Barito Pacific (BRPT IJ) More levers to pull. Clear organic and inorganic growth blueprint. Rising oil price is a double-edged sword

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1 (BRPT IJ) More levers to pull Petrochemical Initiation Report November 27, 217 (Initiate) Trading Buy Target Price (12M, IDR) 2,55 Share Price (11/24/17, IDR) 2,22 Expected Return 14.9% OP (18F, USDmn) 678. Consensus OP (18F, USDmn) EPS Growth (18F, %) 22.1 Market EPS Growth (18F, %) 8.7 P/E (18F, x) 12.4 Market P/E (18F, x) 15.9 Market Cap (IDRbn) 3,99.7 Shares Outstanding (mn) 13,959.8 Free Float (%) 4,31.3 Foreign Ownership (%) 2.36 Beta (12M).6 52-Week Low Week High 2,3 (%) 1M 6M 12M Absolute Relative (D-1yr=1) JCI BRPT /1612/161/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/171/17 We initiate coverage on (BRPT) with a Trading Buy call and TP of IDR2,55. We highlight the favorable supply and demand profile of the local petrochemical industry and believe BRPT is well positioned to benefit over the long-term. We also judge the management's intention to acquire Star Energy to stabilize the group's earnings volatility which we consider to be a key catalyst. Strong competitive advantage in petrochemical business Barito's petrochemical unit, Chandra Asri Petrochemical (TPIA) is well positioned to benefit from the growing demand supported by its strong competitive advantage (i.e., integrated business lines and strategic locations) and favorable market dynamics (seller s market). In addition, given the high capex characteristics of the petrochemical business, we see limited near-term threats from competitors. Clear organic and inorganic growth blueprint We like the managment's clear organic and inorganic growth strategies. Management's strategies include both adding production capacity to its petrochemical business (TPIA) and expanding its business scope through the acquisition of Star Energy - a world-class geothermal operator. Furthermore, Barito is partnering with Indonesia Power (subsidiary of the state-owned electricity provider, PLN) in the development of the 2,MW power plant. Last but not least, we see low execution risks over the course of the management s adventure. Rising oil price is a double-edged sword Oil price (Brent) has been on the rise since June. Given oil price is a cost indicator for BRPT, rising oil price should lead to margin compression. However, we stress the fact that higher oil price means 1) higher ASP and 2) higher volume growth (as oil price recovery implies economic recovery). All factored in, we predict BRPT s net profit to almost double to USD262mn in 219F from USD131.7mn in 216. Unfolding of a crowded trade Since its inclusion into the LQ45 index on July 24, 217, we believe it s only a matter of time before being included into the MSCI and FTSE indexes. When materialized, we expect to see greater flow into the name hence, a crowded trade. Trading Buy call with TP of IDR2,55 We initiate coverage on BRPT with a Trading Buy (TP IDR2,55). In deriving our target price, we use the DCF methodology. We assume a 6.5% risk free rate and 1.x beta. Cost of equity came in at 16.% as we included business risks into our CoE component (rising oil price and high potential capital expenditures). PT Mirae Asset Sekuritas Indonesia Basic Industry & Chemical Taye Shim taye.shim@miraeasset.com Andy Wibowo Gunawan (ext: 243) andy.wibowo@miraeasset.co.id Mangesti Diah Sulistiani (ext: 127) mangesti@miraeasset.co.id 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (USDmn) 2,477 1,46 1,961 2,211 2,633 3,558 Gross Profit (USDmn) ,81 Operating Profit (USDmn) Net Profit (USDmn) EPS (IDR) BPS (IDR) 982 1,114 1,349 1,48 1,64 1,859 P/E (x) N.A N.A P/B (x) ROE (%) N.A N.A ROA (%) N.A N.A Note: NP refers to net profit attributable to controlling interests Source: Company data, estimates PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

2 C O N T E N T S Company overview 3 Overview of 3 Shareholder structure and management team 4 The perfect chemistry 7 Basics of petrochemical industry 7 Barito group s petrochemical business 1 One of the most profitable petrochemical players in Asia 13 Organic production expansions 15 Diversification through Star Energy acquisition 18 Star Energy acquisition: Reducing the cyclicality of BRPT s revenue 18 Star Energy: The third largest geothermal operator in the world 18 Is oil price hike a short-term risk? 22 Rising oil price means higher cost of revenue and higher ASP 22 Our sensitivity analysis tells us 23 Assumptions and financial forecast 24 Petrochemical: Production to grow alongside Indonesia s economic growth 24 Forestry and plantation segment revenue outlooks 25 Property segment revenue outlook 26 Strong from top-line to bottom-line 26 Unfolding of a crowded trade 27 BRPT s LQ45 index inclusion to showcase its positive fundamentals 27 We see increasing chances of BRPT being included into the global indexes 27 Valuations and recommendation 28 Are valuations stretched? 28 Initiate coverage with a Trading Buy call and TP of IDR2,

