Chandra Asri Petrochemical (TPIA.JK)

Transcription

1 Citi Research Equities 21 Feb :02:16 ET 40 pages Commodity Chemicals Asia Indonesia Chandra Asri Petrochemical (TPIA.JK) Initiate at Neutral: Positives Reflected in Premium Valuations TP of Rp6,600 implies 8.3% total return Trading at 13.5x 18E EV/EBITDA vs. the regional sector s current 8.7x and five-year mean of 11.1x, Chandra Asri Petrochemical (CAP) has already priced in much of the premium we think it deserves. We therefore initiate on CAP at Neutral with a DCF-based TP of Rp6,600 (14.9x 18E EV/EBITDA). A premium is justified, in our view, given 1) Indonesia s growing petrochem demand, 2) CAP s market leadership and solid position as Indonesia s sole naphtha cracker operator and largest integrated petrochem producer, 3) its expansion plan for E, and 4) its premium product pricing, ROE of 19% in 18E vs. regional peers 16%, and index-stock status. Spreads at risk, but earnings growth still positive in 18-19E Given the cyclical nature of the petrochem industry, CAP s spreads are exposed to risks. Citi estimates lower olefin/polyolefin-naphtha spreads in 18E before a small improvement in 19E. Nevertheless, we still expect CAP s earnings to grow 8.5% yoy in 18E, driven by the company s new higher-margin synthetic rubber. For 19E, we forecast +10.2% yoy EPS growth on additional capacity and slightly higher spreads. Initiation of Coverage Neutral 2 Price (21 Feb 18 16:00) Rp6,150 Target price Rp6,600 Expected share price return 7.3% Expected dividend yield 1.0% Expected total return 8.3% Market Cap Rp109,676,148M US$8,057M Price Performance (RIC: TPIA.JK, BB: TPIA IJ) Capacity expansion the next growth engine CAP is set to undertake heavy capex in the next few years (c.us$2bn in the next three years, on our estimates) for capacity expansion, debottlenecking and building the second naphtha cracker. CAP s continuous capacity expansion since 2010 should improve its earnings growth given Indonesia s strong petrochem demand and supply shortages. In addition, we believe 30% stakeholder Siam Commercial Group (SCG) will continue to support CAP s expansion plans. Risks Downside and upside risks to our call could stem from spread trends, production levels, progress in capacity expansion, capex, and competition against CAP s domestic premium pricing. Statistical Abstract Year to Net Profit Diluted EPS EPS growth P/E P/B ROE Yield 31 Dec (US$M) (US$) (%) (x) (x) (%) (%) 2015A na A na E E E Source: Powered by datacentral Ferry Wong, CFA AC ferry.wong@citi.com See Appendix A-1 for Analyst Certification, Important Disclosures and non-us research analyst disclosures. Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the author's published research) are available only on Citi's portals. Not for distribution in the People's Republic of China, excluding the Hong Kong Special Administrative Region and Qualified Foreign Institutional Investors.

2 TPIA.JK: Fiscal year end 31-Dec Price: Rp6,150; TP: Rp6,600; Market Cap: Rp109,676,148m; Recomm: Neutral Profit & Loss (US$m) E 2018E 2019E Valuation ratios E 2018E 2019E Sales revenue 1,378 1,930 2,429 2,589 2,610 PE (x) na Cost of sales -1,232-1,436-1,886-2,016-1,984 PB (x) Gross profit EV/EBITDA (x) Gross Margin (%) FCF yield (%) EBITDA (Adj) Dividend yield (%) EBITDA Margin (Adj) (%) Payout ratio (%) Depreciation ROE (%) Amortisation Cashflow (US$m) E 2018E 2019E EBIT (Adj) EBITDA EBIT Margin (Adj) (%) Working capital Net interest Other Associates Operating cashflow Non-Op/Except/Other Adj Capex Pre-tax profit Net acq/disposals Tax Other Extraord./Min.Int./Pref.div Investing cashflow Reported net profit Dividends paid Net Margin (%) Financing cashflow Core NPAT Net change in cash Per share data E 2018E 2019E Free cashflow to s/holders Reported EPS ($) Core EPS ($) DPS ($) CFPS ($) FCFPS ($) BVPS ($) Wtd avg ord shares (m) 17,834 17,834 17,834 17,834 17,834 Wtd avg diluted shares (m) 17,834 17,834 17,834 17,834 17,834 Growth rates E 2018E 2019E Sales revenue (%) EBIT (Adj) (%) Core NPAT (%) 44.4 na Core EPS (%) 44.4 na Balance Sheet (US$m) E 2018E 2019E Cash & cash equiv Accounts receivables Inventory Net fixed & other tangibles 1,407 1,403 1,575 2,059 2,506 Goodwill & intangibles Financial & other assets Total assets 1,862 2,129 2,984 3,228 3,426 Accounts payable Short-term debt Long-term debt Provisions & other liab Total liabilities ,268 1,243 1,143 Shareholders' equity 880 1,135 1,710 1,978 2,276 Minority interests Total equity 887 1,142 1,717 1,985 2,282 Net debt (Adj) Net debt to equity (Adj) (%) For definitions of the items in this table, please click here. 2

3 Contents Key Charts 4 Investment Thesis 5 Benefiting from continuous investments as biggest player 5 Indonesia has growth potential 5 CAP: Indonesia s sole naphtha cracker operator, largest integrated petrochem producer 7 CAP selling polyolefin at premium amid shortages 8 Capacity expansion is the engine of growth 9 CAP expanding 2 nd naphtha cracker 10 Support from Siam Cement Group (SCG) 11 Lotte Chemical Titan: A threat? 12 Long-standing ties to help withstand competition 12 Index stock 13 Risks 14 Valuation 15 Sensitivity analysis 16 Earnings Drivers and Financials 17 Capacity, production/utilization, spreads are key drivers 18 Sensitivity analysis 23 Industry Outlook 25 Bull/Bear: Chandra Asri Petrochemical (TPIA.JK) 28 Risks 29 Company Background 30 Appendix A

4 Key Charts Figure 1. CAP Key Spreads Assumptions, E Figure 2. CAP Production Capacity, E Source: Company, Citi Research estimates Source: Citi Research estimates, Company Figure 3. CAP Capacity Utilization Rate, E Figure 4. CAP Capex, E Source: Company, Citi Research estimates Source: Citi Research estimates, Company Figure 5. CAP Gross Profit, E Figure 6. CAP Net Profit, E Source: Company, Citi Research estimates Source: Company, Citi Research estimates 4

5 Our DCF-based TP is Rp6,600, implying an 18E EV/EBITDA of 14.9x, higher than regional peers five-year mean of 11.1x Slightly narrower spread in 2018E, but earnings are likely to slightly improve upon the introduction of synthetic rubber Investment Thesis Benefiting from continuous investments as biggest player We value CAP on DCF (WACC 8.8%, terminal growth 3%) to capture the company s capacity expansion. Our TP of Rp6,600/sh suggests that the stock is fairly valued and implies a 2018E EV/EBITDA of 14.9x, higher than the regional peers five-year mean of 11.1x. We believe CAP deserves a premium given (i) Indonesia s growing petrochem demand, (ii) the company s market leadership and position as the sole naphtha cracker operator and the largest integrated petrochem producer in Indonesia, (iii) its solid expansion plan in E, (iv) its premium product pricing, (v) its ROE of 18% in 2018E vs. regional peers 16%, and (vi) its index-stock status considering its market cap (No. 11 in Indonesia). We believe CAP s inclusion into the MSCI in the next round of review is possible given the size and liquidity of the stock. We rate CAP Neutral on valuation grounds. We expect CAP s earnings to grow 8.5%/10.2% yoy to US$349/384m in 2018E/19E, largely driven by capacity expansion. Our regional team estimates lower olefin/polyolefin-naphtha spreads in 2018E and a slightly better polyolefin spread in 2019, which would pressure CAP s 2018E earnings but help in 2019E. However, we still estimate a slight gross profit increase (+5.6% yoy) in 2018E on the back of CAP s new synthetic rubber, which has higher value than CAP s other products and provides higher margins. We expect CAP s gross profit to further rise in 2019E (+9.4%yoy) on the back of additional capacity and slightly higher spreads. Figure 7. CAP: Key Spreads Assumptions, E Figure 8. CAP Gross Profit and Net Profit, E Source: Company, Citi Research estimates Source: Company, Citi Research estimates Indonesia has growth potential Indonesia s positive GDP growth should bode well for petrochem demand Nexant estimates Indonesia s polyolefin consumption will outpace regional and global growth Citi forecasts Indonesia s GDP growth will grow above 5% pa in the next five years, which should drive demand for petrochem end-market products such as plastic bags, packaging, and auto parts. Nexant estimates that Indonesia s polyolefin consumption will grow at a % CAGR in E, higher than regional and global demand growth of % and %, respectively. Indonesia s polyolefin consumption per capita is still low (3kg/capita) compared with that of other Southeast Asia (SEA) countries (8kg/capita). From such a low base, there is ample room for Indonesia s polyolefin demand to grow. We are positive on Indonesia s petrochem, including polyolefin, demand. 5

