indonesia cement sector 30sep edited - dbs group semen indonesia : semen gresik was established in...

www.dbsvickers.com

ed-SGC / sa- MA

Incumbents under siege Supply-demand balance will remain skewed

Stiff competition ahead margins under pressure

Slashed earnings to reflect current situation

Maintain FULLY VALUED calls for INTP and SMGR with lower TPs

Skewed supply-demand balance. We forecast cement sales volume will drop by 3.5% this year (vs 2.6% growth previously) to 57.7m tonnes, despite encouraging demand recovery in August (8M15 domestic cement sales was 37.4m tonnes, down 1.3% y-o-y). The correlation between domestic direct investment (DDI) in the tertiary sector and cement sales support our argument for weak cement sales in 4Q as well. And, given 19.3m tonnes expected additional design capacity coming online by 2017, utilisation is expected to slump further to 66% (back to 2004 level).

Stiff competition, continued shift to bulk segment will pressure margins. The entry of new players is turning up the heat on the Big 3 cement producers, by attacking the more vulnerable bulk segment where there is minimal product differentiation, and pricing point is cheaper (c.5%) than bag cement. The increasing share of bulk segment sales and the challenging demand & supply situation, especially in the incumbents stronghold regions, will force the incumbents to sacrifice margins to either defend or expand market share in the long run. Also, the pricing behavior of foreign players has been fluid with Anhui Conch (in Kalimantan) being the most disruptive thus far.

Slashed earnings, maintain FULLY VALUED calls (with lower TPs) for INTP and SMGR. We slashed FY15-17F earnings for INTP and SMGR by 15.9%-23.8% after reflecting YTD domestic cement demand, a slower overall economy, and more intense competition and lower margins going forward. We now have one of the lowest estimates in the street. We also slashed target prices, pegging them to -1SD of mean forward PE, similar to 2004 levels when industry utilisation was low. Current valuation is near the sectors lows as cement producers stocks have dipped 28-54% YTD, however de-rating may continue due to shifts in competitive landscape and threat from new entrants.

JCI : 4,120.50

Analyst Edward Ariadi Tanuwijaya +6221 3003 4932 [email protected] Tjen San Chong +603 2604 3972 [email protected]

STOCKS

Source: DBS Vickers Indocement Tunggal P. : Indocement was established in 1975. The expanded heavily in the 90s, prior to Heidelberg Cement Group becoming the majority shareholder in 2001. The company trades cement product under Tiga Roda brand.

Semen Indonesia : Semen Gresik was established in 1957 as state-owned cement producer before changing its brand name to Semen Indonesia recently. In 1995 the company completed an acquisition of Semen Padang and Semen Tonasa. It is currently the largest player in the market with more than 40% market share.

Domestic cement demand trend

0

10

20

30

40

50

60

70

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

2017

Fm tonnes

5% CAGR

11% CAGR

3% CAGR

Source: Indonesia Cement Association (ASI), DBS Vickers

DBS Group Research . Equity 29 Sep 2015

Indonesia Industry Focus

Indonesia Cement Sector Refer to important disclosures at the end of this report

Price Mkt Cap Target Performance (%)

Rp US$m Price Rp 3 mth 12 mth Rating

Indocement 16,625 4,164 14,600 (19.0) (26.5) FULLY VALUEDSemen Indonesia 9,150 3,693 7,800 (21.5) (40.7) FULLY VALUED

Industry Focus

Indonesia Cement Sector

Page 2

Supply-demand balance will remain skewed August domestic cement sales jumped 56.3% m-o-m to 5.3m tonnes, taking 8M15 domestic cement sales to 37.4m tonnes, down 1.3% y-o-y. Although this is mostly driven by the low base effect in July (Lebaran period), the surge in cement sales in August has breathed some positive sentiment into the sector. Despite the encouraging August data, we are still not convinced there will be a sharp recovery in domestic demand the rest of the year. The expected weak GDP growth and flat property presales this year have contributed to the declining cement demand thus far. The long-term multiplier effect from the much heralded infrastructure development cycle remains a key positive catalyst. But, volumes will not surge in the near term. For this year, we forecast domestic demand for cement will decline by 3.5% y-o-y to 57.7m tonnes. This is premised on the accelerating rollout of infrastructure projects, aas well as more high-rise projects by developers, from next year onwards. We forecast 12%/14% growth in bulk cement sales for FY16/17F, but are sticking to only 4%/5% growth for bag segment (slower than GDP growth assumption, which is line with the post-2013 trend). Based on the above growth assumptions, domestic cement demand would reach 61m tonnes (+5.7% y-o-y) in FY16 and 65.3m tonnes (+7.2% y-o-y) in FY17. These imply domestic cement demand will continue to grow but at a slower rate (3% CAGR) for the next three years after experiencing 10.1% growth between 2010 and 2014. Domestic cement demand (historical and forecast)

0

10

20

30

40

50

60

70

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

2017

F

m tonnes

5% CAGR

11% CAGR

3% CAGR


Channel checks suggests 19.3m tonnes of new capacity will come online between now and 2017. As a result, we expect industry utilisation rate to drop from 86% in 2014 to 66% in 2017, similar to 2004 levels. Between 2004 and 2010, domestic cement demand expanded at 5.2% CAGR, matching Indonesias average real GDP growth for the period. The presence of new foreign players has also added to the challenges faced by incumbents. Refer to APPENDIX for Indonesia cement demand, supply and utilisation rate trends. Our recent study revealed that growth in domestic direct investment (DDI) in the tertiary sector is a relatively good indicator of the direction of cement demand for the next one or two quarters. The chart implies that 4Q15 cement demand growth will remain slow, suggesting full year sales would meet our FY15 domestic volume forecast. Correlation between DDI tertiary sector and cement sales

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-40%

-20%

0%

20%

40%

60%

80%

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3 period moving average DDI Tertiary sector growth (LHS)

3 period moving average cement sales growth (RHS)

Source: CEIC, Indonesia Cement Association (ASI), DBS Vickers

Industry Focus


Page 3

Can the incumbents hold the fort? For over a decade, the Big 3 cement producers have commanded more than 88% market share of the domestic cement market. The emergence of new players such as Thailands Siam Cement (SCG), Chinas Anhui Conch and Semen Merah Putih (part of Wilmar group) is a substantial threat to the incumbents. There has not been material impact in the bag cement segment, which currently accounts for 77% of total domestic cement sales. However, the incumbents are feeling the heat, and gradually losing market share, in the bulk cement segment; the new players are attacking this segment because there are less stringent entry barriers (i.e. little differentiation between products). Market share of incumbents in bag segment

42.8%

28.0%

14.9%

14.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2006 2007 2008 2009 2010 2011 2012 2013 2014 3M15 6M15 8M15

SMGR INTP SMCB Others

Source: Indonesia Cement Association (ASI), DBS Vickers Steeper declines in market share in the bulk segment