3 Company overview Overview of (BRPT) is mainly engaged in four business activities: 1) petrochemical, operated under Chandra Asri Petrochemical (TPIA/Not rated); 2) forestry, engaged in logging and timber manufacturing and operated under Tunggal Agathis Indah Wood Industries and Mangole Timber Producers; 3) property, operated under Griya Idola, which manages Wisma and an integrated industrial park at Cipuka; and 4) plantation, which is run under Royal Indo Mandiri and mainly engaged in the development of palm oil plantations. Some of the major products and services provided by the company s subsidiaries include feedstocks for the upstream plastic industry (ethylene, propylene, pygas, and mixed C4), plantation commodities (palm oil and derivatives), and property rental (offices and hotels). Figure 1. Company structure (as of FY16) Source: Company data, Milestones at a glance Started in 1979 as an integrated timber-based company in South Kalimantan under the name Bumi Pura Mas Kalimantan, BRPT is one of the pioneers in Indonesia s industrial forest estate. The company then listed its shares on Jakarta and Surabaya stock exchanges in 1993 as PT Barito Pacific Timber Tbk. Since the late 199s, Indonesia s struggling timber industry has forced the company to downsize its timber-based operations and diversify into other resource-based industries. In 27 the company changed its name into PT Tbk as a reflection of its diversified business. In the same year, BRPT acquired PT Chandra Asri and its subsidiary, PT Styrindo Mono Indonesia, followed by the acquisition of PT Tri Polyta Indonesia Tbk (a major downstream producer of polypropylene) in 28. In 21, the company started its palm oil business by acquiring PT Royal Indo Mandiri and introduced the ecofriendly degradable plastic products of PT Chandra Asri. In the following year, Chandra Asri and Tri Polyta Indonesia were merged into PT Chandra Asri Petrochemical Tbk, an integrated petrochemical producer in Indonesia. Also in the same year, BRPT released 7.13% of TPIA share ownership to SCG Chemicals Co. Ltd. In 216, the company announced that it is acquiring a majority stake of Star Energy Group Holdings (Not listed). 3

4 Shareholder structure and management team Shareholder structure Table 1. Shareholder composition (as of 1H17) (Shares, %) Shareholders Number of shares Percentage Note Prajogo Pangestu 4,83,995, President commissioner PT Lumber 11,146, PT Tunggal Setia Pratama 32,6,.46 Agus Salim Pangestu 37,333. President director Public*) 1,976,42, Treasury stocks 39,25,6.56 Total Note: *) Each with ownership interest below 5% Source: Company data, Management team Table 2. List of commissioners and directors (as of 1H17) Name Prajogo Pangestu Harlina Tjandinegara Alimin Hamdy Agus Salim Pangestu Rudy Suparman Salwati Agustina Henky Susanto Source: Company, Position President Commissioner Commissioner Independent Commissioner President Director Vice President Director Director Independent Director President commissioner Mr. Prajogo Pangestu is the founding father of BRPT and has been serving the company as president commissioner since Previously, he had served as a director of the Djajanti Timber Group in , a president director of the same company in , a president director of Chandra Asri in , a commissioner of PT Astra International Tbk (ASII IJ) in He had also served as a president commissioner of PT Tri Polyta Indonesia Tbk in Commissioner Ms. Harlina Tjandinegara has been serving the company as a commissioner since June She began her career path as a commissioner of Lumber in Independent commissioner Mr. Alimin Hamdy has been serving as a commissioner of the company since May 214. Previously, he worked at PT Bank Negara Indonesia Tbk (BBNI IJ) and also served as a commissioner of PT Asuransi Tripakarta Tbk. 4

5 Figure 2. Prajogo Pangestu Figure 3. Harlina Tjandinegara Figure 4. Alimin Hamdy Source: Company, Mirae Asset Sekuritas Indonesia Research Source: Company, Mirae Asset Sekuritas Indonesia Research Source: Company, Mirae Asset Sekuritas Indonesia Research President director Mr. Agus Salim Pangestu has been serving as a president director of the company since June 213. He joined the company in July 1997 and was appointed a director in He graduated from Boston College, USA, with a Bachelor degree in Economics Science and Business Administration in Beginning career at Linkage Human Resources Management in 1993, he was then employed as a financial analyst by Merrill Lynch, USA, in He served the company as a vice president director from June 22 June 213. He was also appointed a commissioner of PT Chandra Asri from January 26 until the merger took place and is currently serving as a commissioner of PT Chandra Asri Petrochemical Tbk (TPIA). Vice president director Mr. Rudy Suparman was appointed a vice president director of in June 217. A president and founder of Star Energy, he is considering the company s plans to finalize the acquisition of a majority stake of Star Energy Group Holdings (Not Listed). After 1 years of service at Bank Niaga, an Indonesian commercial bank, since the beginning of his career in 1986, he moved to Danareksa, a state-owned investment bank,. He was a member of the advisory team to the Government, particularly for the state-owned privatization program for PT. Pasifik Satelite Nusantara and the loan syndication for Asia Cellular Satelite. He led the advisory team for Indonesia Bank Restructuring Agency ("IBRA") and was involved in several bank restructuring programs, asset disposals, and key loan workouts. Director Ms. Salwati Agustina joined the company in 1988 as a general manager of the legal department. She has been serving the company as a director since June 23 and is currently assuming the role of the company s corporate secretary. Independent director Mr. Henky Susanto joined the company as a General Manager of Finance and was appointed a director of the company in June 23. He began his career in 1977 as a chief accountant at PT Dresser Magcobar Indonesia. 5

6 Figure 5. Agus Salim Pangestu Figure 6. Rudy Suparman Source: Company, Source: Company, Figure 7. Salwati Agustina Figure 8. Henky Susanto Source: Company, Source: Company, 6