6 Figure 9. Indonesia: GDP growth (Citi s forecast) Figure 10. Polyolefin Consumption Growth Source: Citi Research estimates Source: Nexant, Indonesia still has one of the lowest polyolefin consumption per capita levels Figure 11. Polyolefin Consumption per Capita Source: Nexant 6

7 Figure 12. Strong demand growth for petrochemical products in Indonesia Source: Nexant, CAP: Indonesia s sole naphtha cracker operator, largest integrated petrochem producer CAP to benefit from growing petrochem demand in Indonesia CAP is the market leader in Indonesia with c.35% share of the country s olefin and polymers production capacity Given Indonesia s positive demand outlook, petrochem producers should benefit. Most petrochem players in Indonesia lack value chain integration, with companies operating only in the upstream or downstream segments, or some only in the downstream segment. CAP is thus well positioned to capitalize on petrochem demand growth in Indonesia by virtue of being the largest and the only fully integrated petrochem company, with operations in every segment of the value chain. The company offers various petrochemical products, ranging from upstream products such as ethylene to downstream products such as polyethylene. As of 2016, CAP is the market leader in Indonesia with a c.35% share of Indonesia s olefin and polymers production capacity. CAP operates the country s only naphtha cracker, styrene monomer, and butadiene plants. CAP owns 52%/24%/29%/100% of Indonesia s olefin/polyethylene/polypropylene/styrene monomer total capacity, respectively. Figure 13. Indonesia: Olefin Market Share Figure 14. Indonesia: Polyethylene Market Share Source: Company, Nexant, and Citi Research Source: Company, Nexant, and Citi Research 7

8 Figure 15. Indonesia Polypropylene Market Share Figure 16. Indonesia Styrene Monomer Market Share Source: Company, Nexant, and Citi Research Source: Company, Nexant, and Citi Research CAP selling polyolefin at premium amid shortages Indonesia is a net importer of petrochem products; CAP is the sole domestic naphtha cracker operator Given Indonesia s petrochem shortages, it is a net importer of such products, especially Ethylene, Polyethylene (PE) and Polypropylene (PP). The fact that Indonesia is a net oil importer doesn t help the domestic petrochem industry, as oil is the main raw material for naphtha, which in turn is the main raw material to produce olefins through naphtha crackers. Indonesia has only one naphtha cracker operator in Indonesia. Most of the petrochem products need to be imported. Indonesia s polyolefin imports in 2015 were estimated at over 1.3m tons, mostly sourced from Malaysia, Thailand, and Singapore. Figure 17. Indonesia Demand for Petrochemical Imports 2012 Figure 18. Overview of Indonesia Petrochem Industry Source: EIC Analysis (Data from PTTGC) Source: Nexant, Citi Research CAP has been selling polyolefin at a premium for the past six years Given Indonesia s position as a net petrochem importer and CAP s status as the only naphtha cracker operator in Indonesia, CAP has been selling its polyolefin at a premium over market prices since

9 Figure 19. CAP Polyolefins ASP vs. Market (US$/t) HDPE Market 1,201 1,353 1,353 1,419 1,462 1,182 1,061 ASP (CAP) ASP vs Market LLDPE Market 1,289 1,325 1,311 1,458 1,492 1,186 1,124 ASP (CAP) ASP vs Market PE (avg. HDPE & LLDPE) Market 1,245 1,339 1,332 1,439 1,477 1,184 1,092 ASP (CAP) 1,334 1,450 1,471 1,586 1,642 1,359 1,228 ASP vs Market 111.2% 114.8% 112.4% PP Market 1,303 1,514 1,391 1,454 1,458 1, ASP (CAP) 1,418 1,685 1,552 1,623 1,670 1,249 1,167 ASP vs Market 114.5% 116.0% 122.9% Source: Citi Research estimates, IHS, Company Risk to premium pricing could come from capacity additions from players like LCT However, CAP s advantages are not without any risks. Over the next few years, imports of petrochem materials may decline as new investments in domestic capacity come on-stream in the mid-term. An example of this is Lotte Chemical Titan (LCT) s 1Mt cracker project in Indonesia, which is undergoing preliminary work and development works may commence in The project could start commercial production in Capacity expansion is the engine of growth Capacity expansion to drive CAP s earnings Capacity expansion helps CAP capitalize on the domestic supply-demand imbalances. Its capacity grew from 2.08 Mt in 2010 to 3.3 Mt in 2016, at a CAGR of 8% in In 2015, the company completed a naphtha cracker expansion at Cilegon, which increased the cracker's capacity to 0.86Mt, propylene capacity to 0.47Mt, pygas capacity to 0.4Mt and mixed C4 capacity to 0.315Mt. CAP is also planning a new 0.4Mt swing polyethylene (PE) facility, which will be integrated into the existing naphtha cracker complex and is expected to start production in It currently operates a 336,000-t/y two-train PE unit. We estimate CAP will have 4.2Mt capacity in 2020E, growing at CAGRs of 6.2% in and 7.3% in E. Figure 20. CAP Strategic Expansion Figure 21. CAP Strategic Expansion Source: Company, Citi Research Source: Company, Citi Research 9

10 Figure 22. CAP Capacity, E Source: Citi Research estimates, Company CAP expanding 2 nd naphtha cracker CAP will build a 2 nd naphtha cracker with capacity of 1Mt ethylene and various downstream derivatives We have factored in the second naphtha cracker project in our model CAP has undertaken a feasibility study to build and operate a second integrated petrochem complex in Cilegon, Banten province. The new multi-billion dollar, worldscale complex, which will be located adjacent to CAP's existing integrated petrochem complex, will have cracker capacity of 1Mt ethylene and various downstream derivatives. This project study is in-line with CAP's strategy to expand its petrochem footprint in Indonesia to serve the growing domestic market with a population of some 250m people, in-line with forecast GDP growth of above 5% and in-line with the government stimulus to improve basic infrastructure. The capacity expansion is expected to be completed by CAP plans to establish a company, PT Chandra Asri Perkasa, to undertake the new project and discuss fiscal incentives with relevant government authorities to accelerate the project. We have factored in the second naphtha cracker project in our model. Based on our assumptions, we estimate CAP s capacity will almost double to 8,251 KTA by 2023E, from 4,201 KTA in 2020E-22E. Current CAP capacity is 3,301 KTA. We assume total project cost of US$ 4bn, in which we include our capex projection for CAP. We estimate CAP will need c.us$2bn of financing to complete the second naphtha cracker project. 10

