MORNING HIGHLIGHT. Equity Research Tuesday, November 22, 2016

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1 Equity Research Tuesday, November 22, 2016 MORNING HIGHLIGHT FROM EQUITY RESEARCH Coal Sector: Better earnings visibility amid coal price consolidation With coal prices up substantially by 107.7% ytd, mainly reflecting supply concerns and additional demand ahead of winter in China, we expect coal prices to remain firm in the short-term. In the longer term, however, we foresee stabilization of the coal price since: a) China may allow some coal producers in the country to ramp up production, b) coal production in producing countries will increase as higher coal prices improve the profitability of coal miners and c) coal demand growth will remain muted. Hence, we retain our Neutral stance on the sector with our top picks being Adaro Indonesia (ADRO) and Bukit Asam (PTBA). MARKET NEWS *Analysts comment inside Vale Indonesia: Plans to offer 60 70% share on ferronickel smelter projects (Investor Daily) WSKT booked Rp61.0tr of new contracts, the highest among SOE contractors (Bisnis Indonesia) ACES new store opening (Kontan) HK Realtindo appointed five underwriters (Bisnis Indonesia) LPCK to launch sixth apartment tower in Orange County (Kontan) LTV relaxation to boost property sector (Kontan) JSMR rights issue price is Rp3,900 per share (Bisnis Indonesia) Previous Reports: Mandom Indonesia: Remaining Competitive- Snapshot AUTO: Flat car sales in October Snapshot RALS: In-line 10M16 revenues, LPPF: Confirms plans to increase its stake in MatahariMall.com- Snapshot Strategy: Unmapped Roads (NEUTRAL)- Snapshot ITMG 3Q16 earnings: Better ASP to boost quarterly profit- Snapshot Cement: Weak October Performance-Snapshot Slower 3Q16 GDP growth, but recovery visible, LPPF: Launching MatahariStore-Snapshot Strategy: Market Impact of Friday s rally-snapshot Key Index Close Chg Ytd Vol (%) (%) (US$ m) Asean - 5 Indonesia 5,148 (0.4) Thailand 1, ,070 Philippines 6,979 (1.3) Malaysia 1, (3.9) 343 Singapore 2,817 (0.8) (2.3) 884 Regional China 3, (9.1) 45,185 Hong Kong 22, ,239 Japan 18,087 (0.1) (5.0) 884 Korea 1, ,976 Taiwan 9, ,947 India 25,765 (1.5) (1.3) 374 NASDAQ 5, ,714 Dow Jones 18, ,480 Currency and Interest Rate Rate w-w m-m ytd (%) (%) (%) Rupiah Rp/1US$ 13,406 (0.2) (2.8) 2.8 SBI rate % (0.3) (1.3) 10y Gov Indo bond 7.85 (0.0) 0.8 (0.9) Unit Hard Commodities Price d-d m-m ytd (%) (%) (%) Coal US$/ton Gold US$/toz 1, (3.8) 14.8 Nickel US$/mt.ton 11, Tin US$/mt.ton 21, Unit Soft Commodities Price d-d m-m ytd (%) (%) (%) Cocoa US$/mt.ton 2,456 (0.1) (8.1) (24.9) Corn US$/mt.ton (3.1) IDX ANNOUNCEMENT Cash Announcement Code Ex-Date Date Payable Amount (Rp) LAMI EGM 30-Nov SKBM EGM 30-Nov Source: KSEI Crude Oil US$/barrel (4.4) 31.2 Palm oil MYR/mt.ton (5.6) 31.2 Rubber USd/kg 2,906 (0.4) Pulp US$/tonne Coffee US$/60kgbag 809 N/A Sugar US$/MT 152 (3.4) (0.7) 38.2 Wheat US$/ton (9.3) 27.5 Source: Bloomberg Danareksa Sekuritas Equity Research

2 Equity Research Tuesday, November 22, 2016 PT Danareksa Sekuritas Jl. Medan Merdeka Selatan No. 14 Jakarta Indonesia Tel (62 21) Fax (62 21) Equity Research Team Agus Pramono, CFA (62-21) ext.3500 Strategy, Banking Stefanus Darmagiri (62-21) Auto, Coal, Heavy Equip., Metal, Cement Natalia Sutanto (62-21) ext.3508 Consumer, Tobacco Maria Renata (62-21) ext.3513 Construction Adeline Solaiman (62-21) 2955 ext Retail Puti Adani (62-21) Consumer Antonia Febe Hartono (62-21) ext.3504 Cement Lucky Bayu Purnomo (62-21) ext.3512 Technical Analyst Melati Laksmindra Isnandari (62-21) ext Research Associate Sales team Novrita E. Putrianti (62 21) ext Laksmita Armandani (62 21) ext Ehrliech Suhartono (62 21) ext Muhammad Hardiansyah (62 21) ext Yunita L. Nababan (62 21) ext Tuty Sutopo (62 21) ext Upik Yuzarni (62 21) ext Kevin Giarto (62 21) ext Danareksa Sekuritas Equity Research