7 The perfect chemistry Basics of petrochemical industry Overview Petrochemical industry produces chemical products through the use of oil and gas as raw materials. It is an important business for the manufacturing industry as petrochemical products are converted into various industrial and consumer-related products. Key petrochemical products include plastics, packagings, bottles, paints, coatings, rubbers, fertilizers, cleaning agents, dyes, textiles and solvents. Petrochemical industry is a relatively young industry. Its development particularly gained much attention during the World War II amid surging demand for synthetic rubber and synthetic chemicals - which were key ingredients for producing explosives. Key ingredents of petrochemical industry naphtha The most widely used raw material in the petrochemical industry is naphtha. Naphtha is a product that is produced in the process of refining crude oil. As unprocessed crude oil contains a mixture of hydrocarbons, various products can be separated at different boiling points using fractional distillation. Once crude oil is evaporated, the vapors are condensed at different temperatures in the fractionating column. Naphtha is a flammable liquid hydrocarbon product which is fractionated at the mid level of the column. It consists of molecules with 5~ 12 carbon atoms and is divided into light naphtha (5~ 6 carbon atoms) and heavy naphtha (6~ 12 carbon atoms). Figure 9. The fractionating column Source: BBC, 7

8 Naphtha cracking Cracking - by definition - is a process where hydrocarbon molecule links are broken to produce valuable products, such as ethylene, propylene, and C4 alkene. The key ingredient in the cracking process is naphtha, and the facility cracking the naphtha is called Naphtha Cracking Center (NC). Although the product yields from NCC vary according to the naphtha feedstock used, the average yield by mass from steam cracking is as follows: Table 3. Typical product yields by mass from naphtha steam cracking (%) Product name Ethylene Prpylene C4 alkene RPG* Others** Yield Source: KPIA, Note: *: Raw Pyrolysis Gasoline Note **: Others include methane, hydrogen, fuel oil, etc. Figure 1. Naphtha cracking process Source: KPIA, 8

9 Petrochemical products widely used in our daily lives What we use in our daily lives have direct associations with petrochemical products. These include construction materials, electronic devices, cellular phones, tablet, etc. Most of the things that we see and use in our daily lives are in some way related to petrochemical products. Figure 11. 7% of things we use in our daily lives are made of petrochem products Source: KPIA, 9

10 Barito group s petrochemical business Petrochemical operations (through its subsidiary, TPIA) account for 98.2% of BRPT s total revenue (as of 1H17). With the successful acquisitions of PT. Chandra Asri in 27 and PT. Tri Polyta Indonesia in 28, BRPT laid the foundation to transform itself into a diversified petrochemical player. The capital-intensive acquisitions were carried out during a period of rallying oil prices (global economic recovery), leading to margin squeeze for TPIA. Figure 12. Petrochem contributes 98% to BRPT s revenue Figure 13. Earnings trend of BRPT since acquisition of TPIA (%) (USDmn) 3, 2,5 2, Revenue Operating profit Net profit Petrochemical Plantation Others 1,5 1, Source: Company data, Source: Company data, After painful turnaround efforts, BRPT is now on much firmer financial footing, allowing the company to concentrate its resources on organic expansion. As Indonesia is still heavily dependent on petrochemical imports, further expansion of TPIA should allow it to grab market share. Figure 14. Petrochemical product market share (%) 1 Others Import Chandra Asri Polyethylene Polypropylene Olefin Styrene Monomer Source: Company data, 1

11 The most integrated petrochemical player in Indonesia TPIA is the most integrated petrochemical producer in Indonesia which fully covers upstream to midstream businesses. Taking a closer look at its business line-up, TPIA s revenue stems from four key segments, namely olefins (ethelene, propylene, py-gas, mixed C4), polyolefins (polyethylene, Polypropylene), styerene monomer, and butadiene. In the downstream business, Indonesia's largest downstream petrochemical players are clustered near TPIA's site. That being said, Chandra Asri is efficiently able to cater to its clients needs through a network of distribution pipelines as most of these end products are widely consumed on a daily basis. As such, we think TPIA s and Indonesia s long-term economic growth potentials can go side by side. Figure 15. TPIA s supply chain Source: Company data, The most common petrochemical output classes are olefins (including ethylene and propylene) and aromatics (including benzene, toluene, and xylene isomers). Oil refineries produce olefins and aromatics through a fluid catalytic cracking of petroleum fractions. Chemical plants produce olefins by steam cracking of natural gas liquids like ethane and propane. Aromatics are produced by catalytically reforming naphtha. Olefins and aromatics are the building-blocks for a wide range of materials, such as solvent, detergents, and adhesives. Olefins are the basis for polymers and oligomers used in plastics, resins, fibers, elastomers, lubricants, and gels. 11

