THIRD-PARTY AFFILIATED RESEARCH

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1 Vol m Construction Indonesia November 2, 2017 Company Note Indonesia ADD (no change) Consensus ratings*: Buy 20 Hold 1 Sell 1 Current price: Rp2,200 Target price: Rp2,900 Previous target: Rp2,500 Up/downside: 31.8% CIMB / Consensus: 6.8% Reuters: Bloomberg: Market cap: Average daily turnover: ADHI.JK ADHI IJ US$576.9m Rp7,833,869m US$1.71m Rp22,910m Current shares o/s: 3,561m Free float: 49.0% *Source: Bloomberg Key changes in this note FY17F core EPS decreased by 7%. FY18F core EPS increased by 7%. FY19F core EPS increased by 32%. 2,500 2,300 2,100 1,900 1, Source: Bloomberg Price performance 1M 3M 12M Absolute (%) Relative (%) Major shareholders % held Government of Indonesia 51.0 Insert Price Close Relative to JCI (RHS) Nov-16 Feb-17 May-17 Aug Adhi Karya Insert Insert Transit-oriented developments (TOD) to drive growth In 9M17, TOD posted Rp348bn marketing sales, with nine new projects in FY M17 net profit jumped 78% yoy, masking a weak 3Q17 figure that contracted 34% qoq due to high interest expense incurred from financing LRT s working capital. It has yet to receive its first LRT payment (Rp3tr-4tr expected at end-17), which could improve FY17F OCF by 93% at least. Cumulative LRT revenue realisation in Sep 15 to Sep 17 was 21.9%, with 12.8% progress in 9M17 alone, though this is still behind our expectation. Maintain Add. We raise TP to Rp2,900, still based on 16x FY18F P/E. Factoring TOD projects into our FY17-19F forecasts ADHI launched its first TOD project in Dec 16 (Eastern Green in Bekasi), which had a low take-up rate of 10%. TOD performance improved in 9M17, garnering Rp348bn marketing sales. The latest pre-launch was Urban Signature apartment tower 1 in Aug 17, which was fully booked. We expect a c.60% take-up rate when it is launched in Nov 17. ADHI plans to launch nine new projects in FY18-19F. We estimate Rp680bn-1tr marketing sales in FY17-19F. Positive on TOD despite riskier payment terms We are positive on ADHI s TOD plans amidst a more buoyant property market and deliveries of infra-related projects. TODs offer 30% GPM, which is higher than ADHI s main construction GPM of 6-13%. About 70% of TOD project buyers are investors, as reflected by some 85% of payments coming under soft cash terms. This may pose higher impairment risk in the future. ADHI plans to increase the proportion of mortgage payments from 10% of its total payment composition currently to 40-50% in the future. Weak 3Q17 results but strong overall growth in 9M17 ADHI posted Rp8.7tr revenue (+53% yoy, +20% qoq) in 9M17, in line with our expectation. 9M17 EBIT was Rp765bn (+165% yoy, +24% qoq), above our estimate. The 9M17 EBIT margin widened to 8.8% (vs. 8.5% in 1H17) from a lower opex-to-revenue ratio of 4.2% in 9M17 (vs. 4.6% in 1H17). 9M17 net profit of Rp205bn (+78% yoy, -34% qoq) beat its 3-year average achievement in 9M of 33% but this lagged behind 9M16 s 43% achievement. 9M17 net profit was above at 40% of our FY17 forecast. Slower-than-expected Jabodebek LRT revenue realisation in 9M17 The cumulative progress of the Jabodebek LRT in Sep 15 to Sep 17 reached 21.9% (implied value of Rp4.3tr). In 9M17 alone, LRT revenue was only Rp2.5tr, implying 12.8% additional progress. We deem LRT revenue realisation slower than expected because it has yet to receive the first payment from KAI (Kereta Api Indonesia or Indonesia Railways Company). We adjust our cumulative LRT revenue realisation target to 33%/73% in FY17F/FY18F (prev. 37%/85% in FY17F/FY18F/FY19F). KAI secures all LRT PMN; ADHI still awaiting the first payment KAI has secured all PMN (capital injections) for the Jabodebek LRT, including Rp2tr from FY15 PMN reallocation and Rp5.6tr of new funds from the FY17 revised state budget and FY18 state budget. Even so, ADHI is still waiting to receive its first project payment. It expects to pocket Rp3tr-4tr by end-fy17f vs. our assumption of FY18F. If received, operating cash flow (OCF) at end-fy17f will improve by 93% (Rp3tr payment) or turn positive (Rp4tr payment). Maintain Add with a higher target price of Rp2,900 We cut our FY17 EPS forecast by 7% due to lower LRT revenue target, but raise FY18-19 EPS forecasts by 7-32% as we factor in TOD projects. We raise our target price to Rp2,900 as we roll forward to FY18F, still based on 16x P/E (3-year P/E mean). Key risks: delay in LRT project payment, slower-than-expected new contracts achievement, slower-than-expected LRT revenue realisation and slower-than-expected marketing sales. Analyst(s) Aurelia BARUS T (62) E aurelia.barus@cimb.com Financial Summary Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F Revenue (Rpb) 9,390 11,064 14,750 18,267 19,222 Operating EBITDA (Rpb) ,469 2,134 2,213 Net Profit (Rpb) Core EPS (Rp) Core EPS Growth (7.8%) (42.1%) 77.2% 34.8% 22.9% FD Core P/E (x) DPS (Rp) Dividend Yield 1.64% 1.19% 1.20% 1.21% 1.63% EV/EBITDA (x) P/FCFE (x) NA Net Gearing (23%) 17% 96% 113% 60% P/BV (x) ROE 10.3% 5.1% 8.3% 10.0% 10.9% % Change In Core EPS Estimates (6.9%) 7.3% 31.6% CIMB/consensus EPS (x) SOURCE: COMPANY DATA, CIMB FORECASTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Powered by the EFA Platform