3 Tuesday, 22 November 2016 NEUTRAL Stocks Price Target Rec. (Rp) price (Rp) ADRO 1,530 1,900 BUY PTBA 11,125 14,500 BUY HRUM 2,320 2,000 SELL ITMG 14,700 15,800 HOLD Jakmine relative to JCI Index 1,500 1,300 1, Jakmine (LHS) Relative to JCI (RHS) 11/22/15 12/21/15 1/18/16 2/15/16 3/14/16 4/11/16 5/9/16 6/6/16 7/4/16 8/1/16 8/29/16 9/26/16 10/24/16 11/21/16 % COAL SECTOR/SECTOR UPDATE Coal Sector Better earnings visibility amid coal price consolidation With coal prices up substantially by 107.7% ytd, mainly reflecting supply concerns and additional demand ahead of winter in China, we expect coal prices to remain firm in the short-term. In the longer term, however, we foresee stabilization of the coal price since: a) China may allow some coal producers in the country to ramp up production, b) coal production in producing countries will increase as higher coal prices improve the profitability of coal miners and c) coal demand growth will remain muted. Hence, we retain our Neutral stance on the sector with our top picks being Adaro Indonesia (ADRO) and Bukit Asam (PTBA). Global coal supply concerns The coal price has increased significantly by 107.7% ytd. This reflects tighter supply following: a) policies to cap coal production in China, the world s largest coal producer, by 250mn tons in 2016 by reducing the number of working days from 330 days previously to 276 days. By 8M16, approximately 150mn tons of coal capacity in China had been cut. B) lower coal prices in the beginning of the year resulted in mine closures in China and c) the adverse weather conditions and loading delays in Indonesia. are expected to moderate the impact of muted global demand While thermal coal imports to China are expected to be maintained in 2016 and 2017 after falling 8.4% yoy in 2014 and by 31.9% yoy in 2015 thanks to government cuts in coal production, we expect global coal demand to remain muted with global coal imports to post further declines in 2016 and 2017 mainly due to lower imports in developed countries, such as Japan and EU-27 countries. The coal price is expected to stabilize in 2017 Given the recent surge in coal prices, we believe that the government of China may allow some coal producers to ramp up production. Hence, coupled with the persistently muted coal demand globally and Chinese officials to tighten its commodity exchange markets, we expect the coal price to stabilize in As such, our average coal price assumption is US$70/ton for 2017, improving slightly to US$72/ton for We assume a long-term coal price of US$75/ton from 2019 onward. Better earnings visibility for coal miners in 2017 With expectation on higher average coal prices assumption to US$70/ton for 2017 from this year expectation of around US$60/ton, we believe that this will improve the earnings visibility for coal mining companies under our coverage. Nonetheless, we expect higher cash-cost of production on coal mining companies given a) expectation on higher stripping ratio and b) higher crude oil prices to translate rising fuel cost, which constituted for about 20 25% of total cash cost. Still, we are expecting earnings growth for coal mining under our coverage by 35.9% yoy in 2017 and by 17.9% yoy for Stefanus Darmagiri (62-21) ext.3530 stefanus.darmagiri@danareksa.com Remaining Neutral with ADRO and PTBA as our top picks We expect coal prices to stabilize given: a) the likelihood that China allows some coal producers to ramp up production, b) the end of winter in the Northern Hemisphere, c) greater coal production from producing countries as higher coal prices improve the profitability of coalminers and c) persistently muted coal demand growth. Hence, we maintain our Neutral recommendation on the sector with Adaro Indonesia (ADRO) and Bukit Asam (PTBA) as our top picks. Company Rec. Current Target P/E, x EV/EBITDA, x EPS growth, % Price, Rp Price, Rp 2016F 2017F 2016F 2017F 2016F 2017F Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. ADRO BUY 1,530 1, PTBA BUY 11,125 14, (28.9) 72.7 HRUM SELL 2,320 2, n.a ITMG HOLD 14,700 15, See important disclosure on the back of this report

4 22 November 2016 Coal Sector Coal Industry Outlook Global coal supply concerns The coal price has increased significantly by 107.7% ytd. This reflects tighter supply following: a) policies to cap coal production in China, the world s largest coal producer, by 250mn tons in 2016 by reducing the number of working days from 330 days previously to 276 days. By 8M16, approximately 150mn tons of coal capacity in China had been cut. B) lower coal prices in the beginning of the year resulted in mine closures in China and c) the adverse weather conditions and loading delays in Indonesia. Furthermore, the impact of winter in the Northern Hemisphere mainly in China has boosted demand for coal, as reflected in the higher prices. are expected to moderate the impact of muted global demand While thermal coal imports to China are expected to be maintained in 2016 and 2017 after falling 8.4% yoy in 2014 and by 31.9% yoy in 2015 thanks to government cuts in coal production, we expect global coal demand to remain muted with global coal imports to post further declines in 2016 and 2017 mainly due to lower imports in developed countries, such as Japan and EU-27 countries. Meanwhile, India, the largest coal importer plans to lessen its dependence on coal imports through stronger domestic production while coal stocks at domestic power plants remain high. The coal price is expected to stabilize in 2017 Given the recent surge in coal prices, the government of China has reportedly allowed some 865 coal producers in the country to ramp up production. Moreover, to calm the overheated future markets, Chinese officials have also raised transaction fees and deposit requirements in addition to restricting the intraday open positions on its commodity exchange market. Hence, coupled with the persistently muted coal demand globally and the fact that winter in the Northern Hemisphere will end soon, we expect the coal price to stabilize in As such, our average coal price assumption is US$70/ton for 2017, improving slightly to US$72/ ton for We assume a long-term coal price of US$75/ton from 2019 onward. Exhibit 1. Recent recovery in coal prices Exhibit 2. Coal supply concern to moderate muted demand US$/ton yoy % Import Export Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul (5.0) (10.0) F 2017F Source: Bloomberg, Danareksa Sekuritas Source: BREE, IEA, Danareksa Sekuritas China: Showing a recovery in coal imports with China s coal imports have declined in the past two years, falling by 31.9% yoy alone in This reflects: a) the slowdown in China s economic growth, b) greater usage of domestic coal due to oversupply, and c) policies to reduce air pollution in China s major cities by reducing the usage of coal and improving the fuel mix from non-fossil fuel sources. 2