42.7%

29.2%

11.5%

16.6%

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 3M15 6M15 8M15

SMGR INTP SMCB Others


The Java and Kalimantan markets are facing the biggest supply risk with the emergence of prominent new players such as Anhui Conch, Siam Cement and Semen Merah Putih. These markets also registered steeper declines (y-o-y) than other regions (i.e. Sumatra, Sulawesi and other East Indonesia area). Therefore, we expect the situation to hurt both INTP and SMGR. Market share of incumbents in Java

38.6%

37.2%

17.7%

15%

20%

25%

30%

35%

40%

45%

1M06

7M06

1M07

7M07

1M08

7M08

1M09

7M09

1M10

7M10

1M11

7M11

1M12

7M12

1M13

7M13

1M14

7M14

1M15

7M15

SMGR INTP SMCB

Source: Indonesia Cement Association (ASI), DBS Vickers Market share of incumbents in Kalimantan

52.0%

27.8%

9.8%

0%

10%

20%

30%

40%

50%

60%

70%

1M06

7M06

1M07

7M07

1M08

7M08

1M09

7M09

1M10

7M10

1M11

7M11

1M12

7M12

1M13

7M13

1M14

7M14

1M15

7M15

SMGR INTP SMCB

Source: Indonesia Cement Association (ASI), DBS Vickers 8M15 cement sales: y-o-y decline by region

1.3%

0.3%

-0.6%

-1.2%

-8.6%

-10% -8% -6% -4% -2% 0% 2%

Others

Sulawesi

Sumatra

Java

Kalimantan


Industry Focus


Page 4

Demand distribution by region

60.3% 57.7% 55.7% 55.1% 53.8% 55.3% 55.3% 56.4% 56.3% 55.6% 56.7% 56.4%

5.2% 5.8% 6.4% 6.4% 6.4% 7.0% 7.4% 7.6% 7.6% 8.0% 7.2% 7.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 3M15 6M15 8M15

Java Sumatra Kalimantan Sulawesi Others

Source: Indonesia Cement Association (ASI), DBS Vickers Continued shift to bulk cement adding pressure on margins The slowdown in property presales this year and accelerating infrastructure development has led to the increasing share of bulk segment in the domestic cement market. Infrastructure spending as % of GDP

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

Infrastructure Investment (LHS) % of GDP (RHS)Rp tr

Source: JICA presentation (based on state budget data), DBS Vickers Property presales slowing down

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2009 2010 2011 2012 2013 2014 2015F

+35% CAGR

flattishRpbn

Source: Companies, DBS Vickers

8M15 bulk segment sales grew 6% y-o-y to 8.4m tonnes, which helped to offset the slack in bag segment sales (which fell 3.3% y-o-y in the period). The share of bulk cement sales has risen to a record high of 23% in 8M15, from a low of 15.6% in 2008. Growth in the bulk segment was more than double that for bag cement between 2010 and 2014. Hence, we estimate bulk cement will account for 27% of total domestic sales by 2017. Share of Bulk and Bag cement sales in Indonesia

84% 83% 84% 84% 84% 81% 80% 79% 78% 77% 76% 75% 73%

16% 17% 16% 16% 16% 19% 20% 21% 22% 23% 24% 25% 27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006

2007

2008

2009

2010

2011

2012

2013

2014

8M15

2015

F

2016

F

2017

F

Bag Bulk

Source: Indonesia Cement Association (ASI), DBS Vickers As mentioned earlier, the incumbent cement producers are facing more pressure in the bulk segment because there is little product differentiation, making it a more competitive market. This has also partly resulted in bulk cement being c.5% cheaper than bag cement. And, coupled with the declining utilisation rate, these will lead to further margin erosion going forward. EBITDA margins vs utilisation rate

20%

25%

30%

35%

40%

45%

60%

65%

70%

75%

80%

85%

90%

95%

00%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

F

2016

F

2017

F

Capacity utilisation rate (LHS)

INTP's EBITDA margin (RHS)

SMGR's EBITDA margin (RHS)

Source: Bloomberg Finance L.P., DBS Vickers

Industry Focus


Page 5

The pricing behaviour of foreign players has been fluid with Anhui Conch (new plant in East Kalimantan) being the most disruptive thus far. The price points for Anhui Conchs products are generally 10-15% lower than INTP and SMGRs products sold in the same regions. We need to bear in mind that Anhui Conch has not entered Java market (which represents 56% of total domestic cement demand). There is further risk of margin compression as the benefits of lower coal and oil prices are offset by a weaker IDR (c.60% of cost is transacted in USD) and electricity tariff hike. Cash cost breakdwon

16.6% 18.7%

14.9% 14.2%

23.0% 17.5%

7.2%7.3%

38.2% 42.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SMGR INTP

Coal/fuel Electricity Distribution, transportation and handling Direct labor Others

Source: Companies, DBS Vickers Energy prices & USD/IDR trend

90

95

100

105

110

115

0

20

40

60

80

100

120

140

160

180

Jan

-14

Feb

-14

Mar

-14

Ap

r-14

May

-14

Jun

-14

Jul-1

4

Au

g-1

4

Sep

-14

Oct

-14

No

v-14

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-15

May

-15

Jun

-15

Jul-1

5

Au

g-1

5

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

Source: State-owned electricity company (PLN), Ministry of Energy and Mineral Resources (ESDM), Bloomberg Finance L.P., DBS Vickers. Note: The indexing used Jan 2014 price as 100.

Industry Focus


Page 6

Slash forecast earnings; maintain cautious view on sector We revised down FY15/16/17F domestic sales volume for both INTP and SMGR by 8.4-11.2% after adjusting for the current domestic cement demand dynamics, a slower Indonesian economy ahead, and intense competition in the major regions. These led us to cut forecast revenues by 11.4-17.8% for those years. And, we adjusted for weaker margin expectations premised on cement producers wanting to maintain or gain market share as they fear utilisation rates would drop, and the benefits of low coal and oil prices are offset by an electricity tariff hike and weaker IDR. All in, we slashed FY15/16/17F earnings for INTP and SMGR by 15.9-23.8%, resulting is our earnings estimates being among the lowest in the street. We also cut target prices by 27% for INTP (to Rp14.600) and 35% for SMGR (to Rp7,800), pegged to -1SD of mean PE forward. Our target prices imply 12-14% downside risk for both counters. Therefore, we maintain our FULLY VALUED calls. Refer to APPENDIX for summary of changes to our assumptions and earnings projections. Further downside, but valuations are near record lows Indonesias cement stocks have tumbled 28-55% YTD, and their weighting in the JCI has fallen back to pre-2009 levels. More external pressure on the fragile sentiment in Asia markets (we have turned risk-off on Asian markets after the CNY revaluation) and still-high foreign shareholdings, should lead to a further de-rating of Indonesias cement stocks. At current valuation multiple, there is not significant gaps between SMGR and INTP. However, we prefer expsoure to SMGR for its more diversified demand spread throughout Indonesia islands (i.e. not just the Java island, which is the most lucrative market but with the stiffest competition going forward). In addition, the three brands under SMGR command 38%, 43% and 64% market share in Java, Sumatra and Sulawesi, respectively. INTP is currently trading at 13.3x FY16F PE (just below its mean forward PE) and 8.6x FY16F EV/EBITDA. These are close to trough valuations. The stock would be attractive enough to warrant accumulating if the stock price drops by another c.12% to trade at 11.7x FY16F PE (-1SD of mean forward PE). SMGR is currently trading at 12 x FY16F PE (at mean forward PE) and 7.5x FY16F EV/EBITDA. The stock had bottomed out recently at Rp7,200 (on 24 Aug) before recovering sharply to current levels.