2 Transit-oriented development (TOD) to drive growth TOD PROGRESS AND OUTLOOK TOD progress Our latest discussion with ADHI revealed that in conjunction with Jabodebek LRT phase I, it plans to build 19 integrated TOD under the brand LRT City. 18 TODs will be integrated with Jabodebek LRT phase I stations (Fig 1, red line represents Jabodebek LRT phase I), and one TOD will be integrated with Jabodebek LRT phase II station in Sentul. Out of the planned 19 TODs, only 16 stations will include residential and/or commercial developments while the rest will only have supporting facilities and parking areas due to saturated surrounding areas (Fig 2). Total area for the 19 planned TODs is 57ha, with total estimated land acquisition cost of Rp3tr (combined ADHI and partners). ADHI s portion is Rp2tr. It secured of 27ha land area in FY15-9M17 and spent Rp800bn in total. It will secure the remaining 30ha in FY18F for a total of Rp1.2tr, of which some of the costs will be borne by its partners. Figure 1: Jabodebek LRT map - red line represents Jabodebek LRT phase I SOURCES: CIMB, COMPANY REPORTS 2

3 Figure 2: TOD plans Residence Commercial Area Support Facilities Office Hotel (MICE) Park & ride Meeting point Condotel Jabodebek LRT phase I East Bekasi West Bekasi Cikunir Jatibening Jaticempaka Halim Cawang Cibinong Cikoko Pancoran Kuningan Rasuna Said Setiabudi Dukuh Atas Taman Mini Kp. Rambutan Ciracas Cibubur Jabodebek LRT phase II Sentul SOURCE: CIMB RESEARCH, COMPANY Looking forward to more project launches ADHI s TOD projects are divided into three different schemes: 1) sole development by ADHI s TOD division, 2) JV development by ADHI s TOD division and Adhi Persada Properti (APP), and 3) JV development by ADHI s TOD division and third party (other SOE and/or private entity). It launched its first project in Dec 16 and has launched three apartment projects and two shop house projects thus far. It plans to launch another apartment projects in Nov 17. In FY18-19F, the company expects to launch nine projects in nine locations. It aims to sell five of its projects en bloc, which offers potential upside to our forecasts as we have yet to factor this into our model. Besides TOD that is integrated with Jabodebek LRT, ADHI is interested in participating in TOD along commuter lines with KAI. KAI is land owner of all commuter line TODs. For our outlook on TOD commuter line development, please see the subsequent section titled Brief outlook of TOD commuter line developments. EASTERN GREEN Eastern Green is located in Bekasi, West Java. Eastern Green will be integrated with East Bekasi station (Jabodebek LRT phase I). Total land area is 14ha, of which only 3.2ha is for property development and the remaining 10.8ha has been earmarked for the LRT depot. It plans to have 16 towers, i.e. 15 apartment towers and one office tower. This project is 100%-owned by ADHI at the holding company level. At the business division and subsidiary levels, this project is under a JV, in which ADHI s TOD division has a 60% stake and Adhi Persada Properti (APP) has a 40% stake. APP is the land owner of the project. Project launch progress and outlook: It launched one apartment tower (LOT 1) in Dec 2016, which had a low take-up rate of only 10%. We estimate the project ASP to be Rp18m psm with total gross development value (GDV) of Rp323.5bn. Since its launch in Dec 16 until 9M17, it garnered Rp114bn marketing sales. In FY16, it fully sold 12 units of shop houses in the area for total marketing sales of Rp24bn. In FY16, the JV company of Eastern Green fully sold a mall in the area to APP. This was not accounted for as marketing sales at ADHI s holding level. 3