5 22 November 2016 Coal Sector However, China s coal imports recovered in 9M16, growing 14.0% yoy. This was mainly attributable to: a) lower coal production in China given low coal prices in the beginning of the year which forced several coal miners to close down their operations. In 9M16, coal mining production in China dropped 11% yoy. b) The government s policy to cap coal production in the country and c) higher electricity consumption due to the warmer summer between May to August China s total electricity consumption rose by 6.9% yoy in 9M16. expectations of stable coal imports growth in 2017 Although China is expected to continue reducing capacity with the target of cutting coal production by 500mn tons over the next three-to-five years, we expect flat growth in China s coal imports in 2016 and 2017 as a favorable coal prices environment will encourage the country to increase domestic coal production. This will limit further increases in imports. Exhibit 3. Flat growth in China s coal import Exhibit 4. China s lower coal imports in October 2016 mn tons Import (LHS) Growth (RHS) %, yoy mn tons (20) F 2017F (40) Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: BREE, IEA, Danareksa Sekuritas Source: Customs General Administration, Bloomberg India: Flat growth in coal imports We expect India s coal imports to decline by around 2.9% yoy in 2016, with flat growth expected in This reflects: a) the expectation of higher domestic coal production. Coal India Limited, a state-owned coal producer, managed to increase its production by 10-year CAGR of 4.6% in the period FY2006 FY2016, with coal production to increase by 9.0% yoy for FY2016 ending March 2016 and b) the high level of coal stocks at domestic power supply plants. Also, the move by the Indian government to cancel four proposed coal-fired power plants with combined capacity of 16 GW owing to a lack of interest and in a bid to transform and diversify its electricity sector away from coal will be reflected in India s muted coal imports growth. 3

6 22 November 2016 Coal Sector Developed countries coal imports to remain low Despite the slower-than-expected restart of nuclear power plants in Japan, we expect Japan s coal imports to remain flat over the next two years. In 1H16, Japan s coal imports posted flat growth. Also, other developed countries coal imports (including European countries coal imports) are expected to post negative growth owing to lower coal consumption in the UK following efforts by the UK government to phase out coal-fired power plants by Exhibit 5. Expect slower growth on India s coal import mn tons Import (LHS) Growth (RHS) yoy, % Exhibit 6. Flat growth in Japan s coal imports Import (LHS) Growth (RHS) mn tons yoy, % (5) F 2017F (20) F 2017F (10) Source: BREE, IEA, Danareksa Sekuritas Source: BREE, IEA, Danareksa Sekuritas Indonesia: higher domestic consumption and lower coal exports Indonesia s coal exports have trended down since 2014 with 5.0% yoy lower exports in 2014 and 4.2% yoy lower exports in This reflects: a) the scaled down production of coal mining companies. Indonesia s coal production fell by 3.4% yoy in 2014 and was flat in This owed to unfavorable coal prices which caused small to mid-coal mining companies to either reduce production or shut down their operations in order to maintain profitability. And b) rising domestic sales. Given the recent pick-up in coal prices, we expect coal producers in Indonesia to increase their coal production in the coming years as better coal prices will improve the profitability of coal mining companies. With the expectation of higher coal demand in the domestic market following the operation of new coal-based power plants, we expect Indonesia s coal exports to decline further in the future. Based on PLN s latest Power Supply Business Plan (RUPTL ), the coal demand for power plants is expected to increase by 10-year CAGR of 7.2% in the period

7 22 November 2016 Coal Sector Exhibit 7. Indonesia s coal exports have dipped mn tons Production Export Domestic Source: ESDM Exhibit 8. Rising domestic coal demand for power plant mn tons RUPTL PLN RUPTL PLN F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F Source: PLN Revival in Australia s coal exports Due to the recent surge in coal prices, several coal mines have reopened. Glencore PLC, for instance, plans to reopen its shutdown coal mines in Australia in early 2017, which have been shut down since July 2014 due to the downturn in the global coal market. With the reopening of coal mines, we expect Australia s coal exports to grow by 4.6% yoy in Q16 Result wrap - Indication of better quarterly prices 9M16: mixed results Four coal mining companies under our coverage reported mixed results in 9M16. With Adaro Energy (ADRO) and Harum Energy (HRUM) managed to post better-than-expected results mainly attributable lower cash cost of production as a result of lower-than expected on the stripping ratio. ITMG s better than expected results justified by lower COGS, operating expenses and lower effective tax rate. Meanwhile, PTBA reported below expectation on the result due to a) lower-than-expected on the coal sales volume particularly from export sales volume and b) higher stripping ratio. Better quarterly coal prices to improve earnings in 3Q16 We note that the increased on coal prices in the beginning July 2016 has reflected on rising quarterly ASP for coal mining companies. Three of coal mining companies under our coverage: a) HRUM managed to improve its qoq ASP by 17.1% qoq to US$54.2/ton in 3Q16, b) ADRO increased coal ASP by 4.5% qoq to US$41.8/ton and c) ITMG reported higher coal ASP by 11.6% qoq to US$49.9/ton. As such, this reflected on higher net profit for ADRO (+40% qoq), ITMG (+146% qoq) and HRUM (+170% qoq) in 3Q16. On contrary, PTBA was the only coal mining company to book lower ASP by 7.3% qoq to Rp623,300/ton. This was mainly attributable to change on product mix, of which the company sold greater portion of medium calorific value vs. previously high calorific value. Therefore, PTBA reported lower net profit by 10% qoq to Rp340bn. With the coal price continued its rally in 4Q16, we believe that coal mining companies under our coverage to continue reap benefit to improve their profitability. 5