Cement Producers: Stock performance YTD

-33.5%

-43.5%

-54.7%

-27.6%

-60%

-50%

-40%

-30%

-20%

-10%

0%

INTP SMGR SMCB SMBR

End 1Q15 End 2Q15 YTD

Source: Bloomberg Finance L.P, DBS Vickers. Note: YTD price is as of 23Sep2015 Cement Sector: Smaller weighting in the JCI

-

0.5

1.0

1.5

2.0

2.5

3.0 1Q

043Q

041Q

053Q

051Q

063Q

061Q

073Q

071Q

083Q

081Q

093Q

091Q

103Q

101Q

113Q

111Q

123Q

121Q

133Q

131Q

143Q

141Q

15Y

TD

INTP SMGR SMCB%

Source: Bloomberg Finance L.P, DBS Vickers Cement Stocks: Foreign ownership (as % of free float)

75.1%

76.5%

77.7%

70%

72%

74%

76%

78%

80%

82%

84%

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

INTP SMGR SMCB

Source: Indonesia Central Securities Depository (KSEI), Bloomberg Finance L.P, DBS Vickers

Industry Focus


Page 7

INTP PE Band

-2SD, 6.4

-1SD, 11.7

Ave, 17.0

+1SD, 22.3

+2SD, 27.6

4.0

9.0

14.0

19.0

24.0

29.0

34.0

39.0

Jan

-05

Jul-

05Ja

n-0

6Ju

l-06

Jan

-07

Jul-

07Ja

n-0

8Ju

l-08

Jan

-09

Jul-

09Ja

n-1

0Ju

l-10

Jan

-11

Jul-

11Ja

n-1

2Ju

l-12

Jan

-13

Jul-

13Ja

n-1

4Ju

l-14

Jan

-15

Jul-

15

Source: Bloomberg Finance L.P, DBS Vickers SMGR PE Band

-2SD, 6.9

-1SD, 10.2

Ave, 13.4

+1SD, 16.7

+2SD, 20.0

-

5.0

10.0

15.0

20.0

25.0

Jan

-05

Jul-

05Ja

n-0

6Ju

l-06

Jan

-07

Jul-

07Ja

n-0

8Ju

l-08

Jan

-09

Jul-

09Ja

n-1

0Ju

l-10

Jan

-11

Jul-

11Ja

n-1

2Ju

l-12

Jan

-13

Jul-

13Ja

n-1

4Ju

l-14

Jan

-15

Jul-

15

Source: Bloomberg Finance L.P, DBS Vickers JCI Index PE Band

Source: Bloomberg Finance L.P, DBS Vickers

INTP EV/EBITDA Band

-2SD, 5.7

-1SD, 7.9

Ave, 10.0

+1SD, 12.1

+2SD, 14.3

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jan

-05

Jul-

05Ja

n-0

6Ju

l-06

Jan

-07

Jul-

07Ja

n-0

8Ju

l-08

Jan

-09

Jul-

09Ja

n-1

0Ju

l-10

Jan

-11

Jul-

11Ja

n-1

2Ju

l-12

Jan

-13

Jul-

13Ja

n-1

4Ju

l-14

Jan

-15

Jul-

15

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

-2SD, 3.3

-1SD, 5.9

Ave, 8.5

+1SD, 11.1

+2SD, 13.7

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0 Ja

n-0

5Ju

l-05

Jan

-06

Jul-

06Ja

n-0

7Ju

l-07

Jan

-08

Jul-

08Ja

n-0

9Ju

l-09

Jan

-10

Jul-

10Ja

n-1

1Ju

l-11

Jan

-12

Jul-

12Ja

n-1

3Ju

l-13

Jan

-14

Jul-

14Ja

n-1

5Ju

l-15

Source: Bloomberg Finance L.P, DBS Vickers

Industry Focus


Page 8

APPENDIX Summary of assumptions changes

INTP SMGR FY15F FY16F FY17F FY15F FY16F FY17F

Domestic volume Now 16,742 17,614 18,732 25,042 26,464 28,330 ('000 tonnes) Prev 18,495 19,843 21,080 27,350 29,100 31,000

Chg (%) -9.5% -11.2% -11.1% -8.4% -9.1% -8.6% Revenue Now 18,573 20,286 22,375 25,698 27,877 30,603 in Rpbn Prev 21,340 24,134 27,224 28,990 32,134 35,811

Chg (%) -13.0% -15.9% -17.8% -11.4% -13.2% -14.5% GP margin Now 44.6% 44.2% 43.7% 39.4% 38.8% 38.2%

Prev 45.2% 44.1% 42.9% 41.7% 40.6% 39.4% EBITDA margin Now 32.0% 31.1% 30.1% 25.8% 25.4% 24.8%

Prev 33.7% 32.1% 30.3% 29.1% 28.3% 27.0% Operational profit Now 5,030 5,310 5,636 5,486 5,806 6,232 in Rpbn Prev 6,143 6,556 6,911 7,139 7,583 8,007

Chg (%) -18.1% -19.0% -18.5% -23.2% -23.4% -22.2% Net profit Now 4,481 4,590 4,796 4,294 4,530 4,880 in Rpbn Prev 5,330 5,611 5,913 5,565 5,941 6,332

Chg (%) -15.9% -18.2% -18.9% -22.8% -23.8% -22.9% TP Now 14,600 7,800 in Rp/sh Prev 20,000 12,000

Chg (%) -27% -35% Recommendation Now FULLY VALUED FULLY VALUED

Prev FULLY VALUED FULLY VALUED

Source: DBS Vickers Indonesia cement producers: demand, supply and utilisation rate dynamic

67%

96%

66%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-

20,000

40,000

60,000

80,000

100,000

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

Demand (000 tons) - LHS

Capacity (000 tons) - LHS

Utilization rate - RHS

'000 tonnes

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

Source: Cement producers, Indonesia Cement Association (ASI), DBS Vickers. Note: Utilisation rate is based on effective (operational) capacities.