4 It targets to sell apartment tower 2 (LOT 1) en bloc. It mentioned there are at least three interested buyers, namely two local and a Japanese party. It aims to launch one apartment tower (LOT 2) in FY18F with estimated ASP of Rp23m psm. Figure 3: Show unit of Eastern Green apartment tower 1 (LOT 1) Figure 4: Show unit of Eastern Green apartment tower 1 (LOT 1) SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS Figure 5: Masterplan of Eastern Green SOURCES: CIMB, COMPANY REPORTS 4

5 ROYAL SENTUL PARK Royal Sentul Park is located in Bogor, West Java, and will be integrated with Sentul station (Jabodebek LRT phase II). Total land area is 14.8ha and it targets to have 10 towers in total (9 apartments and 1 office). The project will be developed under two schemes (JV development and sole development). The company launched one project in Dec 16 and expects more projects to be launched in this area in FY20F at the earliest after the construction of Jabodebek LRT phase II commences. Figure 6: Masterplan of Royal Sentul Park SOURCES: CIMB, COMPANY REPORTS JV development scheme Phase I of the development is a JV between ADHI (65%) and a private partner (35%). Total land area for phase I is 9.8ha, whereby the land is owned by the private partner. It launched one apartment tower in Dec 2016, with a low take-up rate of only 11%. We estimate the project ASP to be Rp16m psm with total GDV of Rp763bn. Since its launch in Dec 16 until 9M17, it garnered Rp83bn marketing sales in total. Sole development scheme Phase II is solely developed by ADHI s TOD division with total land area of 5ha. GATEWAY PARK Gateway Park is located in Jaticempaka, Bekasi, which will be integrated with Jaticempaka station (Jabodebek LRT phase I station). Gateway Park s total land area is 5.2ha, which will be developed via a JV with Nusa Jaya Propertindo (40% stake). Nusa Jaya Propertindo is a subsidiary of Urban Jaya Propertindo, which has several property development JVs with SOE contractors subsidiaries, including Adhi Persada Properti (APP) for Grand Dhika City and WIKA Realty for Tamansari Margonda. Project launch progress and outlook: In early Sep 17, it held its first apartment project pre-launch and received 90% registration booking. The project launch took place at end- Sep 17, and marketing sales reached 60%. We estimate ASP at Rp18m psm with total GDV of Rp330bn. It also launched 20 shop houses, with ASP per unit of Rp3.5bn. In 9M17, it garnered Rp27bn marketing sales in total. It targets to sell apartment tower 2 en bloc to a local investor and expects to complete the transaction by end-fy17f. Management said the potential buyer is a local investor. 5

6 Figure 7: Masterplan of Gateway Park Apartment tower 3 Middle class apartment Apartment tower 2 Middle class apartment Apartment tower 4 Middle class apartment Apartment tower 1 Middle class apartment Pond Main gate Apartment tower 5 Iconic apartment LRT station Shop houses Mall SOURCES: CIMB, LRT CITY URBAN SIGNATURE Urban Signature is located in Ciracas, East Jakarta, and will be integrated with Ciracas station (Jabodebek LRT phase I). Total land area is 11.2ha and Urban Signature will be developed via JV with two different partners: JV with Nusa Wijaya Propertindo (NWP) for 6.2ha (ADHI s stake: 60%; NWP s stake: 40%) JV with another SOE (still under discussion) for 5ha (ADHI s stake: 60%; the other SOE s stake: 40%) Project launch progress and outlook: Its first apartment s (apartment tower 1-A) pre-launch was in Aug 17, and garnered 100% registration booking. We estimate ASP for the project at Rp18m psm with total GDV of Rp231bn. The project launch is expected to take place in early-nov 17, and we estimate 60% take-up rate then. ADHI mentioned that it targets to sell apartment tower 1-B en bloc to a private investor. Management said the potential buyer is local investor. 6

