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PT. Semen Indonesia, Tbk (SMGR)

Company Update, February 24

th

_{, 2016}

SMGR’s price movement is underperforming JCI JKSE in the last 12-months with 1.4 - 1.6 Beta.

Analysts:

Robertus Yanuar Hardy robertus@reliance-securities.com +6221 5790 5455

Shanti Dwi Jayanti

(Research Associate)

shanti@reliance-securities.com

Expecting more Government-initiated infrastructure projects.

FY2015 financial and business performance

Revenue slightly declined 0.14% to Rp26,948 bn last year from Rp26,987 bn in the year before. However, increasing costs especially from general and administration expenses which includes salaries, maintenance, and impairment losses, has squeezed profit margins so net income fallen 19% to Rp4,521 bn from Rp5,566 bn. (Exhibit 1 & 5). SMGR has encountered a tough year with sales volume declining 0.7% to 25.97 mn tons in 2015, from 26.15 mn tons in the year before. However, with national cement consumption increasing 7% - 8% YoY in January 2016, we also have another expectations of possible significant increase in domestic cement consumption if the Government could initiate another several large scale infrastructure development projects. So far, the million homes program (Program Sejuta Rumah) is the nearest project to meet our expectation.

Opportunities and challenges in the future

National cement industry will encounter another tough challenge in the future, with total production capacity will reach 75 - 80 mn tons p.a. (Exhibit 4) yet consumption is still around 60 mn tons. With oversupply condition is expected to worsen, we are assuming that there will be an adjustment of selling price to encourage sales growth, especially in the retail segment. However we expect that there will be more Government initiatives to start another large scale infrastructure projects like Trans Sumatra Toll Road in the future, so that bulk cement sales could significantly increase.

Possible challenges in the future could come from the addition of several new cement producers (Exhibit 4). However, with years of experience and nation wide distribution channels, we expect SMGR could survive the competition by increasing efficiency to maintain profit margins. We also expect the beginning of several strategic infrastructure projects by the Government recently could affect other related sectors, especially property, to grow together this year.

Valuation and recommendation

We are downgrading to Hold rating with target price at Rp11,000,-. Implying 12.2x of 2017 P/E Ratio. Our projection is already based on the possibility of oversupply in the cement market in the future, however we are still holding our expectations of possible significant increase in domestic cement consumption if the Government could initiate another several large scale infrastructure development projects.

Risks to our projection

Other than the possibility of oversupply and price war from new competitors, we see currency volatility could be a problem for the company’s financial performance, regarding some of the raw materials are still have to be imported, and also more than 30% of the company’s long term debts are in foreign currency.

Indonesia Cement

Sales (mn tons) Jan-16 Jan-15 change

Tot al 5.17 4.792 8.0%

Domest ic 5.14 4.785 7.4% Indonesia Cement

Sales (mn tons) 2015 2014 change

Tot al 61.04 60.17 1.4% Domest ic 60.04 59.91 0.2% So urce: B lo o mberg Current Price 10,100 2017 P/E 11.2 Target Price 11,000 2017 P/E 12.2 JCI JKSE 4,654

Basic Indust ry, Cement .

Bloomberg ticker SMGR:IJ

Reuters ticker SMGR.JK

52 w eek High 15,150

52 w eek Low 7,100

Shares Outstanding (mn shares) 5,932 Market Cap (Rp tn) 59.9 Market Cap (US$ bn) 4.5

USDIDR 13,400

Daily Average Vol ('000 shares) 6,604 Daily Average Val (Rp bn) 63.0 Daily Average Val (US$ mn) 4.7

Major Shareholders:

Indonesia Government 51.01%

Public 48.99%

Relat ive Performance vs JCI JKSE:

HEAD OFFICE

PT. Semen Indonesia, Tbk (SMGR)

Exhibit 1: 96% of the company’s revenue are generated from cement sales, where more than 70% is from bagged cement sales, and the rest is from bulk cement sales.

Manufacturing overhead contributes the largest to COGS, reaching almost 86%. The weakening of Rupiah exchange rate has also contribute to the increase of several costs, regarding some of the raw materials is still have to be imported, or using foreign currency as benchmark pricing.