11 Figure 23. Second Naphtha Cracker Project Capacity Assumptions Product Capacity (KTA) Naphtha Cracker Ethylene 1,000 Propylene 500 Py-Gas 450 Mixed C4 150 Midstream & Downstream PE 1,000 PP 500 SM 300 Butadiene 150 Total Capacity 4,050 Source: Citi Research estimates Figure 24. CAP Total Capacity, E Figure 25. CAP Capex, E 9,000 8,000 8,251 7,000 6,000 5,000 4,000 3,000 2,000 4,201 4,201 4,201 3,968 3,301 3,301 3,458 2,576 2,576 2,676 2,676 2,676 2,080 1, F2018F2019F2020F2021F2022F2023F Capacity (KTA) Source: Citi Research estimates, Company Source: Company, Citi Research estimates Second naphtha cracker complex will help CAP serve future demand growth, especially in the domestic market We think the second naphtha cracker complex will be positive for CAP as it will help serve future demand growth, especially in the domestic market. This would, in our view, boost earnings and more than offset any concerns about declining margins due to competition. Support from Siam Cement Group (SCG) CAP s operations and expansion plans have so far gone smoothly, thanks in part to SCG SCG also plays a role in developing CAP s human resources CAP s expansion has so far been free of any major disruptions, and capacity utilization has consistently been high. We attribute these achievements in part to 30% shareholder Siam Cement Group, which has substantial expertise and experience in the business. SCG has been sharing with CAP knowledge, production know-how, market information, best practices, raw-material efficiency, sales & marketing efforts, and access to financing from Thailand. SCG also plays a role in the development of CAP s human resources. In 2016, CAP collaborated with SCG by sending six selected employees for a one-year assignment to SCG s plant in Rayong, Thailand, with the idea of improving their technical capabilities while gaining the working experience and culture needed to operate and manage a plant properly. 11

12 Lotte Chemical Titan: A threat? LCT is planning a 1Mt naphtha cracker in Indonesia, projected to start by 2023 Competition could emerge for CAP, especially given LCT s plan to expand in Indonesia through a 1Mt cracker project, which is undergoing preliminary work and development works may commence in Production could begin in 2023, about the same time as CAP s second naphtha cracker. See Lotte Chemical Titan (LOTT.KL) - Initiate at Buy: The Titan Strikes Back. We believe CAP is better prepared to complete the capacity expansion on time: CAP can utilize its existing facilities and infrastructure, giving it better cost economics; CAP already has the land in place, whereas only part of LCT s land acquisition has been completed; and CAP s regular and reasonably priced naphtha supplies have prevented any significant disruption / issues for years. LCT in Indonesia has so far relied on ethylene supply from CAP and from Malaysia, as LCT has yet to have a naphtha cracker on the ground. Declining margin should be easily offset by higher revenue and earnings CAP has a diversified customer base and long-standing ties CAP is therefore better placed to capitalize early on Indonesia s petrochem demand. Overall, LCT could lower CAP s premium pricing margin, but CAP s increasing capacity should improve earnings. Long-standing ties to help withstand competition Operating since 1992 and given its market leadership, CAP has developed strong ties with its customers. CAP has more than 300 customers in its portfolio, and its top 10 customers accounted for only 43.6% of revenue in 2016 and have been with CAP for more than 10 years. We believe CAP s long-standing ties will be difficult to break and should give CAP an edge over new competition. Figure 26. CAP: Top 10 Customers Share Source: Company, Citi Research CAP has stable and close ties with its suppliers CAP sources naphtha and benzene (raw materials) from external parties and has long standing, stable relationships with its well diversified suppliers. As of 2016, 12

13 CAP spent US$1bn on raw materials, mainly naphtha and then Benzene. So far, it has not undergone any material feedstock supply disruption, giving it another edge over potential new competition. Figure 27. CAP: Main Raw Materials Figure 28. CAP: Suppliers of Naphtha Source: Company, Citi Research Source: Company, Citi Research Index stock CAP, an index stock, deserves premium valuations, in our view CAP has become an index stock in Indonesia due to its large market cap (No. 11), commanding a weighting of 1.5% despite its small free float of 9%. Fund managers benchmarked against the Indonesian stock market Index or the LQ45 Index have to track the stock. In addition, CAP could potentially be included in the MSCI given its sizable daily turnover. Figure 29. JCI Top 15 by Market Cap Figure 30. LQ45 Top 15 by Market Cap No. Ticker Name Weight Market Cap (US$ mn) 1 BBCA Bank Central Asia 7.9% 43,896 2 HMSP Hanjaya Mandala Sampoerna 7.6% 42,016 3 BBRI Bank Rakyat Indonesia Persero 6.3% 34,956 4 UNVR Unilever Indonesia 5.6% 30,698 5 TLKM Telekomunikasi Indonesia Persero 5.5% 29,972 6 BMRI Bank Mandiri Persero 5.6% 29,037 7 ASII Astra International 4.5% 25,041 8 BBNI Bank Negara Indonesia Persero 2.5% 13,520 9 GGRM Gudang Garam 2.1% 11, UNTR United Tractors 1.9% 10, TPIA Chandra Asri Petrochemical 1.5% 8, ICBP Indofood CBP Sukses Makmur 1.4% 7, ADRO Adaro Energy 1.0% 5, INTP Indocement Tunggal Prakarsa 1.1% 5, KLBF Kalbe Farma 1.0% 5,627 Source: Citi Research, Bloomberg No. Ticker Name Weight Market Cap (US$ mn) 1 BBCA Bank Central Asia 11.8% 43,896 2 HMSP Hanjaya Mandala Sampoerna 11.3% 42,016 3 BBRI Bank Rakyat Indonesia Persero 9.3% 34,956 4 UNVR Unilever Indonesia 8.3% 30,698 5 TLKM Telekomunikasi Indonesia Persero 8.2% 29,972 6 BMRI Bank Mandiri Persero 8.4% 29,037 7 ASII Astra International 6.7% 25,041 8 BBNI Bank Negara Indonesia Persero 3.7% 13,520 9 GGRM Gudang Garam 3.1% 11, UNTR United Tractors 2.8% 10, TPIA Chandra Asri Petrochemical 2.2% 8, ICBP Indofood CBP Sukses Makmur 2.1% 7, ADRO Adaro Energy 1.6% 5, INTP Indocement Tunggal Prakarsa 1.6% 5, KLBF Kalbe Farma 1.5% 5,627 Source: Citi Research, Bloomberg 13

14 CAP could possibly be included in the MSCI Indonesia Index given decent liquidity and relatively sufficient free float Figure 31. MSCI Indonesia Index No.Ticker Name Weight Market Cap (US$ mn) Free Float Free Float Market Cap (US$ mn) 6-mths ADTV (US$ mn) 1 BBCA Bank Central Asia 13.9% 43, % 18, BBRI Bank Rakyat Indonesia 12.3% 34, % 15, TLKM Telekomunikasi Indonesia 11.9% 29, % 14, ASII Astra International 10.0% 25, % 12, BMRI Bank Mandiri Persero 9.2% 29, % 11, UNVR Unilever Indonesia 5.1% 30, % 4, BBNI Bank Negara Indonesia 4.2% 13, % 5, UNTR United Tractors 3.9% 10, % 4, HMSP HM Sampoerna 2.7% 42, % 3, INTP Indocement Tunggal 2.4% 5, % 2, GGRM Gudang Garam 2.3% 11, % 2, KLBF Kalbe Farma 2.1% 5, % 2, INDF Indofood Sukses Makmur 2.0% 5, % 2, ADRO Adaro Energy 2.0% 5, % 2, SMGR Semen Indonesia 1.8% 5, % 2, PGAS Perusahaan Gas Negara 1.5% 4, % 1, LPPF Matahari Department 1.5% 2, % 1, CPIN Charoen Pokphand 1.4% 4, % 1, BDMN Bank Danamon 1.4% 4, % 1, ICBP Indofood CBP 1.2% 7, % 1, SCMA Surya Citra Media 0.9% 2, % 1, BBTN Bank Tabungan Negara 0.9% 2, % 1, PWON Pakuwon Jati 0.9% 2, % WSKT Waskita Karya Persero 0.8% 3, % 1, BSDE Bumi Serpong Damai 0.8% 2, % 1, JSMR Jasa Marga Persero 0.7% 3, % TBIG Tower Bersama 0.7% 1, % AKRA AKR Corporindo 0.6% 1, % EXCL XL Axiata 0.6% 2, % Total MSCI Indonesia 100.0% - TPIA Chandra Asri Petrochemical 8, % BRPT Barito Pacific 2, % Source: Citi Research, Bloomberg Risks Downside and upside risks to our call could stem from spread trends, production levels, progress in capacity expansion, capex, and competition against CAP s domestic premium pricing. 14

