FOCUS Building Material Sector Update 03 March 2015

Transcription

1 FOCUS XXX Company Update XX XXXXX 2013 FOCUS Building Material Mandiri Sekuritas Analyst Liliana S Bambang liliana.bambang@mandirisek.co.id Yudha Gautama yudha.gautama@mandirisek.co.id Sector : Building Material NEUTRAL Hanging in Balance We are positive on the government s ambition to build more infrastructure, as national capital spending is expected to go up by 65% YoY this year. However, the recent price cut on state-owned-enterprise caused us to downgrade the sector recently to Neutral. At this juncture, our preffered play is INTP. Demand recovery. Indonesia's cement demand story remains attractive, as we have one of the lowest cement per capita consumption in South East Asia at 240kg. Our economists expect GDP growth picking up to 5.3% in 2015 from 5.1% in 2014 on the back of growth in government and private investments (a trend which did not occur on the previous fuel price hikes). Hence, we project recovery on cement demand, from 3% growth in FY14 to 7% in FY15F due to 65% increase on capital spending by the government to Rp290tn. Further catalyst is infrastructure spending. For FY16F and beyond, the upside surprises rely on the new infrastructure projects and positive policies on infrastructure. The new government is planning to build 15 new airports, 6 new cargo airports, and 24 new ports. We estimate that these projects would absorb around 15-25mn MT of cement demand. This would translate to around 5-10% of additional cement growth. The new government plans to concentrate the reallocation to basic and big infrastructure projects. We believe the government s commitment on infrastructure will also lure foreign direct investment and private investment needed to finance the gap for big infrastructure projects. The new government is serious about infrastructure development, as they have allocated a portion of the savings from fuel subsidy to infrastructure. Pricing and oversupply risks caused us to maintain our Neutral stance. Despite the potential demand, we fear continuous earnings disappointment, as cement companies could not pass-on the hiccup on costs. There is a de-rating risk on the stocks if the government could not boost infrastructure projects, therefore causing cement demand to be on the low single digit growth. Preferred play is INTP. Our preferred play is currently INTP as the company would benefit from consolidation. We maintain our Buy recommendation for both INTP at Rp27,000, and SMGR at Rp16,500. We are slightly cautious on SMCB due to its high gearing and aggressive consensus earnings estimate. We would turn more positive on the sector if we see stronger demand pick-up on the back of rising infrastructure demand. If execution on infrastructure is worse than our expectation, there s risk for de-rating on the sector, as the sector is currently trading in-line with its previous three years average of 15-16x. Company Share Px Price Target Rec PER 2015F PER 2016F EV/EBITDA 2015F EV/EBITDA 2016F INTP 24,050 27,000 Buy SMGR 14,875 16,500 Buy SMCB 1,910 2,050 Neutral Please see important disclosure at the back of this report Page 1 of 24

2 FIGURE 1. CEMENT SALES BREAKDOWN 12M14 Yogyakarta 2% East Java 13% Central Java 11% West Java 20% Jakarta 10% Source: Indonesia Cement Association Sumatera 21% Kalimantan 8% Sulawesi 7% Nusa Tenggara 6% Eastern Indo 2% FIGURE 2. CEMENT CONSUMPTION TREND 100, % 80, % 60,000 40, % 20, % E 2015E 2016E 2017E Annual cement demand ('000 MT) Cement demand growth (%) FIGURE 3. MARKET SHARES 12M14 FIGURE 4. CEMENT S BAG VS BULK RATIO 100.0% Others 11% 80.0% SMCB 15% SMGR 44% 60.0% 40.0% INTP 30% 20.0% 0.0% Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 % of bag % of bulk Source: Indonesia Cement Association Source: Indonesia Cement Association FIGURE M ROLLING FORWARD P/E VALUATION CHART FIGURE 6. VALUATION TABLE Company Share price PER 2015F PER 2016F EV/EBITDA 2015F EV/EBITDA 2016F Indonesia INTP 24, SMCB 1, SMGR 14, Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 SMGR INTP SMCB Source: Bloomberg (per Feb 27 th 2015) Please see important disclosure at the back of this report Page 2 of 24

3 Investment Summary Neutral on Indonesia's cement sector. Currently, we are projecting 7% cement sales growth in FY15F and 11-12% in FY16-17F. Despite the strong cement sales, we are Neutral on the sector as we see risks on pricing, due to the President s mid-jan announcement to cut state-owned cement prices by around 5% (on retail basis). We are also slightly worried on potential competition as most of the new capacity would be ready at the end of FY15F. Sector s positive catalysts: 1) Strong cement sales in 2H15 and FY16-17F. We are projecting a recovery towards 2H15 instead of 1H15, on rising government s spending on the later part of the year. With new land law coming full throttle in the beginning of FY14, we forecast most of the land acquisition to be done in mid to later part of FY15F. We also view that bureaucracy reform might take some time before it comes in effect. Hence, we project stronger cement sales growth in FY16-17F. 2) Positive policies on infrastructure or PPP. We view that the new government s commitment on infrastructure will lure foreign direct investment and private investment needed to finance the gap for big infrastructure projects. We also expect reform on infrastructure investment policies, hence making it easier for FDI and DDI to invest in infrastructure. 3) Easing cost pressure due to lower power costs. Lower coal price and decline on electricity cost also caused easing on cost pressure for Indonesian cement. PLN has reduced electricity cost for cement industry by 15% MoM in January Fuel and power comprise of c. 50% of Indonesia s cement cost structure. Sector s negative catalysts: 1) Another cut on the pricing for state-owned enterprises. There are no written rules or regulations for cement pricing in Indonesia. The announcement by Jokowi, in our view, is likely to be one-off, as it coincides with the cut in the fuel price. However, it brings a risk to the earnings number and currently the cement companies have not de-rated post the cut in retail cement prices. 2) Failure on the new government to boost infrastructure projects. The government plans to increase capital spending by 65% YoY for this year to Rp291tn. The market has high hopes for the new government to boost infrastructure projects, as Jokowi is well-known for bureaucracy reforms. The risk, in our view, is that if the infrastructure development does not come as fast as the market thinks. 3) Valuation de-rating ahead of concern on supply. We fear that there is a valuation de-rating risk if the market is more focused on supply instead of demand. We forecast 14% CAGR of supply growth in FY14-16F. If demand could not pick up strongly in 2H14, cement companies could experience a de-rating first. Preferred plays. For plays on infrastructure, we prefer SMGR and INTP compared to SMCB. SMGR and INTP have better balance sheets compared to SMCB. SMGR has better potential for ASP increase due to its diversification of cement sales in Java and ex-java. INTP has better sales volume potential due to its new 4.4mn MT capacity which would come online in 2H15. We are worried that SMCB still has consensus earnings downgrade potential for FY15F, as consensus priced in 15% earnings growth for SMCB. Please see important disclosure at the back of this report Page 3 of 24

