Refer to Important disclosures in the last of this report

  N ^{o v -1 7 D e c -1 7 D e c -1 7 J a n -1 8 F e b -1 8 F e b -1 8 M a r- 1 8 A p r- 1 8 M a y -1 8 M a y -1 8 J u n -1 8 J u l- 1 8 J u l- 1 8 A u g -1 8 S e p -1 8 S e p -1 8 O c t- 1 8 N o v -1 8} SMGR-Rebase JCI Index-Rebase

  1.9

  5.2

  4.0 Net Profit (RpBn) 4,522 2,014 2,563 2,802 3,013 EPS (Rp) 762 340 432 472 508 EPS Growth (%) 0.0 (55.5)

  27.2

  9.4

  7.5 Net Gearing (%)

  11.1 11.0 (7.7) (14.7) (21.6) PER (x)

  13.8

  30.9

  24.3

  22.2

  20.7 PBV (x)

  2.0

  2.0

  2.0

  1.8 Dividend Yield (%)

  Revenue (RpBn) 26,134 27,814 26,027 28,430 30,938 EBITDA (RpBn) 6,611 5,035 5,414 5,698 5,928 EBITDA Growth (%) (9.0) (23.8)

  10.1

  90 100 110 120 130

  80

  70

  60

  E q u it y | I n d o n e s ia | C e m e n t

  9.3 Source: SMGR, IndoPremier Share Price Closing as of : 15 November 2018

  10.7

  3.6

  11.7

  8.9

  2.2 EV/EBITDA (x)

  2.1

  1.6

  3.6

  7.5

  Year To 31 Dec 2016A 2017A 2018F 2019F 2020F

  StockData

  3M

  6.1 Relative to JCI (%) 25.9

  25.7

  28.8

  Absolute (%)

  12M

  6M

  3.6 Price Performance

  7.9 52whigh/low (Rp) 11,750 - 6,725

  49.0 Avg. 6m dailyT/O (US$ m)

  Sharesoutstanding (m) 5,932 Marketcap. (US$ m) 4,247 Free float (%)

  Upside/downside (%) +11.1

  Shareprice (Rp) Rp10,300

  Prior TP (Rp) Rp10,350

  Target price (Rp) Rp11,500

  21.9

  Major Shareholders

  16 November 2018 Company Update BUY (Unchanged)

  PT Indo Premier Sekuritas willy.goutama@ipc.co.id

  Semen Indonesia (SMGR IJ)

  Valuations. The disposal of entire shareholding of Lafarge Holcim in SMCB valued at $1.75bn translates to EV/ton of $117 that implies 9% premium to current SMCB EV/ton of $107, 16% and 36% discount to SMGR EV/ton of $140 and INTP EV/ton of $182. The risk to the transaction is regulatory approval from KPPU. We maintain our BUY rating albeit with higher TP of Rp11,500 due to the valuation base year roll over to 2019.

  Efficiency should emerge in long run. We also highlight that holistic operational reach results to SMGR’s cash cost of Rp832k/ton which gauged 5%/51%/76% higher to SMCB/INTP/SMBR’s cash costs. We believe this acquisition will enable SMGR to gradually pin down cash cost as the result of improved economics of scale (better utilization and lower clinker/cement ratio to c.70-75%) and lower logistical costs as SMGR & SMCB can efficiently complement their vast networks (fig. 3) in the long run. Though, a $1.28bn (or Rp19.2tn) worth of loan to finance this acquisition will add an additional interest expenses of Rp570bn (18% of 9M18 EBIT) by applying current cost of joint financing of 2.8% and will reduce 9M18 net income by 20% to Rp1.6tn (pro- forma), we also expect higher D/E FY18F ratio of 1.1x (9M18: 0.6x).

  SMGR poised to control both of pricing and supply. We argue the dominant domestic presence of SMGR (with market share topped c.50%) post acquisition brings two positive catalyst. First, we expect an enhancement of SMGR’s pricing power; SMGR alone was capable of leading an upward adjustment (3Q18: +50% qoq, 100% yoy) to its ASP (fig.1) which explains its good 3Q18 sales performance (+22% qoq, 4% yoy), though also coupled with strong volume recovery (+40% qoq, 5% yoy). Meanwhile, SMCB also exhibited a less volatile and higher quarterly ASP trend (fig.2) over the last ten quarters as it serves a more clustered market (W. Java, E. Java, and N. Sumatera). In sum, we positively view the ability of SMGR post acquisition to institute price adjustments on two key regions, Java and Sumatera. Second, we argue that the surfeit of supply eases as SMGR is about to control 43% of national production capacity (SMGR and SMCB at 33.5mton and 15mton) whose move profoundly affect the overall supply growth.

