Lifecycle of a downcycle Indonesia Cement

Key challenge to earnings morphing

from cost inflation to a price war

We believe we are in stage 4 of a 5-stage downcycle: consensus estimates are falling and multiples contracting

Establish Reduce rating on SMGR, INTP and SMCB with fair value TPs of IDR9,700, IDR16,500 and IDR900

Indonesian cement stocks have been resilient despite six

quarters of earnings underperformance. In this report, we

explain why and provide a sector update. We also establish

new ratings in line with HSBC’s new rating structure.

Lifecycle of a downcycle: The causes of a slump are mostly

fundamental – macro and micro – but the symptoms are most

visible in the equity markets. We classify these into five

chronological stages. We believe the sector is in stage 4 with

potential capitulation ahead.

1. Warning (mid-2013): After years of earnings and

multiple expansion, demand and stocks decline for the first

time. Cyclical/structural weakness is read as a blip

2. Denial (1Q14): Decline in demand blamed on macro

volatility and QE3 taper. Confirmation bias leads to stock

rebound but demand remains tepid and cost inflation picks up

3. Hope (2Q-4Q14): Demand weakness and cost inflation

persist; weak earnings follow. Investors grow wary but most

pin hopes on a new government to support demand and further

share price strength. Marginal stocks and investors leave

4. Remorse (1Q-2Q15?): Demand remains weak and key

challenge morphs from cost inflation to price war, earnings

worsen. Start of downward revisions in consensus earnings

and multiples. Investors regret not having sold earlier

5. Capitulation (3Q-4Q15?): Price war hits earnings and

worsens. Estimates and multiples contract as believers’

attempt to “flee the camp” leads to a wholesale sell-down.

We see 28-41% downside in stocks: We have made small

changes to our estimates and still expect earnings decline to

exceed 20% YoY in 2015 vs. Street expectations of flat

earnings. Sector 1-yr fwd PE of 14.3x is just at its historical

mean and appears to be too generous for its weak outlook.

Building Materials Indonesia Cement

Indonesia Cement

Lifecycle of a downcycle – Stage 4

Indonesia Cement valuations (priced at 7 April 2015)

Company Semen Indo Indocement Holcim Indo Bloomberg Ticker SMGR IJ INTP IJ SMCB IJ

Mkt Cap (USD mn) 6,247 6,506 900 Target Price (Local Ccy) 9,700 16,500 900 Current Price (Local Ccy) 13,675 22,950 1,525 Rating R R R Upside/(downside) -29.1 -28.1 -41.0 2015e PE 19.1x 19.8x 24.9x 2016e PE 20.1x 18.5x 24.2x 2015e PB 3.2x 3.3x 1.3x 2016e PB 3.0x 3.1x 1.3x 2015e ROE (%) 17.2 16.9 5.3 2016e ROE (%) 15.3 17.2 5.4 2015e EPS growth -22.4 -19.3 -30.1 2016e EPS growth -5.0 7.1 2.9 2015e EV/t (USD) 244 324 155 2016e EV/t (USD) 215 286 137 Dividend Yield (%) - 2015 3.4 4.1 2.7

Source: Thomson Reuters Datastream, HSBC estimates. On 23 March, HSBC introduced a new rating structure based on Buy, Hold and Reduce and on fair value target prices. For more detail please see: Changes to the HSBC rating structure

9 April 2015 Shishir Singh* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4292 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=SR9ZqVYyej&n=452616.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=SR9ZqVYyej&n=452616.PDF

http://www.research.hsbc.com/

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Lifecycle of a downcycle - Indonesian Cement Sector – Stage-5 of Capitulation is yet to come

Source: HSBC

60.0

75.0

90.0

105.0

120.0

135.0

150.0

Aug-13 Sep-13 Oct-13 Oct-13 Nov-13 Dec-13 Dec-13 Jan-14 Feb-14 Mar-14 Mar-14 Apr-14 May-14 May-14 Jun-14 Jul-14 Jul-14 Aug-14 Sep-14 Sep-14 Oct-14 Nov-14 Dec-14 Dec-14 Jan-15 Feb-15 Feb-15 Mar-15

JakComp SMGR INTP SMCB

Stage-1: Warning

Demand shocks for the first time after a long uptrend. Macro factors like commodity price falls, export weakness, FX depreciation & rising inflation signal deterioration

Stage-2: Denial

Confirmation bias prevails. Most of Sell-side & investors dismiss the demand decline as a blip and position in the stocks as nothing ever happened. Positive catalysts and newsflow are rewarded dispropotionately relative to persistently negative fundamentals (cost inflation, weak demand).

