Vale Indonesia Tbk (INCO)

  Last Price (IDR) 4,080 Price date as of Aug 13, 2018 52 wk range (Hi/Lo) 4,720/2,340 Free float (%)

  Intermediate Products Optimized Further Making best use of stainless steel’s dominance, INCO likely focuses on optimizing the production capacity of intermediate products with 78% nickel content as the catalyst for maximum revenues. Meanwhile, from 2018 to 2019, its capacity production is stable at the average of 76,000 ton/ year. On the other side, the downside risks of a prolonged dry season most likely cause production delay due to the shortage of electricity supply from hydropower plant.

  20.5 Outstanding sh.(mn) 9,936 Market Cap (IDR bn) 39,249 Market Cap (USD mn) 2,695 Avg. Trd Vol - 3M (mn)

  8.56 Avg. Trd Val - 3M (bn)

  Sales growth

  Sales 584 629 812 906

  34.92 Foreign Ownership 78.8%

  Target Price of IDR5,325 We use an estimate of forward EV/EBITDA of 11.0x (+0.25 SD higher than the last 5-year average of 10.1x) as the basis for valuation method. The target price implies a 2018E EV/EBITDA of 13.2x (vs. the current 2018E EV/EBITDA of 9.9x).

  Stainless Steel’s Dominance Lingering Still We oversee that 70% of global nickel supply is currently used by the steel industry, while the remaining 5% is used by the Electric Vehicle (EV) battery industry—making use 99% nickel content. Despite the contrast nickel supply, the demand for automotive EV battery likely snaps higher within the long-term period.

  Buy Dec 2018 TP (IDR) 5,325 Consensus Price (IDR) 5,300 TP to Consensus Price +0.5% vs. Last Price +30.5% Shares data

  INCO enjoyed the net profit of USD22.5 million or growing by 247.2% y-y and 11.0% q-q. Thanks to the soaring ASP to USD 10,880/ton or edging up 10.0% q-q and 44.3% y-y. The uptrend of higher global nickel prices is a logical takeaway for the soaring ASP. We project that the global nickel prices likely tops USD14,000-14,750/ton in 2018-2019 in light of the growth of 5%-7% in demand for China’s steel.

  2Q18’s Outperformance: Thanks to Soaring ASP

  Mining Nickel Bloomberg

INCO IJ

  Reuters

  INCO.JK Firman Hidayat

• 62 21 7976202, ext:170

  firman@nhsec.co.id

• 26.0% 7.7% 29.0% 11.7%

• 96.2%

  ROA 0.1%

  Rel. Ret. 49.0% -7.9% 1.9% 59.6%

  Abs. Ret. 41.2% -9.3% 1.5% 60.6%

  12M

  3M

  1M

  Share Price Performance YTD

• 901.2% 723.6% 42.6%
• 2.9% 11.5% 15.0%

• 1.0% 5.0% 6.9%
• 0.8% 4.2% 5.8%
• 1.1% 7.1% 9.3%

• 114.4x 30.6x 21.0x

  Please consider the rating criteria & important disclaimer Company Report | Aug 15,2018 Vale Indonesia Tbk (INCO) Focuses on Stainless Steel Vale Indonesia Tbk | Summary (USD mn)

  Source: Company Data, Bloomberg, NHKS Research 2016/12A 2017/12A 2018/12E 2019/12E

  EBITDA 140 105 266 320 Net profit 1 (18) 93 136 EPS (IDR) 0.192 (1.537) 9.585 13.671

  EPS growth

  BVPS (IDR) 2,455 2,499 2,734 2,928 EBITDA margin 24.0% 16.7% 32.8% 35.3% NPM 0.3%

  ROE 0.1%

  0% 0% 0% 0%

  Dividend yield

  P/BV 1.1x 1.2x 1.5x 1.4x EV/EBITDA 14.5x 18.6x 9.9x 7.6x DPS (IDR)

  P/E 1440.2x

  ROIC 0.8%

  Efficiency at Non-Fuel Cost In 2Q18, on the quarter basis, the COGS per metric ton slightly slid, albeit the rosier production of 10.2% q-q. It indicated the success in the efficiency at non-fuel cost at the time fuel prices hiked by 5.0%. Of note, the fuel cost contributed 18.6% to COGS.