15 Valuation We value CAP using DCF valuation with WACC of 8.8% and terminal growth of 3% In our view, CAP s premium valuation is justified but priced in CAP s outlook remains positive due to (i) premium pricing, (ii) capacity expansion and (iii) minimal competition We value CAP using DCF with a WACC of 8.8% and terminal growth of 3% to capture the company s capacity expansion potential. Our TP of Rp6,600/sh implies the stock is currently fairly valued. Our TP implies 2018E EV/EBITDA 14.9x, higher than the regional peers 5-year mean of 11.1x. We believe premium valuations for CAP are justified, given (i) Indonesia s growing petrochemical demand, (ii) CAP s market leadership and position as the sole naphtha cracker operator and the largest integrated petrochemical producer in Indonesia, (iii) its solid expansion plan over E, (iv) premium product pricing, (v) its ROE of 18% in 2018E vs. regional peers 16%, and (vi) its status as an index stock given its market cap (No. 11 in Indonesia). The outlook remains positive for CAP, in our view, given (i) continued premium product pricing, (ii) capacity expansion and (iii) minimal competition, with LCT the only imminent notable threat. Figure 32. CAP DCF Valuation CAP DCF 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E TV DCF (US$mn)) Operating profit (-) tax (125.2) (136.9) (105.9) (146.9) (142.2) (172.9) (330.8) (215.9) (332.7) (327.4) Operating profit after tax (+) Amortisation and depreciation Gross cash flow (-) Capital expenditure (568.0) (536.0) (1000.0) (1000.0) (1000.0) (400.0) (135.0) (200.0) (135.0) (135.0) (+) Incremental working capital 2.5 (9.6) (5.3) (0.6) (85.6) 16.4 (18.2) 3.9 Unlev FCFF (106.0) (46.1) (592.4) (457.7) (461.1) ,208.3 t= Discount factor PV of CF (106.0) (42.4) (500.3) (355.3) (328.9) Terminal growth 3% PV of Forecasted Years PV of TV 8,044.2 PV of Unlev FCFF 8,707.7 Net Cash/(Debt) NPV of Equity 8,813.4 No. of Shares(bn) NPV/Shares (US$) 0.49 NPV/Share (Rp) 6,600 Implied Valuation Implied 2018E P/E (x) 25.3 Implied EV 2018E (US$ mn) 8,707.7 Implied 2018E EV/EBITDA (x) 14.9 WACC 8.8% Source: Citi Research estimates 15

16 Sensitivity analysis Sensitivity analysis to our DCF TP Figure 33. CAP DCF Sensitivity Analysis Valuation CAP DCF Assumptions TP (Rp/share) Bear Base Bull Bear Base Bull WACC 9.8% 8.8% 7.8% 5,270 6,600 8,620 Change 1.0% 0.0% -1.0% -20.2% 0.0% 30.6% Terminal growth 2.0% 3.0% 4.0% 5,680 6,600 7,940 Change -1.0% 0.0% 1.0% -13.9% 0.0% 20.3% Source: Citi Research estimates Figure 34. Regional Valuation Comparison 2/20/2018 TPIA BRPT FPC FCFC NYP FPCC OUCC LG Chem Lotte Chem SCC PTTGC PCG LCT SPC Wanhua Kumho TSRC CSR CBC QSLI Sector Price 6,200 2, , , , TP 6,600 3, , , , Mkt cap (US$ mn) 8,154 2,563 22,142 21,295 20,812 36, ,899 14,546 18,420 13,570 16,656 3,073 2,046 16,336 2, ,464 1,473 5, ,751 Risk/Rating Ric code TPIA. JK BRPT. JK TW TW TW TW TW KS KS SCC. BK PTTGC. BK PCGB. KL LOTT. KL HK SS KS TW TW HK SZ PB(x) 2018E E EV/EBITDA (x) 2018E E PE (x) 2018E , E Dividend yield (%) 2018E 1.5% 0.0% 5.4% 5.5% 5.3% 4.8% 3.6% 1.6% 1.8% 4.0% 4.2% 3.0% 4.3% 5.3% 2.8% 1.3% 5.3% 4.3% 4.5% 0.1% 3.7% 2019E 1.5% 0.0% 5.6% 5.9% 5.4% 4.4% 2.2% 1.6% 2.3% 4.1% 4.3% 3.1% 4.8% 4.1% 2.9% 1.3% 6.4% 5.1% 4.8% 0.2% 3.8% ROE (%) 2018E 18.0% 9.1% 13.8% 12.7% 12.4% 18.8% 14.9% 12.9% 18.7% 17.6% 13.7% 13.4% 10.4% 17.6% 34.5% 12.9% 7.2% 11.1% 6.0% 0.3% 15.9% 2019E 16.1% 9.3% 13.8% 13.2% 12.3% 18.7% 10.1% 12.4% 16.5% 16.5% 12.9% 12.8% 10.8% 14.0% 29.3% 13.3% 11.0% 12.7% 6.1% 3.2% 15.2% Source: Citi Research estimates, datacentral Figure 3. Regional Petrochemical Sector: 5-yr EV/EBITDA Band (1-yr Forward) Source: Citi Research estimates, datacentral 16

17 Figure 35. CAP: Income Statement (US$ mn) E Net Revenues 2,197 2,285 2,506 2,460 1,378 1,930 2,429 2,589 2,610 Cost of Revenue (2,093) (2,262) (2,408) (2,343) (1,232) (1,436) (1,886) (2,016) (1,984) Gross Profit Selling Expenses (28) (36) (41) (43) (42) (43) (43) (43) (48) General & Administrative Expenses (31) (27) (26) (25) (25) (28) (28) (28) (31) Total Opex (58) (63) (67) (67) (67) (71) (72) (72) (79) Operating Income 46 (40) EBITDA Other Income (charges) Finance Costs (49) (46) (23) (32) (23) (32) (51) (45) (39) Gain (Loss) on derivative financial instruments - (1) 2 (3) (2) Share in net loss of an associate (1) (4) (6) (6) (6) (6) Gain (Loss) on FX - net (2) (11) (4) (3) (12) (1) (1) (1) (1) Other gains (loss) - net 2 (13) Total Other Income (expense) (48) (71) (14) (25) (23) (23) (42) (36) (35) Pre-tax Income (2) (111) Income Tax Benefit (Expense) (6) (6) (30) (100) (107) (116) (128) Profit before minorities interest 8 (87) Minorities Interest (0) 0 Net Profit 8 (87) Source: Citi Research estimates, Company data Earnings Drivers and Financials Figure 36. CAP: Cashflow (US$ mn) F 2018F 2019F Operating profit 46 (40) Depreciation & Amortization Taxation (6) (6) (30) (100) (107) (116) (128) Working Capital (28) (67) (10) Net interest expense (49) (46) (23) (32) (23) (32) (51) (45) (39) other operating cash (25) Operating Cash Flow (4) Capex (133) (109) (81) (227) (229) (84) (253) (568) (536) Divestitures/(Acquisition) Investments (1) 6 (5) (7) (25) Other investing cash (17) 18 (49) (5) Investing Cash Flow (151) (85) (134) (239) (238) (69) (253) (568) (536) Dividends paid (5) - - (3) (5) (43) (118) (80) (87) Additional ST debt 25 (20) 17 (22) 51 (51) Additional LT debt (16) (72) 249 (51) (93) Additional equity capital Other financing cash (169) (57) (30) (41) (31) (39) Financing Cash Flow (205) 502 (131) (180) Changes in Net Cash Flow (119) (34) (111) (264) (253) Cash position beg Cash position - end Source: Citi Research estimates, Company data 17