Industry Focus


Page 9

Indonesia cement producers: historical and estimated additional design capacities

Company Location 2012 2013 2014 2015F 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 22,300 22,300 22,300

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

Central Java - - - - - -

18,600 18,600 20,500 24,900 24,900 24,900

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 81,800 97,450 101,100

Source: Cement producers, Indonesia Cement Association (ASI), DBS Vickers

Industry Focus


Page 10

Cement regional peers valuation

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

(%) ROE

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

Semen Indonesia SMGR IJ 9,150 3,698.6 12.6 12.0 8.1 7.5 25.8 25.5 20.0%

Indocement Tunggal INTP IJ 16,625 4,170.7 13.7 13.3 8.9 8.6 32.0 31.1 20.0%

Holcim Indonesia * SMCB IJ 990 517.0 23.5 14.3 9.0 nm 16.4 17.5 3.0%

Weighted average Indonesia 13.8 12.8 8.6 7.6 28.3 27.8 19.0%

Anhui Conch Cement 914 HK 24 15,044.8 10.9 9.7 6.6 5.9 30.5 30.8 10.0%

Asia Cement (China) Hldgs * 743 HK 2 458.9 6.7 4.9 5.9 nm 16.4 18.7 9.2%

China National Building Material 3323 HK 5 3,253.3 5.5 5.6 8.2 8.0 22.1 22.1 10.0%

China Shanshui Cement 691 HK 6 2,742.6 39.7 36.8 10.9 9.9 19.4 19.5 nm

West China Cement * 2233 HK 1 811.4 28.0 10.7 7.5 nm 28.0 33.7 4.4%

CR Cement * 1313 HK 4 3,051.5 7.8 7.7 6.0 nm 20.3 21.1 10.1%

Weighted average China 13.4 11.8 7.2 5.6 26.7 27.2 8.7%

Siam Cement SCC TB 456 15,059.9 12.1 11.2 7.5 7.0 21.9 22.6 20.0%

Weighted average Thailand 12.1 11.2 7.5 7.0 21.9 22.6 20.0%

Source: Bloomberg Finance L.P, DBS Vickers. Note: (*): not under our coverage, estimates are based on Bloomberg consensus numbers.

Industry Focus


Page 11

Stock Profiles Stock Profiles

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com ed: SGC / sa: MA

FULLY VALUED Last Traded Price: Rp16,625 (JCI : 4,120.50) Price Target : Rp14,600 (-12% downside) (Prev Rp20,000) Potential Catalyst: Rebound in property presales, better execution from nationwide infrastructure development and lower energy price Where we differ: Having one of the lowest estimates in the street Analyst Edward Ariadi Tanuwijaya +6221 3003 4932 [email protected] Tjen San Chong +603 2604 3972 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rp bn) 2014A 2015F 2016F 2017F Revenue 19,996 18,573 20,286 22,375 EBITDA 6,732 5,940 6,304 6,732 Pre-tax Profit 6,790 5,819 5,960 6,228 Net Profit 5,271 4,481 4,590 4,796 Net Pft (Pre Ex.) 5,271 4,481 4,590 4,796 Net Pft (ex. BA gains) N/A N/A N/A N/A EPS (Rp) 1,432 1,217 1,247 1,303 EPS Pre Ex. (Rp) 1,432 1,217 1,247 1,303 EPS Gth (%) 5 (15) 2 4 EPS Gth Pre Ex (%) 5 (15) 2 4 Diluted EPS (Rp) 1,432 1,217 1,247 1,303 Net DPS (Rp) 1,350 852 873 912 BV Per Share (Rp) 6,733 6,600 6,995 7,425 PE (X) 11.6 13.7 13.3 12.8 PE Pre Ex. (X) 11.6 13.7 13.3 12.8 P/Cash Flow (X) 11.5 10.9 11.3 10.7 EV/EBITDA (X) 7.4 8.9 8.6 8.3 Net Div Yield (%) 8.1 5.1 5.2 5.5 P/Book Value (X) 2.5 2.5 2.4 2.2 Net Debt/Equity (X) CASH CASH CASH CASH

ROAE (%) 22.1 18.3 18.3 18.1

Earnings Rev (%): (16) (18) (19) Consensus EPS (Rp): 1,338 1,431 1,543 Other Broker Recs: B: 19 S: 8 H: 8

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

THE RUNNER-UP Maintain FULLY VALUED call with lower TP. We cut FY15/16/17F domestic sales volumes by 9.5%/11.2%/11.1% after adjusting for YTD sales. We also forecast declining margin going forward given intensifying competition for market share and higher COGS (from US$-linked material and energy price in weakening IDR environment). All in, we slashed FY15/16/17F earnings by 15.9%/18.2%/18.9%, resulting in this being one of the lowest estimates in the street. YTD sales volume drops more than industry. INTPs 8M15 cement sales fell 7.5% y-o-y to 10.4m tonnes (industry volume fell 1.2%). INTPs main markets - Java and Kalimantan posted relatively larger declines than other regions. These regions account for 74% and 6.8% of INTPs domestic cement sales volume, respectively. Intense competition in Western Java will erode margins. We estimate 76% of the planned incoming capacity in 2015-2017 will be located in West Java. We expect new players to sacrifice margins to gain market share as they ramp-up utilisation rates. Therefore, our EBITDA margins are trending down for the next three years. INTP still commands the highest EBITDA margins in the sector. Valuation: Our target price of Rp14,600 is pegged to 11.7x FY16F EPS, at (-)1SD of 10-year mean forward PE (similar to 2004 levels when utilisation rates were depressed). Key Risks to Our View: Significant delays in new players greenfield cement plants. This would reduce competition in SMGRs strongholds, reduce the severity of competition from new players (better pricing power for incumbents), and lift utilisation rates. Recovery in property presales. We expect property presales to remain flat going forward after a 3-4 year boom (2010-2013). But a sharp recovery in property presales would be upside risk to our cement volume sales assumptions. The property sector remains the major cement consumer in Indonesia. At A Glance Issued Capital (m shrs) 3,681 Mkt. Cap (Rpbn/US$m) 61,200 / 4,164 Major Shareholders HC Indocement Gmbr (%) 64.1 Mekar Perkasa (%) 13.0 Free Float (%) 22.9 3m Avg. Daily Val (US$m) 2.4 ICB Industry : Industrials / Construction & Materials


Indonesia Company Guide

Indocement Tunggal P. Edition 1 Version 1 | Bloomberg: INTP IJ | Reuters: INTP.JK Refer to important disclosures at the end of this report

88

108

128

148

168

188

208

10,620.0

12,620.0

14,620.0

16,620.0

18,620.0

20,620.0

22,620.0

24,620.0

26,620.0

28,620.0

Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Relative IndexRp

Indocement Tunggal P. (LHS) Relative JCI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 13

Company Guide

Indocement Tunggal P.

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Domestic cement volume driving top line growth. We forecast industry demand will grow modestly (in line with Indonesias real GDP growth) for the next three years as the country is entering normal growth state. As the 2nd largest cement producer in the country, INTP should experience similar growth. In addition, we expect INTP to lose market share to new foreign players. We forecast INTPs sale volume will grow by 1% CAGR over 20142017F, a bearish stance considering that consensus is expecting mid-single-digit % growth for the period. Limited price upside because of competition. We do not expect cement prices to rise significantly going forward as incumbent players (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 utilisation rate of incumbent players remain depressed. We forecast only 1.3% CAGR in ASP/tonne between 2014 and 2017F; this is minimal compared to consensus expectations of mid-single-digit % growth for the period. Shift to bulk segment will pressure margins. Accelerating rollout of infrastructure projects from next year onwards 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. Weakening IDR leads to higher cash and financing cost. The benefits of lower coal and oil prices are largely offset by a weaker IDR against the USD, which inflates other cash cost components. Approximately 45% of INTPs cash cost is for energy, while c.70% of its COGS is transacted in USD. We expect SMGRs cash cost per tonne to increase by 5.2% CAGR, which would reduce EBITDA margins (see chart).

