Jasa Marga. Concrete growth OUTPERFORM INDONESIA INITIATING COVERAGE. 23 May Target: Rp1,888. Toll roads

Transcription

1 INITIATING COVERAGE 23 May 2008 OUTPERFORM Jasa Marga Concrete growth Target: Rp1,888 INDONESIA Toll roads JSMR IJ / JSMR.JK Rania Rahmundita +62(21) rania.rahmundita@cimb.com Please read carefully the important disclosures at the end of this publication.

2 Contents Investment summary...3 Background...4 Management...6 Industry review...9 Traffic volumes...16 Tariff structure...17 Land acquisition...18 Outlook...19 Financials...23 Risks...27 Valuation and recommendation...28 Jasa Marga 23 May 2008 [ 2 ]

3 Investment summary Fuel-price hike to restore momentum in infrastructure development. An imminent fuel-price hike in Indonesia in Jun 08 should remove the overhang from concerns over potential cuts to the state infrastructure budget this year. We believe that the government would restore the infrastructure budget, following a smaller burden of subsidising fuel. We thus expect the rollout of ready toll-road projects (including Jasa Marga s) in 2H08. This would craft a momentum for the sector, and Jasa Marga, which is the anchor of Indonesia s toll-road sector. An inflation- and oil-price hedge. Unlike other domestic- or infrastructureoriented companies, Jasa Marga uniquely offers a hedge to inflation. Its biennial tariff hike is based on inflation, as regulated by the new Road Law 38/2004. We believe future tariff hikes would take place as scheduled, although 2-3 months delays cannot be ruled out. On top of tariff hikes, its traffic volumes have proved inelastic to tariff hikes, as suggested by two previous hikes. Traffic volumes have also been inelastic to fuel-price hikes, as in the Oct 05 experience. We therefore believe the imminent 30% fuel-price hike in June would have little impact on its traffic volumes. Growth from new toll roads. Jasa Marga may be one of the few toll-road operators in the region that is still in the growth phase. It will be adding six new toll roads (153km), including an extension of its current JORR toll road, over the next five years. We are particularly bullish on the traffic growth of its Jakarta toll roads. We also believe regulated tariff increases and lower interest rates would pave the way for better returns from its new toll roads. Initiate with Outperform and DCF target price of Rp1,888, implying 1x PEG. We expect a 45% EPS CAGR, driven by 1) regulated tariff hikes, 2) continued traffic growth at its young toll roads; and 3) lower financing and labour costs. This would be the strongest growth prospect in our universe of toll-road operators. Financial summary FYE Dec F 2009F 2010F Revenue (Rp bn) 2,296 2,645 3,329 3,816 4,815 EBITDA (Rp bn) 1,138 1,380 1,882 2,215 3,000 EBITDA margins (%) 49.6% 52.2% 56.6% 58.0% 62.3% Pretax profit (Rp bn) ,215 Net profit (Rp bn) EPS (Rp) EPS growth (%) 50.4% (82.3%) 114.8% 5.3% 34.8% P/E (x) Core EPS (Rp) Core EPS growth (%) 185.1% (82.3%) 114.8% 5.3% 34.8% Core P/E (x) Gross DPS (Rp) Dividend yield (%) 2.1% 0.3% 1.0% 1.3% 1.3% P/BV (x) ROE (%) 21.2% 6.6% 9.6% 9.3% 11.5% Net gearing (%) 264.3% 37.2% 70.8% 121.1% 145.4% P/FCFE (x) (19.0) 37.6 (3.1) (89.6) (159.6) EV/EBITDA (x) CIMB/Consensus (x) Source: Company, CIMB-GK Research, Bloomberg Price chart Nov-07 Feb-08 May-08 Volume 100m (R.H.S ca le ) Jasa Marga Source: Bloomberg Market capitalisation & share price info Market cap Rp9,384bn/US$1,010m Share price perf. (%) 1M 3M 12M 12-mth price range Rp2,050/Rp1,250 Relative (3.6) (11.6) (32.4) 3-mth avg daily volume 4.3m Absolute 3.0 (19.3) (18.8) # of shares (m) 6,800 Major shareholders % held Est. free float (%) 30.0 Indonesian Government 70.0 Conv. secs (m) N/A Conv. price ( ) N/A Source: Company, CIMB-GK Research, Bloomberg Jasa Marga 23 May 2008 [ 3 ]

4 Background A long-time regulator. Unveiling Jasa Marga s history is tantamount to uncovering the history and development of the toll-road sector in Indonesia. The company dates back to 1 Mar 1978, when Government Regulation No. 4/1978 established Jasa Marga as the state toll-road company, just in time for the inauguration of the first toll road in Indonesia, the Jagorawi toll road connecting Jakarta, Bogor, and Ciawi. This was Jasa Marga s first toll road. In 1980, through Road Law No. 13/1980, the government assigned sole rights to Jasa Marga to develop, operate and manage toll roads in Indonesia. The objective was to avoid burdening the state budget with the huge investment needed and to create a favourable toll system for specific roads. While licensing toll roads was still the prerogative of the government and required presidential decrees, Jasa Marga was authorised to: 1) build toll roads; 2) maintain and operate them; 3) provide toll-road networks; and 4) provide and manage facilities associated with the toll roads. Following this, Jasa Marga developed new roads in Jabotabek (Jakarta and Greater Municipality), Bandung, Cirebon, Semarang, Surabaya and Medan. Funding came from government-to-government loans and bond issuances. Jasa Marga was required to seek government approval in any partnership with other parties for the operation, maintenance and development of toll roads. Toll-road tariffs, however, were set by presidential decrees, based on Vehicle Operating Cost Savings calculations. It was not until the late 1980s that the government invited the private sector to enter the toll-road business. Jasa Marga then became the government s authorisation body, or the toll-road regulator for the private sector. It took on a dual role, of a commercial toll-road operator as well as a regulator of private-sector toll roads. Figure 1: Jasa Marga s dual role in the olden days Then Indonesian Government Toll road management rights Jasa Marga Business Corporation Authorization agreement Equity share (if any) Private Company Investor Toll roads invested & operated by Jasa Marga Commercial function Toll roads invested & operated by private company Authorization function Now Indonesian Government Ministry of SOE Ministry of Public Works Indonesian Toll road Authority Granting & supervising Road network planning & Directorate General (BPJT) Toll road concessions setting of technical specifications of Highways <-- Concession agreement ---> Jasa Marga Private Toll road investors Source: Ministry of Public Works Jasa Marga 23 May 2008 [ 4 ]