4 Recovery ahead on infrastructure growth Our economists are positive on FY15F outlook We expect stronger economic and cement demand growth in FY15F. Our economists penciled in stronger economic growth of 5.3% in FY15F due to growth in government and private investments (a trend which did not occur on the previous fuel price hikes). We forecast positive trajectory of gross capital fixed formation, from 4.6% in FY14F to 6.2% in FY15F. We have seen property demand gradually recovering in 2H14, after a slump in 2H13-1H14 due to the new LTV rule. The government also seems eager to relax the LTV rule for cheap housing. Hence, we view that it is unlikely for the government to issue a tighter mortgage rule. We project cement demand growth of 7% in FY15F to 64mn MT, from 3% in FY14. We remain positive on the Indonesian cement demand, considering that our cement demand consumption per capita, at c. 240kg per capita, remains one of the lowest in the region. Our number implies 1.3x of GDP growth. On average in the past 20 years, cement demand growth is around 1.4x of GDP growth. Hence, we see an upside in our FY15F numbers should the infrastructure building is much faster than our expectations. FIGURE 7. OUR ECONOMISTS EXPECT STRONGER GROSS FIXED CAPITAL FORMATION IN FY15F F 2015F National A c c ounts R eal GDP (% yoy) 4,6 6,2 6,5 6,3 5,8 5,1 5,3 Domes tic Demand (% yoy) 5,4 5,3 5,5 6,1 5,1 5 5,4 R eal Cons umption: Private (% yoy) 4,9 4,7 4,7 5,3 5,3 5,4 5,2 R eal C ons umption: Government (% yoy) 15,7 0,3 3,2 1,3 4,9 2,9 5 R eal Gros s Fixed Capital Formation (% yoy) 3,3 8,5 8,3 9,7 4,7 4,6 6,2 GDP per capita (US$) - nominal 2,328 2,977 3,498 3,562 3,587 3,723 4,044 BI rate (% year end) 6,5 6,5 6 5,75 7,5 7,25 7,25 Source: BI, Mandiri Sekuritas estimates FIGURE 8. WE FORECAST CEMENT GROWTH OF 7% IN FY15F E 2016E 2017E Annual cement demand ('000 MT) 40,778 48,001 54,969 58,024 59,909 64,018 71,262 80,194 Cement demand growth (%) 6.3% 17.7% 14.5% 5.6% 3.2% 6.9% 11.3% 12.5% GDP growth 6.2% 6.5% 6.2% 5.8% 5.3% 5.1% 5.5% 5.5% Cement growth vs. GDP growth Source: Indonesia Cement Associates, Mandiri Sekuritas estimates FY15F assisted by growth on infrastructure spending. For FY15F, we estimate demand growth of 7%, as we view positively the recent changes on the government s capital spending budget. The government is projecting a 65% increase on capital spending, from Rp176tn to Rp290tn. During such increase on capital spending, bulk cement growth tends to grow in double digit. In FY11-13, when the capital spending went up by 20%-30%, bulk cement sales went up by 15-37%. Bulk cement sales is around 20% of Indonesia s total cement sales. The rest is still dominated by retail (bagged) cement sales. The key risk in our estimate is that at times it is easier to build using bagged cement instead of bulk cement due to poor infrastructure. Please see important disclosure at the back of this report Page 4 of 24

5 FIGURE 9. MASSIVE UPWARD POTENTIAL FROM THE GOVERNMENT CAPITAL SPENDING Government capital spending - budget (Rp tn) Government capital spending - realization (Rp tn) * 2015** 2015 (APBN-P) Source: Indonesia Cement Association, Mandiri Sekuritas estimates FIGURE 10. WE PROJECT STRONG BULK SALES GROWTH ON THE BACK OF INFRASTRUCTURE SPENDING Bulk Sales ('000 MT) 6, , , , , ,406 17,250 21,863 Growth (%) 6.5% 36.5% 19.7% 14.9% 5.6% 10.2% 19.7% 26.7% ASP per MT 813, , , , , , ,323 1,003,553 Value in Rp tn Bulk value as % of capital spending APBN & APBD 3.0% 3.3% 3.4% 3.2% 4.5% 3.5% 3.7% 4.2% Capital spending - realization (Rp tn) APBN APBD APBN & APBD Growth -7% 31% 20% 28% -23% 43% 15% 15% Source: Indonesia Cement Association, Mandiri Sekuritas estimates We view that cement growth going forward would rely on the new infrastructure projects. The new government is planning to build 15 new airports, 6 new cargo airports, and 24 new ports. We estimate that these projects would absorb around 15-25mn MT of cement demand. The new government plans to concentrate the reallocation to basic and big infrastructure projects. We believe the government s commitment on infrastructure will also lure foreign direct investment and private investment needed to finance the gap for big infrastructure projects. We are more bullish on FY16F and beyond. For FY16F and beyond, we forecast higher cement growth in FY16-17F to be more than 10% due to: 1) realization and the start of the realization of Jokowi s massive infrastructure project, 2) recovery of the consumer demand (bagged). We also expect the benefit of the new land law (which could be implemented in FY15) to bear fruit. The new land law provides specific guidelines on the government to acquire land for public use. Please see important disclosure at the back of this report Page 5 of 24