Low capacity utilisation rate will cap SG&A expenses (as % of revenue). In anticipation of 7m tonnes of effective capacity coming online in 2015 and 2016, we expect INTPs utilisation rate to drop from 93% in 2014 to 76% in 2017F. In that period, SG&A expenses are expected to stay at 17.5-18.5% of revenue (vs 16% 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

17,642 18,18916,742

17,61418,732

0

2,400

4,800

7,200

9,600

12,000

14,400

16,800

2013A 2014A 2015F 2016F 2017F

958,265997,104 977,162 1,006,477

1,036,671

0

211,500

423,000

634,500

846,000

2013A 2014A 2015F 2016F 2017F

36.333.7

32 31.1 30.1

0.0

7.4

14.8

22.2

29.6

37.0

2013A 2014A 2015F 2016F 2017F

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%20.0%

0

5,000

10,000

15,000

20,000

2013A 2014A 2015F 2016F 2017F

Rp bn

Total Revenue Revenue Growth (%) (YoY)

28%

29%

29%

30%

30%

31%

31%

32%

32%

33%

2006 2007 2008 2009 2010 2011 2012 2013 2014 FY15F FY16F FY17F


Company Guide


Balance Sheet: Strong balance sheet for future expansion. INTPs balance sheet has been impeccable with near-zero interest bearing debt since 2008. Strong operational cash flow generation and 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 lift cement demand, and improve INTPs utilisation rate, and hence, profitability. Cement sales. Monthly cement sales data released by the Indonesia Cement Association (ASI) is a leading indicator of INTPs stock price direction. High dividend yield. We expect INTP to continue pay high dividends, possibly offering c.5% yield annually. Key Risks: Further price control by government. The new government has surprised the market in early 2015 by instructing state-owned cement producers to cut cement price by 4-5% per bag. Given the competitive market, other producers have to follow suit or risked losing their market share. Further price regulation by government will negatively affected cement producers profitability. Slower than expected much heralded infrastructure projects roll-out. Despite the gallant effort from the government to speed up the process, infrastructure development realization has been slower than what the streets lofty expectations. Slower execution will directly affect cement demand growth and subsequently negatively affecting INTPs utilisation and profitability. Competition intensifies in Java. INTPs dominance in Java (particularly West Java) could be under threat once the new players start production. Its lead 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%). It 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)


0.6

0.6

0.6

0.7

0.7

0.7

0.7

0.7

0.8

0.8

0.8

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

Rp

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg:16x

+1sd:18.3x

+2sd:20.5x

1sd:13.7x

2sd:11.5x

8.7

10.7

12.7

14.7

16.7

18.7

20.7

22.7

Sep-11 Sep-12 Sep-13 Sep-14

(x)

Avg:3.69x

+1sd:4.11x

+2sd:4.53x

1sd:3.28x

2sd:2.86x

2.2

2.7

3.2

3.7

4.2

4.7

5.2


(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Domestic Sales Volume (m tonnes) 17.6 18.2 16.7 17.6 18.7 Domestic ASP/tonne (Rp) 958,265 997,104 977,162 1,006,477 1,036,671 EBITDA margin (%) 36.3 33.7 32.0 31.1 30.1 Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rp bn) Cement 17,046 18,293 16,541 17,918 19,618 Ready Mix Concrete 2,739 2,819 3,256 3,760 4,343 Aggregates 116 135 156 179 206 Other Businesses (1,209) (1,251) (1,379) (1,572) (1,791) Total 18,691 19,996 18,573 20,286 22,375 Operating profit (Rp bn) Cement 6,139 5,930 4,942 5,096 5,388 Ready Mix Concrete (86) 43 65 188 217 Aggregates 11 2 23 27 31 Other Businesses 0 0 0 0 0 Total 6,064 5,975 5,030 5,310 5,636 Operating profit Margins Cement 36.0 32.4 29.9 28.4 27.5 Ready Mix Concrete (3.1) 1.5 2.0 5.0 5.0 Aggregates 9.2 1.6 15.0 15.0 15.0 Other Businesses 0.0 0.0 0.0 0.0 0.0 Total 32.4 29.9 27.1 26.2 25.2 Income Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 18,691 19,996 18,573 20,286 22,375 Cost of Goods Sold (10,037) (10,910) (10,284) (11,316) (12,595) Gross Profit 8,655 9,087 8,290 8,969 9,780 Other Opng (Exp)/Inc (2,680) (3,233) (3,260) (3,659) (4,144) Operating Profit 5,975 5,854 5,030 5,310 5,636 Other Non Opg (Exp)/Inc 89 121 100 130 162 Associates & JV Inc 18 24 25 26 28 Net Interest (Exp)/Inc 513 790 664 494 403 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 6,595 6,790 5,819 5,960 6,228 Tax (1,583) (1,516) (1,338) (1,371) (1,433) Minority Interest (2) (3) 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 5,010 5,271 4,481 4,590 4,796 Net Profit before Except. 5,010 5,271 4,481 4,590 4,796 EBITDA 6,785 6,732 5,940 6,304 6,732 Growth Revenue Gth (%) 8.1 7.0 (7.1) 9.2 10.3 EBITDA Gth (%) 2.5 (0.8) (11.8) 6.1 6.8 Opg Profit Gth (%) 2.2 (2.0) (14.1) 5.6 6.1 Net Profit Gth (%) 5.2 5.2 (15.0) 2.4 4.5 Margins & Ratio Gross Margins (%) 46.3 45.4 44.6 44.2 43.7 Opg Profit Margin (%) 32.0 29.3 27.1 26.2 25.2 Net Profit Margin (%) 26.8 26.4 24.1 22.6 21.4 ROAE (%) 23.7 22.1 18.3 18.3 18.1 ROA (%) 20.3 19.0 15.7 15.7 15.5 ROCE (%) 20.5 18.4 15.3 15.8 15.8 Div Payout Ratio (%) 66.1 94.3 70.0 70.0 70.0 Net Interest Cover (x) NM NM NM NM NM