8 22 November 2016 Coal Sector Exhibit 9. Recovery in ASP in 3Q16 Exhibit 10. to improve quarterly net profit ASP 3Q16 qoq chg yoy chg 9M16 yoy chg % % % PTBA, Rp000/ton ADRO, US$/ton ITMG, US$/ton HRUM, US$/ton Source: Respective companies Net profit 3Q16 qoq chg yoy chg 9M16 yoy chg % % % PTBA, Rp bn , ADRO, US$ mn ITMG, US$ mn HRUM, US$ mn n.a 13 1,161 Source: Respective companies Weak coal production to persist Coal production under our coverage reported a decline by 5.6% yoy in 9M16. This was mainly due to the impact of weak coal prices occurs at 1H16. The greatest decline came from HRUM with lower production by 30.1% yoy on weak coal prices resulted on the company to lower monthly production in order to preserve its limited reserves. PTBA, surprisingly, also recorded lower coal production by 7.8% yoy due to optimization on its coal stock. Operational efficiency through lowering stripping ratio To sustain profitability amid unfavorable coal prices, several coal miners conducted operational efficiency by lowering the stripping ratio. The stripping ratio of ADRO went down to 4.4x in 9M16 from 5.3x in 9M15. HRUM also cut its stripping ratio significantly to 5.8x in 9M16 (9M15: 7.5x). ITMG also slashed its stripping ratio to 8.4x in 9M16 from 8.9x in 9M15. However, PTBA s stripping ratio increased to 5.4x in 9M16 (9M15: 4.6x). Exhibit 11. Weak coal production to persist Exhibit 12. Lower stripping ratio to sustain margin mn tons 3Q16 qoq chg yoy chg 9M16 yoy chg % % % PPTBA (10) 14.0 (8) ADRO (4) 39.3 (1) ITMG 6.3 (4) (12) 19.0 (12) HRUM (30) Source: Respective companies x 3Q15 2Q16 3Q16 9M15 9M16 PTBA ADRO ITMG HRUM Source: Respective companies This led to a decline in cash cost of production With lower stripping ratio and positive impact from lower crude oil prices, which reflected on lower fuel cost, this reflected on lower cash cost of production and better profitability. The cash cost of ADRO lowered significantly by 26.9% yoy to US$21.0/ton and HRUM s FOB vessel cash cost went down by 25.3% yoy to US$29.9/ton in 9M16. As such, the gross margin of ADRO and HRUM improved significantly to 26.2% and 30.6% in 9M16 from 20.7% and 18.8% in 9M15 respectively. While ITMG managed to lower total cost by 15.6% yoy, its gross margin still lowered to 20.2% in 9M16 from 21.5% in 9M15. Nonetheless, the profitability of PTBA lowered, with a decline in gross margin to 24.3% in 9M16 from 28.2% in 9M15 owing to a) higher cash cost by 2.4% yoy and b) shifting into lower calorific value with lower ASP outlook: Better earning visibility Although at the moment, coal mining companies have not provided guideline on their coal production for 2017 as most of them are still waiting and the stabilization on the coal prices, we expect that some coal mining companies continue to increase their production. We expect PTBA continue to increase its coal production by 18.8% yoy for 2017 in-line with 6

9 22 November 2016 Coal Sector greater railway capacity. Smaller companies, such as HRUM is expected to recover its coal production by 33.3% yoy from low-base. Bigger companies, such as ADRO and ITMG is expected to post a flat coal production for Sustaining margin amid expectation on higher cash cost We expect cash cost production coal mining companies to increase. This will be due to a) expectation on higher stripping ratio for 2017 as a result of higher coal prices and b) higher assumption on the crude oil prices to US$50/bbl for 2017 from this year expectation of US$40/ bbl. Nonetheless, the impact on better coal prices will help coal mining companies to sustain profitability. We foresee the gross margin of coal mining companies under our coverage to improve to 26.1% in 2017 from this year s expected 24.4% and 22.5% in Exhibit 13. Recovery in coal production Exhibit 14. Better prices to enhance gross margin Source: Respective companies Source: Respective companies Exhibit 15. PE Band Coal Sector Our top pick in the sector: Adaro Energy (ADRO) and Bukit Asam (PTBA) We continue to like coal mining companies with adequate reserves as well as diversification into power plant business in order to sustain their long-term operation and to support earnings. As such, our top picks in the sector are: Adaro Energy (ADRO) for business diversification and the strategy to develop coking coal and Bukit Asam (PTBA) which is expected to sustain its domestic price amid the expectation on consolidation in the coal price. Exhibit 16. PE Band PTBA (x ) x sd 1sd mean -1sd sd 1sd mean 5 - Jan 09 Okt 09 Jul 10 Apr 11 Jan 12 Okt 12 Jul 13 Apr 14 Jan 15 Okt 15-2sd Jul Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14-1sd -2sd Jan 15 Jan 16 Source: Bloomberg, Danareksa Sekuritas Source: Bloomberg, Danareksa Sekuritas 7

10 22 November 2016 Coal Sector Exhibit 17. PE Band ADRO Exhibit 18. PE Band ITMG (x ) (x ) sd 1sd sd 1sd 15 mean 15 mean 10-1sd 10-1sd 5-2sd 5-2sd - Jan 09 Sep 09 Mei 10 Jan 11 Sep 11 Mei 12 Jan 13 Sep 13 Mei 14 Jan 15 Sep 15 Mei 16 - Jan 10 Sep 10 Mei 11 Jan 12 Sep 12 Mei 13 Jan 14 Sep 14 Mei 15 Jan 16 Sep 16 Source: Bloomberg, Danareksa Sekuritas Source: Bloomberg, Danareksa Sekuritas 8