7 Figure 8: Masterplan of Urban Signature (11.2ha) SOURCES: CIMB, COMPANY REPORTS Marketing sales progress and outlook We estimate Rp680bn/Rp1tr/Rp1tr marketing sales in FY17F/FY18F/FY19F from the TOD business: In FY16, ADHI s TOD division garnered a total of Rp251.7bn marketing sales. On the ADHI holding level, total TOD marketing sales were only for Rp83bn. We exclude Rp168bn in marketing sales for Eastern Green mall as it was sold by the TOD-APP JV to APP (intra-company transaction). As of 9M17, the company had booked a total of Rp348bn marketing sales. We project total marketing sales of Rp680bn in FY17F. We think our FY17F target is achievable given the major contribution expected to come from the Gateway Park launch in Nov 17 (projecting 60% marketing sales). Our marketing sales target in FY17F is more conservative compared to the company s guidance of Rp1.5tr. In FY18F, the company is targeting to launch 4 new apartments, 1 office, and 2 commercial projects in five locations. It is also targeting to hold a block sale (apartment project) in FY18F, which we have not included into our forecasts yet. Our take-up rate assumptions for the new project launches are 50-60%. The company guided for total marketing sales of Rp1.9tr in FY18F. In FY19F, it plans to launch 4 new projects in 4 locations. We estimate that each project will have Rp200bn GDV (lower than the average of its current GDV). We assume 50% take-up rates for the new projects. The company is targeting Rp2.4tr marketing sales in FY19F. Expect better push from potential partnerships with property agents The company said it currently does not have partnerships with property agents, but it may look at partnering with property agents in future. We believe this is a good way to boost its marketing sales. 7

8 Improving overall margins Construction costs form 50-60% of the TOD business s cost of revenue, with land costs forming 10-20%, and overheads, licensing, design and administration fees forming 20-30%. Figure 9: TOD s cost of revenue breakdown 20% 20% 60% Land cost Construction Overhead, licensing, design, administrations, etc SOURCE: CIMB RESEARCH, COMPANY The company guided for 30% GPM for TOD developments, on par with its existing property business under APP but higher compared to its main contractor business s 6-13% GPM. Figure 10: ADHI's revenue contribution Figure 11: ADHI's GPM by business segments 100% 90% 80% 70% 60% 50% 40% 40% 30% 20% 10% 0% -10% -20% -30% 30% 20% 10% 0% F 20108F 2019F Construction (non-lrt) Construction (LRT) EPC Property (APP and TOD) Precast SOURCE: CIMB RESEARCH, COMPANY -40% -50% F 2018F 2019F Construction Construction (non-lrt) Construction (LRT) EPC Property (APP and TOD) Precast Total GPM SOURCE: CIMB RESEARCH, COMPANY Plenty of investment buyers; ADHI is exposed to higher risk The company said that 70% of its TOD project buyers are investment buyers, while the remaining 30% are first-time home buyers. Buyers are normally local residents from the surrounding areas. Since most of its buyers are investment buyers, and likely have a couple of investments on hand, 85% of its payments are currently under soft cash payment terms (cash installments to developers). Soft cash payment terms are comprised 12x/24x/36x/60x installments with downpayments of 20%. Soft cash payments with 60x installments contribute only 1% of its total payments and are offered only for special programmes (promotions). This is positive for ADHI s working capital outlook as the development period for its apartment projects is three years. However, we believe that the large portion of soft cash payment terms could pose higher future impairment risks for ADHI. 8

9 Figure 12: TOD projects payment term composition Hard cash 5% Mortgage 10% Soft cash 85% SOURCE: CIMB RESEARCH, COMPANY ADHI said that currently it has cooperation agreements with three banks, namely Bank Mandiri (BMRI IJ), Bank Muamalat, and Bank BTN (BBTN IJ), for mortgage loans. It said that moving forward, it plans to partner with more banks, including Bank BNI (BBNI IJ). In the next 2-3 years, the company targets to increase the mortgage payment composition to 40-50%; however, this depends on customers preferences. A higher proportion of mortgage payments translates into longer receivable days for ADHI as mortgage disbursements will lag behind revenue recognition. The company starts recognising revenue after the foundation is completed (20% progress) and downpayment is received. After that, it will book revenue based on progress of completion. However, mortgages have to follow each bank s conditions. For example, Bank Indonesia s regulations for apartment mortgage disbursements are: 40% after foundation, 30% after topping off, 20% when delivered, and 10% when the property title deed is ready. However, the mortgage disbursements in Indonesia differ from one bank to another based on each bank s discretion. On a more positive note, higher mortgage payment contributions lower ADHI s future impairment risks, in our view. 9

