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PROFITABILITY ENHANCEMENT STRATEGY THROUGH CAPACITY EXPANSION AND MARKET EXPORT DIVERSIFICATION(CASE STUDY: ACQUISITION OF THANG LONG CEMENT COMPANY VIETNAM BY PT SEMEN INDONESIA TBK)

ANANDITA ADE PUTRI29112476

INTRODUCTION

Under the Master Plan for Acceleration & Expansion of Indosias Economic Development (MP3I) and the National Medium Term Develpment Plan implemented through public partnership program is expected to drive domestic cement consumption

Domestic cement consumption moves side by side with Indonesian economy growth

DOMESTIC MARKET CONSUMPTION (2012)

INTRODUCTIONIndonesian cement industry is dominated by three largest players namely PT Semen Indonesia, Holcim Indonesia and Indocement Tunggal Prakarsa

Companys NameInstalled Capacity (thousand tons)Market SharesSemen Indonesia24,150 43%Indocement Tunggal Prakarsa18,60034%Holcim Indonesia8,70014%Looking at the installed capacity, Semen Indonesia was the biggest with installed capacity ofaround 24,150 thousand tons in 2012. It represented about 41.7% of total domestic capacity andamplified its leadership position in the market. Other two major players Indocement and Holcim hadabout 18,600 thousand tons and 8,700 thousand tons of installed capacity, respectively, with marketshares of about 32.1% and 15.0%. Meanwhile, other cement producers had lower installed capacitiesnamely Semen Bosowa Maros (3,000 thousand tons), Lafarge Cement (1,600 thousand tons) SemenBaturaja (1,250 thousand tons) and Semen Kupang (570 thousand tons).4 BUSINESS ISSUE

Indonesias cement industry is growing rapidly and cement demand is rising over the years, with very tight competitiveness between another cement companies

Related to the acquisition strategyWhat is the companys consideration of the acquisition strategy?What are the effects of acquisition strategy to companys financial performance?What are the proposed strategy that can be implement on Thang Long Cement to gain greater value (in the post-acquisition period)?

PT Semen Indonesias strategic action : Business Expansion through acquisition with Vietnams leading cement company, Thang Long Cement Vietnam

EXPANSION STRATEGYAcquisition of foreign companyQuick source of supply to fulfill 44% Indonesia market shareFoundation for global market expansionDomestic Branding StrategyMarket Entry StrategyRegional Market Entry Strategy (Southeast Asia)LOCAL BRANDUsing local existing brands, which have strong value in their respective marketBRAND ACQUISITIONEntering Vietnam market through local existing brand (Thang Long)ALTERNATIVE BRANDNew brand will be used to enter regional market outside Vietnam & Indonesia

Acquisition Thang Long by Semen IndonesiaBusiness Issue ExplorationBusiness Condition AnalysisMacro Environment and Industry AnalysisCompanies financial performance analysis Financial Analysis Profitability Ratio, Asset Management Ratio, Debt Ratio, Operating Ratio Economic Model: Performance Measurement (Growth Rate, ROIC)

Root Cause Thang Long Cement Hasnt Achieve Productivity OptimizationBusiness SolutionCapacity Expansion & Market Export DiversificationDiscounted Cash Flow (3 scenarios)Conclusion & Implementation PlanCONCEPTUAL FRAMEWORKProfitability EnhancementMacro Condition Exploration

CountryYear 2011Year 2012Cambodia7,1%7,3%Indonesia6.5%6,2%Vietnam6,0%5,0%Malaysia5,6%5,1%Singapore5,2%1,3%Phillipine3,6%6,8%Brunei Darussalam2,2%2,2%Thailand 0,1%6,5%Manufacturing has an important role in the growth engines of the country (about 24% of total output)

Cement industry is a part of manufacturing based industry and the movements in the cement industry growth are signalled for another top economics indicators, such as household consumption

In the end of 2010, Vietnam faced severe macro economic instability with high inflation, high interest rates, large trade deficit and public debt. The government reacted in beginning 2011 by tightening monetary and fiscal policy. By 2012, sign of relief in the bank liquidity shortage began to emerge.

Indonesia was able to post sound economic growth in the last three years amidst the slowingeconomic growth globally following the prolonged debt crisis in the European countries as well as aslow recovery of US economy, thanks to the strong domestic consumption. Looking at the productionside of Indonesias GDP (current prices), construction sector reported a CAGR of 19.7%, higher thannational GDPs CAGR of 13.6% during 2008-2012. In 2012, construction sector posted a productionvalue of around Rp861.0 trillion compared with only Rp419.7 trillion in 2008. This faster pace ofproduction in the construction sector directly went up this sectors contribution to around 10.4% ofGDP in 2012, from 8.5% in 2008.10M&A Smart StrategyMerger and acquisition activity in Vietnam has risen dramatically in the past five years and there are clear reasons to be optimistic about the prospects for future growthStrong developmentaccess to new growth sectors and in-country expansionpopulation of over 90 million and rising middle class and urbanization levelsIndonesias cement demand is higher than VietnamsVietnam is facing excess supply while Indonesia is struggling to fulfill high demand in cement product

FINANCIAL RATIO Current RatioQuick ratio measures the companys liquidity and current ratio used to see the companys ability to pay back short-term liabilities (debt and payables) with its short term assets (cash, inventory, receivables). The quick ratio is more conservative in this calculation because it excludes inventory from current assets. As we know that Thang Long Cement Company has excess inventory and it made its financial weakens. Meanwhile, total debt to equity of Thang Long Cement Company shows very high proportion which indicates that debts were using more to finance its assets.