11 Tuesday, 22 November 2016 BUY Target Price, Rp 1,900 Upside 24.1 ADRO I/ADRO.JK Last Price, Rp 1,530 No. of shares, mn 31,986 Market Cap, Rp bn 48,939 (US$ mn) 3,693 3M T/O, US$mn 3.8 ADRO relative to JCI Index Rp/share 1,900 1,600 1,300 1, /22/15 12/21/15 1/18/16 2/15/16 3/14/16 4/11/16 5/9/16 6/6/16 7/4/16 8/1/16 8/29/16 9/26/16 10/24/16 11/21/16 Consensus Our Cons % Diff Target price, Rp 1,900 1, EPS 2016F, Rp PE 2016F, x Market Recommendation BUY HOLD SELL 1 2 ADRO (LHS) Relative to JCI (RHS) % COAL SECTOR/COMPANY UPDATE Adaro Energy Better long-term earnings visibility Given our higher coal price assumption and the tweak to our financial numbers on better-than-expected results, we upgrade Adaro Energy (ADRO) to BUY with a target price of Rp1,900 (based on DCF valuation with WACC of 9.6%). Our optimism reflects: a) the expectation of better coal prices to sustain profitability, and b) further earnings enhancement in the long-run owing to the development of coking coal and power plants. Our Target Price implies 14.2x 2017F PE. Expect flat coal production growth Although the recent surge in coal prices will encourage several coal miners to ramp up production, we expect ADRO to maintain its coal production target of around 54mn tons for 2017, slightly higher than this year s expectation of 53mn tons. We believe that the company is unlikely to aggressively increase its production since it will want to preserve its coal for use in its power plants. While ADRO has not yet provided guidance for 2017, the company has stated that it would be able to raise its coal production to 60mn tons (based on the annual capacity of ADRO s Kelanis terminal of 60mn tons). Operational efficiency to sustain profitability Cost initiatives reduced its stripping ratio to 4.4x in 9M16 from 5.3x in 9M15. With lower fuel prices, the company managed to lower its cash cost to US$21.0/ton in 9M16 from US$28.7/ton in 9M15. This is better than the company s initial estimate of US$26 28/ton for Given the increase in coal prices, we believe that the company will raise its stripping ratio to around 5.0x in 2017 from this year s expected 4.7x. Although this will increase the company s cash cost (in light of the firmer coal prices), we believe that ADRO will be able to sustain its profitability in Further earnings enhancement on the development of coking coal and power plants While the company is expected to post flat coal production growth, we expect further earnings enhancement in the longer term given: a) the development of coking coal from its 100% stake in the Indo Met Coal Project (IMC). Located in Central and East Kalimantan, the CCoW of IMC has metallurgical coal resources of 1.27bn tons and it is expected to commence operation in the next 2 3 years. And b) a larger earnings contribution from the operation of power plants. Stefanus Darmagiri (62-21) ext.3530 stefanus.darmagiri@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Upgrade to BUY We upgrade the stock to BUY given: a) expectation of better coal prices to sustain profitability, and b) further earnings enhancement in the long-run following the development of coking coal and the operation of power plants. We raise our earnings forecast owing to better results, a higher coal price assumption and the updated coal reserves. Coupled with the roll-over of our valuation, we raise our target price to Rp1,900 (based on DCF valuation with WACC of 9.6%). Revenue, USD mn 3,325 2,684 2,449 2,921 3,103 EBITDA, USD mn ,031 EBITDA Growth, % Net profit, USD mn EPS, USD EPS growth, % BVPS, USD DPS, USD Net Gearing, % PER, x PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report

12 22 November 2016 Adaro Energy Exhibit 1. Quarterly Coal Sales Volume and ASP Exhibit 2. India dominated ADRO s exports in 9M16 mn tons Sales Vol (LHS) ASP (RHS) US$/ton Spain 5% Japan 8% Others 10% Indonesia 24% Korea 8% Hong Kong 8% India 15% Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 Malays ia 8% China 14% Source: Company Source: Company Exhibit 3. Higher stripping ratio Exhibit 4. to reflect rising cash costs in 3Q16 mn tons 15.0 Production (LHS) Stripping Ratio (RHS) x 10.0 US$/ton Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Source: Company Source: Company Exhibit 5. Changes in our earning forecast New Previous Change (%) 2016F 2017F 2018F 2016F 2017F 2018F 2016F 2017F 2018F Coal sales volume, mn tons Coal production volume, mn tons Coal Price, USD/ton Blended Coal ASP, USD/ton Revenue (USD mn) 2,449 2,921 3,103 2,373 2,530 2, EBITDA (USD mn) , Net Profit (USD mn)

13 22 November 2016 Adaro Energy Exhibit 6. Profit and Loss, USD mn F 2016F 2018F Turnover 3,325 2,684 2,449 2,921 3,103 COGS (2,606) (2,141) (1,807) (2,134) (2,252) Gross profit Operating expenses (163) (133) (134) (169) (177) Operating profit Other income/expenses (235) (130) (58) (69) (62) Pre-tax profit Taxes (138) (129) (180) (220) (245) Minority interest (5) Net profit Exhibit 7. Balance sheet, USD mn Cash ,033 1,290 1,514 Account Receivables Inventories Other current assets Total current assets 1,272 1,093 1,445 1,758 2,003 Fixed assets 1,617 1,467 1,339 1,226 1,124 Other noncurrent assets 3,526 3,399 3,295 3,190 3,086 Total non current assets 5,142 4,866 4,634 4,416 4,210 Total assets 6,414 5,959 6,079 6,174 6,213 Account payable Short term debt Other current liabilities Total current liabilities Long term debt 1,688 1,444 1,310 1, Other non current liabiltieis Total non current liabilites 2,380 2,151 2,016 1,854 1,667 Minority Interest Share capital Excess paid in 1,154 1,154 1,154 1,154 1,154 Retained earnings & others 1,270 1,368 1,554 1,735 1,921 Total equity 3,259 3,353 3,539 3,720 3,906 Total equity & liabilities 6,414 5,959 6,079 6,174 6,213 3

14 22 November 2016 Adaro Energy Exhibit 8. Cash flow, USD mn Net profit Depreciation and amortisation Change in working capital 159 (114) 12 (13) (6) Others (85) 151 (1) 0 0 Operating cash flow Capex (103) (101) (100) (125) (150) Others 77 (17) Investing cash flow (26) (118) (100) (125) (150) Dividends (75) (75) (84) (148) (181) Net change in debt (411) (352) (131) (129) (162) Others (10) Financing cash flow (496) (423) (183) (277) (343) Net change in cash 70 (30) Net cash (debt) at beg ,033 1,290 Forex adjustments (5) (13) Net cash (debt) at end ,033 1,290 1,514 Exhibit 9. Selected ratios Gross margin, % Operating margin, % EBITDA margin, % Net margin, % ROA, % ROE, % Net gearing, % (8.6) 4

