Alpha Asiamoney's 2014 Asiamoney’s Southeast Asia 2013 Finance Asia's Sector flash 2013 2014 Best Best Domestic Best Best Domestic Research Call Equity House Equity House Equity House FMCG Sector 7 April 2015 Indonesian toll roads NEUTRAL (Unchanged) Bob Setiadi E-mail: [email protected] Phone: +6221 250 5081 ext. 3605 Policy updates Exhibit 1. Sector summary Code Ratings Share price +/- P/E EPS grwth . 4 SOEs to construct Trans-Sumatra toll-road sections: Upon obtaining CP TP (%) (x) (%) IDR3.6tn capital injection, Hutama Karya, a non-listed construction SOE, JSMR BUY 7,125 8,000 12.3 30.0 14.9 recently signed a toll-road concession agreement (PPJT) for the 17km Source: Bloomberg, Bahana estimates Based on closing prices on 7 April 2015 Medan-Binjai toll road, one of four Trans Sumatra toll-road sections (exhibit 8), assigned to Hutama Karya based on Presidential Decree No.100/2014. Exhibit 2. Inflation sensitivity to toll revenue Effect on toll-road revenue Inflation rate (%) The government plans to issue a new decree to form a consortium between 2015F 2016F Hutama Karya and three other listed SOEs (Jasa Marga, Waskita Karya and 11.0 2.0% 8.4% 12.0 2.2% 9.1% Wijaya Karya) to develop the Trans-Sumatra toll roads, utilizing the same 13.0 (base case) 2.4% 9.8% scheme that was successful in constructing the Bali Mandara toll road. While 14.0 2.6% 10.5% 15.0 2.8% 11.2% we support government’s plan to accelerate the Trans-Sumatra project, we Source: Bahana estimates; Note: Based on 2-year inflation are awaiting the announcement of the consortium agreements, as the adjustment Trans-Sumatra offers a relatively low IRR (7-17%) which could result in Exhibit 3. Summary of Law No.2/2012 financial losses for all four SOEs involved. Main points of land-acquisition process Share price Fair price determined through independent appraisal . Revisions to land-clearing processes; privates to fund acquisitions: +/- Land owner may chooseRatings to rej ect in court, but court Due to several issues with Law No.2/2012 on land-acquisition processes, the must make final decision within 30 days government has released Presidential Decree (PP) No.30/2015, with two After transaction process (normal) or by court verdict, project can commence main points: 1) Permitting private investors to fund land acquisitions which Re-settlement also an option would be reimbursed by the government once the land has been acquired; Government should carry out socialization far in advance (transparent) 2) Giving approval to the concession holders to continue land-clearing National Land Agency (BPN) is the only body process without using the new land-acquisition law, as long as agreement responsible for land acquisitions in the public interest Source: Jasa Marga letters on the construction sites (SP2LP) have been authorized by the local Exhibit 4. Toll-road sector relative to JCI government. We believe the government has included the first point of the (%) (%) new decree to accelerate the land-acquisition progress given the limitations 2 30 1.1 1 0.5 of annual land-clearing budget (2015: IDR5tn), while the second point 0.1 25 0 ytd 1M 3M 6M 9M 12M 20 would be to address complaints from concession holders who have been (1) hesitant to restart the land-clearing process for existing toll-road projects. (2) 15 (3) (1.9) 10 (4) Outlook: Maintain expectation of 13% toll-road tariff hike in 2015 5 (5) (4.6) (4.7) In accordance with the government’s regulation allowing toll-road tariff hikes (6) 0 every two years, the Indonesia Toll Road Authority (BPJT) plans to raise tariffs Toll roads-related sector relative to JCI for 18 toll-road sections (exhibit 6) in 2015. Despite Bahana having recently Source: Bloomberg, Bahana lowered our 2015 inflation target to 4.31% from 5%, we continue to expect Exhibit 5. Relative performance to JCI, ytd 2015 average toll-tariff increase of 13%, translating into 2.4% higher revenues (%) (%) 0 100 in 2015 and 9.8% in 2016 for the overall sector (exhibit 2). Meanwhile, on the JSMR SECTOR CMNP (1) issue of the 10% VAT implementation on toll-road tariffs, we expect the 80 (2) government to closely monitor Indonesia’s inflation figures, especially in 2H15, 60 (3) to determine whether to implement the new tax at the same time as the tariff 40 (4) hikes in 4Q15 or to push it back to 2016. 20 (5) (4.6) (4.6) (5.0) Recommendation: Reiterate sector NEUTRAL due to high capex (6) 0 While recent policy changes indicate government support for toll-road development, we retain our NEUTRAL rating as higher toll-road construction Source: Bloomberg, Bahana could pressure overall margins. On the company level, we retain a BUY on JSMR, particularly on ytd market underperformance (exhibit 4). Additionally, we expect stable earnings and JSMR’s defensive nature to shelter investors against rising policy risks in the market place. Risks are lower traffic volumes due to construction delays and lower-than-expected toll-road tariff hikes. Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report *Based on consensus’ recent changes ↑ (up), ↓ (down), ↔ (unchanged) Exhibit 6. Planned 2015 toll-road tariff hikes Date Toll-road section Length (km) 18 toll-road sections flagged 1 May Makassar section IV 11.6 by the BPJT for tariff hikes in 26 August Surabaya-Mojokerto section I 1.9 2015, mostly in 4Q15 18 September Bali Mandara 10.0 4 October Jakarta-Bogor-Ciawi 59.0 Jakarta-Tangerang 33.0 Jakarta Outer Ring Road 45.4 Padalarang-Cileunyi 64.4 Semarang section A,B,C 24.7 Surabaya-Gempol 49.0 Palimanan-Plumbon-Kanci 26.3 Cikampek-Purwakarta-Padalarang 58.5 Belawan-Medan-Tanjung Morawa 42.7 Serpong-Pondok Aren 7.3 Tangerang-Merak 73.0 Ujung Pandang phase I & II 6.0 Pondok Aren-Bintaro-Ulujami 5.5 28 November Jakarta Inner Ring Road 50.6 11 December Kanci-Pejagan 35.0 Total 603.9 % of total Indonesia toll roads 75.5% Source: Indonesia Toll Road Authority Exhibit 7. Trans-Java toll road, 1,200km 640km of additional roads planned for Trans Java toll- road Source: Bahana Exhibit 8. Trans-Sumatra toll road, 2,700km Length IRR Investment Sections Four Trans-Sumatra toll- (km) (%) (IDRtn) Lampung-Palembang 358 17 44 roads sections to be Palembang-Pekanbaru 610 13 95 Pekanbaru-Medan 548 16 64 constructed by Hutama Karya Medan-Banda Aceh 460 9 95 following capital-raising, Palembang-Bengkulu 303 9 63 Pekanbaru-Padang 242 11 35 starting with Medan-Binjai Medan-Sibolga 172 7 30 toll road Source: Detik.com Exhibit 9. Toll roads to be tendered, 2015 Total Length 274 km of toll roads to be Toll road Region investment Progress (km) (IDRtn) offered for tender by the Pasirkoja - Soreang West Java 10.6 1.89 In tender process Public Works Ministry in 2015 Serpong – Balaraja Banten 30.0 5.2 In tender process Pandaan - Malang East Java 37.6 3.99 Tender preparation Balikpapan - Samarinda East Kalimantan 99.0 11.40 Tender preparation Manado - Bitung North Sulawesi 38.7 4.16 Tender preparation Cileunyi – Sumedang - West Java 58.5 12.33 Tender preparation Dawuan Source: Indonesia Toll Road Authority Exhibit 10. Toll roads under concession agreements Length Investment No Toll roads Ultimate investors Current progress Construction for 11 toll roads (km) (IDRbn) 1 Cikampek - Palimanan 116.8 12,563 Plus Expressway, SSIA & Saratoga Construction currently underway, with 2 Ciawi - Sukabumi 54.0 7,775 MNC Group Construction IDR56tn in total investment 3 Bekasi - Cawang - Kampung Melayu 21.0 7,581 Waskita Karya Construction 4 Medan - Kualanamu - Tebing Tinggi 60.0 6,290 Jasa Marga Construction 5 Pejagan - Pemalang 57.1 5,518 Waskita Karya Construction 6 Kertosono - Mojokerto 40.5 3,480 Astra Group Construction 7 Surabaya - Mojokerto 36.3 3,379 Jasa Marga Construction 8 Depok - Antasari 21.5 3,000 Citra Marga Construction 9 Gempol - Pasuruan 34.2 2,769 Jasa Marga Construction 10 Cinere - Jagorawi 14.6 2,621 Gramedia Group Construction 11 Gempol - Pandaan 13.6 1,167 Jasa Marga Construction 12 6 Jakarta Inner City Toll-roads 69.8 40,310 DKI Jakarta City-owned Enterprises Land clearing 13 Waru Wonokromo - Tanjung Perak 18.2 11,110 Margaraya Jawa Tol Land clearing 14 Semarang - Solo phase II 72.6 8,144 Jasa Marga Land clearing 15 Semarang - Batang 75.0 7,214 MNC Group Land clearing 16 Solo - Ngawi 69.2 5,138 Thiess Contractors Land clearing 17 Cimanggis - Cibitung 25.4 4,524 Bakrie Group Land clearing 18 Cibitung - Cilincing 34.0 4,220 MTD Expressway Land clearing 19 Pemalang - Batang 39.2 4,077 Pejagan-Batang Tol Road Land clearing 20 Ngawi - Kertosono 49.5 3,832 Thiess Contractors Land clearing 21 Pasuruan - Probolinggo 31.3 3,551 MNC Group Land clearing 22 Cengkareng - Batu Ceper - Kunciran 14.2 3,507 Jasa Marga Land clearing 23 Kunciran - Serpong 11.2 2,623 Jasa Marga Land clearing 24 Serpong - Cinere 10.1 2,219 Thiess Contractors Land clearing 25 Bogor Ring Road section II & II 7.2 983 Jasa Marga Land clearing Source: Indonesia Toll Road Authority Research: +62 21 250 5081 Harry Su Teguh Hartanto [email protected] [email protected] Leonardo Henry Gavaza, CFA Arandi Nugraha Senior Associate Director [email protected] [email protected] Associate Director Head of Research Senior Research Manager Research Analyst Strategy, Consumer Deputy Head of Research Auto, Heavy equipment, Telco Coal, Metals, Oil & Gas ext 3600 Banks, Cement, Aviation ext 3608 ext 3619 ext