6 FIGURE 11. WE PROJECT UPWARD RECOVERY ON INDONESIA'S CEMENT DEMAND mn MT p g 2009A 2010A 2011A 2012A 2013A 2014A 2015F 2016F 2017F 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Cement consumption YoY growth - RHS Source: Indonesia Cement Association, Mandiri Sekuritas estimates Infrastructure growth is key Positive on the new government. We are positive on the progress of infrastructure projects going forward as we view that: 1) The new government could tackle the much needed bureaucracy reform, 2) The land reform bill, which would be effective at the end of FY14F should assist the new government on handling land acquisition for public use, 3) the recent increase on subsidized fuel price gives room for more infrastructure spending. We think the bulk of the demand from infrastructure is most likely to pick up in FY16F instead of FY15F. We are more positive on FY16F, as FY15F would be the start of the land acquisition law, hence, the bulk of the land acquisition would be finished in mid FY16F. Using the land acquisition law, there are clearer steps on how the government could acquire land for public use. Jokowi has many infrastructure projects on hand, and we estimate that these projects would require around 26mn MT of cement in the next four years. Jokowi s main projects are: 1) Building 15 new airports and 6 cargo airports. These projects will be under the supervision of the Minister of Transportation and Angkasa Pura, state-owned airport operator. The Minister of Transportation has identified locations for 10 new airports in , which will be mostly located in the eastern part of Indonesia. 2) New toll roads construction. The new administration is looking to build 2,648km of additional public roads, 1,000km of new toll roads, and improve and maintain 46,770km of existing roads. Around 945km of toll road projects have already secured long-term concessions. 3) Building 24 seaport projects over the next five years. According to Bappenas, State Ministry of National Development Planning, there are 24 seaports across Indonesia that needs to be built and expanded. The Rp39.5tn project will be spearheaded and financed by the respective Pelindo, the state-owned seaport operator. The Ministry of Transportation and State Owned Enterprise will be overseeing the project execution. Please see important disclosure at the back of this report Page 6 of 24

7 FIGURE 12. INFRASTRUCTURE PROJECTS F Airport Ports Roads Construction of 15 new Construction of 24 new ports New roads: 2,650km airports Procurement of 20 pioneering aircrafts Development of cargo airports in 6 locations Source: Bappenas Procurement of 26 Highway construction: 1,000km pioneering cargo ships Procurement of 2 cattle ships Road maintenance: 46,770km Harbor crossing in 60 locations 50 units of pioneering ferries Railways Housing Irrigation Construction of 3,258 railway: Intercity railway 2,159km, Urban railway 1,099km Development of Bus Rapid Transit (BRT) network in 29 cities Development of Mass Rapid Transit in 6 metropolitan cities and 17 big cities Housing stimulus for 5.5mn households Handling slum areas 37,407 ha Mortgage access extension for 2.5mn low-income residents 1mn ha construction and improvement in irrigation system Rehabilitation of 3.3mn ha of irrigation networks FIGURE 13. CEMENT REQUIRED FOR INFRASTRUCTURE PROJECTS Cement requirement Total cement used FY15-19F Toll roads (km) 1,000 3,000 3,000,000 Airports ,000 11,250,000 Ports ,000 12,000,000 Cement needed FY15-19 (MT) 26,250,000 Source: Indonesia Cement Association, Mandiri Sekuritas estimates Land reform bill could be a game changer. Issued in early 2012, the law sets out a strategic framework on land acquisition for public needs, and more importantly, a fixed timeline on every land acquisition step (hence enabling a highly predictable project completion timeline). Under the new law, land acquisition for public facilities will be the government's responsibility. The new land law has three key attributes: 1) fixed timeline of working days, 2) court to settle any dispute with land owners, 3) predictable project ground breaking report. With the law effective in Jan 2015, we expect faster and better progress on infrastructure projects, in particular ports. We are also quite bullish on the toll road projects. Please see important disclosure at the back of this report Page 7 of 24

8 FIGURE 14. THE NEW LAND ACQUISITION PROCESS AND TIMELINE Certification Land Ownership Transfer Compensation Payment Negotiation Appraisal Verification Location Announcement Public Consultation Data Collection Public Announcement Preparation Team Minimum (Working days) Maximum (Working days) Source: Law No.2/2012 FIGURE 15. THE NEW LAND ACQUISITION PROCESS AND TIMELINE Planning Stage The project owner submits a Land Acquisition Plan that contains 1) land use planning, 2) suitability analysis, and 3) the plan s alignment with the Indonesia s national development priority to the respective Governor. Preparation Stage ( working days) Formation of Preparation Team Governor will form Preparation Team upon receiving the (max 10 working days) Land Acquisition Plan document. The Preparation Team member includes : city mayor, local government work unit, land acquirer party, and other related party Development Plan Announcement (max 10 working days) Preliminary Data Collection (30 working days) Public Consultation of the Development Plan ( working days) Development Location Verdict (max 17 days) Land Acquisition Stage ( days) Document and Location Verification by National Land Agency (BPN) (44-72 working days) Independent Appraisal assignment by BPN (max 60 working days) Negotiation of compensation amount and type ( working days) Source: Law No.2/2012 The Preparation Team will then make a public announcement of the development plan, location suitability planning, and other things related to the preparation stage (directly and indirectly). The Preparation Team should collect sufficient data related to the land acquisition plan, which mainly composed of the ownership status data of the land. Public consultation is done by Preparation Team to reach an agreement with the land owners; The consultation must be completed within 60 working days. In case an agreement is not met, second consultation would take maximum of 30 working days; If the second consultation still does not come up with an agreement. The final verdict will be decided by the Governor within 14 working days. Governor and land acquirer party will make a public announcement regarding the approval/disapproval of the proposed location for the development within 17 working days. If the Governor does not approve the proposed land acquisition, process cannot be continued. BPN will form a Land Procurement Team to verify the legal documentation of the land and its owner by 30 working days and to announce it by 14 working days. The land owner is given 14 working days if there is any objection to the result. BPN will process the objection by 14 working days. BPN has 30 working days to nominate an independent appraiser. Then the appraiser has 30 days to perform land value appraisal. The Land Procurement Team has 30 working days to negotiate with land owner regarding the compensation amount and type. In case that the agreement is not reached, the land owner could file an objection the court. The objection should be submitted within 14 days, land owner has 2 chances to object to both local district court and Supreme Court, each of court would announce the Please see important disclosure at the back of this report Page 8 of 24