Expect margins to decline as competition intensify

Growing RMC business


Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 Revenue 4,999 4,668 5,829 4,328 4,547 Cost of Goods Sold (2,764) (2,524) (3,090) (2,400) (2,481) Gross Profit 2,235 2,144 2,739 1,928 2,066 Other Oper. (Exp)/Inc (774) (786) (944) (695) (782) Operating Profit 1,461 1,358 1,795 1,233 1,285 Other Non Opg (Exp)/Inc 91 9 45 43 (14) Associates & JV Inc 6 7 7 8 6 Net Interest (Exp)/Inc 215 180 177 183 170 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,773 1,554 2,025 1,466 1,447 Tax (390) (348) (470) (320) (337) Minority Interest (2) 0 0 0 0 Net Profit 1,380 1,206 1,555 1,146 1,110 Net profit bef Except. 1,380 1,206 1,555 1,146 1,110 EBITDA 1,684 1,571 2,026 1,465 1,285 Growth Revenue Gth (%) 11.1 (6.6) 24.9 (25.8) 5.1 EBITDA Gth (%) 16.1 (6.7) 29.0 (27.7) (12.3) Opg Profit Gth (%) 17.9 (7.0) 32.2 (31.3) 4.2 Net Profit Gth (%) 22.2 (12.6) 28.9 (26.3) (3.2) Margins Gross Margins (%) 44.7 45.9 47.0 44.5 45.4 Opg Margins (%) 29.2 29.1 30.8 28.5 28.3 Net Profit Margins (%) 27.6 25.8 26.7 26.5 24.4 Balance Sheet (Rp bn) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 9,305 12,144 14,734 17,540 20,243 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 456 655 655 655 655 Cash & ST Invts 12,595 11,256 8,378 6,871 5,562 Inventory 1,474 1,666 1,570 1,728 1,923 Debtors 2,519 2,671 2,481 2,710 2,989 Other Current Assets 259 494 473 523 585 Total Assets 26,607 28,885 28,290 30,025 31,956 ST Debt 0 0 0 0 0 Creditor 1,375 1,695 1,632 1,808 2,023 Other Current Liab 1,365 1,565 1,521 1,628 1,759 LT Debt 93 76 76 76 76 Other LT Liabilities 797 764 764 764 764 Shareholders Equity 22,947 24,785 24,298 25,751 27,334 Minority Interests 30 0 0 0 0 Total Cap. & Liab. 26,607 28,885 28,290 30,025 31,956 Non-Cash Wkg. Capital 1,511 1,570 1,371 1,525 1,714 Net Cash/(Debt) 12,502 11,180 8,302 6,795 5,486 Debtors Turn (avg days) 48.6 47.4 50.6 46.7 46.5 Creditors Turn (avg days) 53.5 55.9 64.8 60.8 60.8 Inventory Turn (avg days) 58.2 57.1 63.0 58.3 57.9 Asset Turnover (x) 0.8 0.7 0.6 0.7 0.7 Current Ratio (x) 6.1 4.9 4.1 3.4 2.9 Quick Ratio (x) 5.5 4.3 3.4 2.8 2.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 2,161.0 4,476.9 4,602.1 4,996.5 4,996.5 Z-Score (X) 15.5 15.8 15.3 14.4 13.4


1Q is the seasonally weakest quarter

Near-zero debt since 2008

Strong net cash position


Company Guide


Cash Flow Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 6,595 6,790 5,819 5,960 6,228 Dep. & Amort. 810 878 910 994 1,096 Tax Paid 0 0 0 0 0 Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. 160 (41) 199 (154) (189) Other Operating CF (563) (767) 0 0 0 Net Operating CF 5,419 5,345 5,590 5,430 5,704 Capital Exp.(net) (2,005) (3,405) (3,500) (3,800) (3,800) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 0 9 0 0 0 Net Investing CF (2,005) (3,396) (3,500) (3,800) (3,800) Div Paid (1,658) (3,313) (4,968) (3,137) (3,213) Chg in Gross Debt (49) (53) 0 0 0 Capital Issues 0 0 0 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF (1,707) (3,366) (4,968) (3,137) (3,213) Currency Adjustments 414 77 0 0 0 Chg in Cash 2,121 (1,340) (2,878) (1,507) (1,309) Opg CFPS (Rp) 1,429 1,463 1,464 1,517 1,601 Free CFPS (Rp) 927 527 568 443 517


Target Price & Ratings History

Source: DBS Vickers

S.No. DateClosing

PriceTarget Price

Rating

1: 18 Feb 15 23700 20200 FULLY VALUED2: 14 Apr 15 22650 20200 FULLY VALUED3: 04 May 15 22800 20000 FULLY VALUED4: 27 May 15 22100 20000 FULLY VALUED5: 08 Jun 15 21425 20000 FULLY VALUED6: 10 Aug 15 19800 20000 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions.

1

2

34

5 6

15746

17746

19746

21746

23746

25746

Sep-14 Jan-15 May-15 Sep-15

Rp

Strong operational cash flow to cover future capex

ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com ed: SGC / sa: MA

FULLY VALUED Last Traded Price: Rp9,150 (JCI : 4,120.50) Price Target : Rp7,800 (-15% downside) Potential Catalyst: Rebound in property presales, better execution from nationwide infrastructure development and lower energy price Where we differ: Having one of the lowest estimates in the street Analyst Edward Ariadi Tanuwijaya +6221 3003 4932 [email protected] Tjen San Chong +603 2604 3972 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rp bn) 2014A 2015F 2016F 2017F Revenue 26,987 25,698 27,877 30,603 EBITDA 8,195 6,643 7,116 7,640 Pre-tax Profit 7,091 5,583 5,883 6,332 Net Profit 5,566 4,294 4,530 4,880 Net Pft (Pre Ex.) 5,566 4,294 4,530 4,880 Net Pft (ex. BA gains) N/A N/A N/A N/A EPS (Rp) 938 724 764 823 EPS Pre Ex. (Rp) 938 724 764 823 EPS Gth (%) 4 (23) 5 8 EPS Gth Pre Ex (%) 4 (23) 5 8 Diluted EPS (Rp) 938 724 764 823 Net DPS (Rp) 375 290 305 329 BV Per Share (Rp) 4,070 4,418 4,892 5,410 PE (X) 9.8 12.6 12.0 11.1 PE Pre Ex. (X) 9.8 12.6 12.0 11.1 P/Cash Flow (X) 8.1 9.7 9.6 8.9 EV/EBITDA (X) 6.5 8.1 7.5 6.9 Net Div Yield (%) 4.1 3.2 3.3 3.6 P/Book Value (X) 2.2 2.1 1.9 1.7 Net Debt/Equity (X) CASH CASH CASH CASH

ROAE (%) 24.7 17.1 16.4 16.0

Earnings Rev (%): (23) (24) (23) Consensus EPS (Rp): 851 939 1,075 Other Broker Recs: B: 18 S: 5 H: 12