13BUSINESS SOLUTIONDiscounted Cash Flow Free Cash FlowCash Flow ProjectionEnterprise ValueCompanies Stand Independently Without Choosing Acquisition (Scenario 1)

Acquisition Strategy is Taken (Scenario 2)

Post Acquisition Analysis With Strategy of Capacity Expansion and Market Export Diversification (Scenario 3)

BUSINESS SOLUTIONFree Cash Flow Projection of PT Semen Indonesia

Scenario 1Scenario 2

Scenario 3

BUSINESS SOLUTIONShares Price

As the first State Owned Enterprise (SOE) in Indonesia who did the expansion strategy to another region, PT Semen Indonesia is quite appealing for new investors and it will encourages them to buy shares.

At the end of 2012 when the acquisition happened, share price per share of Thang Long Cement Vietnam is noted 10.000 VND(in the consolidated financial statement of Thang Long Cement Vietnam).

BUSINESS SOLUTIONFree Cash Flow Projection of Thang Long Cement

Scenario 1Scenario 2Scenario 3

BUSINESS SOLUTIONEnterprise ValueBUSINESS SOLUTIONREVENUE GROWTH

Both companies reflect improvement if they have had implemented proposed scenario of expanison (scenario 3)BUSINESS SOLUTIONCASH FLOW PROJECTION

The cash flow projection will be beneficial for both companies as shown in Figures if they implement the 3rd scenario CAPACITY EXPANSION (in Vietnam base)

Thang Long Cement has a total production capacity of 2.3 mt/year

Two new factories are expected to open soon, in the Quang Ninh and Binh Phuoc provinces, increasing the company's total capacity to 6.5 mt/yearCurrent capacity of Thang Long Cement is 2,3 mt/year which resulted revenue as projected with growth assumption 3%

Potential revenue with new installment capacity is expected to enhance greater revenue with growth assumption 6%

The purpose of this expansion is to fix the revenue and sales of Thang Long Cement Company itself, as well as giving significant profitability growth to PT Semen Indonesia Tbk

MARKET EXPORT DIVERSIFICATIONExport destinations are Bangladesh, Sri Lanka, South Africa, and some countries in Middle East

Indonesia can compete more in Southeast Asia region while the market will become more excessively tight between another strong competitors from another countries such as Thailand, Malaysia, Phillipines.

23MARKET EXPORT DIVERSIFICATIONIn 2011, Thang Long Cement Company exported 500,000 tons of cement to Singapore, Africa, North & South America and the Middle East

On 1st December 2013, at Cai Lan Port, Quang Ninh Province, Thang Long Cement has successfully exported 30,000 tons bulk cement packed with Jumbo bag to Peru market

Export market of Thang Long Cement is the most memorable milestones for efforts of all member of Thang Long Cement in particular and PT. Semen Indonesia in general, to diversify the products and packing methods for better occupying the international market

The export of 30,000 tons bulk cement packed with Jumbo bag to Peru market has affirmed once more that the product quality of Thang Long Cement satisfies the strict requirements of international customers.The 2013 is still a difficult year for Vietnam cement market due to economic crisis, declined demand, domestic cement consumption in 2013 is forecasted by VNCA to not be higher than that of 2012. Thus, local cement producers still face many difficulties in 2013.Thats why Thang Long Cement has promoted the sales activities especially the export to overcome obstacles and challenges in this period. Furthermore, the company has obtained remarkable advances in production such as: diversifying the products by presenting new product line PC50 bulk cement (OPC); diversifying the packing as well as loading methods. Until present time, Thang Long Cement is one of few companies in Vietnam who can directly load bulk cement through belt conveyor to specialized vessels and normal vessels from plant jetty.Since May of 2013 to present, Thang Long Cement has exported over 750,000 tons of products. In which, particularly the bulk cement OPC is over 100,000 tons. Total domestic sales and export reaches over 1.9 million tons.It is considered a firm progress in obtaining the big target of Thang Long Cement to become a prestigious cement producer in Vietnam and one of strong members of PT. Semen Indonesia Group.

24SYNERGISTIC ACQUISITIONThe key to the synergy is that the buyer company controls a specified resource that will becomes more valuable if combined with the targetted companys resources

In this acquisition between PT Semen Indonesia and Thang Long Cement Company, the resources collaboration is focus on economies of scale which reduce costs and increase market power in Southeast Asia region, which enhance profit margins and sales.

OPERATIONAL SYNERGIESCombined operational strengthsIncrease pricing powerCost effectiveFINANCIAL SYNERGIESIncrease debt capacityOptimizing outputIMPLEMENTATION PLAN

IMPLEMENTATION RISK

RECOMMENDATIONTo stabilise the domestic cement market, The Ministry of Vietnam should be working with the Vietnam Cement Association to instruct cement companies nationwide to carry out solutions by applying advanced technology to reduce costs

To carefully monitor monthly and quarterly consumption in order to meet domestic demand, especially in the construction high season

In addition, the ministry should manage to boost the development of cement projects approved by the Government so they can be put into operation on schedule.

Along with the success achieved, PT Semen Indonesia must be prepared for future prospect that has been planned, which is stepping in Myanmar market and also Bangladesh

In total, PT Semen Indonesia expects to produce 29 million ton by this year, 20% rise from last years total capacity

In the future, PT Semen Indonesia and Thang Long Cement Vietnam must pay fully attention to several factors that could threatening their market position:CompetitorsEconomic GrowthMarket Demand

NOT ONLYBUT ALSOCompete in current cement industryCompete to get cement product leadershipCompete as a single entityMaximize ratio of new products salesCompete in creating industry structure for the futureCompete to get core competencies leadershipCompete as a strategic coalitionMaximize its rate of new m

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