15 Tuesday, 22 November 2016 BUY Target Price, Rp 14,500 Upside 30.3% PTBA IJ/PTBA.JK Last Price, Rp 11,125 No. of shares, mn 2,304 Market Cap, Rp bn 25,632 (US$ mn) 1,935 3M T/O, US$mn 3.8 PTBA relative to JCI Index Rp/share 14,000 11,500 9,000 6,500 4,000 11/22/15 12/21/15 1/18/16 2/15/16 3/14/16 4/11/16 5/9/16 6/6/16 7/4/16 8/1/16 8/29/16 9/26/16 10/24/16 11/21/16 Consensus Our Cons % Diff Target price, Rp 14,500 14, EPS 2016F, Rp PE 2016F, x Market Recommendation BUY HOLD SELL 2 PTBA (LHS) 3 Stefanus Darmagiri (62-21) ext.3530 stefanus.darmagiri@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Relative to JCI (RHS) 13 % COAL SECTOR/COMPANY UPDATE Bukit Asam Resilient in the face of possible coal price consolidation We expect Bukit Asam (PTBA) to benefit from the current higher coal prices in 2017 due to adjustments in coal prices in the domestic market (which represented 60% of the total coal sales volume in 9M16) becoming effective in the beginning of We raise our target price to Rp14,500 (based on DCF valuation with WACC of 11.4% and long-term growth of 3%), reflecting the 9M16 result and higher coal price assumption. Maintain BUY. Our TP implies 12.6x 2017F PE. Full impact of higher coal prices to be reflected in the ASP in 2017 Given that domestic sales volume, which is less sensitive to price changes, accounted for 60.6% of the total sales volume in 9M16, we believe that the recent increases in the coal price will only improve the ASP in export markets in 4Q16. Going into 2017, with most of PTBA s coal sales volume sold to the domestic market, where coal prices are only adjusted on a yearly basis with prices based on average coal prices in the last three months of the year, we expect PTBA to benefit from the current higher coal price in This will provide a cushion if the coal price consolidates. Sales volume target cut for 2016, but sales volume to improve thereafter PTBA cut its coal sales volume target to 23.1mn tons for 2016 from 29.1mn tons previously following the coal production cut to 20.0mn tons (+3.3% yoy) from 25.7mn tons. This reflects: a) the revision in railway capacity to 19.1mn tons from 23.7mn tons, b) optimization of the coal stocks in the mining area and at the port and c) the move into medium-rank coal, reflecting 13% yoy lower export sales volume in 9M16. PTBA recorded 8% yoy lower coal production of 13.0mn tons in 9M16. For 2017, we expect 18.8% yoy higher production volume owing to higher coal demand from power plants and thanks to the full operation of double track railway between Tanjung-Enim and Prabumulih. Expect a lower stripping ratio in 4Q16 PTBA reported a higher stripping ratio of 5.5x in 9M16 compared to 4.6x in 9M15. This translated into 2.4% yoy higher total costs (ex-royalty) of Rp516,664/ton. Going into 4Q16, PTBA is expected to cut its stripping ratio to bring it closer to the company s target. Assuming a stripping ratio of 4.0x in 4Q16, this would translate into a stripping ratio of only 5.0x in As such, we expect a positive impact (i.e. a reduction) in the company s cash costs. Maintain BUY We raise our target price to Rp14,500 (based on DCF valuation and long-term growth of 3%) given a higher coal price assumption. We maintain our BUY call given the expectation of solid production growth and more resilient financial performance. In particular, the company should benefit from its significant exposure to the domestic market where the current higher coal prices will be locked in for a year. Our TP implies 12.6x 2017F PE F 2016F 2017F Revenue, Rp bn 13,078 13,734 14,218 18,497 20,237 EBITDA, Rp bn 2,336 2,832 2,135 3,778 4,520 EBITDA Growth, % Net profit, Rp bn 1,861 2,036 1,446 2,498 3,004 EPS, Rp ,149 1,382 EPS growth, % BVPS, Rp 3,867 4,220 4,554 5,470 6,450 DPS, Rp Net Gearing, % PER, x PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report

16 22 November 2016 Bukit Asam Exhibit 1. Continue double digit production growth Exhibit 2. Domestic dominated coal sales volume mn tons 35.0 Production Sales Japan 6.8% Srilanka 4.6% India 1.2% France 0.8% Malaysia 8.2% Taiwan 17.8% Domestic 60.6% Source: Company Exhibit 3. Coal transported by railway mn tons Exhibit 4. Quarterly stripping ratio and production Production (LHS) Stripping Ratio (RHS) mn tons x Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Source: Company Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 Source: Company Exhibit 5. Changes in our earning forecast New Previous Change (%) 2016F 2017F 2018F 2016F 2017F 2018F 2016F 2017F 2018F Coal sales volume, mn tons (7.4) (1.1) (0.7) Coal production volume, mn tons (7.9) (1.2) (0.7) Coal Price, USD/ton Blended Coal ASP, IDR/ton 653, , , , , , Revenue (IDR bn) 14,218 18,497 20,237 14,884 16,466 18,189 (4.5) EBITDA (IDR bn) 2,135 3,778 4,520 2,301 2,775 3,438 (7.2) Net Profit (IDR bn) 1,446 2,498 3,004 1,610 1,834 2,262 (10.2)

17 22 November 2016 Bukit Asam Exhibit 6. Profit and Loss, Rp bn Turnover 13,078 13,734 14,218 18,497 20,237 COGS (9,156) (9,594) (10,756) (13,087) (13,958) Gross profit 3,922 4,140 3,462 5,410 6,279 Operating expenses (1,873) (1,725) (1,674) (2,141) (2,355) Operating profit 2,049 2,414 1,789 3,269 3,924 Other income/expenses Net interest Pre-tax profit 2,648 2,883 2,091 3,445 4,062 Taxes (550) (627) (494) (848) (1,018) Minority interest (3) (1) (36) (46) (51) Net profit 1,861 2,036 1,446 2,498 3,004 Exhibit 7. Balance sheet, Rp bn Cash 4,039 3,115 1,836 2,352 2,710 Account Receivables 1,439 1,596 1,558 2,027 2,218 Inventories 1,033 1,233 1,383 1,682 1,794 Other current assets 905 1,654 1,324 1,059 1,059 Total current assets 7,417 7,598 6,100 7,120 7,780 Fixed assets 3,988 5,579 7,932 10,042 11,948 Other noncurrent assets 3,456 3,716 3,774 3,841 3,958 Total assets 14,861 16,894 17,806 21,003 23,686 Account payable 546 1,146 1,285 1,563 1,667 Short term debt 1,294 1,336 1,000 1,500 2,000 Other current liabilities 1,742 2,441 2,562 2,691 2,590 Total current liabilities 3,581 4,923 4,847 5,754 6,257 Long term debt Other noncurrent liabilities 1,793 2,014 2,238 2,490 2,490 Total noncurrent liabilities 2,755 2,684 2,909 3,160 3,160 Minority interest Share capital 1,152 1,152 1,152 1,152 1,152 Excess paid in Retained earnings & others 9,060 10,192 10,925 12,917 15,047 Total equity 8,408 9,175 9,902 11,893 14,023 Total equity & liabilities 14,861 16,894 17,806 21,003 23,686 3