  Buoyant LME Nickel Prices The current global nickel prices are lower than its prior 5-year prices. In 2012, the nickel prices soared at USD 21,800/ton. In ahead years, we estimate that the global nickel prices likely rallies, thanks for positive catalysts: 1) the termination of Philippine-based nickel mine caused detriment to environment, 2) uptrend growth of steel industry in China, 3) the demand for nickel supplied to the EV battery industry, 4) the Indonesia government revoking the ban on raw mineral exports.

  Stainless Steel to Dominate Demand for Nickel We estimate the global nickel demand for the EV battery likely grows by 15% per year; thus, within 5 ahead years, the total percentage of demand for nickel supplied to the EV battery edges up 8.7% (vs. the current growth of 5.0%). The growth remains lighter than the demand for nickel supplied to the steel industry. In light of the growth of 2.5% per year, within 5 ahead years, the total percentage of demand for steel supplied to the steel industry likely soars 77.3% (vs. the current growth of 70%).

  INCO at A Glance PT Vale Indonesia Tbk (INCO) whose mine is located in Sorowako, Sulawesi Island is the biggest nickel producer in Indonesia. Its annual production represents around 4% of the global total nickel production. It operates an integrated mine and laterite nickel refining. Of note, 80% of its nickel products are supplied to Vale Canada Ltd, while 20% is supplied to Sumitomo Metal Co. Ltd.

  Nickel Industry in Asia Pacific Indonesia dragging out Philippine is the first biggest nickel producer in the Asia Pacific.

  After the government revoked the ban on exports of raw mineral, the nickel production beefed up from 199,000 MT in 2016 to 400,000 MT in 2017. In Asia Pacific regions, INCO, the subsidiary of Vale S.A Brazil—the world’s second-biggest nickel producer, has the second biggest market capitalization and a high net profit growth as it succeeds to reign in profit zone after plunging at biggest loss triggered by a steep decline in the global nickel prices.

  Asia Pasific Nickel Companies Market Cap Total Asset Sales Gross Operating Net Profit ROE P/E Dividend Company (USD mn) (USD mn) Growth Margin Margin Growth (LTM) (LTM) Yield Indonesia

  INCO 2,770 2,185 7.74% 1% 2.9% 7473.6% 1.9% 71.6x N/A

• ANTM 1,404 2,209 39.0% 13% 4.7% 467.7% 2.0% 54.7x 0.2% TINS 415 874 32.3% 17% 7.9% 7.2% 8.3% 12.2x 2.9%

  China

  ZHONGJIN GOLD CORP 3,445 5,919 -15.6% 11% 4% 33.1% 1.9% 86.6x 0.4%

• YINTAI RESOURCES 2,637 831 96.3% 50% 34% 102.9% 7.0% 35.1x 1.6%

  INNER MONGOLIA 2,480 2,900 26.2% 13% 9% 94.8% 12.8% 14.2x 7.0%

  Taiwan

  KING SLIDE WORKS 1,269 333 -7.96% 53% 41% 23.8% 17.8% 25.4x 2.0%

  Philiphine

  NICKEL ASIA CORP 668 915 11.4% 58% 34% 19.3% 10.3% 12.7x 2.6%

• Source: Bloomberg, NHKS research

  Performance Highlights Nickel Production & Sales Volume (mt) |1Q15- 4Q18E ASP & Avg.Nickel Price (USD/mt) | 1Q15 - 4Q18E

  Source: Company, NHKS research Source: Company, NHKS research

  Sales & Avg.Nickel Price|1Q15 - 4Q18E ASP & Cost per MT (USD/mt) | 1Q15 - 4Q18E

  Source: Bloomberg, NHKS research Source: Company, NHKS research

  COGS Composition | 2Q18 LT Debt & ST Debt (USD mn)|1Q15 - 4Q18E

  Source: Company, NHKS research Source: Company, NHKS research

  Multiple Valuation Forward EV/EBITDA band | Last 5 years Dynamic Forward P/E band | Last 5 years

  Source: NHKS research Source: NHKS research

  Rating and target price update Target Price Revision Date Rating Target Price Last Price Consensus vs Last Price vs Consensus

  08/14/2017 Hold 2,560 (Dec 2017) 2,550 2,305 +0.4% +11.1% 11/06/2017 Hold 3,410 (Dec.2018) 3,050 3,021 +11.8% +12.9% 08/15/2018 Buy 5,325 (Dec.2018) 4,080 5,300 +30.5% +0.5% Source: Bloomberg, NHKS research.