Exhibit 2: Domestic cement consumption slightly declined MoM in January 2016, however managed to grew more than 7% YoY, as a result of the beginning of several government infrastructure projects that already initiated since the end of last year. We are expecting that this year’s sales volume growth will reach 4% - 5%, or relatively in-line with expected GDP growth, and average selling price increase will reach 2% - 3%, or relatively under expected inflation rate. We also expect national business and investment climate especially in the property sector could recover this year and benefit SMGR further as the company with nation-wide product distribution channels.

Exhibit 3: SMGR is currently still the largest market share holder in domestic cement sales. Together with INTP, the company is dominating more than 70% of the country’s cement market. We consider both companies as primary benchmark for others, in terms of product price and business achievements.

Exhibit 4: There will be a tougher challenge for companies in national cement industry in the future, where the possible addition of production capacity from several new players will also increase 3,000,000 3,500,000 4,000,000 4,500,000 5,000,000 5,500,000 6,000,000 6,500,000

Indonesia Domestic Cement Consumption (tons)

Revenue Cont ribut ion

(Rp bn) 2015 2014 Change Cont ribut ion Cement Sales 25,958 26,032 -0.3% 96.3% Ready mix concrete 523 438 19.4% 1.9% Clinker 180 273 -34.1% 0.7% Cement bags 81 38 110.3% 0.3% Mining Services 71 82 -13.3% 0.3% Industrial estate rental 21 25 -16.0% 0.1% Industrial estate sales 1 18 -93.8% 0.0% Blasting services 7 7 -7.7% 0.0% Others 106 74 43.6% 0.4% Cost St ruct ure

(Rp bn) 2015 2014 Change Cont ribut ion Manufacturing overhead 13,743 12,958 6.1% 85.8%

Labor 1,402 1,370 2.3% 8.8%

Raw materials 873 874 0.0% 5.5% Cost of other sales 0 6 -94.8% 0.0% USDIDR Exchange Rat e 13,780 12,430 10.9%

Domest ic Cement Market Share, 9M 2015. SMGR 42.8% INTP 28.2% SMCB 14.2% Bosowa 5.1% Andalas 3.0% SMBR 2.5% Ot hers 4.2%

Domest ic Cement Product ion Capacit y 2015 - 2016 (mn ton p.a.)

SMGR 30.0

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PT. Semen Indonesia, Tbk (SMGR)

Exhibit 5: Previous financial performance and future estimates

Brief company profile

PT. Semen Indonesia, Tbk (SMGR) is a holding of 3 state-owned cement companies, which are: • Semen Padang that is mainly operating in Sumatra,

• Semen Gresik that is mainly operating in Java and Kalimantan, and

• Semen Tonasa that is mainly operating in Sulawesi, Kalimantan, and Eastern Indonesia.

Currently the group holds the largest market share and production capacity in the country’s cement industry (Exhibit 3 and 4).

Income St at ement Balance Sheet

(Rp bn) 2014 2015 2016E 2017E 2018E (Rp bn) 2014 2015 2016E 2017E 2018E

Revenue 26,987 26,948 28,586 30,467 32,625 Cash 4,926 3,964 4,340 5,975 8,921 Gross Profit 11,599 10,646 11,436 12,341 13,378 Restricted cash 14 25 26 27 27 EBT 7,091 5,851 6,342 6,906 7,553 Short term investment 92 2 2 2 2 EAT 5,574 4,525 4,906 5,341 5,842 Account receivables 3,433 3,629 3,719 3,812 3,908 Net income 5,566 4,521 4,901 5,337 5,837 Inventories 2,812 2,409 2,361 2,314 2,267 EPS 938 762 826 900 984 Advances, prepaids & taxes 373 509 499 489 479