18 Figure 37. CAP: Balance Sheet (US$ mn) F 2018F 2019F Cash & Cash Equivalents Restricted Cash in Banks Trade Account Receivables - net Other Account Receivables Inventories - net of allowance Prepaid taxes Advances and prepaid expenses Noncurrent assets held for sales Total Current Assets ,376 1, Deferred Tax Assets Investment in Associate Advances for purchase of PPE Derivative Financial Assets Claims for Tax refund Restricted Cash in Banks PPE - net ,144 1,308 1,317 1,489 1,973 2,420 Other Noncurrent Assets Total Noncurrent Assets ,096 1,257 1,446 1,437 1,609 2,093 2,540 Total Assets 1,605 1,687 1,907 1,924 1,862 2,129 2,984 3,228 3,426 Bank Loans Trade Accounts Payable Other Accounts Payable Taxes Payable Accrual Expenses Customer Advances Current Maturities of LT Liabilities Bank Loans Bonds Payable Finance Lease Obligation Total Current Liabilities Deferred Tax Liabilities - net LT Liabilities - net of current maturities Bank Loans Bonds Payable Finance Lease Obligation Derivative Financial Liabilities Post-Employment Benefits Obligation Decommissioning Cost Total Noncurrent Liabilities Total Liabilities ,054 1, ,268 1,243 1,143 Capital Stock APIC OCI - (0) 1 (1) (1) (3) (3) (3) (3) Retained Earnings ,141 1,435 Total Equity attributable to owners ,135 1,710 1,978 2,276 Minorities Interest Total Equity ,142 1,717 1,985 2,282 Total Liabilities & Equity 1,605 1,687 1,907 1,924 1,862 2,129 2,984 3,228 3,426 Source: Citi Research estimates, Company data Capacity, production/utilization, spreads are key drivers CAP s capacity is 3,301KT, which it plans to increase to 3,968KT by 2019E CAP makes a wide variety of consumer and industrial products, such as plastic packaging, containers, and automotive parts. CAP imports naphtha, which is converted into olefin and its by-products (Ethylene, Propylene, Pygas and Mixed C4). These olefin products are either sold at spot or converted into downstream products such as Polyethylene (PE), Polypropylene (PP), Styrene Monomer, Butadiene and Synthetic Rubber (per 2Q18). Currently, CAP has capacity of 3,301 KT, which we estimate will increase to 3,968KT by

19 Figure 38. CAP: Operational estimates Capacity (KTA) F 2018F 2019F Ethylene (C2) Propylene (C3) Py-Gas Mixed C Total Olefins 1,420 1,420 1,420 1,420 1,420 1,420 2,045 2,045 2,045 2,045 HDPE LLDPE Total PE Total PP Total Polyolefins ,326 Styrene Monomer Butadiene Synthetic Rubber Total Capacity 2,080 2,576 2,576 2,676 2,676 2,676 3,301 3,301 3,458 3,968 Utilization (%) F 2018F 2019F Ethylene (C2) 95% 78% 89% 99% 94% 57% 90% 99% 100% 100% Propylene (C3) 92% 80% 91% 102% 93% 57% 89% 98% 98% 98% Py-Gas 77% 64% 75% 76% 65% 42% 59% 65% 75% 75% Mixed C4 87% 75% 90% 98% 84% 50% 79% 88% 95% 95% Total Olefins 94% 78% 89% 99% 94% 57% 90% 99% 100% 100% PE (HDPE) 95% 98% 40% PE (LLDPE) 95% 98% 55% Total PE 102% 89% 100% 94% 92% 67% 98% 95% 98% 40% Total PP 105% 90% 96% 95% 99% 92% 89% 95% 98% 85% Styrene Monomer 75% 90% 89% 94% 74% 69% 82% 105% 105% 105% Butadiene 0% 0% 0% 76% 79% 47% 88% 125% 125% 130% Synthetic Rubber 0% 0% 0% 0% 0% 0% 0% 0% 25% 60% Production (KTA) F 2018F 2019F Ethylene (C2) Propylene (C3) Py-Gas Mixed C Total Olefins 1,268 1,067 1,229 1,349 1, ,673 1,853 1,920 1,920 PE (HDPE) PE (LLDPE) Total PE Total PP Total Polyolefins Styrene Monomer Butadiene Raffinate Synthetic Rubber Total Production 2,106 2,072 2,335 2,504 2,440 1,759 2,915 3,253 3,406 3,534 Source: Citi Research estimates, Company data 19

20 Figure 39. CAP Production Capacity, E Figure 40. CAP Capacity Utilization Rate, E 4,500 (KTA) 4,000 3,500 3,000 2,500 2,000 1,500 1, ,201 CAGR: 7.3% 3,968 3,301 3,301 3,458 2,576 2,576 2,676 2,676 2,676 2, F 2018F 2019F 2020F Capacity (KTA) Source: Citi Research estimates, Company Source: Citi Research estimates, Company CAP to increase capacity at a CAGR of 7.3% in E CAP sell its polyolefin at a premium CAP s capacity is set to grow at a CAGR of 7.3% in E. Its plant utilization has been relatively stable. The dip in utilization in 2015 was due to an 85-day shutdown for Turn-around Maintenance (TAM) and tie-in works for the Cracker Expansion project, where its capacity increased to 3,301 KT in 2016 from 2,676 KT in CAP will conduct TAM every five years, with 2020 being its next round. Most of CAP s products are sold locally (74% of sales in 2016), with polyolefin being the main contributor. It has been selling it at a premium in the past six years, implying domestic shortage of polyolefin products. Its export sales (26% of sales in 2016) mainly come from olefins. Most of the olefins that are exported are Pygas, which CAP mainly sells to SCG. Figure 41. CAP Total Sales Figure 42. CAP Local Sales Figure 43. CAP Export Sales Source: Citi Research, Company data Source: Citi Research, Company data Source: Citi Research, Company data Figure 44. CAP Olefin Sales Figure 45. CAP Polyolefin Sales Source: Citi Research, Company data Source: Citi Research, Company data 20

21 Figure 46. CAP Styrene Monomer Sales Figure 47. CAP Butadiene Sales Source: Citi Research, Company data Source: Citi Research, Company data We estimates CAP revenue to grow by 1%/8% in 2018E/19E We estimate CAP will grow revenues 6.6%/0.8% to US$2.59/2.61bn in 2018E/19E on higher capacity and added value from Synthetic Rubber sales, which CAP will start producing in 2Q18. Most of the sales will still come from polyolefin and olefin. Figure 48. CAP Revenue Breakdown ( E) Source: Citi Research estimates, Company data We estimate CAP earnings to grow by 8.5%/10.2% in 2018E/19E Aside from capacity and utilization, petrochem spreads (e.g. Ethylene-Naphtha, PE- Naphtha, etc.) are important determinants of profitability. Given the cyclical nature of the industry, CAP is exposed to shrinking spreads. Citi estimates lower olefin/polyolefin-naphtha spreads in 2018E, but slightly higher spreads in 2019, which could put pressure on CAP in 2018E but be positive in 2019E. However, we still estimate slight growth in CAP s earnings (+8.5%yoy) in 2018E on the back of CAP s new Synthetic Rubber (SBR) production, which is higher in value than CAP s other products and provides it with higher margins through its lower naphtha cost. We expect CAP s earnings to further increase in 2019 (+10.2%yoy) on the back of additional capacity and slightly higher spreads. 21