5 When the crisis hit. The 1997 economic crisis halted all private-sector investment in the industry. Some concessions were revoked while others were postponed indefinitely. Even Jasa Marga only re-started the construction of toll roads in These included the Jakarta Outer Ring Road (JORR), linking all road networks in the capital city and the Cikampek-Purwakarta-Padalarang (Cipularang) toll road. The latter had been revoked from private investors. Now turned into a mere investor marked a turning point for the sector, including Jasa Marga. The inauguration of a new Road Law No. 38/2004 stripped Jasa Marga of its privilege as the sole toll-road operator in Indonesia and marked the end of the company s dual role in the sector, with the establishment of the Government Toll Road Authorization Body (Badan Pengatur Jalan Toll or BPJT). However, the law allowed Jasa Marga to retain its commercial toll-road operations. It also granted Jasa Marga concession agreements for all of its toll-road investments. Figure 2: Current regulatory framework changes for Jasa Marga and the sector post 2004 No. 1 Item Toll Road Provision Regulation Law No.38/2004 on Road Govt. Regulation (GR) No.15/2005 on Toll Road Minister of Public Work Decree No. 295/PRT/M/2005 on Toll Road Regulatory Body (BPJT) Minister of Public Work Decree No. 392/PRT/M/2005 on Minimum Standard of Toll Road Services 2 Toll Road Network Minister of Public Work Decree No. 369/KPTS/M/2005 jo. No. 280/KPTS/M/2006 on Master Plan on National Road Network that included the Toll road network 3 4 Land Acquisition Toll Road Investment Source: Ministry of Public Works Presidential Regulation No. 36/2005 jo. No. 65/2006 on Land Aqcuisition for implementation of Development for Public Interest Minister of Public Works Regulation No. 10/PRT/M/2006 on the Guideline for Enterprise Fund Usage for Land Aqcuisition for Toll Road Presidential Regulation No. 67/2005 on Partnership between Government and Enterprise on Infrastructure Provision regulating the criteria on partnership project, tariff, government support as well as process and procedure of procurement Minister of Finance Decree No. 38/PMK.01/2006 on Guidance for Implementation and Management of risk on Infrastructure Provision which regulate the Government guarantee to the associated risk related to the political, project performance, and demand risks of PPP project. Minister of Public Works Regulation No. 27/PRT/M/2006 on Guideline on Toll Road Commercialization Figure 3: Key reforms in toll-road sector after the new Road Law in Establishment of Indonesian Toll Road Authority (BPJT), ending Jasa Marga's dual role 2 Toll-road investment open to both SOE and private companies, ending Jasa Marga's sole right to develop toll-roads 3 A PPP (Public private partnership) scheme is introduced in toll road investment 4 Initial tariff is set based on investment return calculation 5 Tariff adjustment every 2 years, based on inflation rate 6 Land acquisition is the government responsibility Source: Ministry of Public Works Figure 4: Toll road PPP scheme project viability scheme Project viability 1 Economic (+) Financial (-) PPP Scheme E G 2 Economic (+) E Financial (marginal) G E 3 Economic (+) Financial (+) E E Source: Ministry of Public Works Note: G E Operation and Maintenance Funding, DED and/or construction Government Enterprises Jasa Marga 23 May 2008 [ 5 ]

6 Management Jasa Marga s management is a mix of seasoned professionals in the toll-road business and finance/human resource professionals. This team was appointed in 2006, after reforms in the sector, with the key aim of revitalising the company. Its IPO in 2007 was an initial step, with more areas to be improved. In addition, its Board of Commissioners has a right mix of personnel and connections, to the Ministry of Public Works, State Land Agency and army etc. This should give Jasa Marga better reach to the relevant authorities, particularly those key to land acquisitions. Figure 5: Management profile Background Appointment Drs. Gembong Prijono MSc. Economic graduate Since 2002 President Commissioner 35 years experience in Ministry of Public Works Ir. Sumaryanto Widayatin MSCE Civil Engineering and transportation graduate Since 2006 Commissioner 26 years experience in Ministry of Public Works Dr. Joyo Winoto Head of State Land Agency Since 2008 Commissioner Prof. Dr. Akhmad Syakhroza Accounting, Finance and Informating System graduate Since 2006 Commissioner 23 years experience in Management Accounting Mayjen (Purn). Samsoedin Business management graduate Since 2006 Independent Commissioner 32 years of service in Military Army Ir. Pol. (Purn) Drs. MD. Law graduate Since 2007 Primanto, SH, MH 32 years of service in Indonesian Police Independent Commissioner Ir. Frans S. Sunito Civil engineering graduate Since 2006 President Director 31 years experience in construction and toll road 8 years experience as Business Development Director of Jasa Marga previously Ir. Reynaldi Hermansjah Electro Engineering graduate Since 2006 Finance Director 15 years experience in securities firm and investment management Ir. Adityawarman Civil engineering graduate Since 2008 Operation Director 20 years experience in operation and maintenance of toll roads 10 years experience as operational manager previously Ir. Abdul Hadi H.S. MBA Civil and MBA graduate Since 2006 Business Development Director 19 years experience in construction, maintenance and toll road investments Ir. Firmansyah, CES City planning and MBA graduate Since 2008 Human Resource Director 25 years experience in management and human resource consulting Source: Company IPO in Oct 07 raised Rp3.37tr. Its recent IPO in Oct 07 raised Rp3.37tr (US$374m), diluting the government s stake to 70% from 100% and reducing the company s gross gearing to 1.06x from 2.72x. Proceeds are meant for funding the development of new toll roads, repaying Rp150bn of bond principal, and other capex and working-capital requirements. About Rp150bn had been spent on debt repayment in Mar 08, leaving Rp2.0tr for the development of new toll roads this year. About 13% of its shares are held by foreign institutional investors, up from 10% earlier, while domestic institutional investors hold some 10% now, relatively unchanged. Jasa Marga 23 May 2008 [ 6 ]