9 Pricing & supply risk ahead? Pricing risk is minimum in our view. The announcement of the cut in the stateowned-enterprise cement prices (Semen Indonesia, Semen Baturaja and Semen Kupang) by Rp3,000 per sack (which is equal to around 5% ASP cut) on January 16 th came as a shock. According to the cabinet secretary, the cut on these three items are necessary, as these are essential public goods. Hence, the government has a responsibility to prioritize public welfare. At this juncture, we think that such a cut on the cement price is only one-time, as SMGR was asked to be a role model to reduce prices post the decline on fuel price. There are no regulations in place to control cement prices. Officially, there are no regulations to control cement pricing. SMGR s management viewed that they plan to increase cement prices in the next three months. Due to the cut on the cement prices, we estimate EBITDA margin on both SMGR and INTP to decline by 190bps and 150bps respectively in FY15F. Outlook for costs in FY15F is slightly more positive, as coal price, which is c. 30% of total cement cost, has been plummeting from US$80/MT to US$60/MT. Electricity cost, which is around 15-20% of total cement cost, would go down by 15% MoM in January Transportation cost accounts for c. 15% of total cement cost. Even though cement companies have mostly used non-subsidized fuel price, the third parties small fleets are still using non-subsidized fuel price. FIGURE 16. POST THE CUT ON RETAIL CEMENT PRICES ON 1Q15, WE EXPECT MARGIN TO BOTTOM IN 2Q15 Gross margin 52% 50% 48% 46% 44% 42% 40% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 SMGR INTP Source: Indonesia Cement Association, Mandiri Sekuritas estimates FIGURE 17. INTP COGS BREAKDOWN 9M14 Manufactu ring overhead 19% Source: Company Packing cost 7% Fuel and power 40% Others 1% Raw materials 24% Direct labour 9% FIGURE 18. SMGR COGS BREAKDOWN 9M14 Packaging 7% Others 7% Manufacturi ng overhead 17% Source: Company Transportati on 16% Labor 9% Raw and supporting material 6% Fuel & power 38% Please see important disclosure at the back of this report Page 9 of 24

10 New players are coming to town. We are cautious in FY15F, as we think the current players are likely to be less aggressive in increasing pricing as the capacity of the new competitors are ramping up in FY16F. We project 15% growth on cement capacity in FY15F. What we find is that the new competitors are currently aiming for bulk market, as they do not have a strong foothold yet in the retail or bagged market. The new competitors (Semen Merah Putih, Anhui, and Siam Cement) have been importing cement at around 2mn MT. Within FY14-17F, we estimate cement supply growth of 12% CAGR. Two of the new competitors would likely commission their new plants around the end of FY15F to mid FY16F (Wilmar group under Semen Merah Putih and Siam Cement) with capacity around 6.4mn MT. Some competitors have not built their cement plants just yet, but the potential new capacity could reach up to 40mn MT. Some of the new players are currently courting the smaller to medium-sized distributors by providing them with higher distributor margin and better terms of payment (45-60 days versus current players at 30 days). Both Siam Cement and Semen Merah Putih seem to be ready on providing market to retail. Semen Merah Putih has been importing more than 1mn MT cement p.a., while Siam Cement already has building material distributors. Our channel check suggests that Anhui Conh does not have strong distributors just yet. FIGURE 19. INDONESIA'S CEMENT DEMAND AND SUPPLY ESTIMATES E 2016E 2017E Indonesian capacity Semen Gresik group 20,000 22,500 27,700 29,500 30,500 30,900 33,900 Indocement 18,600 18,600 18,933 20,600 21,600 24,600 24,600 Semen Andalas 1,600 1,600 1,600 1,600 1,600 1,600 1,600 Semen Baturaja* 1,250 1,250 1,625 2,000 2,750 2,750 2,750 Holcim Indonesia 8,600 8,600 9,500 10,000 11,500 12,500 13,500 Semen Bosowa Maros* 2,800 2,800 3,000 3,600 5,000 5,000 5,000 Semen Kupang (Wilmar group) ,570 4,570 Semen Jui Shin 1,500 1,500 1,500 Semen Panasia 2,000 2,000 Siam Cement 2,000 2,000 Anhui Conh 3,000 3,000 3,000 Total capacity 53,420 55,920 62,928 67,870 78,020 88,420 94,420 Capacity growth 2.3% 4.7% 12.5% 7.9% 15.0% 13.3% 6.8% Annual domestic consumption 48,001 54,969 58,024 59,909 64,018 71,262 80,194 Growth (%) 17.7% 14.5% 5.6% 3.2% 6.9% 11.3% 12.5% Utilization for domestic consumption 89.9% 98.3% 92.2% 88.3% 82.1% 80.6% 84.9% Wilmar group includes Semen Merah Putih as well Source: Indonesia Cement Associaton, Mandiri Sekuritas estimates Please see important disclosure at the back of this report Page 10 of 24

11 FIGURE 20. NEW COMPETITORS ARE CHALLENGING THE BIG THREE S DOMINANCE New players Location Status Capacity ('000 k MT) Ready Anhui Conh South Kalimantan Operational 3,000 4Q14 Siam Cement Sukabumi (West Java) Under construction 1,700 3Q15 Semen Panasia Ajubarang, Central Java Under construction 1, Semen Merah Putih Banten, West Java Under construction 4,400 4Q15 Jui Shin Indonesia Karawang, East Java Operational 1,500 2Q14 Semen Baru South Sulawesi 3,300 Semen Puger East Java 600 CNBM Central Java 2,400 Ultratech Wonogiri, Central Java 4,500 Semen Merah Putih Banten, West Java 7,100 East Kalimantan, West Kalimantan Anhui Conh and West Papua 10,700 Total 40,900 Source: Indonesia Cement Association, Mandiri Sekuritas estimates Challenge on the oligopolistic structure. We view that the Big Three (SMCB, INTP, and SMGR) would no longer hold c. 90% market share in the next few years, as the smaller players are gaining more foothold. We forecast that by 2017F, the Big Three's market share would contract from 90% to c. 80%. Our conversation with the Big Three indicates that they understand the oversupply risk and would focus on margin instead of market share. We view that aggressive price war is unlikely, as the smaller players would need to get some return on their investment. The smaller players have indicated that they would price their product slightly below the no. 3 in market share. The new cement players would want to get IRR of 15% on their new Greenfield cement plants, hence we view that massive price war is unlikely. FIGURE 21. WE VIEW THAT THE BIG THREE WOULD NO LONGER HOLD 90% MARKET SHARE Market share E 2016E 2017E SMGR group 40.8% 40.9% 43.9% 43.7% 42.9% 40.9% 38.9% INTP 31.5% 32.0% 30.4% 30.4% 30.1% 29.8% 29.1% SMCB 15.5% 15.6% 14.5% 14.6% 14.6% 14.3% 13.4% The Big Three 87.9% 88.5% 88.8% 88.6% 87.7% 85.0% 81.3% Semen Bosowa Maros 5.8% 5.6% 5.4% 5.8% 5.5% 5.3% 5.0% Other player 6.3% 6.0% 5.9% 5.6% 6.8% 9.7% 13.6% Source: Indonesia Cement Association, Mandiri Sekuritas estimates Oversupply risk if infrastructure fails to pick up. We view that cement oversupply could be a big issue, if the infrastructure spending and Indonesia's domestic consumption growth fail to pick up. We forecast that if cement demand growth is only 5% CAGR in FY15E-17E, then cement utilization rate on the domestic side would start to drop below 75%. Such utilization rate provides a minimum buffer and could bring a risk of price war. Please see important disclosure at the back of this report Page 11 of 24