22 Citi regional team expects spreads to narrow in 2018E but rebound in 2019E Figure 49. Key price and spread assumptions (US$/t) F 2018F 2019F Products Brent Crude Naphtha Ethylene 1,108 1,088 1,190 1, Propylene Benzene HDPE 1,182 1,061 1,109 1,100 1,080 LLDPE 1,186 1,124 1,137 1,070 1,060 PP 1, ,061 1,100 1,080 Styrene Monomer 1,063 1,028 1,217 1,250 1,180 Butadiene 916 1,198 1,542 1,330 1,500 SBR 1,286 1,428 1,893 1,700 1,850 Spreads Ethylene-naphtha Propylene-naphtha HDPE-naphtha LLDPE-naphtha PP-propylene PP-naphtha SM-naphtha Butadiene-naphtha , ,000 SBR-Naphtha 1,170 1,350 Source: Citi Research estimates We assume CAP will sell polyolefin at a 10-20% premium in 2017E-19E Figure 50. CAP Polyolefin ASP vs Market (US$/t) F 2018F 2019F HDPE Market 1,201 1,353 1,353 1,419 1,462 1,182 1,061 1,109 1,100 1,080 ASP (CAP) 1,220 1,210 1,188 ASP vs Market 110.0% 110.0% 110.0% LLDPE Market 1,289 1,325 1,311 1,458 1,492 1,186 1,124 1,137 1,000 1,100 ASP (CAP) 1,250 1,100 1,210 ASP vs Market 110.0% 110.0% 110.0% PE (avg. HDPE & LLDPE) Market 1,245 1,339 1,332 1,439 1,477 1,184 1,092 1,123 1,050 1,090 ASP (CAP) 1,334 1,450 1,471 1,586 1,642 1,359 1,228 1,235 1,155 1,199 ASP vs Market 111.2% 114.8% 112.4% 110.0% 110.0% 110.0% PP Market 1,303 1,514 1,391 1,454 1,458 1, ,061 1,100 1,080 ASP (CAP) 1,418 1,685 1,552 1,623 1,670 1,249 1,167 1,252 1,320 1,296 ASP vs Market 114.5% 116.0% 122.9% 118.0% 120.0% 120.0% Source: Citi Research estimates, IHS, Company 22

23 Figure 51. CAP Gross Profit, E Figure 52. CAP Net Profit, E Source: Company, Citi Research estimates Source: Company, Citi Research estimates Sensitivity analysis Our sensitivity analysis suggests that in every US$100/t change in Ethylene/PE- Naphtha spread will impact earnings by 9.3%/3.2% in 2018E. Figure 53. CAP Sensitivity Analysis in 2018E Spreads (2018E) Spread Net Profit Bear Base Bull Bear Base Bull Ethylene-naphtha change (100) % 0.0% 9.3% PE-naphtha change (100) % 0.0% 3.2% PP-naphtha change (100) % 0.0% 12.1% Source: Citi Research estimates Heavy capex cycle in FY17-20E Capacity expansion to continue CAP s continuous expansion plan is to support growth, and to meet the growing petrochem demand, it will need large capex for its expansion. As a result, CAP will undergo a heavy capex cycle over the next few years and will spend c.us$2.0bn over the next three years, mainly on expansion and debottlenecking, including the second naphtha cracker. 23

24 Figure 54. CAP Capex, E Source: Citi Research estimates, Company 24

25 Industry Outlook What drives the chemical cycle? Petrochemical industry is a cyclical industry with typical cycle of 7-9 years Chemical product prices track oil prices Brent oil and Naphtha prices are highly correlated Petrochemical is a cyclical industry with a typical cycle of 7-9 years. A long lead time means it is difficult to get the timing right for capacity additions. The cycle itself is driven more by supply than demand as capacity additions are lumpy, with a greenfield complex taking at least 5-6 years (3 years for construction, 1 year for feasibility study and 1-2 years for arranging project financing, securing permits, EPC bidding, etc.) while demand is more likely to stay intact given the demand for plastic, bottles, packaging, tires, etc, especially in emerging markets. Demand growth however is difficult to predict, which will determine the extent of margin expansion or erosion. While analysts can call the direction of the chemical cycle, forecasting the prices and spreads accurately is difficult. Chemical product prices track oil directionally with the delta of net change in demand-supply a good indicator of cycle direction and margin outlook. A gradual rise/stable oil price is generally good for the sector but a rapid rise is negative due to the difficulty for plastics converters to reflect cost hikes and concerns of a demand slowdown. Figure 55. Brent Oil and Naphtha Price Correlation Source: Citi Research 2018 outlook Price fluctuation is likely through 2018E Higher upstream price likely to be passed through to downstream over time Fluctuation is likely through the year. The end of the heating season in China at the end of 1Q18 will alleviate some constraints on coal and gas availability which could temporarily see a recovery in supply but we expect this to be less pronounced than in The constraints in early 2018 will be more prolonged. Current conditions are more a reflection of the structural factors rather than one-time issues. Butadiene, for example, which is always most volatile, is traded at US$1,100/t in Jan 18 vs. US$3,000/t Jan 17. Upstream conditions have pressured downstream margins, as passing through higher prices takes time given the nature of longer-term contracts. That said, the higher oil prices, whilst not the driver of margins in our opinion, could now help downstream customers be more inclined to accept higher prices. Our price benchmarks in January indicate that building blocks, up 3.0% on a global basis, continue to mandate higher downstream prices, which increased just 0.6% in the month. There are some seasonal trends to be cognizant of, notably that Benzene demand is likely to be higher due to its increased use in winter mogas as an ignition agent. 25

26 Citi estimates FY18E oil price at US$57/bbl, lower than the current price Outlook for chemical building blocks is good and we expect ethylene pricing to be moderated by effects of new capacity Ethylene price has been supportive owing to tight supply Oil Crude oil price was up by c.4% in Jan 2018 and up c.17.5%yoy. Brent price rose to an avg. of c.us$66.6/bbl from US$64/bbl in Dec, continuing the recent uptrend. Our commodity team s base-case for oil prices is US$57/bbl for 2018 and US$49/bbl in 2019, so we expect oil price driven inflation to abate in 1H18. Oil prices are up 91% from the 2016 trough, supported by the OPEC s decision to cut oil production along with a decline in Chinese production. The current prices are still supportive of Asian and European naphtha cracker margins versus high cost Chinese coal to olefins. We believe this advantage is structural for the medium term as long as the oil price remains at or below US$70/barrel. Chemical Building Blocks Building blocks pricing broadly followed the upward trend this month in most products and regions with the exception of Benzene in some regions. Ethylene prices were up this month with prices in Europe up 1.2% MoM, up 1.5% MoM in the US, and up 6.1% MoM in Asia. Propylene prices were up 2.2% MoM in Europe, Asia prices +4.2% and US prices + 2.1% MoM. Benzene prices were down 6.5% MoM in Europe, in the US down 3.9% and in Asia marginally up by 0.6% MoM. Butadiene prices were up 7.1% in Europe, up 5.1% in the US and up 8.9% in Asia, MoM. We see the outlook as good overall but expect ethylene pricing to be moderated by the effects of new, mainly US, capacity but for coproduct pricing to be generally strong due to limited supply growth. Ethylene Ethylene prices in Northeast Asia increased from the end of November owing to tight supply in the region. With most market players still engaged in the negotiation of their 2018 term contract, most sellers refrained from offering additional spot cargos. In addition, some buyers also sought to purchase spot cargos for early next year owing to the protracted contract discussions. Regional price sentiments were further supported by the strong affordability levels from certain downstream derivative products and prestocking ahead of the Lunar New Year holidays in February, as well as tight spot supply from regional producers due to the protracted term contract negotiations. Prices were last assessed at US$1,300-1,330 per metric ton CFR Northeast Asia. In Southeast Asia, the spot prices had also moved higher from the end of November, in line with the sentiments seen in the key Northeast Asia market. As regional demand remained tepid owing to weak derivative markets, sellers continued to target the more lucrative Northeast Asia market for better netbacks. Some producers were reported to have cut back on downstream derivative production and were selling ethylene instead. 26

27 Utilization rates under modest pressure in 2018E due to US ethane cracker expansions Figure 56. Ethylene Supply, Demand and Utilization rate History and Outlook, E (kt) Source: Citi Research, HIS, Citi Research estimates Figure 57. Ethylene Supply, Demand and Utilization Rate, E Source: Citi Research, IHS, Citi Research estimates 27