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

THE VETERAN LEADER Maintain FULLY VALUED call with lower TP. We cut FY15/16/17F domestic sales volume assumptions by 8.4%/9.1%/8.6% after adjusting for YTD data. We also forecast weaker margins ahead because of intensifying competition for market share and higher COGS (weaker IDR; energy and material costs in USD). All in, we slashed FY15/16/17F earnings by 22.8%/23.8%/22.9%, resulting in this being one of the lowest estimates in the street. Buffer from Sumatra and Sulawesi. SMGRs 8M15 cement sales fell 4.4% y-o-y to 15.8m tonnes, with noticeable weakness in Java (-7% y-o-y) and Kalimantan (-6.3% y-o-y). However, Sumatra and Sulawesi cement sales held up (flat growth) and helped to support group earnings. Sumatra and Sulawesi accounted for 21% and 11% of SMGRs domestic cement sales by volume, respectively. Plans to expand to neighbouring countries. 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. The three brands under SMGR command 38%, 43% and 64% market share in Java, Sumatra and Sulawesi, respectively. The planned entry into neighbouring countries will not happen so soon given better domestic margins. Valuation: Our target price of Rp7,800 is pegged to 10.2x FY16F EPS, at (-)1SD of 10-year mean forward PE (similar valuation it traded at in 2004 when utilisation level were depressed). Key Risks to Our View: Significant delays in new players greenfield cement plants. This would reduce competition in SMGRs strongholds, reduce the severity of competition from new players (better pricing power for incumbents), and lift utilisation rates. Recovery in property presales. We expect property presales to remain flat going forward after a 3-4 year boom (2010-2013). But a sharp recovery in property presales would be upside risk to our cement volume sales assumptions. The property sector remains the major cement consumer in Indonesia. At A Glance Issued Capital (m shrs) 5,932 Mkt. Cap (Rpbn/US$m) 54,273 / 3,693 Major Shareholders Govt. of Indonesia (%) 60.0 Free Float (%) 40.0 3m Avg. Daily Val (US$m) 4.0 ICB Industry : Industrials / Construction & Materials


Indonesia Company Guide

Semen Indonesia Edition 1 Version 1 | Bloomberg: SMGR IJ | Reuters: SMGR.JK Refer to important disclosures at the end of this report

65

85

105

125

145

165

185

205

6,480.0

8,480.0

10,480.0

12,480.0

14,480.0

16,480.0

18,480.0

20,480.0

Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Relative IndexRp

Semen Indonesia (LHS) Relative JCI INDEX (RHS)


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 SMGRs sales volume to expand at 2.4% CAGR over 2014 2017F, a bearish stance considering that consensus is expecting mid-single-digit % growth for the period. This is in-line with our industry demand forecast, which expects modest growth (in line with Indonesias real GDP growth) for the next three years as the country is entering normal growth state. Limited price upside because of competition. We do not expect cement prices to rise significantly going forward as incumbent players (including SMGR) 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 utilisation rate of incumbent players remain depressed. We forecast only 1.3% CAGR in ASP/tonne between 2014 and 2017F; this is minimal compared to consensus expectations of mid-single-digit % growth for the period. Shift to bulk segment will pressure margins. Accelerating 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. Weakening IDR leads to higher cash and financing cost. The benefits of lower coal and oil prices are largely offset by a weaker IDR against the USD, which inflates other cash cost components. Approximately 40% of INTPs cash cost is for energy, while c.65% of its COGS is transacted in USD. We expect SMGRs cash cost per tonne to increase by 3.9% CAGR, which would reduce EBITDA margins (see chart). 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 depreciated by another 10% against the USD.

Low capacity utilisation rate will cap SG&A expenses (as % of revenue). In anticipation of 7m tonnes of effective capacity coming online in 2015 and 2016, we expect SMGRs utilisation rate to drop from 90% in 2014 to 78% in 2017F. In that period, SG&A expenses are expected to stay at 18% of revenue (vs 16.5% average in the past decade).

Domestic Sales Volume

Domestic ASP/tonne

EBITDA margin

Revenue Trend

Market share trend in domestic market


25,450 26,354 25,04226,464

28,330

0

3,600

7,200

10,800

14,400

18,000

21,600

25,200

2013A 2014F 2015F 2016F 2017F

904,542947,077 928,136 955,980

984,659

0

200,900

401,800

602,700

803,600

2013A 2014F 2015F 2016F 2017F

33.130.4

25.8 25.5 25

0.0

6.7

13.5

20.2

27.0

33.7

2013A 2014F 2015F 2016F 2017F

40%

41%

42%

43%

44%

45%

46%

47%

2006 2007 2008 2009 2010 2011 2012 2013 2014 FY15F FY16F FY17F


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 Jun 2015, foreign debt made up about one-third of SMGRs total long term debt. Further weakness in the IDR will inflate SMGRs debt position. Net cash position provides buffer for future expansion. SMGR has been in net cash position in the past decade (except in 2012 when it took on new loans for the TLCC acqusition), thanks to strong operational cash flow and good management of expansion capex. Share Price Drivers: Positive progress in nationwide infrastructure development. Good progress and faster infrastructure budget absorption should lift cement demand, and improve SMGRs utilisation rate, and hence, profitability. Cement sales. Monthly cement sales data released by the Indonesia Cement Association (ASI) is a leading indicator of SMGRs stock price direction. Expect lower dividend payout. SMGR has distributed 45-55% of net profits over 2006-2013. Following recent talks 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. More delays in infrastructure projects. Despite gallant efforts by the government to speed up the process, project rollouts have been slower than the streets lofty expectations. Slower execution will directly affect cement demand growth, and consequently, hurt SMGRs utilisation and profitability. Additional risks from overseas expansion. SMGRs vision to expand overseas presents potential country and political risks. SMGR has expanded into Vietnam (after acquiring 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. SMGR sells cement under three brands, Semen Gresik, Semen Padang and Semen Tonasa, which have strong brand equities in Java, Sumatra and Sulawesi, respectively.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.7

0.7

0.8

0.8

0.8

0.8

0.8

0.9

0.9

0.9

0.00

0.05

0.10

0.15

0.20

0.25

2013A 2014F 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2013A 2014F 2015F 2016F 2017F

Capital Expenditure (-)

Rp

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014F 2015F 2016F 2017F

Avg:16.6x

+1sd:19.5x

+2sd:22.4x

1sd:13.6x

2sd:10.7x

8.6

10.6

12.6

14.6

16.6

18.6

20.6

22.6

24.6


(x)

Avg:4.24x

+1sd:5.09x

+2sd:5.94x

1sd:3.39x

2sd:2.54x

1.5

2.5

3.5

4.5

5.5

6.5


(x)