12 FIGURE 22. IF REFORM FAILS, CEMENT UTILIZATION RATE COULD DROP BELOW 75% 120% 100% 80% 60% 40% 20% 0% E 2015E 2016E 2017E Utilization rate (domestic) 89.9% 98.3% 92.2% 86.6% 82.4% 74.8% 73.6% Cement demand growth 17.7% 14.5% 5.6% 3.5% 5.0% 5.0% 5.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: Indonesia Cement Association, Mandiri Sekuritas estimates The bulk of the new capacity would be in Java. Currently, the capacity in Java stands at around 43.4mn MT, around 64% of Indonesia's total cement capacity. Within FY14-16F, the new additional capacity would be around 21mn MT, in which 16mn MT would be in Java areas. We estimate that 80% of the new capacity would mostly be in Java. The risk is that since the new players do not have strong distributor networks just yet, they would be focusing on the surrounding market, which is mostly in Java areas. Hence, we are more cautious for companies whose sales are mostly focused in Java areas, such as INTP and SMCB. Both of these companies have around 70% of sales in Java areas. SMGR is the most diversified compared to peers, as its sales are c. 50% located in ex-java market. FIGURE 23. CURRENT CEMENT CAPACITY DISBURSEMENTS Semen Andalas 1.6mn MT Semen Padang 7.3mn MT Semen Baturaja 2.0mn MT Indocement 18.5 mn MT Indocement 2 mn MT Holcim Indonesia 10.5 mn MT Semen Gresik 14.4mn MT Semen Tonasa 7.8mn MT Semen Bosowa 3.6 mn MT Semen Kupang 0.6 mn MT Source: Indonesia Cement Association, Mandiri Sekuritas estimates Please see important disclosure at the back of this report Page 12 of 24

13 Valuation INTP and SMGR are trading at 15-16x, in-line with the previous average. We forecast cement companies to continue trading in-line with the market, at around 16x forward P/E. We see re-rating potential if demand could hit above our cement sales growth target of 11% in FY16-17F. The growth would rely on Jokowi s delivery on his infrastructure projects. The market, in our view, would ignore the risk of oversupply in favor of the strong cement sales. FIGURE 24. CEMENT COMPANIES ARE CURRENTLY TRADING IN-LINE WITH ITS 3-YR AVERAGE VALUATION OF 15-16X Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 SMGR INTP SMCB Source: Bloomberg Market has priced in the recent cement price cut. Even though consensus forecast has not penciled in recent cement price cut on its earnings, we think the market is ahead and has priced in the recent cement price cut. Few days after the announcement, the stock has declined in accordance to the amount of potential ASP cut. Hence, we are not too worried on share price pressure post consensus earnings downgrade. Risk for the sector, in our view, is more towards politics and infrastructure execution. FIGURE 25. CONSENSUS EARNINGS IS CURRENTLY HIGHER THAN OUR FORECAST SMGR INTP SMCB Consensus (Rp bn) FY15F FY16F YoY FY15F FY16F YoY FY15F FY16F YoY Sales 29, , % 22, , % 11, , % EBITDA 9, , % 7, , % 2, , % Operating Profit 7, , % 6, , % 1, , % NPAT 5, , % 5, , % , % Source: Bloomberg (per March 2 nd 2015) Please see important disclosure at the back of this report Page 13 of 24

14 Regional Comparison FIGURE 26. REGIONAL PEER COMPARISON (FEB 27 TH, 2015) Company Share price Source: Bloomberg, Mandiri Sekuritas estimates PER 2015F PER 2016F EV/EBITDA 2015F EV/EBITDA 2016F Indonesia 1 Indocement Tunggal Prakarsa Tbk PT 24, Holcim Indonesia Tbk PT 1, Semen Indonesia Persero Tbk PT 14, High 24, Mean 13, Low 1, India 4 ACC Ltd 1, Ambuja Cements Ltd Ultratech Cement Ltd 3, High 3, Mean 1, Low Southeast Asia 7 Lafarge Malayan Cement Bhd Siam City Cement PCL TPI Polene PCL High Mean Low Total High 24, Mean 4, Low P/BV 2015F P/BV 2016F ROE 2015F ROE 2016F Div. Yield 15F Div. Yield 16F Please see important disclosure at the back of this report Page 14 of 24