28 Bull/Bear: Chandra Asri Petrochemical (TPIA.JK) 28

29 Risks Oil price volatility A gradual rise/stable oil prices are generally good for the sector and CAP. Passthroughs are also relatively smooth. However, a rapid rise in oil prices is negative due to the difficulty in reflecting cost hikes immediately. This works vice versa, too. Naphtha prices are highly correlated with oil prices. Higher/lower-than-expected capacity utilization Higher/lower-than-expected capacity utilization will impact CAP s sales volume, and subsequently its earnings. Disruption to production could be due to several factors such as electricity outages, fire, and worker absentees. Capacity expansion risk A slower-than-expected capacity expansion execution will impact CAP s earnings negatively, and vice versa. In addition, a higher-than-expected capex will impact CAP s valuation adversely, and vice versa. Global/regional petrochem products supply/demand A slower-than-expected ethylene capacity expansion/production will increase ethylene prices, and vice versa. Currently, the biggest threat for a faster/slower capacity expansion mainly comes from US cracker expansion. Similar supply/demand risk applies to downstream products such as Polyethylene (PE), and Polypropylene (PP). Domestic supply/demand, premium pricing Domestic supply/demand development will affect CAP s ability to charge premiums over regional market prices. CAP has so far been able to consistently sell its polyolefin at premium. Significantly new domestic supply, especially if it is domestically produced polyolefin, will put downward pressure on CAP s polyolefin prices and consequently its earnings. Less-than-expected supply or more-thanexpected demand will have the opposite effect. 29

30 Company Background CAP is the sole domestic producer of Ethylene, Styrene Monomer and Butadiene CAP was established in 2011 through a merger between Tri Polyta Indonesia (TPI) and Chandra Asri (CA). TPI was established in 1984 and was the largest Polypropylene (PP) producer in Indonesia, while CA was established in 1989 and was a producer of Olefins and Polyethylene (PE). After the merger, CAP became the sole domestic producer of Ethylene, Styrene Monomer and Butadiene, the largest producer of Propylene and Polypropylene (PP), and one of two producers of Polyethylene (PE) in Indonesia. CAP products are the basic ingredients of various consumer and industrial products such as plastic bags, packaging, automotive parts, and vehicle tires. Figure years track record of growth Source: Company, Citi Research Figure 59. CAP Shareholder Structure (as of 30 September 2017) (1) Owns 69.23% of Barito Pacific as of 30Sep 2017 (2) Subsidiary of Barito Pacific Source: Company, Citi Research 30

31 Management Profile Management has experienced professionals CAP management has experienced petrochem professionals. Many of the board members have more than 10 years of experience in the industry, including its President Director Erwin Ciputra. He served as the President Director of PT Chandrra Asri from November 2007 until the merger. Some of CAP s board members are representatives of the majority shareholders. SCG representatives in CAP help the company in managing and operating its business given SCG s expertise in the petrocheml industry. Figure 60. CAP Board of Directors Profile Name Position Background Board of Directors Erwin Ciputra was born in He is an Indonesian citizen and served as CAP's President Director since January He earned his Bachelor of Economics from Wharton School at the University of Pennsylvania, US, in He served as President Director of Erwin Ciputra President Director PT Chandra Asri from November 2007 until the Merger. In his current position as the President Director of the Company, he is responsible for all the Company s business activities. He has 13 years of experience in the petrochemical industry and has been working for the Company for 12 years. He previously had 6 years of experience in finance included a stint at JP Morgan Securities, TIAA-CREF Asset Management in New York. Kulachet Dharachandra was born in He is a Thai citizen and served as CAP's Vice President Director since January He earned his Bachelor of Chemical Engineering from Chulalongkorn University, Bangkok, Thailand. He also attended SCG Management Development Program by Wharton University, Thailand, Mitsui Global Management Academy at Harvard Business Kulachet Vice President Director School, USA, and SCG Executive Development Program by IMD Business School, Thailand. He currently serves as Vice President Dharachandra of Operations Director of the Company, responsible for the operations of the Company s plants and execution of new investment projects. Previously, he served as the Business Development Director at SCG Chemicals Co. in 2009, Director-Planning, Finance and Investment at SCG Chemicals Co. in 2012, and Corporate Planning Director at the group s headquarter, The Siam Cement PCL in Baritono Prajogo Pangestu was born in He is an Indonesian citizen and served as CAP's Director since January He Baritono Prajogo Vice President Director graduated with a Bachelor of Business from Central Queensland University, Australia in He was appointed as a Director of PT Pangestu of Polymer Commercial Chandra Asri from November 2007 until the Merger. Currently, he serves as the Vice President Director of the Company, responsible for the Company s Polymer commercial and marketing activities. He has 12 years of experience in the petrochemical industry where he has been working in the Company ever since. Terry Lim Chong Thian Piboon Sirinantanakul Fransiskus Ruly Aryawan Suryandi Director of Finance Director of Manufacturing Director of Monomer Commercial Terry Lim Chong Thian was born in He is a Malaysian citizen and served as CAP's Director of Finance since January He obtained his Bachelor of Commerce from the University of New South Wales, Australia in 1980; and he is also a member of CPA Australia, Malaysian Institute of Accountants and the Australian Institute of Company Directors. He served as Finance Director of PT Chandra Asri from January 2006 until the Merger. He has 36 years of experience in the oil and gas industry. Piboon Sirinantanakul was born in He is a Thai citizen and served as CAP's Director since January He earned his Bachelor of Chemical Engineering from Chulalongkorn University, Thailand. Currently, he serves as the Director of the Company, who is responsible for the Company s manufacturing. He has 23 years of experience in the petrochemical industry. Previously, he has worked at Map Ta Phut Olefins Co., Ltd. where he served as Production Division Manager in Fransiskus Ruly Aryawan was born in He is an Indonesian citizen and served as CAP's Director since June He obtained his Bachelor of Science in Finance from Boston College, Massachusetts in In his current position as Director, he is responsible for the Monomer Commercial of the Company. He has 13 years of experience in the petrochemical industry and has been working in the Company ever since. Suryandi was born in He is an Indonesian citizen and served as CAP's Director since October He holds a Bachelor of Director of Human Economics from University of Indonesia. In his current position, he is responsible for personnel management and corporate Resources & Corporate administration. He also serves as CAP s Independent Director and Corporate Secretary. He has 26 years of experience in the Administration petrochemical industry, which includes serving as Director of Treasury for PT Tripolyta Indonesia Tbk (TPI) since He joined TPI in 1990 as Finance Manager. Source: Citi Research, Company 31