  Analyst Coverage Rating Closing and Target Price

  Source: Bloomberg Source: NHKS research

  NH Korindo Sekuritas Indonesia (NHKS) stock ratings

  1. Period: End of year target price

  2. Rating system based on a stock’s absolute return from the date of publication : Greater than +15%

   Buy : -15% to +15%  Hold : Less than -15%  Sell

  Summary of Financials Summary of Financials

DISCLAIMER

INCOME STATEMENT

  

This report and any electronic access hereto are restricted and intended only for the clients and related entity of PT NH Korindo Sekuritas Indonesia. This

report is only for information and recipient use. It is not reproduced, copied, or made available for others. Under no circumstances is it considered as a selling

offer or solicitation of securities buying. Any recommendation contained herein may not suitable for all investors. Although the information here is obtained

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and agents disclaim any responsibility and liability for claims, proceedings, action, losses, expenses, damages, or costs filed against or suffered by any person

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errors, omissions, misstatements, negligence, inaccuracy arising herefrom. All rights reserved by PT NH Korindo Sekuritas Indonesia ^{INCO Summary Last Price (IDR) 4,080}

^{Target Price (IDR) Dec 2018 5,325 in USD mn 2016/12A 2017/12A 2018/12E 2019/12E}

^{Analyst: Firman Hidayat Rating: Buy ROE 0.08% -1.01% 5.00% 6.85%}

^{ROA 0.06% -0.83% 4.19% 5.77% ROIC 0.8% -1.1% 7.1% 9.3% EBITDA/Equi ty 7.6% 5.8% 14.3% 16.2%}

^{in USD mn 2016/12A 2017/12A 2018/12E 2019/12E EBITDA/As s ets 6.2% 4.8% 11.9% 13.6%}

^{Sales 584 629 812 906 Ca s h Di vi dend (USD mn) - - - -}

^{Growth (% y/y) -26.0% 7.7% 29.0% 11.7% Di vi dend Yi el d (%) 0.0% 0.0% 0.0% 0.0%}

^{COGS (550) (623) (648) (680) Pa yout Ra ti o (%) 0.0% 0.0% 0.0% 0.0%}

^{Gross Profit 34 7 163 226 DER 6.0% 4.0% 3.1% 3.6%}

^{Gros s Ma rgi n 5.8% 1.0% 20.1% 25.0% Net Gea ri ng 39.4% 26.3% 21.6% 26.4%}

^{Opera ti ng Expens es (17) (28) (27) (35) LT Debt to Equi ty 4.0% 2.0% 1.0% 2.0%}

^{EBIT 17 (21) 137 191 Ca pi ta l i za ti on Ra ti o 5.6% 3.9% 3.0% 3.5%}

^{EBIT Ma rgi n 2.9% -3.4% 16.8% 21.1% Equi ty Ra ti o 82.4% 83.3% 84.2% 84.3%}

^{Depreci a ti on 123 127 129 129 Debt Ra ti o 4.9% 3.3% 2.6% 3.0%}

^{EBITDA 140 105 266 320 Fi na nci a l Levera ge 124.8% 121.3% 120.1% 118.8%}

^{EBITDA Ma rgi n 24.0% 16.7% 32.8% 35.3% Current Ra ti o 453.9% 461.8% 456.0% 588.3%}

^{Interes t Expens es - - - - Qui ck Ra ti o 251.7% 299.5% 308.2% 448.3%}

^{EBT 5 (26) 129 190 Ca s h Ra ti o 140.6% 171.5% 184.9% 313.6% Income Ta x (3) 8 (36) (54) Ca s h Convers i on Cycl e 2.6 (0.9) (0.3) (0.3) Mi nori ty Interes t - - - - Pa r Va l ue (IDR) 25 25 25}

^{Growth (% y/y) -97.0% -1356.8% 607.9% 45.5% Sha re Pri ce (IDR) 2,820 2,890 4,080 4,080}