12 Figure 16. Petrochemicals flowchart Source: Petrochemicals Europe, Note: See original flowchart at 12

13 Capital intensive business = High entry barrier The capital-intensive nature of the petrochemical business creates a high entry barrier, in our view. According to our quick comparison between TPIA and other members within the basic industries, we note that petrochemical business has higher investment spending in terms of investment/ton. The petrochemical industry showed high investment spending which reached IDR3.2mn/ton vs. the industry average at IDR2.8mn/ton. Higher investment/ton spending indicates high barriers to entry, we think. The petrochemical business embeds a complex production chain, given the diverse output of petrochemical products (solids, liquids, or, gases). Paying attention to Property, Plant, and Equipment (PPE) to total asset ratio, we found out that TPIA has higher PPE to total asset than the industry s counterparts. In other words, petrochemical business is more capital intensive than that of pulp & paper, cement, and other industries, creating a natural entry barrier. By 216, TPIA s PPE to total asset contributed 61.8% to total asset. We calculated PPE to total asset for all members within the Jakarta Basic Industries. Figure 17. Petrochemical is a highly capital-intensive business Figure 18. Net PPE to total asset (216) (IDRmn/tonne) (%) Cement Steel Pulp & Paper Petrochemical 2 TPIA Basic industry average Source: Bloomberg, Source: Bloomberg, One of the most profitable petrochemical players in Asia In terms of profitability, TPIA is the most profitable among other petrochemical players in Asia, as reflected from its gross, EBITDA, and net profit margin that reached 25.6%, 25.8%, and 15.5%, respectively in 1H17. Compared to other Asian petrochemical players (gross, EBITDA, and net profit margins of 19.5%, 16.6%, and 9.4% in 1H17). TPIA s margins are evidently higher. The companies in our samples are PTT Global Chemical (PTTGC TB/ Not rated), Sinopec Shanghai (338 HK/ Not rated), Mitsui Chemical (4183 JP/Not rated), Tosoh Corp (442 JP/ Not rated), Hanwha Chemical Corp (983 KS/ Buy/ TP KRW43,), Formosa Plastic Group (655 TT/ Not rated), and Lotte Chemical (1117 KS/ Buy/ TP KRW6,). We ascribe the stellar margins of TPIA to the diveresified product mix, market characteristics as a seller s market, and its strategic location. Table 4. TPIA boasts its highest profitability among peers in the region (%) Ticker Company Gross margin EBITDA margin Net profit margin TPIA IJ Equity Chandra Asri Petrochemical PTTGC TB Equity PTT Global Chemical HK Equity Sinopec Shanghai JP Equity Mitsui Chemical JP Equity Tosoh Corp KS Equity Hanwha Chemical Corp TT Equity Formosa Plastic Corp KS Equity Lotte Chemical Average Source: Bloomberg, 13

14 TPIA s petrochemical product capacity accounts for 35% of industry in total TPIA is the only one of ethylene, py-gas, crude C4, butadiene, and styrene producer in Indonesia. In propylene, LLDPE, and HDPE, the company is one of the two players. We also note that TPIA is one of the three players for polypropylene products in Indonesia. All in all, TPIA s production capacity contributed 34.9% to Indonesia s total petrochemical production capacity. Table 5. Capacity of petrochemical players in Indonesia by product (Thousand tons) Products Chandra Asri Lotte Chemical Pertamina Polytama ASC Sulfindo TPPI Others Total Ethylene Propylene ,78 LLDPE HDPE Polypropylene Ethylene Dichloride ,14 Vinyl Chloride Monomer Polyvinyl Chloride Ethylene Oxide Ethylene Glycol Acrylic Acid Butanol 2 2 Ethyhexanol Py-Gas 4 4 Crude C Butadiene 1 1 Benzene Para-Xylene Styrene Total 3, , , ,449 Source: Company data, Mirae Asset Sekuritas Indoneisa Research and is located at a very strategic site Another competitive advantage of TPIA is its strategic location in Cilegon, one of the cities under Banten province territory. In addition to being the centre of petrochemical industrial area in Banten province, this location is within TPIA s customers reach and makes it easier for TPIA s suppliers to deliver raw materials for being close to the port. According to Banten province s statistics, there were 22 petrochemical companies located in Cilegon, while the rest were scattered other cities across Banten province in 213. Figure 19. TPIA is located at the heart of the petrochemical cluster Source: Company data, 14

15 Organic production expansions Given the high import of petrochemical products in Indonesia, we believe TPIA s streamlined blueprint for expansions should lead to steady earnings improvement over the years to come. The proven track record of successful executions in the past led us to believe that the upcoming expansions carry low execution risk. Key expansion plans are outlined below: New addition to styrene and butadiene production capacity TPIA is expected to add production capacity for styrene. Styrene production capacity will reach 46, tonnes in 218F, from 34, tonnes in 216. Meanwhile, TPIA is also ramping up its butadiene production capacity to 137, tonnes in 218F, from 1, tonnes in 217F. Styrene is a derivative of benzene, commonly known as colorless liquid. Styrene has diverse commercial applications, such as synthetic rubber and plastics. According to ICIS, the commercial application of styrene includes containers, closures, lids, and vending cups. Furthermore, styrene is used for construction, electrical, and electronic parts. Butadiene according to Dow Chemical is a colorless, non-corrosive gas or liquid with a mild aromatic or gasoline-like odor. It originates from the high-temperate cracking of petroleum fractions and is distilled out of Crude C4 s. Butadiene is used primarily as a chemical intermediate and a monomer in the manufacture of polymers, such as synthetic rubbers or elastomers, including styrene-butadiene rubber (SBR), polybutadiene rubber (PBR), polychloroprene (Neoprene), and nitrile rubber (NR). Figure 2. Styrene production capacity of TPIA Figure 21. Butadiene prod. capacity will be 137, tonnes (' tonnes) (' tonnes) F 218F F 218F Source: Company data, Source: Company data, Expansion in polyethylene and debottlenecking in polypropylene In 218, TPIA will commence an expansion of its polyethylene production capacity to 736, tonnes in 219F, from 336, tonnes in 216. In the same year, the company is expected to begin debottlenecking its polyprophylene production capacity, which could boost polyprophylene production capacity to 59, tonnes in 219F, from 48, tonnes in 216. Polyethylene, one of the most widely used thermoplastic, is chemically synthesized from ethylene. Polyethylene is used in various products, such as packaging products, pond liners, pipes, molds, wires, cables, general purpose tubes, drums, carrier bags, and household goods as it can be easily remolded. There are three major types of polyethylene: high-density polyethylene (HDPE), lowdensity polyethylene (LDPE), and linear low-density polyethylene (LLDPE). Polypropylene is a linear hydrocarbon polymer, having light weight and high optical clarity. Polypropylene is versatile polymers available with applications, both as a plastic and as a fibre, in many of the plastics enduse markets. 15