7 Figure 6: Minority shareholders and IPO proceeds 100% 80% 60% 40% 20% Minority shareholders structure 7% 9% 5% 5% 1% 3% 0% 4% 2% 10% 13% IPO proceeds usage (Rp bn) Total IPO proceeds 3,365.8 Usage: Capital contributions for Bogor Ring Road Capital contributions for Semarang-Solo 1,229.4 Capital contributions for Gempol-Pasuruan Repay the principal amount of Bond VIII, matures in Working capital, other new toll road projects, and 1, % IPO Foreign funds & pension funds Domestic pension funds Domestic institutions 29-Feb-08 Domestic funds Domestic insurance Domestic retail Source: Company Figure 7: Jasa Marga s existing toll roads Road length Operational Concession Age Utilization (km) expiration (years) in 2007 Jagorawi % Semarang Ring Road % Jakarta-Tangerang 33.5 Jakarta-Tangerang % Ulujami-Pondok aren % Cawang-Tomang- Cengkareng (Camareng) 39.3 Airport toll-road % Cawang-Tomang-Pluit % Surabaya-Gempol % Belawan-Medan-Tg Morawa (Belmera) % Jakarta-Cikampek % Purwakarta -Bandung- Cileunyi (Purbaleunyi) Padalarang-Cileunyi % Cikampek-Padalarang % JORR 45 46% Cakung-Cikunir (Section E2) Pondok Pinang-Kampung Rambutan (Section S) Pondok Pinang- Veteran- Ulujami (Section W2) Kampung Rambutan - Jatiasih (Section E1) Cakung- Cilincing (Section E3) Jatiasih-Cikunir (Section E1) Palimanan-Kanci (Palikanci) % Total Source: Company Embarking on new toll roads again. Jasa Marga will be adding six new toll roads, including extensions to its JORR and JORR2 sections within the next five years. A total of 153km would be added, potentially costing more than Rp16tr (US$1.85bn). The company would partner with local governments for the Java toll roads and with private investors for the Jakarta toll roads, largely for risk-sharing purposes. Figure 8: New toll roads Length Concession Location Expiration (km) Partner JM interest West Java 1 Bogor Ring Road Regional government 55% (border of 2 Gempol-Pasuruan (Part of TransJava) East Java Regional government 60% 3 Semarang-Solo (Part of TransJava) Central Java Regional government 60% 4 JORR W2 North Jakarta Regional government 55% 5 Cengkareng-Kunciran (JORR2) Jakarta Private company 55% 6 Kunciran- Serpong (JORR2) Jakarta Private company 55% Total 153 Source: Company Jasa Marga 23 May 2008 [ 7 ]

8 Fig 9: Jasa Marga s new toll-road development scheme Jasa Marga 3. Div estment of 1. Formation of SPV (JV) some stakes in SPV Jasa Marga income: Existing toll-road operations, capital gain from divestment & dividend Toll road SPV (JV) SPV income: toll road operation 2. Toll road construction Source: Company Toll road operations Jasa Marga 23 May 2008 [ 8 ]

