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Description December 31
2014 2015
2016
Return on Assets ROA 1.02
1.91 4.58
Return on Equity ROE 2.59
5.45 9.87
a. Liquidity
The level of liquidity reflects the Company’s ability to meet its current liabilities, which can be measured by the current ratio. Current ratio is calculated by comparing total current assets to total current liabilities.
The Company’s current ratio as of December 31, 2014, 2015, and 2016, were 0.99x, 1.07x, and 1.21x, respectively.
The Company’s continuously improving current ratio from 2014 to 2016 was due to an increase in current assets, i.e., inventories.
b. Leverage
Leverage reflects the proportion of the Company’s funding from debt and equity that is used for operational activities and business expansion. Leverage is measured by the debt-to-equity ratio, which is
calculated by comparing total interest-bearing debt to total equity.
The Company’s debt-to-equity ratio as of December 31, 2014, 2015, and 2016, were 1.23x, 1.53x, and 0.88x, respectively.
The Company’s debt-to-equity ratio from 2014 to 2015 showed an increasing trend, mainly due to an increase in bank loans and non-bank financial institution loans. The Company’s leverage in 2016
increased, due to an increase in additional paid-up capital from shareholders and an increase in the Company’s gain on revaluation.
c. Return on Assets
Return on assets reflects the ability of the Company’s productive assets to generate net income, which is calculated by comparing comprehensive income to total assets.
The Company’s return on assets for the years ended on December 31, 2014, 2015 and 2016, were 1.0, 1.9 and 4.6, respectively.
Return on assets has increased due to an increase in profit as well as assets, such as inventories, in connection with the Company’s business expansion.
d. Return on Equity
Return on assets reflects the Company’s ability to generate net income, which is calculated by comparing comprehensive income to total equity.
The Company’s return on equity for the years ended on December 31, 2014, 2015 and 2016 were 2.6, 5.5 and 9.9, respectively.
The Company’s return on equity continued to increase due to the Company’s profit for the year, which increased year on year.
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IV. CONSOLIDATED STATEMENT OF CASH FLOWS ANALYSIS Liquidity and Funding Sources
As of December 31, 2016, the Company had cash and cash equivalents amounting to Rp30,449,572,479 and unutilized facilities amounting to Rp200,915,008,122.
Over the past three years, the Company’s main sources of liquidity were cash flow from operating activities and financing activities through debt. The use of the Company’s main funds is to finance
working capital and capital expenditure in connection with capacity expansion and business development. The Company regularly evaluates its capital requirements relating to cash flows from
operations, the Company’s expansion plans and market conditions. If the Company does not generate sufficient cash flow from operations, the Company still has other funding sources such as debt or equity
financing.
The Company’s subsidiaries are not restricted from transferring funds to the Company. As such, they are able to provide loans to the Company when required in accordance with Companies Law.
The following table sets forth the information on the Company’s cash flows for the years ended on December 31, 2014, 2015 and 2016:
In Rupiah
Description December 31
2014 2015
2016 CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers 956,773,576,810
1,158,171,383,790 1,238,094,707,735
Cash payments to suppliers, directors, employees, and other operational expenses
886,162,863,406 1,076,278,614,083
1,312,603,447,919
Net cash flows provided by used in operating activities
70,610,713,404 81,892,769,707
74,508,740,184
Financial income 222,261,844
749,969,374 893,970,605
Financial expense 62,629,047,360
82,331,104,454 108,082,005,895
Payment of taxes 8,291,031,939
9,877,880,616 22,814,825,939
Receipt from taxes 1,030,186,236
1,405,185,446 416,312,095
Others – net 7,168,537,414
8,132,624,499 10,377,755,877
Net cash flows provided by used in operating activities
8,111,619,599 28,436,044
193,717,533,441 CASH FLOWS FOR INVESTING ACTIVITIES