16 Figure 22. Polyethylene production to double in 219F Figure 23. Polyprophylene production capacity until 219F (' tonnes) (' tonnes) F 218F 219F F 218F 219F Source: Company data, Source: Company data, Furnace revamping of MTBE and butene-1 The company expects C4 production capacity to increase to 375, tonnes in 22F, from 315, tonnes in 216. Additionally, TPIA will revamp its butadiene production capacity to 31, tonnes in 22F once butadiene production capacity s upgrade at 137, tonnes is completed by 218. According to ICIS, butadiene is a versatile raw material used in the production of a wide variety of synthetic rubbers and polymers resins as well as a few chemical intermediates. The largest single use of butadiene is in the production of styrene butadiene rubber (SBR), which is principally used in the manufactures of automobiles tyres. SBR is also used in adhesives, sealent, coatings, and rubber articles, such as shoe soles. Figure 24. C4 prod. capacity reaches 375, tonnes in 22F Figure 25. Butadiene before and after furnace revamping (' tonnes) (' tonnes) F 218F 219F 22F 1 218F 22F Source: Company data, Mirae Asset Sekuritas Indonesia Source: Company data, Mirae Asset Sekuritas Indonesia 16

17 The next big project: New petrochemical complex On the long-term investment horizon, the management seems to be excited about its expansion plan. According to our discussions with the company, TPIA is expected to build a second petrochemical complex with an additional ethylene cracker facility (capacity addition of 1.mn tonnes). TPIA is currently in discussion with various third parties concerning the new petrochemical complex while conducting feasibility study. This expansion plan is in line with BRPT's mission to leave strong footprints in the petrochemical industry. In achieving its mission, BRPT's petrochemical subsidiary is integrating its upstream and downsstream business lines to maintain its market dominance, in our view. All in all, we believe TPIA's streamlined expansion plan will translate into strong revenue growth for TPIA and BRPT. Figure 26. TPIA s total production capacity until 22F Figure 27. Planned building of new prod. cap. of 1.mn tonnes (mn tonnes) (mn tonnes) F 218F 219F 22F - 22F New additional Total Source: Company data, Source: Company data, 17

18 Diversification through Star Energy acquisition Star Energy acquisition: Reducing the cyclicality of BRPT s revenue On December 2, 216, BRPT announced that it is acquiring a majority stake of Star Energy Group Holdings (Not Listed), a diversified energy producer engaged in oil and gas, geothermal, and coal bed methane. Based on the company s filings, the acquisition is an affiliated transaction whereby the issuers, Star Enery Investment Ltd. and Star Energy Holdings Limited, are controlled by the same party, namely Mr. Prajogo Pangestu (who has 69.2% of controlling interest in ). Following the acquisition announcement, BRPT obtained loans worth USD6mn from Bangkok Bank, which were drawn down on December 21, 216. The funds were used as an advance on the investment in Star Energy Group Holdings. On March 24, 217, the company obtained a second credit facility worth USD25mn from Bangkok Bank. The funds were used to repay the existing USD6mn term loans and as an advance on the investment in Star Energy Group Holdings. According to BRPT s latest financial statement, the balance of advance on investment stood at USD234.3mn. Star Energy is currently finalizing the audit process. Although the management has yet to announce details of the acquisition, we do not believe BRPT will surprise investors, since Barito Pacific Group has continuously been leading the market in terms of outlining its funding scheme (which should involve a mixture of retained capital, loans, and new shares issuance). BRPT is expected to finalize the acquisition by 1Q18. Once the acquisition is complete, we believe Star Energy will reduce the earnings volatility driven by the cyclical movement of crude oil price. Considering the c.usd4mn EBITDA of Star Energy guided by the management, a successful acquisition should enable Barito to get a step closer to transforming into a diversified resource-based company. Figure 28. Ownership structure of Star Energy Source: Company data, Star Energy: The third largest geothermal operator in the world Star Energy has three operational geothermal sites in Indonesia (Darajat, Salak, and Wayang Windu), one site in the exploration stage (Sekincau Selatan), and one site in the tender process (Hamiding). As the largest geothermal operator in Indonesia, Star Energy has a total production capacity of 875 MW, standing also as the third largest in the world. Coming after Star Energy is Pertamina, which has a geothermal power plant with a total capacity of 577MW. Indonesia s third largest geothermal power plant, Geo Dipa, has a total capacity of 12MW. Another operator, Medco Energy (MEDC), also has a geothermal power plant, named Sarulla consortium, with a total capacity of 11MW. 18

19 Figure 29. Star Energy s production capacity Figure 3. The third largest in the world (MW) (MW) Star Energy 577 Pertamina Geothermal Energy Geo Dipa Sarulla Consortium (Medco et al) 1,2 1,1 1, Energy Development Corp. Enel Green Power Star Energy Comisión Federal de Electricidad Calpine Corp. Source: Company data, Source: Company data, Blessing disguise from the God According to the World Energy Council (WEC), USA had the largest total geothermal capacity of 3.6 GW, followed by Phillipines with 1.8 GW as of 215. Proudly enough, Indonesia s total geothermal power plant capacity stood at 1.4 GW, representing the third largest in the world. From a geographical perspective, Indonesia has rich geothermal potential for being naturally surrounded by volcanoes. Indonesia s geothermal sites are stretched out across the northern Sumatera to Nusa Tenggara. We see that Sulawesi also has geothermal potential, which extends towards the northern part of the archipelago. Kalimantan, on the other hand, has limited, if not none, geothermal potential due to its lack of active volcanoes. Figure 31. Indo has the 3 rd largest geothermal capacity (216) Figure 32. Map of Indonesia s volcanoes sites (MW) 4, 3,5 3,567 3, 2,5 2, 1,5 1, 5 1,868 1, Source: World Energy Council, Source: Internet, Star Energy s operating geothermal portfolio Star Energy has installed capacity of 875. MW across three operating sites. Its geothermal assets have been operating for 1 to 23 years compelling evidence of stable operations. Furthermore, we note that its operating assets have an average expiry by 24; hence, steady cash flow from geothermal is required going forward. The management guided a conservative capacity expansion of Star Energy over the next six years (until 223). We think that this expansion plan is chiefly due to a combination of: 1) the management s near-term focus on acquiring a majority stake of Star Energy Group Holdings (expected to be finalized in 1Q18), and 2) the unpredictable nature of geothermal exploration. 19