9 Industry review Rapid development stalled after crisis. Nearly all of the toll roads in Indonesia, or 550.8km out of 630.7km (87.3%), were built before the 1997 financial crisis. The 1997 crisis stalled investment in the sector, both at Jasa Marga as well as in the private sector. During the crisis, a large number of toll concessions were revoked by the government. While Jasa Marga had re-started the construction of some toll roads in 2002, the private sector has remained stuck. Only 79.9km or 12.7% of the total toll roads in the country were built after the crisis, and solely by Jasa Marga. Negotiations with the old investors of those concessions faced stumbling blocks, mainly on financing and regulatory uncertainties. Most of the old investors were associated with ex-president Soeharto, with high credit risks now. This explains the funding difficulty. Re-offering these concessions to new private investors proved to be a challenge for the government, as a poor investment and regulatory framework made investing in this sector unattractive. Figure 10: Toll roads in Indonesia funded before the crisis Jasa Marga Private Sector Road length Operational (km) Jagorawi, Jakarta & Greater Jakarta Semarang Ring Road, Central Java Jakarta-Tangerang, Jakarta & Greater Jakarta Airport toll-road Surabaya-Gempol, East Java*** Belawan-Medan-Tg Morawa (Belmera), North Sumatra Cawang-Tomang-Pluit, JIUT* Jakarta-Cikampek, Jakarta & Greater Jakarta Padalarang-Cileunyi, West Java Cakung-Cikunir (JORR** Section E2) Pondok Pinang-Kampung Rambutan (JORR** Section S) Palimanan-Kanci (Palikanci), East Java Ulujami-Pondok aren, Jakarta & Greater Jakarta Total Source: Company Notes: * JIUT (Jakarta Inner Urban Toll-road) is shared between Jasa Marga and Citra Marga Nusaphala Persada, based on respective concessions * *JORR stands for Jakarta Outer Ring Road *** After deducting the 5km from Section Porong-Gempol which was declared forje majeurein 2006 due to the Lapindo mudflow Investors Toll-roads Length Operational (km) Citra Marga Cawang-Tg Priok,JIUT* Nusaphala Persada Marga Mandala Sakti Tangerang-Merak, Greater Jakarta Marga Bumi Mataraya Surabaya-Gresik, East Java Citra Marga Tg. Priok - Jembatan Nusaphala Persada Tiga, JIUT* Jalantol Lingkar Luar Jakarta JORR Selatan Bosowa Marga Nusantara Ujung Pandang, South Sulawesi Bintaro Serpong Damai Pondok Aren-Serpong, Greater Jakarta Total Figure 11: Toll roads in Indonesia after the crisis. Construction was re-started only in 2002, and only by Jasa Marga Road length Operational (km) Pondok Pinang- Veteran- Ulujami (JORR* Section W2 South) Cikampek-Padalarang (West Java) Kampung Rambutan - Jatiasih (JORR* Section E1) Cakung- Cilincing (JORR* Section E3) Jatiasih-Cikunir (JORR* Section E1) Total 79.9 Source: Company Notes: *JORR stands for Jakarta Outer Ring Road Toll-road development lags behind population, vehicle and urbanisation growth. Under-investment in the sector has resulted in a lack of toll roads in Indonesia, dragging Indonesia into transportation bottlenecks. The number and length of toll roads in Indonesia are clearly inadequate, lagging behind population, vehicleownership and urbanisation growth. Indonesia s urbanisation has been accelerating, from growth rates of just over 20% in 1980 and 36% in 1996 to nearly 50% in There are now nearly 120m towndwellers in the country, double the 60m in This should have been followed by more and longer toll roads, to ease intra-city as well as inter-city congestions. However, there are only an additional 128km of toll roads, or a 23% increase from 1996 levels. Going forward, we expect a declining rate of urbanisation as a whole due to overurbanisation in Jakarta, but faster urbanisation in the key cities of Java (West, Central and East Java), Kalimantan (Central Kalimantan) and Sumatera (Aceh, West Sumatra, Lampung). However, we believe that only Java is in critical need of toll Jasa Marga 23 May 2008 [ 9 ]

10 roads at the moment, as the base population outside Java is still low. A growing urban population in Java (excluding Jakarta) would suggest increasing mobility across Java, in our view, raising the importance of a trans-java toll-road network. Figure 12: Urbanisation Urbanisation rate in Indonesia Urban population CAGR vs toll-roads CAGR (millions) Total population (LHS) Urban population (LHS) % urban (RHS) % 5% 4% 3% 2% 1% 0% 30% 25% 20% 15% 10% 5% 0% Total population (LHS) Urban population (LHS) Toll-road length (RHS) Urbanization rate and growth per province urbani- urbani- Urban urbani- Urban urbani- Urban urbani- Urban urbani- Urban sation sation population sation population sation population sation population sation population (%) (%) 5yr CAGR (%) 5yr CAGR (%) 5yr CAGR (%) 5yr CAGR (%) 5yr CAGR Aceh % % % % % North Sumatra % % % % % West Sumatra % % % % % Riau % % % % % Jambi % % % % % South Sumatra % % % % % Bengkulu % % % % % Lampung % % % % % Bangka Belitung % % % % % Jakarta % % % % % West Java % % % % % Central Java % % % % % Yogyakarta % % % % % East Java % % % % % Banten % % % % % Bali % % % % % West Nusa Tenggara % % % % % East Nusa Tenggara % % % % % West Kalimantan % % % % % Central Kalimantan % % % % % South Kalimantan % % % % % East Kalimantan % % % % % North Sulawesi % % % % % Central Sulawesi % % % % % South Sulawesi % % % % % South-East Sulawesi % % % % % Gorontalo % % % % % Maluku % % % % % North Maluku % % % % % Papua % % % % % Indonesia % % % % % Source: UN, CEIC, CIMB-GK Research Jasa Marga 23 May 2008 [ 10 ]

11 Figure 13: Toll roads per 000 of urban population Urban Urbanisation Toll-road Toll road per '000 Population rate length (km) urban capita (km) 2006 Indonesia 106,584,480 47% Thailand 20,936,520 33% Singapore 4,382, % Philippines 54,346,320 63% Malaysia 17,757,520 68% 1, Japan 84,448,980 66% 7, China 577,060,000 44% 53, Indonesia has 220m people, making it the world s fourth-most populous nation. Its population has been growing at 1.2% p.a. since With only 128km of toll roads built since 1996, Indonesia s toll roads per 1,000 people are well below that of other Asian countries, at 2.8km vs. 39.6km respectively. This places Indonesia below Thailand, which has a lower urbanisation rate and smaller urban population. Figure 14: Toll roads per 000 population (km) Total population Toll-road per '000 capita (millions) (km) Source: Company Figure 15: Toll roads (km per 000 capita comparison) km Japan Korea Malay sia Taiw an Singapore China Thailand Indonesia Philippines Source: Company Vehicle growth in Indonesia has been brisk after the crisis, in line with economic growth and increasing income per capita in the country. Aside from a blip in Oct 05 caused by a 100% fuel-price hike, vehicle ownership has been growing at 11% p.a. over This, again, compares with toll-road growth of only 2.1% p.a. over the same period. Indonesia has fallen behind China, which only started developing toll roads in the 1990s. China s toll-road growth has been able to surpass its vehicleownership growth in the past decade, at 27.4% vs. 13.2% p.a. Going forward, with rising urbanisation in Java, vehicle growth would be faster, in our view, necessitating more toll roads. Jasa Marga 23 May 2008 [ 11 ]