15 FOCUS XXX Company Update XX XXXXX 2013 FOCUS Indocement Company Update 03 March 2015 Mandiri Sekuritas Analyst Liliana S Bambang liliana.bambang@mandirisek.co.id Yudha Gautama yudha.gautama@mandirisek.co.id Sector : Building Materials BUY Current Price Rp24,000 Price Target Rp27,000 (+12.5%) Prev. PT:Rp24, wk range Rp27,500 - Rp20,800 Stock Data Bloomberg Code INTP IJ Mkt.Cap (Rp bn/us$ mn) 88,350 / 6,809 Issued Shares (mn) 3,681 Avg. Daily T/O (Rp bn/us$ mn) 78.4/6.0 Major shareholder HeidelbergCement AG 51.0% Mekar Perkasa 13.0% EPS consensus Mansek Cons Diff 2014F 1, , F 1, ,492.5 (4.8) 2016F 1, ,692.3 (5.9) Share price performance 3m 6m 12m Absolute (%) (6.5) (1.8) 6.9 Relative to JCI (%) (12.4) (7.2) (11.7) Waiting for the Consolidation INTP would be the biggest beneficiary if there is a consolidation within the cement industry as it has the largest cash reserve. The company also has higher potential volume growth compared to SMGR due to its additional 4.4mn MT capacity in 3Q15. Would benefit from consolidation. INTP has the largest cash reserve among the cement companies, with c. Rp10tn of cash as of 9M14. INTP has conveyed that they would be looking for potential acquisition targets. We view that INTP would be the biggest beneficiary should there be a consolidation in the industry due to its clean balance sheet. The company is currently studying Greenfield potential in North Sumatera and Central Java. Better room to increase volume. Compared to SMGR, we view that INTP would have better room to increase its volume. Due to its new 4.4mn MT capacity in Citereup, which is expected to come online in 2H15, INTP would have capacity growth of 9% CAGR on FY14-16F. We forecast SMGR's capacity growth is 2% CAGR on FY14-16F. Hence, INTP has more volume upside if the cement demand is better than expectations. We currently project INTP to post 6% CAGR volume growth for FY14-16F, but we think that if infrastructure building is much better than expectations, the company has sufficient capacity to post 15% CAGR volume growth for FY14-16F. Maintain Buy on INTP. We maintain our Buy rating on INTP with PT of Rp27,000. Our PT is based on DCF based with WACC of 12.1% and TG of 5%. Our PT implies FY16F P/E of 16.9x. We view that INTP would be the beneficiary of consolidation and has more potential volume upside. Key risk is overcapacity in Java market. Around 72% of INTP s sales come from Java areas. We fear that with the potential additional supplies in Java areas, INTP would hold off the price increases. This could bring a risk of not reaching our estimated ASP increase of 4% in FY15F. YTD, INTP has raised ASP by around 5.5%. INTP s ASP per MT currently is the highest compared to its peers, as the market in Java has premium pricing. FINANCIAL SUMMARY YE Dec (Rp Bn) 2012A 2013A 2014F 2015F 2016F EBITDA 6,509 6,753 6,829 6,922 8,013 Net Profit 4,763 5,013 5,230 5,231 5,864 Fully-diluted EPS (Rp) 1,294 1,362 1,421 1,421 1,593 Fully-diluted EPS growth (%) P/E Ratio (x) EV/EBITDA (x) P/B Ratio (x) Dividend Yield (%) ROAE (%) Source: Company ( ), Mandiri Sekuritas ( ) Please see important disclosure at the back of this report Page 15 of 24

16 FOCUS Indocement Company Update 03 March 2015 FIGURE 1. SALES BREAKDOWN 12M14 INTP - At a Glance FIGURE 2. COGS BREAKDOWN FY15F Sumatera 10% Kalimantan 7% Sulawesi 3% Packaging, 7% Depreciation, 6% Net inventory change, 0% Raw materials, 20% Nusa Tenggara 6% Eastern Indo 2% Factory O/H, 12% Labour, 10% Java 72% Fuel and power, 44% FIGURE 3. ASP QUARTERLY 1, % 1, % 4.0% 4.0% 1,100 1, % 1, % 1,040 1, % 0.9% 1.2% 1.0% 1, % 0.0% % % 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 INTP's ASP (Rp'000/MT) INTP's ASP increase (QoQ) FIGURE 4. P/E VALUATION CHART STDEV +1 STDEV Mean -1 STDEV FIGURE 5. EPS GROWTH TREND FIGURE 6. LEVERAGE TREND (Rp) 4,000 3,500 3,000 2,500 2,000 1,500 1, (%) (%) 10 0 (10) (20) (30) (40) (50) (60) (x) 2,000 1,800 1,600 1,400 1,200 1, Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 EPS EPS Growth [RHS] Net Debt/Equity (NDE) Interest Cover [RHS] Please see important disclosure at the back of this report Page 16 of 24

17 FOCUS Indocement Company Update 03 March 2015 Indocement Profit & Loss YE Dec (Rp Bn) 2012A 2013A 2014F 2015F 2016F Revenue 17,290 18,691 20,213 21,318 24,154 Gross Profit 8,270 8,655 9,122 9,529 10,914 Oper. Profit 5,845 5,975 6,051 6,144 7,068 EBITDA 6,509 6,753 6,829 6,922 8,013 Net Interest Interest Expense (32) (51) (10) (10) (10) Interest Income Forex Losses/Gains Net Other Pre-Tax Profit 6,240 6,596 6,974 6,975 7,819 Income Tax (1,476) (1,583) (1,743) (1,744) (1,955) Others Minority Interests Net Profit 4,763 5,013 5,230 5,231 5,864 Cash Flow YE Dec (Rp Bn) 2012A 2013A 2014F 2015F 2016F Operating Profit 5,845 5,975 6,051 6,144 7,068 Net Interest Depr & Amort Other expenses/income Other Gain / Loss Tax (1,476) (1,583) (1,743) (1,744) (1,955) Chg in Working Capital (774) (182) (328) Other Oper. Cash Flow (31) Oper. Cash Flow 5,684 5,859 5,234 5,827 6,482 Capital Expenditure (961) (2,235) (3,200) (4,200) (3,200) FCF (OPCF after Capex) 4,723 3,624 2,034 1,627 3,282 Other Investing CF (9) (11) (97) 0 0 CF From Investing (970) (2,246) (3,297) (4,200) (3,200) Net Chg in Debts (23) (16) Equity Funds Raised Dividend (1,079) (1,672) (1,604) (1,674) (1,674) Other Financing CF CF From Financing (1,102) (1,482) (1,604) (1,674) (1,674) Non-Recur. Inc (Exp) Extraord. Inc(Exp) Net Change in Cash 3,613 2, (46) 1,608 Cash at beginning 6,864 10,474 12,595 12,845 12,799 Cash at End 10,477 12,605 12,929 12,799 14,406 Valuation YE Dec 2012A 2013A 2014F 2015F 2016F PER (x) EV/EBITDA (x) P/BV (x) P/CF (x) Dividend Yield (%) Balance Sheet YE Dec (Rp Bn) 2012A 2013A 2014F 2015F 2016F Cash & ST Investment 10,474 12,595 12,845 12,799 14,406 Acct. Receivable 2,455 2,519 2,034 2,151 2,436 Inventory 1,470 1,474 2,697 2,854 3,211 Others Current Assets 14,579 16,846 17,844 18,072 20,321 Investments Fixed Assets 7,935 9,305 11,814 15,236 17,491 Others Total Assets 22,755 26,607 30,114 33,764 38,268 Curr. Liabilities 2,419 2,740 2,713 2,807 3,120 Acct. Payable 975 1, ST Borrowings Others 1,444 1,732 1,924 1,968 2,177 Long-Term Liabilities Long-Term Payable Others Total Liabilities 3,336 3,630 3,510 3,603 3,917 Shareholder s Equity 19,419 22,977 26,604 30,161 34,351 Key Ratios YE Dec 2012A 2013A 2014F 2015F 2016F Growth (% YoY) Sales EBIT EBITDA Net Profit Profitability (%) Gross Profit Margin Oper. Margin EBITDA Margin Net Margin ROAA ROAE Leverage Net Debt / Equity (%) (53.4) (54.4) (48.3) (42.4) (41.9) EBITDA/Gross Int. (x) Per Share Data (Rp) EPS 1,294 1,362 1,421 1,421 1,593 CFPS 1,544 1,592 1,422 1,583 1,761 BVPS 5,267 6,234 7,219 8,185 9,323 DPS Please see important disclosure at the back of this report Page 17 of 24