10 Discussions on the offered property titles Most of its TOD property developments are under three categories: sole development, JVs with private entities and JVs with other SOEs. Under the JV with private entity category, it is likely that the private entity will be the land owner and ADHI will inject funds for development working capital and marketing expenses. Under this category, as the private entity is the original land owner, the property title for the buyers will be pure right-to-build (right-to-build on top of right-to-build). The right-to-build certificate will last for up to 30 years, which can be extended by another 20 years and followed by a subsequent 30. Under the sole development and JVs with other SOEs categories, the land title should be right-to-build on top of right-to-develop as the land is indirectly owned by the government. Under this title, the property ownership will last for up to 30 years, which can be extended by another 20 years. The right-to-build on top of right-to-develop property title seems weaker compared to the pure right-to-build property title. The biggest risk is if the land utilisation contract is not properly formulated. Plus, at the end of the ownership period, the property owners do not receive any portion from the land payment allotment, though this is minimal. On the other hand, the right-to-build on top of right-to-develop property title could be more secure in case of any disputes on land ownership. The government as the land owner will need to resolve the problem and not the tenants. 10

11 Brief outlook on commuter line TOD developments The commuter line TOD developments aim to reduce the distance between stations and residential areas. Most commuters live between 1km and 10km from a train station. Total daily average passengers on a commuter line amount to about 914,840. In Dec 2016, PT Kereta Api Indonesia (KAI), together with the National Housing Company (Perum Perumnas), signed a memorandum of understanding (MOU) to build 5,100 low-cost high-rise residential units with total value of Rp3tr near three commuter line stations, namely Jakarta, Depok, and Bogor. These projects will be built on KAI s land areas. Hence, the scheme will be on a long-term 30- year lease. Going forward, there could be more TOD projects as KAI has a total of 80 commuter line stations in the Jabodetabek (Jakarta-Bodor-Depok- Tangerang-Bekasi) area. Figure 13: Breakdown of planned 5,100 low-cost high-rise residential units in Jakarta, Depok, and Bogor Stations Total units Bogor 3,600 Pondok Cina 600 Tanjung Barat 900 SOURCES: PERUMNAS Figure 14: Jabodetabek commuter line map SOURCES: CIMB, PT KAI 11

12 9M17 RESULTS REVIEW Weak 3Q17 results but strong growth overall in 9M17 ADHI posted Rp8.7tr revenue (+53% yoy, +20% qoq) in 9M17, accounting for 55%/55% of our/consensus FY17F forecasts. This was in line with its three-year average achievement of 56% in 9M and ahead of its 9M16 achievement of 51%, during which it started to realise LRT revenue. It booked Rp765bn EBIT (+165% yoy, +24% qoq) in 9M17, accounting for 55%/50% of our/consensus FY17F forecasts. This was ahead of its three-year average achievement of 42% in 9M and 39% in 9M16. The EBIT margin improved further to 8.8% in 9M17 (8.3% in 1H17). This can mainly be attributed to a lower opex to revenue ratio of 4.2% in 9M17 vs. 4.6% in 1H17. The pretax profit margin dropped to 5% in 9M17 (vs. 6% in 1H17), hit by a steep increase in interest expense of Rp294bn in 9M17 (+90% yoy, +125% qoq), as well as Rp48bn total other expenses (+69% qoq). The sharp rise in interest expense booking in 9M17 was mainly due to working capital for the Jabodebek LRT. It booked Rp205bn net profit (+78% yoy, -34% qoq), accounting for 40%/36% of our/consensus forecasts in FY17F. This was ahead of its three-year average of 33% in 9M. However, this was below the 43% in 9M16. Figure 15: Results comparison FYE Dec (Rp bn) 3QFY17 3QFY16 yoy % qoq % 3QFY17 3QFY16 yoy% Prev. 2QFY17 chg chg Cum Cum chg FY17F Comments Revenue 3, , , , , ,884.3 In line, 55%/55% of CIMBe/consensus FY17F (3-yr avg achievement in 9M: 56%) Profit from JO Operating costs (3,194.2) (2,379.9) 34.2 (2,663.7) 19.9 (7,949.9) (5,408.0) 47.0 (14,482.1) EBITDA ,544.0 EBITDA margin (%) Depn & Amort , EBIT ,402.2 Ahead, 55%/50% of CIMBe/consensus FY17F (3-yr. avg. achievement in 9M: 42%) Interest expense (144.6) (64.3) (76.0) 90.2 (293.9) (157.4) 86.7 (301.3) Interest & invt inc (13.5) (35.5) - Forex (32.8) 10.1 (0.1) 8, Bad debt expense (3.7) (0.4) (2.5) 47.9 (10.0) (4.2) (200.0) Other income/ (exp) (47.7) (24.1) 98.2 (28.3) 68.7 (91.2) 25.8 (453.9) Pretax profit Tax Tax rate (%) Minority interests 0.6 (0.2) (0.3) (2.4) Net profit (33.5) Ahead, 40%/36% of CIMBe/consensus FY17F (3-yr. avg. achievement in 9M: 33%) Net profit margin 2.1% 2.3% 3.8% 2.4% 2.0% 3.2% Core net profit (33.5) Core profit net margin 2.0% 2.3% 3.7% 2.3% 2.0% 3.2% SOURCES: CIMB, COMPANY REPORTS 12