Payment of advances for purchase of fixed assets 37,561,924,441
25,755,962,630 57,108,698,965
Acquisition of investment properties -
5,334,000,000 -
Acquisition of fixed assets 102,242,573,593
202,720,270,784 87,507,070,769
Acquisition of other assets 2,582,803,591
3,886,429,256 3,498,403,976
Proceeds from disposal of fixed assets 29,341,546,559
30,501,435,185 10,462,930,601
Net cash flows used in investing activities 113,045,755,066
207,195,227,485 137,651,243,109
CASH FLOWS FROM FINANCING ACTIVITIES Payment of bank and non-bank financial institution
loans 879,788,730,499
1,146,954,528,710 2,011,273,248,985
Additional of bank and non-bank financial institution loans
867,031,483,997 1,473,867,038,596
2,047,335,308,620 Payment of obligation under finance lease
16,774,083,449 18,394,852,126
11,624,734,676 Additional of obligation under finance lease
- -
3,169,896,192 Addition payment of other payables
38,857,394,607 32,379,626,929
58,713,981,254 Additional paid-in capital
95,000,000,000 -
90,500,000,000 Additional divestment paid-in capital from non-
controlling interest 9,054,500,000
20,112,000,000 16,692,046,113
Net cash flows provided by financing activities 113,380,564,656
296,250,030,831 160,129,156,292
Net increase decrease in cash and cash 8,446,429,189
89,026,367,302 171,239,620,258
43 In Rupiah
Description December 31
2014 2015
2016 equivalents and overdraft
Net effect of exchange rates changes on cash and cash equivalents
1,027,158,027 1,763,848,000
2,232,977,883 Exchange difference due to translation of financial
statements 3,241,778,034
7,570,997,031 -
Cash and cash equivalents and overdraft at beginning of the year
13,083,884,977 17,261,378,105
100,480,596,376 Cash and cash equivalents and overdraft at end of
the year 17,261,378,105
100,480,596,376 68,526,045,999
Net Cash Flows Provided by Used in Operating Activities
Net cash flows used in operating activities for the year ended on December 31, 2016 amounted to Rp193,717,533,441. Cash flows provided by operating activities were generated from cash receipts from
customers amounting to Rp1,238,094,707,735, finance income amounting to Rp893,970,605, tax refunds amounting to Rp416,312,095, and others amounting to Rp10,377,755,877. Cash flows used in
operating activities were used for, among others, cash payments to suppliers, Directors and employees. Other operating expenses amounting to Rp1,312,603,447,919, finance cost amounting to
Rp108,082,005,895, and tax payments amounting to Rp22,814,825,939.
Net cash flows used in operating activities for the year ended on December 31, 2015 amounted to Rp28,436,044. Cash flows from operating activities were generated from cash receipts from customers
amounted to Rp1,158,171,383,790, finance income amounted to Rp749,969,374, tax refunds amounted to Rp1,405,185,446, and others amounted to Rp8,132,624,499. Cash flows used in operating activities
were used for, among others, cash payments to suppliers, Directors and employees, and other operating expenses amounted to Rp1,076,278,614,083, finance cost amounted to Rp82,331,104,454, and tax
payments amounted to Rp9,877,880,616.
Net cash flows used in operating activities for the year ended on December 31, 2014 amounted to Rp8,111,619,599. Cash flows from operating activities were generated from cash receipts from
customers amounting to Rp956,773,576,810, finance income amounting to Rp222,261,844, tax refunds amounting to Rp1,030,186,236, and others amounting to Rp7,168,537,414. Cash flows used in operating
activities were used for, among others, cash payments to suppliers, Directors and employees. and other operating expenses amounting to Rp886,162,863,406, finance cost amounting to Rp62,629,047,360,
and tax payments amounting to Rp8,291,031,939.
Net cash used in investing activities
Net cash flows used in investing activities for the year ended on December 31, 2016 amounted to Rp137,651,243,109. Cash flows from investing activities were generated from disposal of fixed assets
amounting to Rp10,462,930,601. Cash flows used in investing activities were used for acquisition of fixed assets, amounting to Rp87,507,070,769, acquisition of other assets amounting to Rp3,498,403,976, and
payment of advances to purchase fixed assets amounting to Rp57,108,698,965.