Downcyclestarts

Stage-3: Hope

Weak fundamentals finally take over investor psyche as it becomes too difficult to ignore the obvious. Marginal investors exit and marginal stocks in the sector are sold down. However, wishful thinking prevents a wholesale sell-down particularly from long-term shareholders in core stocks in the sector. Stocks still more receptive to positive newsflow than persistently negative fundamentals but find it difficult to break onto the upside without fundamental support

Stage-4: Remorse

Fundamentals show further deterioration instead of recovery. Some long-term holders lighten up with a feeling of remorse that they ignored the warning earlier. Still not a wholesale sell-down.

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Drivers of ASEAN cement s stock price since middle of 2013 – beginning of the demand downcycle

Source: HSBC

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15

SMGR SET50 JakComp INTP SMCB SCC SCCC

Rally continues in Thailand in hope of political stability but Cements underperform after 2Q-3Q earnings disappoint; lack of fundamental support finally takes its toll

Indonesian rally takes a pause as two-way Presidential race heats up; politics still the key stock driver; growth remains low

Rally as Joko Widodo emerges as winner in the Presidential election

Government rhetoric supports stocks but demand still weak

Stocks dive first after govt. mandated price cut in Jan; then competition driven price cuts in March

SCC takes off after PetChem supported earnings beat in 4Q14 but SCCC declines due to persistent weak cement demand growth

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Asia Cement - Comparative valuation & key operating metrics

Calendarized Price Mcap EV (2014) _____________ EBITDA Margin (%) __________ _________________ EV/EBITDA _____________ __________________ RoA(%) _______________Company Lcl Ccy USD m USD m 2013a 2014a 2015e 2016e 2013a 2014a 2015e 2016e 2013a 2014a 2015e 2016e

Semen Indonesia 13,675 6,247 6,710 33.1 30.9 25.0 22.6 9.7x 9.7x 11.7x 11.5x 28.1 24.4 17.2 15.3 Indocement 22,950 6,506 6,103 36.3 33.7 29.7 29.2 10.5x 10.8x 12.7x 11.3x 23.7 22.1 16.9 17.2 Holcim Indonesia 1,525 900 1,382 27.2 19.1 15.0 13.6 5.5x 8.2x 10.0x 9.4x 11.1 7.6 5.3 5.4 Siam Cement 524 19,306 22,190 12.9 13.1 14.9 15.8 12.7x 11.3x 10.5x 9.5x 22.9 19.8 20.7 20.3 Siam City Cement 375 2,648 2,704 23.9 23.7 25.2 23.8 12.2x 11.7x 10.7x 10.0x 26.0 25.3 24.2 24.2 ASEAN Median 27.2 23.7 25.0 22.6 10.5x 10.8x 10.7x 10.0x 23.7 22.1 17.2 17.2 Anhui Conch 29.95 20,475 21,859 18.6 20.4 12.6 14.4 13.6x 10.7x 17.9x 14.4x 18.0 18.1 11.3 12.2 CNBM 7.88 5,488 33,863 21.5 23.4 18.5 18.1 7.7x 7.3x 9.3x 9.5x 17.5 15.7 7.1 3.6 CR Cement 4.58 3,860 5,506 22.8 25.4 23.6 23.5 6.7x 5.2x 5.8x 5.8x 14.5 15.9 13.3 12.2 China Shanshui 5.52 2,406 4,803 22.8 20.2 16.1 15.1 8.0x 9.4x 12.8x 13.3x 11.4 3.5 -1.3 -4.4 China Median 22.2 21.9 17.3 16.6 7.9x 8.3x 11.1x 11.4x 16.0 15.8 9.2 7.9 Ambuja 260.1 6,471 6,765 14.6 12.9 14.5 16.6 22.1x 11.8x 9.3x 6.9x 14.2 11.5 10.8 14.2 ACC 1,650 4,973 4,718 22.6 18.8 19.7 22.5 17.2x 18.6x 15.0x 11.2x 14.4 10.0 12.4 16.3 Ultratech 2,932 12,913 13,158 21.6 19.1 20.5 23.2 17.8x 20.3x 17.8x 12.6x 9.7 7.4 7.5 10.0 India Median 21.6 18.8 19.7 22.5 17.8x 18.6x 15.0x 11.2x 14.2 10.0 10.8 14.2

