margins (%) 38.8 38.7 40.0 40.3 39.7 Opg Profit Margins (%) 20.8 20.2 23.0 20.5 20.6 Net Profit Margins (%) 15.8 15.6 16.9 17.2 14.4

Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 20,221 25,168 28,819 30,875 29,806 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 2,437 2,447 2,447 2,447 2,447 Cash & ST Invts 5,032 3,992 2,499 3,028 6,469 Inventory 2,812 2,409 2,468 2,646 2,863 Debtors 3,301 3,544 3,547 3,797 4,128 Other Current Assets 504 594 550 593 645 Total Assets 34,307 38,153 40,329 43,386 46,358 ST Debt 81.8 139 139 139 139 Creditor 3,250 3,978 4,086 4,387 4,754 Other Current Liab 1,954 2,483 2,242 2,340 2,458 LT Debt 3,315 3,156 3,310 3,464 3,119 Other LT Liabilities 606 958 958 958 958 Shareholder’s Equity 24,139 26,420 28,524 30,978 33,761 Minority Interests 960 1,021 1,071 1,121 1,171 Total Cap. & Liab. 34,307 38,153 40,329 43,386 46,358 Non-Cash Wkg. Capital 1,413 86.4 236 310 425 Net Cash/(Debt) 1,635 698 (949) (575) 3,212 Debtors Turn (avg days) 42.0 46.4 48.0 46.4 46.1 Creditors Turn (avg days) 78.9 89.3 95.9 93.9 93.7 Inventory Turn (avg days) 70.9 64.5 58.0 56.7 56.5 Asset Turnover (x) 0.8 0.7 0.7 0.7 0.7 Current Ratio (x) 2.2 1.6 1.4 1.5 1.9 Quick Ratio (x) 1.6 1.1 0.9 1.0 1.4 Net Debt/Equity (X) CASH CASH 0.0 0.0 CASH Net Debt/Equity ex MI (X) CASH CASH 0.0 0.0 CASH Capex to Debt (%) 75.3 156.9 145.0 97.1 15.4 Z-Score (X) 6.4 5.5 5.4 5.2 5.2


About one-third of LT debt is in foreign currency

High capex for expansion should push SMGR into net debt in 2016 and 2017


Company Guide

Semen Indonesia

Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 7,091 5,851 5,124 5,261 5,741 Dep. & Amort. 1,341 1,528 1,349 1,444 1,569 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (635) 1,135 (150) (73.1) (116) Other Operating CF 442 100 0.0 0.0 0.0 Net Operating CF 6,721 7,289 5,162 5,440 5,894 Capital Exp.(net) (2,558) (5,168) (5,000) (3,500) (500) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (323) (424) 0.0 0.0 0.0 Net Investing CF (2,881) (5,592) (5,000) (3,500) (500) Div Paid (2,427) (2,226) (1,809) (1,565) (1,608) Chg in Gross Debt (500) 0.0 154 154 (346) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (57.8) (432) 0.0 0.0 0.0 Net Financing CF (2,985) (2,658) (1,654) (1,411) (1,953) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 856 (962) (1,492) 529 3,441 Opg CFPS (Rp) 1,240 1,037 896 929 1,013 Free CFPS (Rp) 702 358 27.3 327 909


Target Price & Ratings History

Source: DBS Vickers

Analyst: Edward Tanuwijaya

Strong operational cash flow to cover future capex

Industry Focus


DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

* Share price appreciation + dividends

Completed Date: 30 Sep 2016 07:20:59 Dissemination Date: 30 Sep 2016 08:55:01

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Industry Focus


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