12 Figure 16: Vehicle growth vs. toll-road growth China Indonesia 60,000 50,000 40,000 30,000 20,000 10, Ex pressw ay length (km) Total v ehicles (ex cluding motorbikes, '000) Ex pressw ay length grow th y oy Vehicle grow th y oy 85% 65% 45% 25% 5% -15% 10,000 8,000 6,000 4,000 2, Toll roads (km) Total v ehicles (ex cluding motorbikes,'000) Toll-road length grow th y oy Vehicle grow th y oy 50% 40% 30% 20% 10% 0%, BPS New toll roads to join the club. There are up to 1,872km of new toll roads planned for Indonesia. Over 85% will be in Java, planned for completion in This should be the government s top priority in its infrastructure spending. Of these toll roads, some 991km are the most feasible and visible, in our view, with progress already made in financing and land acquisitions. About 145km fall within Jasa Marga s concessions. The remaining 881km would be re-tendered or prepared for tender. Six projects are in the construction stage. Despite the government s expectation of completions in 2010, we believe the bulk would only be finished in , because: 1) the land-acquisition process typically takes 6-10 months, longer than the government s expectations; and 2) there may be financing difficulties for the smaller investors, with rising costs of construction. Figure 17: Prospective new toll roads No Toll Road Link Length Location Estimated costs Scheduleaffic Volume Status Investor (Km) Rp bn US$ m (pcu/day) 1 Bogor Ring West Java 1, ,275 Construction in Jasa Marga 2 Waru - Djuanda 12.0 East Java 1, na Construction in Financed by Citra 3 Makassar seksi 11.6 South Sulawesi na tion in progress Financed by Jalan Tol 4 Surabaya East Java 2, ,063 Construction in Financed by Marga 5 Kanci - Pejagan 34.0 West Java 2, ,814 Construction in Financed by Bakrie 6 JORR WI 9.8 Jakarta 2, ,000 Construction in Financed by Jalantol 7 Cikampek West Java 6, na Land Financing Lintas Marga 8 Semarang Central Java 3, ,984 Land Financing Bakrie 9 Kertosono East Java 2, ,264 Land Financing Marga 10 Cinere West Java 1, na Land Financing Translingkarkit 11 Bekasi-Cawang Jakarta 3, ,878 Land Financing Kresna 12 Gempol East Java 2, ,790 Land Financed by Jasa Marga 13 Semarang - Solo 75.7 Central Java 6, & 27,881 Land Financing Jasa Marga 14 Pejagan East Java 3, ,563 Land Financing Sumber Mitra 15 Pemalang Central Java 2, ,850 Land Financing Sumber Mitra 16 JORR W2 Utara 7.0 Jakarta 1, na Land Jasa Marga 17 Ciawi West Java 4, na 61,397 Land Seeking Trans Jabar 18 Cikarang - Tg Jakarta -West 2, na na Land Seeking MTD Capital 19 Depok - Antasari 22.8 Jakarta -West 2, na na Land Financing Citra 20 Solo - Mantingan 56.1 Central Java 2, na na Land Partly financed Thiess 21 Mantingan Central - East 1, na na Land Partly financed Thiess 22 Ngawi East Java 4, na na Land Partly financed Thiess 23 Serpong Cinere 12.4 Jakarta 1, na na Seeking Thiess- 24 Pasuruan East Java 3, na 51,636 Seeking Bukaka Teknik 25 Gempol East Java na 68,944 Seeking Margabumi 26 Cimanngis Jakarta 3, na Seeking Bakrie & 27 Cengkareng Jakarta 2, na JV formation Jasa Marga 28 Kunciran Jakarta 2, na JV formation Jasa Marga Total , Source: KKPPI, Ministry of Public Works, CIMB-GK Research Jasa Marga 23 May 2008 [ 12 ]

13 Figure 18: Toll roads under pre-qualification and preparation No Toll Road Link Length Location Estimated costs Est. Traffic Volume Status (Km) Rp bn US$ m (pcu/day) in 1 Cileunyi - Sumedang 25.0 West Java 1, , Pre-qualification 2 Pasirkoja - Soreang 15.0 West Java , Pre-qualification 3 Medan - Kuala Namu - Tebing 60.0 North Sumatra 4, , Pre-qualification 4 Medan - Binjai 20.5 North Sumatra 1, , Pre-qualification 5 Pekanbaru - Kandis -Dumai Riau, South Sumatra 6, , Pre-qualification 6 Serangan - Tanjung Benoa 7.5 Bali 1, , Pre-qualification 7 Manado - Bitung 46.0 North Sulawesi 4, , Pre-qualification 8 Tegineneng - Babatan 51.0 Lampung, South Sumatra 2, , Pre-qualification 9 Sumedang - Dawuan 33.5 West Java 2, na na Pre-qualification 10 Palembang - Indralaya 16.7 South Sumatra , Pre-qualification 11 Pandaan - Malang 30.0 East Java 2, na Pre-qualification 12 Ciranjang - padalarang 33.3 West Java 3, na Pre-qualification 13 Sukabumi - Ciranjang 31.0 West Java 1, , Pre-qualification 14 Jogja - Bawen Central Java 5, na na Pre-qualification Total , , Cilegon - Bojanegara 10.0 Banten, West Java 1, , Document preparation 2 Djuanda Airport - Tj. Perak II 23.0 East Java 1, , Document preparation 3 Semarang - Demak 25.0 Central Java 2, na na Document preparation 4 Probolinggo Banyuwangi East Java 7, na Document preparation 5 Jogja - Solo 45.0 Central Java 2, , AMDAL study Total , ,660.1 Source: KKPPI, Ministry of Public Works, CIMB-GK Research Figure 19: Map Source: Ministry of Public Works But Jasa Marga remains the king of toll roads. Jasa Marga, given its pioneer position in the sector, commands about 77% of the toll roads in Indonesia, or 496km out of Indonesia s 644km. This puts Jasa Marga at the forefront of toll-road development in Indonesia, with a very wide gap with the next largest operator, the unlisted Marga Mandala Sakti (72.5km). Even if we assume that 991km of new toll roads would be completed in 2012, Jasa Marga would still retain its dominance, at 641km of toll roads, albeit with a lower share of below 40% of the total toll roads in Indonesia. Jasa Marga 23 May 2008 [ 13 ]