20 Table 6. Overview of Star Energy's operating geothermal portfolio Project name Unit Capacity CoD Sales Expiry date Wayang Windu Unit 1 11MW 2 Electricity 23 Unit 2 117MW 2 Electricity 239 Sub-total 227MW Unit x 6MW 1994 Steam 24 Salak Unit3 6MW 1997 Steam 24 Unit x 65.6MW 1997 Electricity 24 Sub-total 377MW Unit 1 55MW 1994 Steam 241 Darajat Unit 2 95MW 2 Electricity 241 Unit 3 121MW 27 Electricity 247 Sub-total 271MW Total 875MW Source: Company data, Further clarity on the pricing scheme is needed Star Energy s management has not disclosed its electricity tariff pricing scheme. Given that PLN is obliged to offtake the electricity generated by geothermal operators, and in light of recent issues related to the new coal pricing scheme (cost+margin) for coal miners, we believe pricing is a highly sensitive issue for the government, PLN, and private suppliers. The latest renewable energy tariff laid out by the government contains clues as to what investors should expect going forward. The new regulation aims to set the price of electricity generated and sold from renewable energy providers to PLN. We note that the renewable energy price generated and sold to PLN will be based on the average cost of generation (Biaya Pokok Pembangkitan/BPP) at the local site and compared to the national blended average BPP. For reference, national blended average BPP stands at USDc.7.5/KWh. Figure 33. National blended average BPP (USc/kwh) National BPP USc7.5/kwh Source: Ministry of Energy and Mineral Resources, Fuel cost of PLN dominated by natural gas and coal As of 216, 96.8% of PLN s total fuel costs were comprised of natural gas, coal, and oil. However, we highlight the volatile movement of the energy source used to power up PLN s generators. In particular, the contribution of coal declined significantly in 216 at 28% from 37% in 215. We ascribe this composition change to the decline in coal prices. On the other hand, we witnessed a meaningful rise in the composition of natural gas (from 33% in 215 to 47% in 216), which we attribute to the rising natural gas price. 2

21 What we think is meaningful for us to discuss is the relatively small contribution of geothermal energy source to PLN. Being a relatively stable energy source, geothermal can be an ideal source of energy for PLN, in our view. At the same time, however, we underscore the fact that geothermal exploration has been slow and unpredictable. As global economic growth recovery is likely to gradually push up commodity prices, we urge policy makers to incentivize geothermal exploration activities and the private sectors to respond to the changing environment. Figure 34. PLN s fuel cost portfolio Figure 35. Global commodity prices (%) Others Geothermal Coal Natural gas Residue Solar High Speed Diesel (USD) Oil price (COA) 4 Coal (XW1) Natural gas (NGA) 2 6/13 12/13 6/14 12/14 6/15 12/15 6/16 12/16 6/17 Source: PLN, Source: Bloomberg, Geothermal is the second top preference for Indonesia s renewable energy mix According to PLN s 217~ 226 master plan, Indonesia renewable energy production capacity from geothermal will contribute 22.4% to the total production capacity of renewable energy by 226F. As a comparison, hydro production capacity will contribute 5.4% to total renewable energy production capacity during the same time frame. During , PLN is optimistic that it can reach a total geothermal production capacity of 6.3 GW. We note that the peak of the new geothermal capacity addition will be set in motion in 225 and reach 2.5 GW. Figure 36. Master plan of renewable capacities by 226F (%) Figure 37. New additional gothermal capacity by 226F (GW) Hydro Geothermal Others Source: PLN, Source: PLN, 21

22 Is oil price hike a short-term risk? Rising oil price means higher cost of revenue and higher ASP Can oil price continue to march higher? On October 27, brent crude oil broke above USD6/barrel. We attribute the robust crude oil price performance to escalating expectations that OPEC may extend its supply-restaints deal. However, market projections for crude oil suggest that it might be premature to get excited. According to Bloomberg media forecast, market participants seem to be waiting for a meaningful correction going forward. Figure 38. Crude oil prices are marching higher Figure 39. Crude oil forecasts (Bloomberg) (USD/b) 7 WTI 65 Brent /16 3/16 5/16 7/16 9/16 11/16 1/17 3/17 5/17 7/17 9/17 11/17 (USD/b) NYMEX WTI 63. ICE Brent F 218F 219F 22F Source: Bloomberg, Source: Bloomberg, Note1: EIA forecast for WTI (USD49.7/b in 217F, USD51./b in 218F) Note2: Spot price for WTI at USD57.8/b and Brent at USD63./b as of Nov. 22 Higher oil price is a double-edged sword Since c.8% of TPIA s production is comprised of raw materials (naphtha), higher crude oil price could potentially deteriorate TPIA s earning in the near term. However, considering its role as a seller s market, we believe that TPIA could (at least partly) pass on the high oil price with higher selling price. Furthermore, we firmly believe the rising oil prices to be an indication of improving macro backdrop, which should reward TPIA with greater sales volume. As a quick reminder, TPIA s products are widely used for consumer-related end products. Higher ASPs and increased sales volume could rather lead to improved earnings for TPIA, in our view. Figure 4. Crude vs. Naphtha Figure 41. Crude vs. Polyethylene Figure 42. Naphtha vs polyethylene (CNY/MT) 1,2 1, Naphtha (L) Brent crude (R) (USD/b) (USD/b) Brent crude (L) Polyethylene (R) (CNY/MT) 13, 12, (USD/MT) 1,2 1,1 1, Naphtha (L) Polyethylene (R) (CNY/MT) 13, 12, , 1, 9, 8, 7, , 1, 9, 8, 7, 1/1 1/12 1/14 1/16 2 1/1 1/12 1/14 1/16 6, 2 1/1 1/12 1/14 1/16 6, Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research 22