Net cash flows used in investing activities for the year ended on December 31, 2015 amounting to Rp207,195,227,485. Cash flows provided by investing activities were generated from disposal of fixed
assets, amounting to Rp30,501,435,185. Cash flows used in investing activities were used for acquisition of fixed assets amounting to Rp202,720,270,784, acquisition of other assets amounting to
Rp3,886,429,256, acquisition of investment properties amounting to Rp5,334,000,000 and payment of advances to purchase fixed assets amounting to Rp25,755,962,630.
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Net cash flows used in investing activities for the year ended on December 31, 2014 amounted to Rp113,045,755,066. Cash flows provided by investing activities were generated from disposal of fixed
assets amounting to Rp29,341,546,599. Cash flows used in investing activities were used for acquisition of fixed assets amounting to Rp102,242,573,593, acquisition of other assets amounting to
Rp2,582,803,591, and payment of advances to purchase fixed assets amounting to Rp37,561,924,441.
Net cash provided by financing activities
Net cash flows from financing activities for the year ended on December 31, 2016 amounting to Rp160,129,156,292. Cash flows from financing activities were generated from addition of bank loans and
non-bank financial institution loans amounting to Rp2,047,335,308,620 and additional paid-in capital amounting to Rp90,500,000,000, addition of lease payables of Rp3,169,896,192, and addition of other
payables amounting to Rp58,713,981,254. Cash flows used in financing activities consisted of payment of bank loans and non-bank financial institution loans amounting to Rp2,011,273,248,985, payment of
lease payables amounting to Rp11,624,7334,676, and divestment by non-controlling interest amounting to Rp16,692,046,113.
Net cash flows from financing activities for the year ended on December 31, 2015 amounted to Rp296,250,030,831. Cash flows provided by financing activities were generated from payment of bank
loans and non-bank financial institution loans amounting to Rp1,473,867,038,596, additional paid-in capital from non-controlling interest amounting to Rp20,112,000,000. Cash flows used in financing
activities consisted of payment of bank loans and non-bank financial institution loans amounting to Rp1,146,954,528,710, payment of lease payables amounting to Rp18,394,852,126, and payment of
other payables amounting to Rp32,379,629,929.
Net cash flows from financing activities for the year ended on December 31, 2014 amounted to Rp113,380,564,656. Cash flows provided by financing activities were generated from payment of bank
loans and non-bank financial institution loans amounting to Rp867,031,483,997, addition of other payables amounting to Rp38,857,394,607, additional paid-in capital amounting to Rp95,000,000,000,
and additional paid-in capital from non-controlling interest amounting to Rp9,054,500,000. Cash flows used in financing activities consisted of payment of bank loans and non-bank financial institution loans
amounting to Rp879,788,730,499, and payment of lease payables amounting to Rp16,774,083,449.
V. CAPITAL EXPENDITURES
The Group spent approximately Rp135,951 billion in 2014, Rp261,867 billion in 2015 and Rp106,460 billion in 2016 on capital expenditures, which are detailed below:
2014 2015
2016
Rp million Rp million
Rp million Manufacturing
120,777 88.8
204,658 78.2
80,189 75.6
Forest Concession 14,634
10.8 18,407
7.0 7,237
6.8 Retail and Distribution
540 0.4
38,802 14.8
18,614 17.6
Total Capital Expenditures 135,951
100.0 261,867
100.0 106,040
100.0
Source: The Company’s Audited Consolidated Financial Statements as of December 31, 2016, 2015 and 2014, and estimates prepared by the Company’s management.
The capital expenditures of the Group from 2014 to 2016 were mainly utilized to increase production capacity of the furniture manufacturing facility from 17,763 m
3
in 2014 to 35,044 m
3
in 2016, as well as the production capacity of the building component manufacturing facility from 17,558 m3 in 2014 to
133,338 m
3
in 2016. Additional production capacity in the furniture manufacturing facility mainly resulted
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from the construction of a new factory owned by Interkraft to replace its previous factory that was lost in a fire in 2014. In addition, the Company also increased the production capacity of its building component
manufacturing facility due to the high demand for building component from customers.
Capital expenditures for the retail and distribution segments had increased significantly in 2015 and 2016 as a result of the construction of Thema Home, the Company’s first retail store, and the warehouse for
furniture under the brand THEMA to be sold in Indonesia.
The Company does not have specific commitment for the procurement of capital goods investments of material value in the future.