13 JABODEBEK LRT PROGRESS AND OUTLOOK Slower-than-expected Jabodebek LRT revenue realisation From Sep 15 up to Sep 17, the Jabodebek LRT was 21.9% complete and ADHI booked total revenue of Rp4.3tr. LRT revenue in 9M17 alone was just Rp2.5tr, implying 12.8% progress in Jan-Sep 2017, which was slower than our expectation. We deem the LRT revenue realisation slower than expected as it has yet to receive the first payment from KAI. We now adjust our total cumulative LRT revenue realisation targets in FY17F/FY18F/FY19F to 33%/73%/100% (previously 37%/85%/100%). Our revised FY17F cumulative LRT revenue realisation target is in line with the company s latest guidance of 35%. Figure 16: Jabodebek LRT phase I realisation target (CIMBe) in Rp bn 25,000 20,000 15,000 10,000 5, M17 FY17F FY18F FY19F Total contracts (exc. VAT) Rev. in FY15 Rev. in FY16 Rev. in 1Q17 Rev. in 2Q17 Rev. in 3Q17 Rev. in 4Q17 Rev. in FY18F Rev. in FY19F SOURCE: CIMB RESEARCH, COMPANY KAI has secured all PMN tranches; ADHI is still waiting for the first payment PT KAI (Indonesia Railways Company) has secured all PMN (capital injections) for the Jabodebek LRT, including Rp2tr for the FY15 PMN reallocation and a total of Rp5.6tr for the new PMN (under the FY17 revised state budget and FY18 state budget). However, KAI is still waiting for the LRT subsidy scheme to be finalised (the Ministry of Finance will need to issue a ministerial decree), which is expected to be completed in Nov 17. This is necessary for PT KAI to receive loans from financial institution consortiums (estimated to be as much as 2x the total equity base of Rp7.6tr, or a Rp15tr loan). ADHI mentioned that it expects PT KAI to receive the disbursement from the FY17F state budget PMN in Dec 2017 at the latest. PT KAI is currently awaiting the issuance of the government regulation regarding the approved PMN. It will then undergo an audit by the National Government Internal Auditor (BPKP) as the project development had started before the PMN was approved. This is stipulated in Presidential Decree No.65/2016. In spite of this, ADHI still expects to receive the first project payment (up to Rp3tr-4tr) from PT KAI by end-fy17f, which is ahead of our expectation. If this materialises, it would significantly improve its operating cashflows (OCF) by 93% as at end-fy17f if the payment is Rp3tr, or turn to positive if the payment is Rp4tr. 13