14 Figure 20: Jasa Marga vs. private-sector operators Toll road As % of Length (km) Indonesia Jasa Marga % Private Sector % - Citra Marga Nusaphala Persada % - Marga Mandala Sakti % - Marga Bumi Mataraya % - Jalantol Lingkar Luar Jakarta % - Bosowa Marga Nusantara % - Bintaro Serpong Damai % Total Indonesia % Source: Company Jasa Marga has longer concession periods than peers. Compared with regional countries, Indonesian toll roads have longer concessions of an average of 40 years vs. the average 30 years in the region. Existing concessions typically last years, but new contracts have a shorter 35 years. This explains the longer concession average for Jasa Marga compared with private investors which are starting to build projects. The longer concession period in Indonesia is meant for meeting payback periods and required returns, to compensate for the lack of tariff increases pre Figure 22: Jasa Marga s concessions Figure 21: Average concession periods in the region Concession Period (years) Notes Indonesia for new toll roads. No guarantee on extension Thailand 30 Extension for 10 more years can be given twice Malaysia New toll roads run for up to 30 years China 30 New toll roads run for up to 25 years. Extension for 3-5 more years available if road undergoes widening. Source: Company Jasa Marga 23 May 2008 [ 14 ]

15 Figure 23: Evolution of Jasa Marga s toll roads and toll-road sector Time-period Formation of Jasa -Second tariff hike Marga Jasa Marga's toll concessions Length (km) between the timeperiod Additions (reductions) Source: Company, CIMB-GK Research - Road Law no.13/1980 assigns sole right to build, operate and manage toll-roads to Jasa Marga Jagorawi Semarang (1983), Jakarta- Tangerang (1984), Airport tollroad (1985), Surabaya-Gempol (1986), Belmera (1986) - Government Regulation no.8/1990 authorizes Jasa Marga to form a JV to build toll-roads with private investors - Crisis hit, halting and slowing investments - First private tollroad construction toll-roads had been - Some 551 km of (Jakarta Harbor) built by 1998, 416km - Jasa Marga begins of which by Jasa its dual role Marga Cawang-Tomang- Pluit (1987), Jakarta-Cikampek (1988), Padaleunyi (1990), JORR (1991) Palikanci (1998), Ulujami-Pondok Aren (2001) -Jasa Marga restarted construction of toll-roads (JORR & Cikampek- Padalarang) -Negotiations with private investors were re-started, but mostly failed on structural problems Cikampek- Padalarang (2003), and further completions of JORR - New Road Law no.38/2004 replaced the old Road Law, new legal framework providing more certainty on investment in the sector & ends Jasa Marga's dual role and establishes BPJT - First tariff hike - Tendering for TransJava toll-roads re-started -Further completions of JORR - Porong-Gempol section (5km) declared forje majeure on Lapindo mudflow - Jasa Marga's IPO -Further completions of JORR - Jasa Marga's new toll-roads: 1) Bogor Ring Road, 2) Gempol-Pasuruan, 3) Semarang-Solo, 4) Cengkareng- Kunciran and 5) Kunciran-Serpong Jasa Marga 23 May 2008 [ 15 ]

16 Traffic volumes Over-capacity at some toll roads. Traffic volume is about 2.5m vehicles per day on Indonesian toll roads. Some 20% is concentrated in the inner ring road of Jakarta alone, and 75% within Jakarta. The inner ring road has reached maximum capacity, particularly during peak hours. It is now heavily congested, while Jakarta s outer ring roads are still seeing growth on the back of more interconnections and the completion of missing links. Close link between traffic and vehicle growth. We have observed a close positive relationship between traffic growth and vehicle growth over the years (0.95x correlation). On the back of our economic-growth forecasts of around 6-7% p.a. for Indonesia for FY08-10, we expect vehicle growth of 3-3.5% p.a. in the corresponding years, given the typical 0.5x correlation. This would mean 3-3.3% p.a. traffic growth on average for Indonesia over FY Jasa Marga contributes 94% of total daily traffic volume. While Jasa Marga s toll roads form 77% of Indonesia s toll roads, its traffic volume accounts for a higher 94% of total daily traffic volume in Indonesia. This underscores the strategic location of its existing concessions. Most of its toll roads have become primary arteries, particularly in Jakarta. Although the figure could potentially decline with the emergence of new toll roads by other investors by , we expect Jasa Marga s traffic to continue to dominate national traffic on the back of the strong growth at JORR and its Greater Jakarta sections. Its new toll roads in Java also form part of the trans-java trunk road, criss-crossing burgeoning townships and cities in central and east Java. Figure 24: Total average daily traffic volume in Indonesia and Jasa Marga ( 000) Non-Jasa Marga TOTAL (Indonesia) TOTAL (Jasa Marga) Jakarta Intra Ring Road Jagorawi Jakarta-Cikampek Jakarta Outer Ring Road Jakarta Tangerang Prof. Dr,. Soedijatmo Surabaya-Gempol Padaleunyi Tangerang-Merak Semarang Ulujami-Pd Aren Surabaya-Gresik Belmera Palikanci Ujungpandang Cipularang Source: Company Figure 25: Traffic volume comparison Toll road length Average daily traffic (km) ('000) Indonesia 644 2,497 Malay sia 1,471 2,156 Thailand China 53,600 40,000 Jasa Marga 23 May 2008 [ 16 ]