VI. RISK MANAGEMENT
The Company is committed to implementing proper risk management to its business in order to maintain its current performance. The Company understands that risks are an inherent part of the Company’s
operations, including risks that are beyond the Company’s control. Therefore, such risks need to be managed in an integrated and sustainable manner as part of a good corporate governance framework.
As part of the Company’s commitment to implement risk management, the Company has established an Internal Audit Unit the IAU, which reports directly to the President Director. The establishment of the
Internal Audit Unit is one of the early steps taken by the management towards implementing an integrated risk management framework in the future.
In addition, some of the management initiatives implemented by the Company in the past few years are as follows:
-
To mitigate against the risk of government regulations, the Company endeavors to anticipate the possibility of changes in regulations by adjusting the Company’s internal policies to comply with the
prevailing regulations and by setting policies that minimize the impacts of unfavorable external conditions. The Company will continue to maintain its FSC and SVLK certifications and produce its
wooden products in an environmentally friendly manner to comply with the rules and regulations relating to wooden and forestry products that are applicable in the US, EU and other countries at all
times.
-
To mitigate against the risk of fluctuations in foreign exchange rates, the Company continuously endeavors to monitor such fluctuation and adjust the Group’s financial projection to anticipate the
possible negative impacts of fluctuations in foreign exchange rates to the Group. A portion of the Company’s bank loans is also denominated in foreign currency which serves as an in-built hedging
mechanism for the Company.
-
To mitigate against the interest rate risk for loans, primarily loans for working capital and investment purposes that have various variable interest rates, the management reviews the various interest
rates offered by creditors to obtain favorable interest rates before making a decision to engage in debt agreement.
-
To mitigate against the risk of availability of raw materials, the Company maintains its raw material inventory at a level that is sufficient for in accordance with the Company’s production requirements.
By purchasing raw materials in large quantities, the Company is able to select wooden raw materials with the best quality, thus enabling the Company to produce premium products for its customers. In
addition, to anticipate bad weather condition that may affect the transportation of raw materials, the Company has built saw mills used for sawing timber logs within close proximity of the concession
forest. Therefore, the sawn timber can be transported by land as well as by the river.
-
To mitigate against the risk of fire in production facilities, the Company actively monitors, maintains and improves its operating efficiency and minimizes the environmental impacts of its operations and
maintains proper health and safety standards. The Group has adequate insurance policies for the protection of the Company’s production facilities from fire incidents. In addition, the Company also
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conducts proper training to its employees fire safety, and proper fire response facilities and training. The Group has designed its buildings in a manner which minimizes the risk of fire spreading to the
entire production facilities, namely, by assigning a 10-meter distance between factory buildings, as well as using non-flammable lights and installing sprinklers in all factory buildings.
-
To mitigate against the risk of regional minimum wage increase, the Company prepares a projection of wage increase and determines the right strategies to minimize the impact of wage increase
following the issuance of Government Regulation No. 78 of 2015 on Remuneration, which regulates the formula to determine annual wage increase. In addition, the Company has relocated Intercraft’s
production facility to a bigger facility in Lamongan, East Java, which has a regional minimum wage which is lower than Sidoarjo.
-
To mitigate against the risk of reliance on main customers, the Group maintains long-term good relationships with its main customers. The Group endeavors to satisfy qualifications and requests of
the main customers by ensuring the quality of all of it’s products through the implementation of proper Standard Operating Procedures and Quality Assurance.
-
To mitigate against the risk of business competition, the Company continues to endeavors to improve its product quality, expand its distribution network and maintain a competitive price edge in
the market. Through such measures, the Company hopes to maintain the loyalty of its customers, and thereby maintain and improve its financial performance from year to year.
In addition, after its conversion into a public company, the Company will comply with OJK and IDX regulations by implementing procedures such as the appointment of Independent Commissioners,
establishment of an Audit Committee, and other procedures to protect the interests of minority shareholders.