23 Figure 43. Higher oil price should drive economic growth Figure 44. Can oil price continue its rally? (YoY, %) 6 World GDP (USD/b) 12 (YoY, %) 3 TPIA GPM (USD/b) 12 5 Crude oil (Brent) 1 25 Crude oil (Brent) Brent crude forecast: for 218F: USD56.3/b /7 12/9 12/11 12/13 12/15 12/17 12/19 Source: Bloomberg, Source: Bloomberg, Our sensitivity analysis tells us We conducted a sensitivity analysis on crude oil price (Brent) and BRPT s 218F earnings. The results reveal that for every USD1 increase in the crude oil price, BRPT s net profit is expected to improve by USD6.4mn. Table 7. Earnings sensitivity to oil price movement Assumptions Global oil price scenario (Brent, USD/barrel) (USDmn) Global naptha price Revenue 2,22. 2, ,633. 2, ,64. 3,279.4 Cost of revenue 1,639. 1, , , ,34.6 2,133.6 Gross profit ,29.3 1,145.9 Operating profit Net profit Source: 23

24 Assumptions and financial forecast Petrochemical: Production to grow alongside Indonesia s economic growth Taking a look into the rear view mirror, TPIA has continuously expanded its production capacity. Before merging with Tri Polita, TPIA's production capacity stood at 2.1mn tonnes in 21. However, post the merger, its production capacity increased to 2.6mn in 211. Backed by the management's vision to transform the company into a diversified petrochemical company, TPIA's total production jumped to 3.3mn tonnes as of 216. We have an optimistic view that TPIA's production capacity will reach the management's guidance of 4.2mn tonnes by 22F (representing +6.3% CAGR growth in F). That being said, we are factoring in the management's guidance into our forecasts. However, we have yet to factor in the second petrochemical complex into our long-term production capacity estimates. All in all, we believe TPIA's production capacity growth will hinge in line with the nominal economic growth of Indonesia. Figure 45. TPIA s total production capacity until 22F (mn tonnes) F 218F 219F 22F Source: Company data, Production and sales volume estimates For its petrochemical production forecasts, we predict that TPIA s total production will reach 3.5mn tonnes in 219F from 2.9mn tonnes in 216. However, we estimate that 22F total production will decline to 3.mn tonnes as the company decided that it will conduct a turnaround maintenance (TAM). The maintenance is expected to take one quarter off the full-year production schedule. In terms of sales volume mix, we predict that olefins segment will contribute 35.3% to total sales volume and polyolefins segment to contribute 32.8% to total sales volume in 22F. Butadiene and styrene segments are projected to contribute 19.8% and 12.% to 22F total sales volume, respectively. 24

25 Figure 46. TPIA production to drop in 22F (mn tonnes) 4. Figure 47. Sales volume of TPIA until 22F (mn tonnes) F 218F 219F 22F F 218F 219F 22F Source: Company data, Source: Company data, Forestry and plantation segment revenue outlooks Since the group has set the mission of transforming into a diversified resources company as a top priority, timber business is not a focus for BRPT. However, it's worth mentioning that BRPT maintains sizeable forest concession rights with a total area of 76,26 ha and 73,375 ha in West Kalimantan and North Maluku, respectively, as of 216. As to the plantation industry, top line exhibited stable trend with narrowing net losses. Nevertheless, we expect the unsupportive CPO price to persist next year, leading us to expect subdued growth heading forward. Figure 48. Asset of forestry and plantation units Figure 49. Earnings trend of forestry and plantation units (USDmn) (USDmn) Forestry Revenue Plantation Revenue Forestry Asset 386 Plantation Asset Forestry (Pretax profit) Plantation (Pretax profit) H16 1H H16 1H17 Source: Company data, Source: Company data, 25

26 Property segment revenue outlook Most of BRPT s property assets are managed by PT Griya Idola, which was established to strategically manage BRPT s assets, including that of Wisma the headquarter of Group. Despite its relatively small contribution to the group s revenue, the financial performance of Barito s property division remains robust. In addition, through its subsidiary, PT Griyal Tirta Asri, PT Griya Idola continues to develop an integrated industrial park at the western part of Jakarta which spans more than 5 hectares. We believe BRPT s property unit will continue to contribute to the overall growth of the group. Figure 5. BRPT s property assets Figure 51. Property segement earnings trend (USDmn) 55 (USDmn) 6 Property Revenue Property (Pretax profit) H16 1H H16 1H17 Source: Company data, Source: Company data, Strong from top-line to bottom-line Factoring in our estimates, we predict BRPT s revenue to jump to USD3.6bn in 219F (+8% growth over the next 3 years). However, we expect to see a mild setback in its revenue stream in 22F as we expect the TAM to likely kick in. In terms of EBITDA, we forecast BRPT s EBITDA to peak at USD1.bn in 219F before easing down to USD.32bn in 22F. We have not modeled in Star Energy s financials into our forecasts as the acquisition has yet to be finalized. Furthermore, we have yet to factor in the second petrochemical complex plan into our financials. Figure 52. Revenue will reach USD3.1bn in 22F Figure 53. EBITDA and net profit trends (USD bn) (USD mn) 1,2 1, 8 EBITDA Net profit , F 218F 219F 22F F 218F 219F 22F Source: Company data, Source: Company data, 26