Tot al Current Asset s 11,649 10,539 10,948 12,619 15,605

Current Price 10,100 Deferred tax assets 40 90 93 95 97 P/E 11.2 Investment in associates 147 224 269 322 387 Target Price 11,000 Investment properties 183 175 173 172 170 P/E 12.2 Fixed asset 20,221 25,168 29,381 32,915 35,820 Market Cap (Rp tn) 59.9 Purchasing advances 532 328 332 335 338 Market Cap (US$ bn) 4.5 Deffered charges 113 135 137 139 141 USDIDR 13,400 Intangible assets 1,104 1,134 1,151 1,169 1,186 Other 326 360 366 371 377

Rat ios & Margins: 2014 2015 2016E 2017E 2018E Tot al NC Asset s 22,666 27,614 31,900 35,518 38,516

Revenue grow th 10.1% -0.1% 6.1% 6.6% 7.1% Tot al Asset s 34,315 38,153 42,848 48,137 54,121

Gross Profit margin 43.0% 39.5% 40.0% 40.5% 41.0% Short term bank loans 82 139 166 200 240 Net Profit margin 20.6% 16.8% 17.1% 17.5% 17.9% Trade payables 3,032 3,783 4,540 5,448 6,537 Net Profit grow th 3.6% -18.8% 8.4% 8.9% 9.4% Other payables 215 194 233 280 336 ROA 16.2% 11.9% 11.4% 11.1% 10.8% Accrued expenses 445 634 760 912 1,095 ROE 22.3% 16.5% 15.9% 15.5% 15.2% Taxes payable 272 276 331 397 477 Total Debt 3,913 4,001 4,234 4,501 4,810 ST Employee Benefit Liab 682 849 1,019 1,222 1,467 Cash 4,926 3,964 4,340 5,975 8,921 Sales advances 30 18 21 25 30 Net Debt (Cash) (1,013) 37 (107) (1,474) (4,111) Current maturities of LT Debt 516 707 848 1,018 1,222 Book Value per share 4,215 4,626 5,181 5,792 6,466 Tot al Current Liabilit ies 5,273 6,599 7,919 9,503 11,403

Dividend per share 407 375 301 322 346 Deferred tax liabilities 58 108 110 112 115 Dividend payout ratio 45.0% 40.0% 39.5% 39.0% 38.5% Employee benefits liabilities 479 654 667 680 694 Long term loans - net 3,315 3,156 3,219 3,283 3,349

Cash Flows 2014 2015 2016E 2017E 2018E LT Provision 175 186 189 193 197 Change in w orking capital (929) 1,116 881 1,064 1,285 Other 12 10 11 11 11 Net income 5,566 4,521 4,901 5,337 5,837 Tot al NC Liabilit ies 4,039 4,113 4,195 4,279 4,365

Depreciation 1,237 1,366 1,468 1,578 1,697 Tot al Liabilit ies 9,312 10,712 12,114 13,782 15,768 Net t cf from operat ion 5,874 7,003 7,250 7,980 8,819

Capex (2,595) (6,312) (5,681) (5,113) (4,602) Equit y

Net cf from invest ment (2,595) (6,312) (5,681) (5,113) (4,602) Share capital 593 593 593 593 593 Loans and Debts (170) 88 232 267 309 Additional paid in capital 1,458 1,458 1,458 1,458 1,458 Employee Benefit Liabilities 114 342 183 217 258 Retained earnings 21,630 23,815 26,930 30,356 34,138 Non Ctrling Int 39 61 123 135 149 Other comprhnsv income 360 553 608 669 736 Chg in Equity 10 193 55 61 67 Sub t ot al Equit y 24,042 26,420 29,590 33,076 36,925 Dividend (2,417) (2,226) (1,786) (1,912) (2,055) Non Controlling Interest 960 1,021 1,144 1,279 1,427

Net cf from financing (2,423) (1,542) (1,193) (1,231) (1,272) Tot al Equit y 25,002 27,441 30,734 34,355 38,353

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Robertus Yanuar Hardy Senior Research Analyst robertus@reliance-securities.com

Aji Setiawan Associate Research Analyst

aji@reliance-securities.com

Alan Milgerry Associate Research Analyst alan@reliance-securities.com

Shanti Dwi Jayanti Associate Research Analyst santi@reliance-securities.com

Lanjar Nafi Taulat I Technical Research Analyst lanjar@reliance-securities.com

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