32 Figure 61. CAP Board of Commissioners Profile Name Position Background Board of Commissioners Djoko Suyanto was born in He is an Indonesian citizen and served as CAP's President Commissioner and Independent Djoko President Commissioner Commissioner since March Graduated from the Indonesian Airforce Academy in 1973, he also took a course at the USAF Fighter & Independent Weapon Instructor School in Nellis Air Force Base, Nevada, US in 1983; and also Airforce Command and Staff Colleges in He Suyanto Commissioner obtained his Bachelor of Social and Political Science from Indonesia Open University in 1990, and joined the Australian Joint Services Staff Colleges in 1994 as well as the National Resillience Institute in He was a Coordinating Minister of Political, Legal and Security of Indonesia from 2009 to Tan Ek Kia Agus Salim Pangestu Cholanat Yanaranop Chaovalit Ekabut Leoki Sundjaja Putra Ho Hon Cheong Vice President Commissioner & Independent Commissioner Commissioner Commissioner Commissioner Commissioner Independent Commissioner Source: Citi Research, Company Tan Ek Kia was born in He is a Malaysian citizen and currently serves as CAP's Vice President Commissioner and Independent Commissioner. He holds a Bsc. in Mechanical Engineering from Nottingham University, United Kingdom. A seasoned professional in the oil and gas and petrochemical industry he previously took various positions in different companies, including Vice President of Ventures and Development at Shell Chemicals for Asia Pacific and Middle East region (Singapore) from 2003 to 2006; Chairman of Shell Companies for North East Asia (Beijing, China) from 2000 to 2003; Managing Director at Shell Nanhai Ltd. (Beijing, China) from 1997 to 2000; and Managing Director of Shell Malaysia Exploration and Production ( Miri, Sarawak, Malaysia) from 1994 to Agus Salim Pangestu was born in He is an Indonesian citizen and served as CAP's Commissioner since January He graduated with a Bachelor of Economic Science and Business Administration from Boston College, USA in With nine years of experience in the petrochemical industry, he served as Commissioner of PT Chandra Asri from January 2006 until the Merger. Currently, besides serving as the Company s Commissioner, he also holds the position of President Director at PT Barito Pacific Tbk Cholanat Yanaranop was born in He is an Indonesian citizen and served as CAP's Commissioner since January He holds a Bachelor of Environmental Chemical Engineering from Salford University, Manchester, UK and a Master of Chemical Engineering from Imperial College, London, UK. He was appointed as President of SCG Chemicals in January Chaovalit Ekabut was born in He is an Indonesian citizen and served as CAP's Commissioner since January He holds a Bachelor of Mechanical Engineering (First-Class Honors) from Chulalongkorn University and Master of Industrial Engineering & Management from Asian Institute of Technology (AIT), Thailand. He also completed the Advanced Management Program (AMP) from Harvard University, USA. He had been the President at SCG Paper for 8 years and currently a member of the Board of Directors in SCG s major businesses. With more than 33 years of experience at SCG, he was tasked in Computer Service Centre, a joint venture in electronic business, and SCG business restructuring during Leoki Sundjaja Putra was born in She is an Indonesian citizen and served as CAP's Commissioner since February She graduated from the Faculty of Economics University of Indonesia majoring in Accounting and has 15 years of experience in the petrochemical industry. She started her career in the industry by joining PT Barito Pacific Tbk in From August 1998 to February 2002, she took the post as Director of PT Jabar Utama Wood Industry, a member of PT Barito Pacific Group. She was the President Director of PT Chandra Asri from August 2002 until December 2007 and was the President Director of PT Barito Pacific Tbk from February 2008 until May 2013, and currently a senior advisor of PT Barito Pacific Tbk. Prior to joining Barito Pacific Group, she held several senior positions in banking and finance in Indonesia. Ho Hon Cheong was born in He is a Malaysian citizen and served as CAP's Independent Commissioner since June He holds a BEng from the University of Malaya, Kuala Lumpur, Malaysia and MBA majoring in Finance and Accounting from McGill University, Montreal, Quebec, Canada. Previously, he served as President Director of PT Bank Danamon Indonesia Tbk until 2015; Managing Director of Investments in Temasek Holdings Pte Ltd, Singapore until 2010; President Director & CEO of PT Bank International Indonesia Tbk from 2004 to

33 Chandra Asri Petrochemical Company description Chandra Asri Petrochemical (CAP) was established in 2011 through a merger of Tri Polyta Indonesia and Chandra Asri. After the merger, CAP became the sole domestic producer of ethylene, styrene monomer and butadiene; the largest producer of polypropylene (PP); and one of two producers of Polyethylene (PE) in Indonesia. CAP s products are the basic ingredients of various consumer and industrial products, such as plastic bags, packaging, automotive parts, and vehicle tires. Investment strategy We rate CAP shares at Neutral with a TP of Rp6,600. Trading at premiums to the regional peers both current EV/EBITDA as well as five-year mean, CAP has already priced in much of the premium we think it deserves. A premium is justified, in our view, given 1) Indonesia s growing petrochem demand, 2) CAP s market leadership and solid position as Indonesia s sole naphtha cracker operator and largest integrated petrochem producer, 3) its expansion plan for E, and 4) its premium product pricing, strong ROE of 19% in 18E vs. regional peers 16%, and index-stock status. Citi s regional team estimates lower olefin/polyolefin-naphtha spreads in 2018E, which would put some pressure on earnings before an improvement in 2019E. Valuation We value CAP at Rp6,600 based on a DCF valuation to capture the company s future capacity expansion a key driver of earnings. Our WACC is 8.8% (risk free rate 6.7%, Beta 0.6 and risk premium 6.5%) and terminal growth 3%. Our TP implies a 2018E EV/EBITDA of 14.9x and a P/E of 25.3x, higher than the regional peers five-year mean. Risks Downside and upside risks that could mean the CAP stock deviates from our target price include: (i) smaller/larger spreads than our base case; (ii) lower/higher production; (iii) slower/faster capacity expansion; (iv) lower/higher capex; and (v) keener/tamer competition. 33

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35 Appendix A-1 Analyst Certification The research analysts primarily responsible for the preparation and content of this research report are either (i) designated by AC in the author block or (ii) listed in bold alongside content which is attributable to that analyst. If multiple AC analysts are designated in the author block, each analyst is certifying with respect to the entire research report other than (a) content attributable to another AC certifying analyst listed in bold alongside the content and (b) views expressed solely with respect to a specific issuer which are attributable to another AC certifying analyst identified in the price charts or rating history tables for that issuer shown below. Each of these analysts certify, with respect to the sections of the report for which they are responsible: (1) that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner, including with respect to Citigroup Global Markets Inc. and its affiliates; and (2) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this report. IMPORTANT DISCLOSURES Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of Chandra Asri Petrochemical. Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Formosa Chemicals & Fiber, China BlueChemical, Siam Cement, Formosa Petrochemical, Lotte Chemical Titan, Nan Ya Plastics, Oriental Union Chemical, Formosa Plastics, PETRONAS Chemicals Group, Sinopec Shanghai Petrochemical, Barito Pacific. Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from China BlueChemical, Sinopec Shanghai Petrochemical. Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from Formosa Chemicals & Fiber, China BlueChemical, Siam Cement, Formosa Petrochemical, Lotte Chemical, Lotte Chemical Titan, Nan Ya Plastics, Wanhua Chemical, Formosa Plastics, PETRONAS Chemicals Group, LG Chem, Cheng Shin Rubber, Kumho Petrochemical, Sinopec Shanghai Petrochemical, Barito Pacific in the past 12 months. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as investment banking client(s): Formosa Chemicals & Fiber, China BlueChemical, Siam Cement, Formosa Petrochemical, Lotte Chemical Titan, Nan Ya Plastics, Oriental Union Chemical, Formosa Plastics, PETRONAS Chemicals Group, Sinopec Shanghai Petrochemical, Barito Pacific. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investmentbanking, securities-related: Formosa Chemicals & Fiber, China BlueChemical, Siam Cement, Formosa Petrochemical, Lotte Chemical, Lotte Chemical Titan, Nan Ya Plastics, Formosa Plastics, PETRONAS Chemicals Group, LG Chem, Sinopec Shanghai Petrochemical. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investmentbanking, non-securities-related: Formosa Chemicals & Fiber, China BlueChemical, Siam Cement, Formosa Petrochemical, Lotte Chemical, Lotte Chemical Titan, Nan Ya Plastics, Wanhua Chemical, Formosa Plastics, PETRONAS Chemicals Group, LG Chem, Cheng Shin Rubber, Kumho Petrochemical, Sinopec Shanghai Petrochemical, Barito Pacific. Citigroup Global Markets Inc. and/or its affiliates has a significant financial interest in relation to Formosa Chemicals & Fiber, China BlueChemical, Siam Cement, Lotte Chemical, Nan Ya Plastics, Formosa Plastics, PETRONAS Chemicals Group, LG Chem, Sinopec Shanghai Petrochemical. (For an explanation of the determination of significant financial interest, please refer to the policy for managing conflicts of interest which can be found at Disclosure for investors in the Republic of Turkey: Under Capital Markets Law of Turkey (Law No: 6362), the investment information, comments and advices given herein are not part of investment advisory activity. Investment advisory services are provided by authorized institutions to persons and entities privately by considering their risk and return preferences. Whereas the comments and advices included herein are of general nature. Therefore, they may not fit to your financial situation and risk and return preferences. For this reason, making an investment decision only by relying on the information given 35