RHB Indonesia Morning Cuppa - 9 September 2016- (Semen Indonesia)

Good morning,

Semen Indonesia: Likely Higher Sales In 2H

Semen Indonesia’s 2H16 sales are likely to increase, driven by:

1. Higher property sales on lower mortgage rates and relaxed LTV;

2. Seasonally high sales at year end, in line with the acceleration in infrastructure projects.

However, industry competition is likely to remain intense due to the overcapacity situation. Since we roll over valuation to FY17F’s cash flow, we lift our DCF-based TP to IDR10,300 (from IDR9,000, 3% upside), implying 12x FY17F P/E. Reiterate NEUTRAL.

¨ Higher property sales. After the 7-day repo rate was cut by 25bps in June, we expect the benchmark rate to decline to 5.25% by end-2016 and further reduce to 4.5% in 2017. This lower rate should trigger the lowering of banks and financing companies’ mortgage rates. In addition, loan-to-value (LTV) regulations have been relaxed by 5-15% for non-subsidised housing or apartments. Banks can also now allow homeowners to purchase a second property that is under construction with mortgage loans as well. Previously, such mortgages were only allowed after the construction process was completed. We believe the lower benchmark rates and more relaxed LTV policies should make properties more affordable and, hence, boost property sales. This, in turn, ought to increase Semen Indonesia’s sales.

¨ High 2H16 sales cycles. Based on our calculations, 2H16 cement sales volumes will account for 53% of full-year sales on average. This will be driven by the increase in infrastructure projects. The Government has plans to accelerate infrastructure and public transportation developments both within and out of Jakarta’s central business district (CBD). This includes the development of mass rapid transit (MRT) and light rail transit (LRT) networks. Outside Jakarta, state-owned construction firms have been tasked with accelerating the construction of toll roads, airports and seaports. These should create further demand on cement.

¨ However, competition is likely to remain intense. Based on our ground checks at building materials stores in Jakarta, we see continued pricing pressures for cement firms. The Indonesian Cement Association also stated the current cement supply remains high. Semen Indonesia is in a better position than its peers in dealing with current competition. In our calculation, its ASP fell a mere 2% YTD while Indocement Tunggal Prakarsa’s (Indocement) (INTP IJ, NEUTRAL, TP: IDR17,900) ASP declined 4% YTD. However, the former’s domestic market share was marginally lower at 41.5% in 7M16 (7M15: 41.9%), while Indocement’s fell to 26.4% (from 27.9%) during the same period.

¨ Reiterate NEUTRAL, with a higher TP. Since we roll over valuation to FY17F cash flow, we lift our DCF-based TP to IDR10,300, implying 12x FY17F P/E. Key upside risks to our call are higher-than expected infrastructure projects from better government spending and elevated property sales driven by lower benchmark rates. The main downside risk is a national overcapacity situation that pressures selling prices. (Andrey Wijaya)

Link to report: Semen Indonesia : Likely Higher Sales In 2H

Link to Daily report: Indonesia Morning Cuppa - 090916

Media Highlights:

Economics

BI lowered its estimate on tax revenue from amnesty to IDR21trn

Corporates

Government to lower gas price by 37%

The government is planning to cut the downstream gas price for industry by 37% from USD9-10 per MMBTU to a maximum of USD6/mmbtu, according to the Maritime Coordinating Ministry Luhut Panjaitan. The decision to lower the price is aligned with the government’s plan to support industrial business along with the decision to merge Pertamina and PGN (PGAS IJ, BUY, TP: IDR4,000). To lower the gas price in industry, the government need to cut the upstream price by up to 48%. (Investor Daily)

Comment: Lower gas tariff is positive for ceramic and glass fertiliser makers – such as Arwana Citra Mulia (ARNA IJ, BUY, TP IDR690), Mulia Industrindo (MLIA IJ, NR), however the timeline is still not uncertain. In May-16, the government has issued policy, Presidential Decree No. 40/2016 which regulates maximum industrial gas tariff of USD6/mmbtu – which is effective retroatively to Jan-16.

Arwana currently purchase gas at downstream price of USD8.5-9.5/mmbtu (upstream gas price USD6.5-7.5/mmbtu + toll fee USD2/mmtbu). According to Arwana, its COGS should decline by IDR900/sqm (around 3.5%) if gas tariff lowered by USD1/mmbtu. In our calculation this should increase earning by c.19%. Maintain BUY on Arwana with DCF based IDR690 TP (19% upside), implying 25x/17x FY16/17F P/Es. (Andrey Wijaya)

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