^{25 Net Profit 1 (18) 93 136 Tota l Sha res (mn) 9,936 9,936 9,936 9,936 Net Profi t Ma rgi n 0.3% -2.9% 11.5% 15.0% Ma rket Ca p (IDR tn) 28.0 28.7 40.5 40.5}

^{in USD mn 2016/12A 2017/12A 2018/12E 2019/12E 2016/12A 2017/12A 2018/12E 2019/12E}

^{Ca s h 186 222 281 481 Pri ce /Ea rni ngs 1440.2x -114.4x 30.6x 21.0x}

^{Recei va bl es 147 166 187 207 Pri ce /Book Va l ue 1.1x 1.2x 1.5x 1.4x}

^{Inventori es 130 118 140 130 Pri ce/Sa l es 3.6x 3.3x 3.5x 3.2x}

^{Other Current As s ets 137 92 84 84 PE/EPS Growth -14.8x 0.1x 0.1x 0.5x}

^{Total Current Assets 599 597 692 903 EV/EBITDA 14.5x 18.6x 9.9x 7.6x}

^{Net Fi xed As s ets 1,533 1,494 1,445 1,440 EV/EBIT 13.3x 13.6x 14.2x 14.2x}

^{Other Non Current As s ets Cu 94 94 138}

^{Total Assets 2,225 2,185 2,275 2,434 Sa l es CAGR (3-Yr) -14.1% -15.4% 0.9% 15.8%}

^{91 EV (IDR bn) 27,010 26,687 37,413 34,755 Pa ya bl es 64 61 69 67 EPS CAGR (3-Yr) -51.5% -148.4% 23.9% 352.8% ST Debt 36 37 41 Other Current Li a b. 32 Ba s i c EPS (IDR) 2 (25) 133 194 31 32 42 LT Debt 54 Di l uted EPS (USD) 2 (25) 133 194 73 36 20}

^{Other Non Current Li a b. 186 200 188 189 Sa l es PS (USD) 782 865 1,159 1,294}

^{41 BVPS (IDR) 2,455 2,499 2,734 2,928 Total Liabilities 391 365 360 383 DPS (USD) - - - - Shareholders' Equity 1,835 1,819 1,915 2,050}

^{in USD mn 2016/12A 2017/12A 2018/12E 2019/12E in USD mn 2016/12A 2017/12A 2018/12E 2019/12E}

^{Net Income 2 (15) 95 136 DCF (USD mn) Deprec & Amorti za ti on 123 127 129 129 NOPAT 17 (21) 137 191 Chg. In Worki ng Ca pi ta l (117) 37 (77) - +Depr./Amor. 123 127 129 129 CFO 8 148 148 265 -CAPEX (70) (75) (100) (125) Ca pex (70) (75) (100) (125) -Incr. (Decr.) i n Worki ng Ca p. (117) 37 (77) - CFI}

^{20 (75) (75) (78) (Unl evered) FCFF (47)}

^{Di vi dends Pa i d (0) (0) (0) - WACC 67 89 195 Net Borrowi ng (PMT) (38) (38) (13) 13 Cos t of Debt (Ta x Adj.) 10.5% 8.0% 9.0% 9.9% CFF (37) (37) (13) 13 Cos t of Equi ty (COE) 10.3% 10.7% 10.0% 10.4% Net Changes in Cash (9) 37 59 201 WACC (%) 10.3% 10.7% 10.0% 10.4% RIM Sprea d (FROE-COE) (%) -10.2% -11.7% -4.9% -3.3% Res i dua l Income (USD mn) (188) (214) (89) (63)}

^{By Geography % Shareholders % Equi ty Cha rge 189 196 182 199}

^{Ca na da 70.1 Va l e SA 58.7 EVA Ja pa n 24.8 Sumi tomo Meta l 20.1 Inves ted Ca pi ta l (USD mn) 1,980 1,944 1,892 1,975 Uni ted Sta tes 2.3 Fi l Ltd 1.1 ROIC-WACC (%) -9.5% -11.8% -2.8% -0.7% Luxembourg 1.8 Di mens i ona l Fund 0.9 EVA (USD mn) (188) (229) (53) (14)}

  OWNERSHIP ^{August 13, 2018} PROFITABILITY & STABILITY

  VALUATION INDEX BALANCE SHEET DCF, RIM & EVA CASH FLOW STATEMENT