  SMGR catches substantial market share. The acquisition of Lafarge Holcim’s stake (80.6%) in Holcim Indonesia (SMCB) by Semen Indonesia (SMGR) solidifies SMGR’s position as Indonesia cement market leader. We herein assume that no shifting in consumer preferences for both SMCB and SMGR’s product. The combined company will establish market shares of over 40% in two domestic cement key markets of Java (SMGR: 27%, SMCB: 17%) and Sumatera (SMGR: 29%, SMCB: 20%) which represented 78% of Indonesia’s overall cement market. SMGR will also challenge Indocement (INTP; Hold) in which its combined share in W. Java & C. Java will rise to 32% and 60%, respectively (INTP: 52% & 34%), INTP’s two key home market region for which have also attracted new entrants (eg. China-based cement producers).

  Consolidation recuperates ailing industry SMGR will raise market share to 54% (from 39%) post acquisition. Industry consolidation should sooth a price war and cement glut. The cost of long run efficiency is a short run financial leverage. EV/ton calculation suggests SMCB’s acquisition is a good deal.

  Willy Goutama

  Government 51.0%

  3.3 Source: Bloomberg

  9.0

  0.0 Vs. Consensus (%)

  0.0

  Latest EPS (Rp) 432 472 Vs. Prior EPS (%)

  Estimate Change; Vs. Consensus 2018F 2019F

• 62 21 5793 1168
• 1,000 2,000 3,000 4,000 5,000

• 200,000 400,000 600,000 800,000 1,000,000
• 200,000 400,000 600,000 800,000 1,000,000

  300 350 400

  INTP SMBR SMCB Others

  17% 5% SMGR

  INTP SMBR SMCB Others 43% 34%

  SMGR

  0% 15% 17%

  INTP SMBR Production Capacity EV/ton 17% 52%

  30,000,000 35,000,000 40,000,000

  1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 SMGR Blended ASP SMCB Blended ASP

  1,200,000 1,400,000

  Sales Volume (kton) Blended Domestic ASP

  6,000 7,000 8,000 9,000

  1,200,000

• 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000
• 50 100 150 200 250

  Source:Indopremier,ASI Source: Indopremier,ASI

  Source: Indopremier, Lafargeholcim, SMCB, SMBR, INTP, SMGR Fig. 5: West Java market share in Fig. 6: East Java market share

  Fig. 3: Cement factory map in Indonesia Fig. 4: EV/ton reveals SMCB priced at discount Source: Indopremier, ASI

  Fig. 1: SMGR alone is capable of leading price recovery Fig. 2: More clustered player exhibit less volatile ASP Source: Indopremier, SMGR Source: Indopremier, SMGR, SMCB

SMGR SMCB

  Year To 31 Dec (RpBn) 2016A 2017A 2018F 2019F 2020F Income Statement

  Net Revenue 26,134 27,814 26,027 28,430 30,938 Cost of Sales (16,278) (19,854) (16,935) (18,525) (20,173) Gross Profit 9,856 7,960 9,092 9,905 10,765 SG&A Expenses (4,882) (4,834) (5,671) (6,286) (7,001) Operating Profit 4,973 3,126 3,421 3,619 3,765 Net Interest (180) (588) 67 195 338 Forex Gain (Loss) Others-Net 291 208 Pre-Tax Income 5,085 2,747 3,488 3,815 4,102 Income Tax (550) (704) (893) (977) (1,051) Minorities (13) (29) (32) (35) (39) Net Income 4,522 2,014 2,563 2,802 3,013

  Balance Sheet

  2,862 3,666 4,153 5,359 7,886 Cash & Equivalent

  4,018 4,995 4,002 4,371 4,757 Receivable

  2,671 3,686 2,660 2,906 3,162 Inventory 822 1,454 466 479 493 Other Current Assets