Source: Company, HSBC estimates; Valuations as at the close of 7th April, 2015

Calendarized Price Mcap EV (2014) ________________ RoE(%) _________________ __________________ PE ___________________ _______________ EPS growth _______________ Company Lcl Ccy USD m USD m 2013a 2014a 2015e 2016e 2013a 2014a 2015e 2016e 2013a 2014a 2015e 2016e

Semen Indonesia 13,675 6,247 6,710 28.1 24.4 17.2 15.3 12.1x 13.6x 19.1x 20.1x 10.8 1.9 -22.4 -5.0 Indocement 22,950 6,506 6,103 23.7 22.1 16.9 17.2 13.5x 14.7x 19.8x 18.5x 5.2 5.2 -19.3 7.1 Holcim Indonesia 1,525 900 1,382 11.1 7.6 5.3 5.4 9.9x 16.0x 24.9x 24.2x -29.5 -29.6 -30.1 2.9 Siam Cement 524 19,306 22,190 22.9 19.8 20.7 20.3 16.9x 18.7x 16.1x 14.6x 48.5 -4.0 15.8 9.8 Siam City Cement 375 2,648 2,704 26.0 25.3 24.2 24.2 17.0x 16.9x 16.4x 15.2x 24.2 6.0 3.0 7.8 ASEAN Median 23.7 22.1 17.2 17.2 13.5x 16.0x 19.1x 18.5x Anhui Conch 29.95 20,475 21,859 18.0 18.1 11.3 12.2 13.4x 11.5x 16.5x 14.0x 48.3 17.0 -30.4 17.5 CNBM 7.88 5,488 33,863 17.5 15.7 7.1 3.6 5.9x 5.7x 11.5x 21.7x 3.3 3.5 -50.8 -47.0 CR Cement 4.58 3,860 5,506 14.5 15.9 13.3 12.2 9.0x 7.1x 7.7x 7.8x 43.6 26.0 -7.2 -1.5 China Shanshui 5.52 2,406 4,803 11.4 3.5 -1.3 -4.4 14.6x 42.6x -107.8x -32.8x -33.0 -65.8 -139.5 228.6 China Median 16.0 15.8 9.2 7.9 11.2x 9.3x 9.6x 10.9x Ambuja 260.1 6,471 6,765 14.2 11.5 10.8 14.2 29.3x 24.8x 20.0x 14.5x -0.2 22.9 26.7 37.9 ACC 1,650 4,973 4,718 14.4 10.0 12.4 16.3 26.6x 38.3x 30.3x 21.6x 3.3 -27.6 28.6 40.2 Ultratech 2931.85 12,913 13,158 18.9 13.3 13.1 16.5 28.4x 35.5x 29.9x 20.8x 1.2 -12.7 20.5 45.2 India Median 14.4 11.5 12.4 16.3 28.4x 35.5x 29.9x 20.8x

Source: Company, HSBC estimates; Valuations as at the close of 7th April, 2015

5

Building Materials Indonesia Cement 9 April 2015

abc

Export weakness continues to depress demand…

Ever since we introduced the monthly current account deficit as a lead indicator for Indonesian cement

sales in July 2013, we have noted a remarkable number of Street participants joining in and attributing

economic malaise to Indonesia’s export weakness. In short, our thesis and that of the Street was and

remains based on the premise that construction activity is driven by employment and confidence in the

economy (i.e. job security). Since the export-oriented commodity sectors (coal, palm oil, rubber, etc.) are

some of the biggest employment generators in Indonesia, a weakness in these sectors has adverse

consequences on everything reliant on them including cement sales.