27 Unfolding of a crowded trade BRPT s LQ45 index inclusion to showcase its positive fundamentals On July 24, 217, BRPT shares were included into the LQ45 index a stock index that is comprised of 45 liquid common stocks listed on the IDX for meeting the following criteria (see Table 8). We believe BRPT s inclusion into the LQ45 index to be significant as it widenes the attention of active local fund managers. In particular, we believe the LQ45 index inclusion should highlight the positive fundamentals of the company. Table 8. Criteria to be included into the LQ45 index Details Ranked within the top 6 listed companies by market capitalization over the past 12 months Ranked within the top 6 listed companies by transaction value over the past 12 months Must be included in the calculation of the composite index Has been listed on the IDX for at least 3 months Has good financial conditions, prospect of growth, high frequency and transaction in the regular market Source: IDX, Since the LQ45 index inclusion, BRPT s shares have jumped by 42.2% (as of November 22 close). However, it s worth to note that the daily transaction value over the past 4 months after the inclusion into the LQ45 index has declined (vs. previous 4 months before the inclusion). All in all, we believe the inclusion itself was rather a trigger for active fund managers to scrutinize the fundamentals of BRPT. Figure 54. BRPT s share price and transaction value (IDR) 2,5 Transaction value (R) (IDRbn) 25 2, Share price (L) Inclusion into LQ45 index 2 1,5 15 1, /16 4/16 7/16 1/16 1/17 4/17 7/17 1/17 Source: Table 9. Daily transaction value of BRPT declined since inclusion into the LQ45 index (IDRbn) 4 months after LQ45 inclusion 4 months before LQ45 inclusion Difference Daily transaction value % Source: We see increasing chances of BRPT being included into the global indexes Since its inclusion in LQ45 index, we now see increasing chances of BRPT being included into MSCI and FTSE indexes. This is based on our belief that one of the key goals of the global indexes (MSCI and FTSE) construction is to select the most liquid stocks within each country and industry group. Furthermore, given mammoth flow contribution from index and exchange-traded funds in recent times, we believe BRPT s inclusion into the global indexes would drive transaction volume higher and place positive implications on its share price (on top of its solid fundamentals). 27

28 Valuations and recommendation Are valuations stretched? Stellar share price performance driven by robust fundamentals Shares of BRPT began a full-fledged rally since early 216. The key driver behind the rally was the fundamental earnings recovery. Since 2Q16, both revenue and net profit of BRPT exhibited solid recoveries, which led valuations to re-rate. As we expect BRPT s earnings to continue to improve over the longer horizon, we expect to see continued upward trending of BRPT s share price. As a quick reminder, 2Q17 quarterly earnings were seasonally weak as Eid al-fitr fell entirely in 2Q17 (i.e., fewer number of working days). Figure 55. Share price vs. quarterly revenue trend Figure 56. Share price vs. quarterly net profit trend (IDR) 2,5 Share price (L) (USDmn) 7 (IDR) 2,5 Share price (L) (USDmn) 6 2, Quarterly revenue (R) , Quarterly net profit (R) 5 1,5 55 1, , 45 1, /16 4/16 7/16 1/16 1/17 4/17 7/17 1/17 3 1/16 4/16 7/16 1/16 1/17 4/17 7/17 1/17 Source: Company data, Source: Company data, In comparison to its operating subsidiary, we see ample room to catch up Over the past 5 years, TPIA and BRPT s shares have rallied 1,137% and 571% respectively. We acknowledge the valuation discount between the operating company and the holding company. However, trading at c. 41% value (discount rate of 59%) of its operating company (TPIA), BRPT s valuations to be undervalued relative to TPIA, we think. Given the management s efforts to transform the company into a diversified resource company (i.e., earnings stability, etc.), we expect to see a narrowing in the discount between the two companies. Figure 57. Price performance of BRPT and TPIA since 212 Figure 58. Valuation trajectory of BRPT and TPIA since 212 (1/1/212=1) 1,2 BRPT 1, TPIA 8 1,137% (Trailing P/B, x) 7 TPIA-BRPT 6 BRPT TPIA % /12 1/13 1/14 1/15 1/16 1/17 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 Source: Source: 28

29 Initiate coverage with a Trading Buy call and TP of IDR2,55 Generally, the valuation methodology that is used for holding companies is a sum of the part (SOTP) methodology. However, we use the DCF valuation methodology due to the fact that 9%+ of BRPT revenue originates from TPIA, which can better capture the instrinsic value of BRPT. Nonetheless, we have not yet factored in Star Energy acquisition into our forecasts. That being said, we see increasing chances of our projections being revised if Star Energy acquisition is complete. For our DCF methodology, we assume a 6.5% risk free rate and 1.x beta. Our cost of equity reached 16.% as we added the market/ business risks into our cost of equity component given that BRPT s cost is historically correlated to the global oil price and is a high capital intensive business. Figure 59. BRPT s trailing P/B band (x) /12 5/13 11/13 5/14 11/14 5/15 11/15 5/16 11/16 5/17 1.9x 1.2x.6x.x -.7x Source: Bloomberg, 29