  10,373 13,802 11,280 13,115 16,298 Total Current Assets

  30,847 32,523 29,367 28,561 27,670 Fixed Assets - Net

  1,355 1,270 1,195 1,115 1,035 Goodwill

  1,280 1,169 939 963 Non Current Assets

  44,227 48,963 43,126 44,122 45,396 Total Assets 819 1,193 ST Loans

  4,078 4,927 4,436 4,827 Payable

  2,263 1,956 2,262 2,564 2,907 Other Payables 992 727 691 657 624 Current Portion of LT Loans

  8,152 8,804 7,014 7,657 8,359 Total Current Liab. 4,450 5,105 1,105

  Long Term Loans 1,051 1,622 Other LT Liab. 13,652 15,531 8,119 7,657 8,359

  Total Liabilities 2,507 2,182 2,051 2,051 2,051

  Equity 26,528 26,733 28,511 30,032 31,644

  Retained Earnings 1,539 1,524 1,600 1,680 1,764

  Minority Interest 30,574 30,439 32,163 33,764 35,459 Total SHE + Minority Int.

  Total Liabilities & Equity 44,227 45,970 40,282 41,421 43,818

  Source: SMGR, IndoPremier

  Year to 31 Dec 2016A 2017A 2018F 2019F 2020F Cash Flow

  4,535 2,043 2,595 2,837 3,052 Net Income (Excl.Extraordinary&Min.Int)

  2,111 1,775 2,127 2,078 2,163 Depr. & Amortization

  (801) (618) 1,197 (145) (152) Changes in Working Capital

  1,422 (28) (777) (89) (206) Others

  7,267 3,172 5,142 4,682 4,857 Cash Flow From Operating

  (8,602) (3,256) 1,334 (1,216) (229) Capital Expenditure 328 340 199 243 338 Others

  (8,274) (2,916) 1,533 (974) 109 Cash Flow From Investing

  2,418 765 (5,229) (1,140) (33) Loans Equity

  (2,261) (2,261) (1,007) (1,281) (1,401) Dividends

  (603) (944) (529)

  33

  84 Others (446) (2,440) (6,765) (2,389) (1,350)

  Cash Flow From Financing (1,452) (2,184) (90) 1,319 3,616

  Changes in Cash

  FinancialRatios

  37.7

  28.6

  34.9

  34.8

  34.8 Gross Margin (%)

  19.0

  11.2

  13.1

  12.7

  12.2 Operating Margin (%)

  19.5

  9.9

  13.4

  13.4

  13.3 Pre-Tax Margin (%)

  17.3

  7.2

  9.8

  9.9

  9.7 Net Margin (%)

  11.0

  4.3

  5.6

  6.4

  6.7 ROA (%)

  15.6

  6.6

  8.2

  8.5

  8.7 ROE (%)

  14.4

  6.1

  8.1

  9.4

  10.0 ROIC (%)

  51.5

  57.2

  61.1

  51.3

  51.4 Acct. Receivables TO (days)

  1.9

  1.9

  2.0

  2.4

  2.4 Acct. Receivables - Other TO (days)

  6.4

  6.2

  5.3

  6.7

  6.6 Inventory TO (days)

  88.1

  82.8

  96.9

  83.7

  83.8 Payable TO (days)

  5.6

  5.8

  6.8

  6.3

  6.3 Acct. Payables - Other TO (days)

  20.5

  23.1

  5.6

  1.9

  1.8 Debt to Equity (%)

  0.1

  0.2

  0.0

  0.0

  0.0 Interest Coverage Ratio (x)

  11.1 11.0 (7.3) (13.9) (20.5) Net Gearing (%)

  Source: SMGR, IndoPremier

  Head Office PT INDO PREMIER SEKURITAS Wisma GKBI 7/F Suite 718 Jl. Jend. Sudirman No.28 Jakarta 10210 - Indonesia p +62.21.5793.1168 f +62.21.5793.1167

INVESTMENT RATINGS

  BUY : Expected total return of 10% or more within a 12-month period HOLD : Expected total return between -10% and 10% within a 12-month period SELL : Expected total return of -10% or worse within a 12-month period ANALYSTS CERTIFICATION.

  The views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

  DISCLAIMERS

  This research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendations contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. PT. Indo Premier Sekuritas or its affiliates may seek or will seek investment banking or other business relationships with the companies in this report.