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VI. RISK FACTORS
An investment in the Company’s shares involves risks. Before making an investment decision in the Offering Shares by the Company in this Initial Public Offering, prospective investors are warned that
these risks may involve the Company, the environment in which it operates, the Company’s shares and general social, economic, political and regulatory conditions in Indonesia. Therefore, prospective
investors are expected to read, understand, and consider all information presented in this Prospectus, including information related to the Company’s business risk exposures in carrying out its business
activities, before making an investment decision. All business and general risks presented in this Prospectus may have a material and negative impact on the Company’s business activities, cash flows,
operating performance, financial performance or prospects, and may have a direct impact on the Company’s share price, which may result in potential investors losing all or part of their investment.
Business and general risks which are not yet known to the Company or those deemed immaterial may also affect the Company’s business activities, cash flows, operating performance, financial performance
or prospects.
The following discussion on business risks contains forward-looking statements which relate to events and financial performance in the future. In general, an investment in the securities of companies based in
developing countries such as Indonesia involve risks that do not generally apply to an investment in securities of companies based in developed countries. Any changes in the global economic, social and
political conditions may put downward pressures on the trading price and value of the Company’s shares and expose investors to risk of loss on investments.
The main and general risks described in the following discussion are risks that are material to the Company. These risks have been prepared in order of the significance of their impact to the Company’s
operating and financial performance, there is no assurance that risks that rank lower in significance of impact will not have material adverse effects on the Company’s business activities, cash flows,
operational performance, financial performance or business prospects.
6.1. RISKS WITH SIGNIFICANT IMPACT TO THE COMPANY’S BUSINESS SUSTAINABILITY
Risk relating to laws and regulations
Regulations issued by the Indonesian government agencies, in particular the regulations issued by the Ministry of Forestry, Ministry of Environment, Department of Trade, Department of Industry, Department
of Finance, Department of Manpower and Transmigration, as well as regulations issued by foreign governments, may affect how the Group carries out its business activities.
The Group is required to comply with the prevailing regulations in carrying out their production processes, marketing activities and distribution of products. The regulations govern issues related to
product, environment, health, manpower, tax and safety standards. The Group is also required to comply with regulations relating to licensing requirements, trade practices, price setting and tax. Failure to
comply with new regulations or amendments, as well as the respective interpretations and implementations of these regulations or amendments, or failure to comply with amendments to the
interpretations and implementations of such regulations may have material adverse impact to the Group’s business activities and operating performance. In addition, the Group’s failure to comply with the
prevailing regulations may result in the imposition of civil sanctions, including fines, penalties or product recalls, and other criminal sanctions.
Risks may arise from regulations issued by the local governments, in particular regulations relating to forestry concessions and wooden products, such as export taxes on veneers and export bans on raw
48
materials, and from regulations issued by foreign governments, such as import bans on the Group’s product types, which may adversely affect the Group’s price competitiveness and revenue.
For instance, the US government has enforced a policy to impose import duties on Chinese furniture products since 2005 as a result of a decision by the US International Trade Commission’s the USITC.
This decision was motivated by the belief that Chinese furniture producers had carried out dumping practices on exports to the US. As a result, Chinese furniture products have become less competitive in
terms of price, prompting a significant decline in sales of Chinese furniture products. Although at present the US government is not enforcing any tariff policy on Indonesian furniture products, the enforcement of
such policy in future may result in a significant impact on the Company’s sales. In addition, the USITC is in the midst of reviewing its tariff policy. Should the USITC decide to lower or remove the import duty
tariff on Chinese furniture products, sales of Chinese furniture products to the US market may increase and therefore impact sales of Indonesian furniture products, including the Company’s sales to the US
market.
In addition to the US government regulations, the Company may also be affected by the EU rules and regulations on the trade of wooden products. In May 2016, the EU’s FLEGT has decided that Indonesia
would become the first country in the world qualified to issue FLEGT licenses following the acknowledgement of the Timber Legality Certificate or Sertifikat Legalitas Kayu the SLK issued by the
SVLK as a FLEGT License. The Company currently possesses the SVLK certificate and therefore has met the FLEGT requirements to export furniture products to the EU market. However, should the
Company fail to maintain the SVLK certificate, or should the Company fail to meet new EU regulations in the future, the Company’s ability to sell its products to the EU market may be adversely affected which
may result in a decline of the Company’s sales.
6.2. MATERIAL RISK FACTORS