14 NEW CONTRACTS AND OUTLOOK Weak new contracts achievement in 9M17 The company booked a total of Rp10.3tr (-6.4% yoy) new contracts, excluding phase I of the Jabodebek LRT in 9M17. This accounted for 53%/48% of our/the company s FY17F new contracts targets, excluding phase I of the Jabodebek LRT, or lower than its three-year average of 64% in 9M. As a result, we revise down our new contracts (excluding LRT) target in FY17F to Rp16.6tr (-7% yoy). We also lower our new contracts targets in FY18F/FY19F to Rp18tr/Rp19.6tr as we maintain our new contracts yoy growth at the same rate of 9% yoy p.a. Figure 17: ADHI's 9M17 new contracts achievement vs. our previous new contracts target of Rp19.4tr Figure 18: ADHI's 9M17 new contracts achievement against our revised new contracts target of Rp16.6tr 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% F 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% F 1Q-achievement 2Q-achievement 1Q-achievement 2Q-achievement 3Q-achievement Remaining to FY17F (CIMBe) 2Q-LT average 4Q-LT average 4Q-achievement 1Q-LT average 3Q-LT average 3Q-achievement Remaining to FY17F (CIMBe) 2Q-LT average 4Q-LT average 4Q-achievement 1Q-LT average 3Q-LT average SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, COMPANY CHANGES TO OUR FORECASTS We adjust our core EPS forecasts by -7% to +32% in FY17-19F. This is mainly driven by the change in LRT revenue realisation forecasts and pricing in TOD revenue. We also increase our JO profit assumptions by 65% p.a. in FY17-19F from better-than-expected JO profit booking in 9M17. Figure 19: Changes to forecasts In Rp bn, unless Old New Changes otherwise stated FY17F FY18F FY19F FY17F FY18F FY19F FY17F FY18F FY19F New contract (excl JO) 19,403 21,511 23,770 16,563 18,239 20,233-15% -15% -15% Revenue (incl JO) 16,605 18,717 20,708 15,939 19,576 20,661-4% 5% 0% Income from JO % 65% 65% Revenue (excl JO) 15,884 17,924 19,836 14,750 18,267 19,222-7% 2% -3% Gross profit 1,914 2,534 2,417 1,763 2,515 2,622-8% -1% 8% EBIT 1,402 1,954 1,748 1,338 1,969 2,039-5% 1% 17% Interest expense (301) (657) (595) (369) (612) (550) 23% -7% -8% Interest & invt inc % 120% 120% Bad debt expenses (200) (200) - (200) (200) (96) 0% 0% Pretax profit 969 1,124 1, ,217 1,411-5% 8% 22% Core net profit % 7% 32% Core EPS % 7% 32% Profitability (%) Gross margin 12.1% 14.1% 12.2% 12.0% 13.8% 12.2% 0% 0% 0% EBIT margin 8.4% 10.4% 8.4% 8.4% 10.1% 8.4% 0% 0% 0% Pretax margin 6.1% 6.3% 5.8% 6.2% 6.7% 5.8% 0% 0% 0% Core net margin 3.2% 3.3% 3.0% 3.2% 3.5% 3.0% 0% 0% 0% SOURCES: CIMB, COMPANY REPORTS 14

15 VALUATION AND RECOMMENDATION Maintain Add We maintain our Add call on ADHI, with a higher target price of Rp2,900 as we roll forward our valuation base to FY18F net profit, still based on 16x P/E (3-year P/E mean). Figure 20: ADHI s LT fwd P/E band Jan-13 4-Jul-13 4-Jan-14 4-Jul-14 4-Jan-15 4-Jul-15 4-Jan-16 4-Jul-16 4-Jan-17 4-Jul-17 ADHI P/E 3YR MA +1 St Dev +2 St Dev -1 St Dev -2 St Dev SOURCE: CIMB RESEARCH, COMPANY Figure 21: Sector Comparisons Company Target Recurring ROE Dividend Yield Price Market Core P/E (x) P/BV (x) Bloomberg Price (%) (%) Ticker Recom. Cap (US$ (local (local m) CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 curr) curr) Adhi Karya ADHI IJ ADD 2, , % 8.3% 1.2% 1.2% Pembangunan Perumahan PTPP IJ ADD 2, , , % 12.7% 1.5% 1.6% Wijaya Karya WIKA IJ ADD 1, , , % 11.6% 1.2% 1.5% Waskita Karya WSKT IJ ADD 2, , , % 16.1% 0.6% 0.8% Total Bangun Persada TOTL IJ ADD % 25.1% 6.1% 5.8% Indonesia average % 13.4% 0.9% 1.2% SOURCES: CIMB, COMPANY REPORTS Key risks Key risks to our Add call include: 1. Slower-than-expected Jabodebek LRT revenue realisation. 2. Slower-than-expected new contracts achievement. 3. Slower-than-expected marketing sales for its property business. 4. Delay in LRT project payment. 15