17 Figure 26: Strong correlation between traffic growth and vehicle growth m m Jasa Marga Annual Traffic -(LHS) Vehicle population in Indonesia (ex motorbikes) (RHS) Source: Company, BPS Tariff structure Since Indonesia s toll-tariff structure had undergone a transformation since Road Law No. 38/2004. Prior to 2004, tariffs were set using Vehicle Operating Cost Savings calculations, and toll tariffs were never increased on a regular basis or ever trailed the inflation rate. However, with the new law, tariffs have been adjusted every two years, based on the inflation rate. They are also set by the Minister of Public Works, not by parliament. With the new legal framework, there should be more regular increases which suggest greater certainty on potential returns on investment. Tariffs have been raised twice since 2004, in 2005 and 2007 respectively, a sign of compliance by the government. Figure 27: Before and after Then (Road Law no.13/1980) Tariff setting: Presidential Decree is required following the recommendation from Ministry of Finance and Ministry of Transportation. The tariff setting was merely done based on Vehicle Operating Cost Savings calculations. No clear setting on adjustments, but must seek Parliament approval Now (Road Law no.38/2004) Tariff setting is based on Users' Affordability, Vehicle Operating Costs Savings calculation and Investment returns. Tariff adjustments and evaluations are carried out every two years, based on inflation rate. Tarif setting and adjustments are set by Minister of Public Works. Source: Ministry of Public Works Figure 28: Tariff increases so far (Rp/km) Rp/km Before After 2005 % chg After 2006 % chg After 2007 % chg Jagorawi Jakarta Cikampek Jakarta - Tangerang Cawang Pluit (JIRR) Surabaya- Gempol Padaleunyi Belmera Source: Company Tariffs in Indonesia still well below regional average. Indonesia s tariffs are still well below those in other countries. The absence of regular increases before 2004 was partly to blame. Users affordability has been somewhat misleading too, in our view, because it takes into account the non-urban population which does not use toll roads. However, biennial tariff increases should increasingly close the gap between Indonesian tariffs with those of the region. Move to an open system in Jakarta. The JIRR (Jasa Marga s and Citra Marga Nusaphala Persada s) and JORR toll roads are shifting to an open system. This should help to lift tariffs/km on these roads, on top of potential operating efficiencies. Jasa Marga 23 May 2008 [ 17 ]

18 Figure 29: Tariff comparisons Indonesia China Malay sia Thailand US2.2cts/km for cars (inner urban toll-road in Jakarta) US6.43 to 8.57cts /km for sedans US13-30cts/km US$0.97/car Land acquisition A traditional problem, but progress is being made. The government has been making progress on this front, noticeably with Road Law No. 38/2004, which states that land acquisitions would be carried out by the government. There have been corrective actions which include the introduction of revolving funds and land capping. Figure 30: Reforms on land acquisitions Reforms Remarks Implications Land freezing No land transation is allowed after toll-road corridor has been decided by the government. Reducing land speculation activities Land price Land price is determined by independent appraisal instead of Fairer land value using tax value of the land. Land title revocation Land title revocation is allowed in case no agreement is reached on the land price among the parties. Stricter actions, ensure project continuity Land capping Government will bear the land cost above 110% of the proposed land cost agreed in the concession agreement. Reducing cost-overrun risk for investors Revolving fund Government prepaid land acquisition cost, investor repay government after land acquisition of a section is completed. Reducing risk of delays Source: Ministry of Public Works Jasa Marga 23 May 2008 [ 18 ]