18 22 November 2016 Bukit Asam Exhibit 8. Cash flow, Rp bn Net income 1,861 2,036 1,446 2,498 3,004 Depreciation and amortisation Change in working capital 1, Others (1,283) (792) (83) (87) (119) Operating cash flow 1,976 1,898 1,853 3,323 3,681 Capex (1,620) (721) (2,680) (2,600) (2,500) Net acquisitions (130) (2) Others (285) (391) Investing cash flow (2,035) (1,113) (2,680) (2,600) (2,500) Dividends (1,004) (706) (713) (506) (874) Net change in debt 1,749 (642) Others (8) (448) Financing cash flow 737 (1,795) (452) (208) (823) Net change in cash 678 (1,011) (1,279) Net cash (debt) at beg. 3,344 4,039 3,115 1,836 2,352 Net cash (debt) at end. 4,039 3,115 1,836 2,352 2,710 Exhibit 9. Selected ratios Gross margin, % Operating margin, % EBITDA margin, % Net margin, % ROA, % ROE, % Net gearing, %

19 Tuesday, 22 November 2016 SELL Target Price, Rp 2,000 Upside (Downside) (13.7%) HRUM IJ/HRUM.JK Last Price, Rp 2,320 No. of shares, mn 2,703 Market Cap, Rp bn 6,271 (US$ mn) 474 3M T/O, US$mn 0.2 HRUM relative to JCI Index Rp/share 2,500 2,000 1,500 1, /22/15 12/21/15 1/18/16 2/15/16 3/14/16 4/11/16 5/9/16 6/6/16 7/4/16 8/1/16 8/29/16 9/26/16 10/24/16 11/21/16 Consensus HRUM (LHS) Relative to JCI (RHS) % Our Cons % Diff Target price, Rp 2,000 1, EPS 2016F, Rp PE 2016F, x COAL SECTOR/COMPANY UPDATE Harum Energy Coal production rebounds off a low base With coal prices improving, Harum Energy (HRUM) has increased its monthly production run rate quite significantly since its lowest level in 2Q16. As such, we expect the coal production to recover by 33.3% yoy to 4.0mn tons in Although we raise our target price to Rp2,000 (based on DCF valuation with WACC of 12.0%) since our valuation is rolled over to 2017 combined with our higher coal price assumption and better-than expected 9M16 results, we downgrade the stock to SELL given: a) concerns on limited reserves, and b) the surge in the share price. Our target price implies 13.9x 2017F PE. Coal production to recover in 2017 Given the strong recovery in coal prices, we expect HRUM s coal production to recover by 33.3% yoy to 4.0mn tons in 2017 (2016F: -16.7% yoy). The company is able to increase production since it has idle heavy equipment and other supporting equipment ready to be used near the mining area. In early 4Q16, HRUM managed to improve its monthly production run-rate significantly. In 3Q16, HRUM s coal production increased by 20.6% qoq. Higher stripping ratio will lead to rising total cash costs HRUM reduced its stripping ratio to 5.8x in 9M16 from 7.5x in 9M15 in an effort to sustain profitability amid weak coal prices. Coupled with 31.4% lower fuel prices, this resulted in substantially lower cash costs (-25.3% yoy) of US$29.9/ton in 9M16 compared to US$40.0/ton in 9M15. Given the recent increase in coal prices, we expect the company to increase its stripping ratio to around 7.0x in 2017 from this year s estimated 6.0x. Also, with the fuel price expected to increase due to higher crude oil prices, cash costs may increase further by around 10.0% yoy in Market Recommendation BUY HOLD SELL Concerns on limited reserves to persist HRUM has a strong balance sheet with no debt position as of 9M16. This will give it the financial flexibility to acquire more coal mines. However, given the complications in acquiring new coalmines (i.e. pricing and licensing issues), HRUM will likely find it difficult to improve its reserves in the future. With HRUM expected to increase coal production in 2017 and assuming flat coal production growth, with MSJ reserves of around 52mn tons as of 1H16, HRUM s mine life is approximately 14 years. Stefanus Darmagiri (62-21) ext.3530 stefanus.darmagiri@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Downgrade to SELL Although we increase our target price to Rp2,000 (based on DCF valuation with WACC of 12.0%), since: a) we raise our coal price assumption, b) we tweak our financial models given the betterthan-expected 9M16 results and c) we roll over our valuation to 2017, we downgrade the stock to SELL. Our downgrade reflects: a) concerns on limited reserves of only 14 years and b) the surge in the share price by 243.7% ytd. Our target price implies 13.9x 2017F PE. Downside risks relate to consolidation of the currently high coal prices. Revenue, USD mn EBITDA, USD mn EBITDA Growth, % Net profit, USD mn EPS, USD EPS growth, % , BVPS, USD DPS, USD Net Gearing, % PER, x 1, PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report

