Equity Research Sector Update

Thursday, 13 April 2017 The Construction and Coal Sectors

ADHI relative to JCI Index Key takeaways from speech given by PT KAI director

We invited Mr. Budi Noviantoro, the Director of Logistics and Business of Kereta Api (KAI) to give a talk at our recent Danareksa Distinguished ADHI (LHS) Relative to JCI (RHS) IDR/share % Speakers event. He addressed several important issues, namely: a) the 3,000 5.0 development of Transport (LRT) and b) freight transportation - 2,700 -4.0 especially for coal in South Sumatera. Adhi Karya (ADHI) and Bukit Asam

2,400 -13.0 (PTBA) stand to benefit from these developments. We maintain our BUY calls on both companies. 2,100 -22.0 1,800 -31.0 The LRT is 100% owned by KAI. KAI is now the sole investor in the 1,500 -40.0 project for which IDR9.0tr of funds have been allocated by the government.

Back in 2015, IDR2.0tr was injected into KAI (originally for the Trans

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Mar-16 Mar-17 Mar-17 May-16 project) and IDR1.4tr was injected into ADHI as the intended investor in the Jakarta LRT project at that time. To undertake the project, the government will inject another IDR5.6tr into KAI this year. The funds which had been provided to PTBA relative to JCI Index ADHI will now be directed toward the development of a depot which will be

rented by KAI with KAI having the option to purchase the depo in the future.

PTBA (LHS) Relative to JCI (RHS) Several conditions apply to the Jakarta LRT project: 1) the project is IDR/share % 14,000 80.0 guaranteed by the government as two-thirds of the total investment of IDR27tr will be financed through subsidized bank loans incurring an expected interest 60.0 12,000 rate of 7.0% (a higher rate would have created additional subsidy costs of more 40.0 10,000 than IDR2.0tr), 2) KAI has a 50-year concession period, 3) in the first 12 years of 20.0 the concession period, KAI will be entitled to subsidies from the government. 8,000 0.0 The subsidies will be used to keep ticket prices low since breakeven will be at 6,000 -20.0 IDR12,000/pax. Another option for the ticket pricing, however, will be cost plus

10% margin for KAI.

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Mar-16 Mar-17 Mar-17 May-16 More railway development for coal transportation. KAI expects more railway development for coal transportation with higher annual capacity oi 25mn tonnes (+13.6% yoy) in 2017. This will come from: a) the full operation of double-track from Tanjung Enim to Prabumulih and the completion of double track from Prabumulih to Kertapati and b) improvements in supporting infrastructure such as signaling and telecommunications, new stations, and additional locomotives and wagons. Over the long-run, KAI is expected to further increase coal railway capacity to around 40 – 50mn tonnes from the completion of double-track between Prabumulih to Tarahan. PTBA expects coal transportation using rail track to increase by 22.5% yoy to 21.7mn tonnes in 2017.

Maria Renata Tariff adjustments for coal transportation are based on inflation. KAI’s tariffs (62-21) 29 555888 ext. 3513 for coal transportation are adjusted every year based on the fuel costs and [email protected] inflation rate. The tariffs will be raised by between 2 – 4% yoy in 2017. Based on KAI’s latest annual report, coal transportation accounted for about 22.0% of Stefanus Darmagiri total revenues in 2015. (62-21) 29 555 888 ext. 3530 [email protected] Positive for both ADHI and PTBA. Under the new LRT scheme, ADHI will remain as the contractor for the project without equity risk. Nonetheless, KAI is still waiting for the revision of the Presidential decree on the Jakarta LRT project. Meanwhile, greater railway capacity for coal transportation will positively impact PTBA as previously the major hurdle to higher coal production was limited railway capacity. Hence, PTBA’s coal production should increase further going forward. The management of PTBA has indicated that coal production will increase by 22.6% yoy to 24.1mn tonnes this year.

www.danareksa.com See important disclosure at the back of this report 1

Construction and Coal Sector 13 April 2017

Exhibit 1. Greater Jakarta LRT

Source: KAI

Exhibit 2. Railway development in South Sumatera

Source: KAI

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www.danareksa.com See important disclosure at the back of this report