18 FOCUS XXX Company Update XX XXXXX 2013 FOCUS Semen Indonesia Company Update 03 March 2015 Mandiri Sekuritas Analyst Liliana S Bambang liliana.bambang@mandirisek.co.id Yudha Gautama yudha.gautama@mandirisek.co.id Sector : Building Materials BUY Current Price Rp14,900 Price Target Rp16,500 (+10.7%) Prev. PT:Rp18, wk range Rp17,400 - Rp13,950 Stock Data Bloomberg Code SMGR IJ Mkt.Cap (Rp bn/us$ mn) 88,380 / 6,811 Issued Shares (mn) 5,932 Avg. Daily T/O (Rp bn/us$ mn) 112.3/8.7 Major shareholder Government 51.0% Public 49.0% EPS consensus Mansek Cons Diff 2015F (3.7) 2016F 1, ,126.1 (6.6) 2017F 1, ,685.0 (29.7) Share price performance 3m 6m 12m Absolute (%) (9.7) (8.4) (0.7) Relative to JCI (%) (15.5) (13.8) (19.2) Best Infrastructure Play For the upcoming new infrastructure projects, Jokowi seems to be focused on building ports and airports on both Java and ex-java. With good diversified exposure on Java and ex-java markets, we view that SMGR would be the best infrastructure play. Best infrastructure play. With diversified factory locations on Java and ex Java, we think this enables the company to receive sufficient exposure for a more aggressive eastern infrastructure development. ASP of SMGR has been weaker compared to its peers, which we suspect partly due to its exposure in ex-java areas. With stronger eastern infrastructure development, we are hoping for better room to increase ASP in ex- Java areas. Looking to increase pricing soon. SMGR plans to increase retail pricing, post the recent retail price cut by around 5%. The company views that they could possibly have room to increase price sometime in 2Q15 if the demand is better than expectations. To be conservative, the company is currently guiding flat YoY earnings growth for FY15F, assuming there is no price increase post the ASP cut. We think that the noise on recent cement price cut is a one-time noise. The risk for the whole sector is more towards potential oversupply in FY16F. Already traded at discount to INTP. The company is currently traded at 7% P/E discount to INTP, as the market is attaching a discount on recent cement price cut for the state-owned enterprises. We view that such discount is fair. There s a re-rating potential in 2H15 once the noise on recent price cut has subsided. Maintain Buy with PT of Rp16,500. We maintain our Buy recommendation for SMGR with PT of Rp16,500. Our PT is based on DCF with WACC of 12.6% and TG of 5%. Our PT implies FY16F P/E of 16.0x. Key risks: SMGR s capacity could be a limitation, as the production growth could only be around 9% CAGR (excluding import from Thang Long). If demand is better than expectations, SMGR might not able to enjoy the buoyant cement sales growth. FINANCIAL SUMMARY YE Dec (Rp Bn) 2013A 2014A 2015F 2016F 2017F EBITDA 8,048 8,190 8,389 9,030 10,030 Net Profit 5,370 5,566 5,658 6,241 7,029 Fully-diluted EPS (Rp) ,052 1,185 Fully-diluted EPS growth (%) P/E Ratio (x) EV/EBITDA (x) P/B Ratio (x) Dividend Yield (%) ROAE (%) Source: Company ( ), Mandiri Sekuritas ( ) Please see important disclosure at the back of this report Page 18 of 24

19 FOCUS Semen Indonesia Company Update 03 March 2015 FIGURE 1. SALES BREAKDOWN 12M14 SMGR - At a Glance FIGURE 2. COGS BREAKDOWN FY15F Others, 0.9% Raw Material & Supporting Material, 5.4% Packaging, 6.3% Java 52% Sumatera 20% Kalimantan 9% Depletion, Depreciation & Amort., 7.5% Transporting, 17.9% Maintenance, 8.0% Fuel, 26.9% Eastern Indo 3% Sulawesi 11% Nusa Tenggara 5% Employees, 10.9% Electricity, 16.2% FIGURE 3. ASP QUARTERLY % 1.8% 1.2% 1.0% 1.1% 0.6% 0.4% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 SMGR's ASP (Rp'000/MT) SMGR's ASP increase (QoQ) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FIGURE 4. P/E VALUATION CHART STDEV +1 STDEV 15 Mean -1 STDEV FIGURE 5. EPS GROWTH TREND FIGURE 6. LEVERAGE TREND (Rp) 2,500 2,000 1,500 1, (500) (1,000) (1,500) (2,000) (2,500) Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 EPS EPS Growth [RHS] (%) (%) (10) (20) (30) (40) (50) (60) (70) Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Net Debt/Equity (NDE) Interest Cover [RHS] (x) (50) Please see important disclosure at the back of this report Page 19 of 24