20 22 November 2016 Harum Energy Exhibit 1. Lower stripping ratio to lower cash costs Exhibit 2. Malaysia is the largest customer as of 9M16 mn tons Coal Sales (LHS) ASP (RHS) US$/ton China 13% India 4% Japan 3% Others 2% Malaysia 30% Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 Taiwan 19% South Korea 29% Source: Company Source: Company Exhibit 3. Lower ASP depressed margins Exhibit 4. Expect recovery in coal production off a low base US$/ton 60 Cash Cost (LHS) Stripping Ratio (RHS) x 13 mn tons 12 Production (LHS) Stripping Ratio (RHS) x Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q Source: Company Exhibit 5. Changes in our forecast New Previous Change (%) 2016F 2017F 2018F 2016F 2017F 2018F 2016F 2017F 2018F Coal sales volume, mn tons Coal production volume, mn tons Coal Price, USD/ton Blended Coal ASP, USD/ton Revenue (USD mn) EBITDA (USD mn) n.a n.a. n.a. Net Profit (USD mn) n.a n.a. n.a. 2

21 22 November 2016 Harum Energy Exhibit 6. Profit and Loss, USD mn Turnover COGS (391) (203) (141) (211) (277) Gross profit Operating expenses (66) (45) (38) (56) (72) Operating profit Other income/expenses (10) (14) Pre-tax profit 7 (18) Taxes (4) (1) (6) (10) (13) Minority interest (2) (0) (0) (0) (0) Net profit 0 (19) Exhibit 7. Balance sheet, USD mn Cash Account Receivables Inventories Other current assets Total current assets Fixed assets Other noncurrent assets Total assets Account payable Short term debt Other current liabilities Total current liabilities Long term debt Other noncurrent liabilities Total noncurrent liabilities Minority Interest Share capital Excess paid in Retained earnings & others Total equity Total equity & liabilities

22 22 November 2016 Harum Energy Exhibit 8. Cash flow, USD mn Net income 0 (19) Depreciation and amortisation Change in working capital 20 4 (20) (3) 3 Others 8 4 (5) (5) (6) Operating cash flow 39 (1) Capex Others (9) (11) (15) (18) (18) Investing cash flow 1 (1) (5) (8) (8) Dividends (25) (0) 0 (10) (16) Net change in debt Others 5 (3) Financing cash flow (20) (3) 25 (10) (15) Net change in cash 20 (6) Net cash (debt) at beg Net cash (debt) at end Exhibit 9. Selected ratios Gross margin, % Operating margin, % EBITDA margin, % Net margin, % 0.1 (7.7) ROA, % 0.1 (4.7) ROE, % 0.1 (6.9) Net gearing, % (68.6) (70.2) (74.8) (74.8) (77.0) 4

23 Tuesday, 22 November 2016 HOLD Target Price, Rp 15,800 Upside 7.5% ITMG IJ/ITMG.JK Last Price, Rp 14,700 No. of shares, mn 1,129 Market Cap, Rp bn 16,596 (US$ mn) 1,253 3M T/O, US$mn 2.9 ITMG relative to JCI Index Rp/share 20,000 16,000 12,000 8,000 4,000 11/22/15 12/21/15 1/18/16 2/15/16 3/14/16 4/11/16 5/9/16 6/6/16 7/4/16 8/1/16 8/29/16 9/26/16 10/24/16 11/21/16 Consensus Our Cons % Diff Target price, Rp 15,800 17, EPS 2016F, Rp 1,207 1, PE 2016F, x Market Recommendation BUY HOLD SELL 1 ITMG (LHS) Relative to JCI (RHS) 8 9 % COAL SECTOR/COMPANY UPDATE Indo Tambangraya Megah Concerns remain on the limited reserves We raise our target price on Indo Tambangraya Megah (ITMG) to Rp15,800 (based on DCF valuation with WACC of 11.9%) as we increase our coal price assumption and roll over our valuation to Even though ITMG makes generous dividend payments, we maintain our HOLD recommendation given: a) the limited upside to our target price and b) concerns on the reserves which are sustainable for about 7.8 years. Our target price implies 11.0x 2017F PE. Expected to at least maintain coal production in 2017 With rising coal prices and no production guidelines provided yet by ITMG for next year as the company is currently in the budgeting process, the management has indicated that the company will at least maintain its coal production at around 26.2mn tons in We assume the company increases its coal production by around 3.1% yoy to 27.0mn tons for 2017 from this year s target of 26.2mn tons (-8.1% yoy). And given the limited reserves, we only expect low production growth in 2018 of around 3.1% yoy. Higher stripping ratio to increase production costs further The company is expected to maintain its stripping ratio at around 8.4x in 2016 from 8.5x in the previous year. ITMG reduced its stripping ratio to 8.4x in 9M16 from 9.0x in 9M15. With 36.5% yoy lower fuel prices of US$0.40/liter thanks to lower crude oil prices, ITMG managed to lower its COGS per ton by 15.9% yoy to US$38.1/ton. Going into 2017, we expect the company to increase its stripping ratio further. The company has indicated that it plans to increase overburden (OB) removal for in-house contractors by around 10% yoy in With a higher stripping ratio and rising fuel prices, we expect further increases in the cost of production in Concerns remain on the limited reserves While in the medium-to-long-term, the company plans to explore opportunities to acquire new mining sites and optimize mine plans or reserves and to further study underground mining, we still have concerns over the company s limited reserves. As of end-9m16, ITMG had about 205mn tons of reserves (proven and probable). With estimated coal production of 7.2mn tons in 4Q16, and assuming stable coal production (based on 2016) and with no acquisition of coal mining assets going forward, ITMG s mining life will be around 7.8 years. Maintain HOLD Even though ITMG is expected to continue making generous dividend payments, we maintain our HOLD recommendation with a target price of Rp15,800 (based on DCF valuation and WACC of 11.9%) given: a) limited upside to our target price and b) concerns on the reserves which are sustainable for about 7.8 years. Our target price implies 11.0x 2017F PE. Stefanus Darmagiri (62-21) ext.3530 stefanus.darmagiri@danareksa.com Danareksa research reports are also available at Reuters Multex and First Call Direct and Bloomberg. Revenue, USD mn 1,943 1,589 1,345 1,664 1,761 EBITDA, USD mn EBITDA Growth, % Net profit, USD mn EPS, USD EPS growth, % BVPS, USD DPS, USD Net Gearing, % PER, x PBV, x EV/EBITDA, x Yield, % See important disclosure on the back of this report