19 Outlook Time to catch up. All the evidence on lagging toll-road growth and underdevelopment in the sector calls for urgent investment in the sector. Toll roads form the backbone of road transportation in the country, and are expected to propel business and economic growth. Hence, we believe that toll roads would be the government s first priority in any infrastructure development. Corrective actions have been recently taken to address structural problems in the sector and should provide a solid framework going forward, we believe. This would precipitate further investments in the sector, for catch-up with regional countries. Figure 31: What went wrong and the corrective actions taken What went wrong? Corrective actions 1. Poor understanding of toll-road concept 1. Road Network plan - Toll-road as part of road network - Java Arterial Road Network Plan (JARN) is established - Toll as a financing concept 2. A PPP scheme is introduced - PPP as a partnercship concept 3. Land acquisition - Poor understanding of project financial feasibility - Revoving fund 2. No proper risk sharing policy - Land capping - Land acquisition risk - Land title revocation - Tariff setting and adjustment risk 4. Tariff setting - Traffic risk - Initial tariff based on return calculation 3. Jasa Marga's double role - Adjustment every 2 years based on inflation - Private investors' default risks borne by Jasa Marga - Determined by Minister of Public Works - Lenders relied on Jasa Marga's guarantee 5. Selection of investors 4. Most private investors were closely linked to Soeharto regime - Selection of investor based on lowest initial tariff offer - Investment risks were shielded by the connection factor - For non-viable project, selection of investor based on lowest subsidy proposal - These investors unwilling to bear the project risks nor continue the projects after Soeharto's regime ends - Selected investor must complete at leats 1 section before it can introduce new strategic partners in the venture Imminent fuel-price hikes should remove the current overhang over the sector and restore momentum Biennial inflation-adjusted tariff hikes offer a hedge against inflation while traffic growth has been quite resilient to tariff hikes Limited impact from fuelprice hikes as well Fuel-price hike to restore momentum in infrastructure development. There have been mounting concerns over a potential cut in the budget for infrastructure this year. This is largely due to the bulging amount needed to cover fuel subsidies, amid soaring oil prices. The initial allocation for infrastructure was over Rp60tr, in addition to Rp4tr for land capping and another Rp4tr for revolving funds, both of which would be used for land acquisitions. However, only 8% of this amount has been used YTD. With an imminent fuel-price hike in Jun 08, we believe the infrastructure budget would be restored. Most of the budget could be disbursed in 2H08, in our view, in 4Q08 particularly. As such, we expect more progress on land acquisitions and the construction of some toll roads in 2H08. This would create momentum for the sector and Jasa Marga, being the anchor of the toll-road sector. Inflation hedge. Unlike other domestic- or infrastructure-oriented companies, Jasa Marga uniquely offers a hedge on inflation, in our view. The new road law legalises tariff hikes based on the inflation rate every two years. Jasa Marga s revenue should grow in line with the inflation rate, as its traffic volumes historically tend to be inelastic to tariff hikes. This inelasticity is not surprising, as nearly all of its toll roads are linked to strategic areas (inner cities or connecting major cities) where road utilisation is high, congestions are a routine and toll roads no longer considered alternative roads but primary roads. As a matter of fact, 78% of its traffic volume and revenue in FY07 (coming from its key toll roads within Jakarta) proved inelastic to tariff hikes. A 20-25% tariff hike would have limited impairment to traffic growth, in our view. In more severe hikes (e.g. of over 50% at Jakarta-Cikampek in 2006), traffic only softened by 15%. On the other hand, we believe costs and expenses are manageable. Cost-efficiency initiatives and the restructuring of its two main cost components, employee and interest expense, are expected to reduce its operating expenses. EBITDA margin expansion should offset potentially higher leverage for new toll-road construction, we believe, and net margin expansion is expected. Oil-price hedge. Traffic volumes have also proved inelastic to costlier fuel. The Oct 05 experience is an illustration, with traffic volume increasing by 6.9% yoy in FY05 despite a 100% increase in fuel prices, and only down 4% the following year. Traffic volume at key toll roads (Inner Ring Road) in the capital city was largely unchanged, underscoring the importance of Jasa Marga s toll roads to most people. If fuel prices are increased by 30% in Jun 08, we believe the impact on its traffic volume would be limited. The main users of toll roads are typically from the medium-to-high income groups, which are generally more resistant to higher fuel prices. Jasa Marga 23 May 2008 [ 19 ]

20 Figure 32: Traffic volumes vs. tariff increases and fuel-price hikes Traffic volume at key toll roads in Jakarta vs. tariff increases traffic tariff growth yoy increase Camareng (JIRR) % 0.0% % 0.0% % 0.0% Jakarta Cikampek % 0.0% % 0.3% % 0.0% Jagorawi % 0.1% % 0.2% % 0.0% m vehicles Traffic vs. fuel price hike Jasa Marga Traffic Reguler Gasoline Price Rp/litre Source: Company Three reasons to believe in biennial tariff hikes: 1) critical need for infrastructure, hence, the government cannot afford to lose investors confidence; 2) rising vested interests to increase tariffs; and 3) most toll-road users relatively resilient to higher costs Doubts on future tariff hikes overblown, in our view. Our notion of an inflation hedge is underpinned by the certainty of future tariff hikes. There have been doubts on the government s commitment to future tariff hikes. We take the view that the current legal framework guarantees future tariff hikes and risks of non-fulfilment are low. We give credit to the government s efforts to urge investment in this sector through reforms and land-acquisition initiatives. Infrastructure and toll roads would remain a top investment priority, we believe, even if there is a change in administrative power in the country. We also believe that with more operators coming into the picture, when a new batch of toll roads becomes operational, there would be greater pressure on the government to abide by the law. Moreover, we note that top politicians are entering the sector, such as Jusuf Kalla s Bosowa Group and the Bakrie Group, which have toll concessions and are developing them in FY Hence, there could be rising vested interests in biennial tariff hikes. Besides, toll-road users are largely medium-to-highincome Indonesians who are typically more resilient to inflation and are less sociopolitically sensitive. A successful 20% hike on Jasa Marga s nine toll roads in Sep 07 has reinforced our confidence in the government s appetite for regular tariff increases, after the first hike in The next one will be an 11-13% hike for Jasa Marga s remaining two toll roads, by mid-year. This should further restore confidence, in our view. However, while we believe future tariff hikes will take place every two years, we do not rule out 1-3month delays, to factor in sluggish execution from the Ministry of Public Works. Growth will also come from new toll roads. Jasa Marga may be one of the few tollroad operators in the region that is still in a growth phase. It will be adding six toll roads (153km) over the next five years, boosting the total length of its toll roads to 641km from 496km currently. We expect new toll roads to be gradually completed in FY Hence, the impact on earnings would be felt after FY10, while near-term growth should still be generated by tariff and traffic growth at existing toll roads. These six toll roads could contribute over Rp500bn of revenue by FY12, about 8.2% of the company s expected revenue in FY12, but a decent 19.6% of FY07 revenue. Figure 33: Jasa Marga s toll-road growth (km) Source: Company Jasa Marga 23 May 2008 [ 20 ]