20 FOCUS Semen Indonesia Company Update 03 March 2015 Semen Indonesia Profit & Loss YE Dec (Rp Bn) 2013A 2014A 2015F 2016F 2017F Revenue 24,501 26,987 27,831 30,230 33,136 Gross Profit 10,944 11,599 12,204 13,347 14,780 Oper. Profit 6,972 6,954 7,289 7,930 8,832 EBITDA 8,048 8,190 8,389 9,030 10,030 Net Interest (177) (97) (106) Interest Expense (340) (383) (334) (334) (334) Interest Income Forex Losses/Gains Net Other Pre-Tax Profit 6,920 7,091 7,285 8,038 9,055 Income Tax (1,566) (1,517) (1,646) (1,817) (2,046) Others Minority Interests 16 (8) Net Profit 5,370 5,566 5,658 6,241 7,029 Cash Flow YE Dec (Rp Bn) 2013A 2014A 2015F 2016F 2017F Operating Profit 6,972 6,954 7,289 7,930 8,832 Net Interest (177) (97) (106) Depr & Amort 1,076 1,236 1,100 1,100 1,198 Other expenses/income Other Gain / Loss Tax (1,566) (1,517) (1,646) (1,817) (2,046) Chg in Working Capital (522) (770) 932 (31) (88) Other Oper. Cash Flow (61) Oper. Cash Flow 5,847 6,258 7,690 7,310 8,139 Capital Expenditure (3,144) (2,595) (3,036) (2,910) (3,333) FCF (OPCF after Capex) 2,702 3,663 4,654 4,401 4,806 Other Investing CF (33) (246) (598) 0 0 CF From Investing (3,177) (2,841) (3,634) (2,910) (3,333) Net Chg in Debts 232 (169) Equity Funds Raised Dividend (2,221) (2,417) (2,783) (1,697) (1,872) Other Financing CF CF From Financing (1,643) (2,586) (2,695) (1,697) (1,872) Non-Recur. Inc (Exp) Extraord. Inc(Exp) Net Change in Cash 1, ,361 2,703 2,934 Cash at beginning 3,081 4,108 4,940 6,300 9,003 Cash at End 4,108 4,939 6,300 9,003 11,937 Valuation YE Dec 2013A 2014A 2015F 2016F 2017F PER (x) EV/EBITDA (x) P/BV (x) P/CF (x) Dividend Yield (%) Balance Sheet YE Dec (Rp Bn) 2013A 2014A 2015F 2016F 2017F Cash & ST Investment 4,108 4,940 6,300 9,003 11,937 Acct. Receivable 2,825 3,434 3,374 3,619 3,974 Inventory 2,646 2,812 2,569 2,775 3,018 Others Current Assets 9,972 11,558 12,616 15,770 19,301 Investments Fixed Assets 18,863 20,221 22,157 23,967 26,101 Others 1,782 2,114 2,114 2,114 2,114 Total Assets 30,793 34,315 37,309 42,272 47,938 Curr. Liabilities 5,298 5,273 5,304 5,724 6,234 Acct. Payable 2,502 3,032 2,997 3,238 3,520 ST Borrowings Others 2,005 1,696 2,307 2,486 2,713 Long-Term Liabilities Long-Term Payable 3,129 3,183 2,500 2,500 2,500 Others ,627 1,627 1,627 Total Liabilities 8,989 9,312 9,431 9,851 10,361 Shareholder s Equity 21,804 25,003 27,878 32,422 37,578 Key Ratios YE Dec 2013A 2014A 2015F 2016F 2017F Growth (% YoY) Sales EBIT 14.1 (0.3) EBITDA Net Profit Profitability (%) Gross Profit Margin Oper. Margin EBITDA Margin Net Margin ROAA ROAE Leverage Net Debt / Equity (%) (0.9) (4.8) (13.6) (20.1) (25.1) EBITDA/Gross Int. (x) Per Share Data (Rp) EPS ,052 1,185 CFPS 986 1,055 1,296 1,232 1,372 BVPS 3,521 4,053 4,538 5,304 6,173 DPS Please see important disclosure at the back of this report Page 20 of 24

21 FOCUS XXX Company Update XX XXXXX 2013 FOCUS Holcim Company Update 03 March 2015 Mandiri Sekuritas Analyst Liliana S Bambang liliana.bambang@mandirisek.co.id Yudha Gautama yudha.gautama@mandirisek.co.id Sector : Building Materials NEUTRAL Current Price Rp1,880 Price Target Rp2,050 (+9.0%) Prev. PT:Rp2, wk range Rp3,100 - Rp1,880 Stock Data Bloomberg Code SMCB IJ Mkt.Cap (Rp bn/us$ mn) 14,406 / 1,110 Issued Shares (mn) 7,663 Avg. Daily T/O (Rp bn/us$ mn) 6.0/0.5 Major shareholder Holderfin B.V. 80.7% Others 19.4% EPS consensus Mansek Cons Diff 2014F F (15.6) 2016F (13.6) Share price performance 3m 6m 12m Absolute (%) (18.1) (35.5) (23.4) Relative to JCI (%) (23.9) (40.8) (42.0) Risks ahead We keep our Neutral stance for SMCB with lower PT of Rp2,050, as we revise down our FY14-16F forecast. We are slightly worried on its margin volatility and balance sheet, hence maintain our Neutral stance. Pricey valuations. Our earning is more conservative, as we are slightly worried with the company s weak gross margin in 3Q14 and potential weak operating margin post the restructuring in 1H15. Our FY15-16F number is 14-16% lower than consensus. Our number is weaker than consensus as we already cut our cement prices and we forecast higher interest expense. We expect management to convert the expiring US$102mn related party loan from USD (average 5% int rate) to IDR debt. Weak balance sheet. With the expansion of Tuban 2, which is expected to finish in 2016, we project SMCB s net gearing to remain high at 50-60% in FY15-16F. We prefer other players with healthier balance sheets compared to SMCB. Waiting for the turnaround story. Last quarter, SMCB hired Gary Schutz as President Director to replace Eamon Ginley. Mr. Schutz was previously the President Director of Holcim Vietnam since FINANCIAL SUMMARY Hence, he has sufficient experience in regards to potential overcapacity issues. Maintain Neutral on SMCB with revised PT of Rp2,050. We maintain our Neutral stance for SMCB and we revise down our PT from Rp2,700 to Rp2,050 (DCF based, WACC: 12.5%, TG: 5%). Our new PT implies FY16F P/E of 15.8x. We revise down our earnings forecast for FY14-16F and our number is currently 14-16% lower than consensus. We view that the company could underperform further compared to other players due to potential disappointment on consensus earnings. Key risks. We would consider upgrading SMCB in 2H15, once we see a better turnaround or more stable earnings. We would also like to see the company gain stronger foothold in the East Java market. As of 4Q14, the company s market share in Java is 18.6% versus previous year at 18.8%. YE Dec (Rp b) 2012A 2013A 2014F 2015F 2016F EBITDA 2,558 2,668 2,392 2,392 2,890 Net Profit 1, Fully-diluted EPS (Rp) Fully-diluted EPS growth (%) 27.0 (29.5) (0.7) (13.8) 22.5 P/E Ratio (x) EV/EBITDA (x) P/B Ratio (x) Dividend Yield (%) ROAE (%) Source: Company ( ), Mandiri Sekuritas ( ) Please see important disclosure at the back of this report Page 21 of 24