Company Guide

Semen Indonesia

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Domestic Sales Volume (m tonnes) 25.5 26.3 25.0 26.5 28.3 Domestic ASP/tonne (Rp) 904,542 947,077 928,136 955,980 984,659 EBITDA margin (%) 33.1 30.4 25.8 25.5 25.0 Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rp bn) Cement 24,152 26,335 25,047 27,194 29,885 Others 370 652 651 683 717 Total 24,522 26,987 25,698 27,877 30,603 Operating profit (Rp bn) Cement 6,998 7,078 5,389 5,704 6,124 Others (26) (124) 98 102 108 Total 6,972 6,954 5,486 5,806 6,232 Operating profit Margins Cement 29.0 26.9 21.5 21.0 20.5 Others (7.0) (19.0) 15.0 15.0 15.0 Total 28.4 25.8 21.3 20.8 20.4 Income Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 24,501 26,987 25,698 27,877 30,603 Cost of Goods Sold (13,557) (15,388) (15,572) (17,014) (18,824) Gross Profit 10,944 11,599 10,126 10,863 11,778 Other Opng (Exp)/Inc (3,972) (4,645) (4,640) (5,057) (5,546) Operating Profit 6,972 6,954 5,486 5,806 6,232 Other Non Opg (Exp)/Inc 91 202 80 80 80 Associates & JV Inc 35 32 30 34 38 Net Interest (Exp)/Inc (177) (97) (13) (37) (18) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 6,920 7,091 5,583 5,883 6,332 Tax (1,566) (1,517) (1,284) (1,353) (1,456) Minority Interest 16 (8) (5) 0 5 Preference Dividend 0 0 0 0 0 Net Profit 5,370 5,566 4,294 4,530 4,880 Net Profit before Except. 5,370 5,566 4,294 4,530 4,880 EBITDA 8,099 8,195 6,643 7,116 7,640 Growth Revenue Gth (%) 25.0 10.1 (4.8) 8.5 9.8 EBITDA Gth (%) 17.9 1.2 (18.9) 7.1 7.4 Opg Profit Gth (%) 14.1 (0.3) (21.1) 5.8 7.3 Net Profit Gth (%) 10.8 3.6 (22.8) 5.5 7.7 Margins & Ratio Gross Margins (%) 44.7 43.0 39.4 39.0 38.5 Opg Profit Margin (%) 28.5 25.8 21.3 20.8 20.4 Net Profit Margin (%) 21.9 20.6 16.7 16.2 15.9 ROAE (%) 28.1 24.7 17.1 16.4 16.0 ROA (%) 18.7 17.1 12.2 11.9 11.6 ROCE (%) 22.5 19.9 14.0 13.7 13.3 Div Payout Ratio (%) 45.0 40.0 40.0 40.0 40.0 Net Interest Cover (x) 39.4 71.8 430.4 156.6 349.2


Cement contributes 98% of SMGRs revenue

Expect margins to decline as competition intensify


Company Guide

Semen Indonesia

Quarterly / Interim Income Statement (Rpbn)

FY Dec 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 Revenue 6,708 6,463 7,638 6,340 6,300 Cost of Goods Sold (3,620) (3,776) (4,490) (3,781) (3,854) Gross Profit 3,088 2,688 3,148 2,560 2,446 Other Oper. (Exp)/Inc (1,163) (1,141) (1,304) (1,078) (1,137) Operating Profit 1,924 1,547 1,844 1,481 1,309 Other Non Opg (Exp)/Inc 26 58 103 8 (5) Associates & JV Inc 8 7 10 7 7 Net Interest (Exp)/Inc (8) (27) (59) 5 (14) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,951 1,584 1,897 1,501 1,297 Tax (420) (326) (417) (307) (297) Minority Interest (7) 4 (3) (4) (5) Net Profit 1,523 1,262 1,478 1,190 995 Net profit bef Except. 1,523 1,262 1,478 1,190 995 EBITDA 2,245 1,892 2,204 1,850 1,677 Growth Revenue Gth (%) 8.6 (3.6) 18.2 (17.0) (0.6) EBITDA Gth (%) 15.0 (15.7) 16.5 (16.1) (9.3) Opg Profit Gth (%) 17.4 (19.6) 19.2 (19.6) (11.7) Net Profit Gth (%) 16.9 (17.1) 17.1 (19.5) (16.4) Margins Gross Margins (%) 46.0 41.6 41.2 40.4 38.8 Opg Margins (%) 28.7 23.9 24.1 23.4 20.8 Net Profit Margins (%) 22.7 19.5 19.3 18.8 15.8 Balance Sheet (Rp bn) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 18,863 20,221 22,565 24,754 26,847 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 2,078 2,437 2,437 2,437 2,437 Cash & ST Invts 4,213 5,032 4,829 5,686 6,847 Inventory 2,646 2,812 2,845 3,109 3,440 Debtors 2,916 3,301 3,144 3,410 3,744 Other Current Assets 197 504 509 555 613 Total Assets 30,912 34,307 36,328 39,951 43,928 ST Debt 321 82 82 82 82 Creditor 2,822 3,250 3,286 3,590 3,970 Other Current Liab 2,163 1,954 1,964 2,070 2,201 LT Debt 3,242 3,315 3,217 3,619 4,022 Other LT Liabilities 508 606 606 606 606 Shareholders Equity 20,935 24,139 26,207 29,019 32,087 Minority Interests 921 960 965 965 960 Total Cap. & Liab. 30,912 34,307 36,328 39,951 43,928 Non-Cash Wkg. Capital 774 1,412 1,247 1,414 1,626 Net Cash/(Debt) 650 1,635 1,530 1,984 2,744 Debtors Turn (avg days) 40.5 42.0 45.8 42.9 42.7 Creditors Turn (avg days) 80.9 78.3 82.8 79.9 79.2 Inventory Turn (avg days) 72.4 70.4 71.6 69.2 68.6 Asset Turnover (x) 0.9 0.8 0.7 0.7 0.7 Current Ratio (x) 1.9 2.2 2.1 2.2 2.3 Quick Ratio (x) 1.3 1.6 1.5 1.6 1.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 71.4 75.3 106.1 94.6 85.3 Z-Score (X) 6.6 6.5 6.4 6.2 5.9


1Q is the seasonally weakest quarter

About one-third of LT debt is in foreign currency

Strong net cash position


Company Guide

Semen Indonesia

Cash Flow Statement (Rp bn)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 6,920 7,091 5,583 5,883 6,332 Dep. & Amort. 1,127 1,241 1,156 1,310 1,408 Tax Paid 0 0 0 0 0 Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. (577) (635) 166 (167) (212) Other Operating CF 143 542 0 0 0 Net Operating CF 6,047 6,721 5,621 5,672 6,072 Capital Exp.(net) (2,544) (2,558) (3,500) (3,500) (3,500) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (131) (323) 0 0 0 Net Investing CF (2,675) (2,881) (3,500) (3,500) (3,500) Div Paid (2,211) (2,427) (2,226) (1,718) (1,812) Chg in Gross Debt (69) (500) (98) 402 402 Capital Issues 0 0 0 0 0 Other Financing CF (43) (58) 0 0 0 Net Financing CF (2,324) (2,984) (2,324) (1,316) (1,410) Currency Adjustments 0 0 0 0 0 Chg in Cash 1,048 855 (203) 857 1,162 Opg CFPS (Rp) 1,117 1,240 920 985 1,059 Free CFPS (Rp) 591 702 358 366 434


Strong operational cash flow to cover future capex

DBSV 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

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by PT. DBS Vickers Securities Indonesia ("DBSVI"), a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVI and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate independent legal or financial advice. DBSVI accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVI, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVI and/or DBSVH (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

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ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. PT. DBS Vickers Securities Indonesia ("DBSVI") has no proprietary position in the company recommended in this report as of 28 September 2015.

2. DBSVI, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of as of 29 September 2015.

3. Compensation for investment banking services: DBSVI, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject companies.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Industry Focus


Page 25

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Indonesia Cement SectorStock ProfilesIndocement Tunggal P.Semen Indonesia

indonesia cement sector 30sep edited - dbs group semen indonesia : semen gresik was established in...

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