16 BY THE NUMBERS P/BV vs ROE Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F 28.0% 24.9% 21.8% 18.6% 15.5% 12.4% 9.3% 6.1% 3.0% 12-mth Fwd FD Core P/E vs FD Core EPS 29.9 Growth Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F 110% 74% 38% 2% -34% -70% Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs) FD Core EPS Growth (rhs) Profit & Loss (Rpb) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F Total Net Revenues 9,422 11,133 14,871 18,401 19,369 Gross Profit 1,007 1,185 1,884 2,649 2,769 Operating EBITDA ,469 2,134 2,213 Depreciation And Amortisation (31) (56) (132) (165) (174) Operating EBIT ,338 1,969 2,039 Financial Income/(Expense) (86) (95) (221) (552) (532) Pretax Income/(Loss) from Assoc Non-Operating Income/(Expense) 221 (21) (200) (200) (96) Profit Before Tax (pre-ei) ,217 1,411 Exceptional Items Pre-tax Profit ,217 1,411 Taxation (281) (298) (423) (528) (543) Exceptional Income - post-tax Profit After Tax Minority Interests (1) (2) (19) (49) (81) Preferred Dividends FX Gain/(Loss) - post tax Other Adjustments - post-tax Net Profit Recurring Net Profit Fully Diluted Recurring Net Profit Cash Flow (Rpb) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F EBITDA ,469 2,134 2,213 Cash Flow from Invt. & Assoc. Change In Working Capital 1,120 1,255 (1,907) 1,098 4,424 (Incr)/Decr in Total Provisions Other Non-Cash (Income)/Expense Other Operating Cashflow (905) (2,434) (2,014) (2,434) (5,428) Net Interest (Paid)/Received (177) (152) (346) (683) (665) Tax Paid (281) (298) (423) (528) (543) Cashflow From Operations 398 (843) (3,222) (413) 0 Capex (608) (441) (1,645) (1,500) (1,500) Disposals Of FAs/subsidiaries Acq. Of Subsidiaries/investments Other Investing Cashflow (185) (806) (126) (131) (134) Cash Flow From Investing (793) (1,247) (1,771) (1,631) (1,634) Debt Raised/(repaid) 843 1,171 5,756 2,256 2,070 Proceeds From Issue Of Shares 3, Shares Repurchased Dividends Paid (65) (93) (94) (95) (128) Preferred Dividends Other Financing Cashflow Cash Flow From Financing 3,901 1,138 5,869 2,400 2,279 Total Cash Generated 3,506 (952) Free Cashflow To Equity 448 (920) Free Cashflow To Firm (167) (1,776) (4,498) (1,301) (950) SOURCE: CIMB RESEARCH, COMPANY DATA 16

17 BY THE NUMBERS cont d Balance Sheet (Rpb) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F Total Cash And Equivalents 4,317 3,365 4,240 4,597 9,645 Total Debtors 6,405 9,802 16,980 20,124 16,936 Inventories Total Other Current Assets 3,807 3,537 3,958 4,746 5,324 Total Current Assets 14,691 16,835 25,350 29,674 32,123 Fixed Assets 1,099 1,460 3,328 4,663 5,989 Total Investments Intangible Assets Total Other Non-Current Assets 939 1,790 1,562 1,693 1,826 Total Non-current Assets 2,070 3,260 4,900 6,365 7,825 Short-term Debt 1,115 2,844 5,209 6,588 9,405 Current Portion of Long-Term Debt Total Creditors 6,704 8,604 11,973 14,397 15,141 Other Current Liabilities 1,595 1,596 2,038 2,363 2,463 Total Current Liabilities 9,414 13,044 19,220 23,349 27,009 Total Long-term Debt 2,003 1,428 4,819 5,696 4,948 Hybrid Debt - Debt Component Total Other Non-Current Liabilities Total Non-current Liabilities 2,182 1,589 4,980 5,857 5,110 Total Provisions Total Liabilities 11,599 14,653 24,219 29,225 32,138 Shareholders' Equity 5,154 5,433 6,002 6,737 7,652 Minority Interests Total Equity 5,162 5,443 6,031 6,815 7,810 Key Ratios Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F Revenue Growth 8.5% 17.8% 33.3% 23.8% 5.2% Operating EBITDA Growth (5.7%) 22.1% 87.3% 45.3% 3.7% Operating EBITDA Margin 6.8% 7.1% 10.0% 11.7% 11.5% Net Cash Per Share (Rp) 447 (255) (1,625) (2,159) (1,322) BVPS (Rp) 1,922 1,526 1,686 1,892 2,149 Gross Interest Cover Effective Tax Rate 37.7% 48.6% 46.2% 43.4% 38.5% Net Dividend Payout Ratio 11.9% 25.3% 16.8% 12.6% 13.8% Accounts Receivables Days Inventory Days Accounts Payables Days ROIC (%) 18.8% 17.7% 20.5% 16.4% 13.9% ROCE (%) 10.9% 9.9% 11.5% 11.5% 10.0% Return On Average Assets 4.05% 2.23% 2.84% 3.74% 3.68% Key Drivers (Rpb) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F Outstanding Orderbook 19,554 29,168 40,561 32,336 27,797 Order Book Depletion N/A N/A N/A N/A N/A Orderbook Replenishment 13,965 17,867 36,263 18,239 20,233 ASP (% chg, main prod./serv.) N/A N/A N/A N/A N/A Unit sales grth (%, main prod./serv.) N/A N/A N/A N/A N/A Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A Unit sales grth (%,2ndary prod/serv) N/A N/A N/A N/A N/A Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A SOURCE: CIMB RESEARCH, COMPANY DATA 17

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