Monthly trade balance has typically led big changes in cement sales growth by 3-8 months since 2006

Source: Thomson Reuters DataStream, HSBC

Details about our thesis can be read in Demand forecast cut on weak trade balance published on 11 July

2013, but it’s worth keeping in mind that while we monitor the trade deficit, our bigger concern pertains

to export weakness. In recent times, country’s trade deficit has stabilized due to a sharper fall in imports

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6Ja

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Apr-0

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Oct

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Jan-

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Apr-0

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l-09

Oct

-09

Jan-

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r-10

Jul-1

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Apr-1

1Ju

l-11

Oct

-11

Jan-

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Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

n-15

Mthly trade balance Cement demand growth YoY

3 per. Mov. Avg. (Mthly trade balance ) 3 per. Mov. Avg. (Cement demand growth YoY)

Stage 4 of downcycle

Indicators like strength of exports and property pre-sales don’t

signal a demand upturn yet while competition continues to pick up

Sector transitioning from challenge of cost inflation to price war;

net profit ex-one-offs to fall 19-39% in 2015

Consensus finally on a downtrend and multiples contracting; we

establish Reduce ratings on SMGR, INTP and SMCB

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=CTKFJp1RB1&n=378018.PDF

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but export and cement demand weakness has continued. However, this doesn’t mean, that lower import

bill has no benefits. A fall in fuel imports, subsequent reduction in fuel subsidies and increased budget

allocation for infrastructure spending are all positive for future cement demand. This is the reason that we

expect a sharp recovery ahead (See our report Fuel price hike to hurt 2015 earnings published on

20 November 2014 for details).

Although the weak demand growth so far this year has supported our pessimistic view, the deterioration

in demand (as opposed to just slow growth) as reported by Indonesian Cement Association (ICA) has

surprised us. In our view, the ICA-reported numbers understate both the real demand and true state of

competition in the market.

…but reported numbers understate true demand and competition

Indonesian cement players forecast 5-6% YoY growth in demand in 2015 but we have started 2015 with a

rather weak trend of ICA-reported demand falling by 1.5% YoY in the first two months of the year. The

deterioration, while possible, appears somewhat inconsistent with the stabilization in trade deficit as well,

lower mortgage rates since 4Q14 as well as a more benign political environment. In our view, even

Relatively sharper fall in imports has stabilized trade deficit Cement demand growth YoY% 12m MA

Source: Thomson Reuters DataStream, HSBC Source: Thomson Reuters DataStream, HSBC

Indonesia Cement demand growth YoY%

Source: Indonesia Cement Association, HSBC estimates

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Expo

rts/Im

ports

(USD

mn)

Imports Exports

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Dec

-01

Jun-

02D

ec-0

2Ju

n-03

Dec

-03

Jun-

04D

ec-0

4Ju

n-05

Dec

-05

Jun-

06D

ec-0

6Ju

n-07

Dec

-07

Jun-

08D

ec-0

8Ju

n-09

Dec

-09

Jun-

10D

ec-1

0Ju

n-11

Dec

-11

Jun-

12D

ec-1

2Ju

n-13

Dec

-13

Jun-

14D

ec-1

4Ju

n-15

Dec

-15

Jun-

16D

ec-1

6

F'cast

1.5

6.9

11.4

0.7

6.3

17.7

14.5

5.5

3.3

5.1

12.8

11.2

15.0

6.7

4.4

7.4

15.9

13.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e

ICA Reported Sales YoY% ICA reported sales adjusted for new entrant volumes YoY%

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=BNQY7RjbdP&n=438606.PDF

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though demand remains rather weak, reported trends are probably understating real demand by not

accounting for cement sales from players which are not part of the Indonesia Cement Association yet.

Admittedly, it’s difficult to get precise production and sales data on the new unlisted start-up plants but

both Semen Karawang and Conch Cement are known to have commenced production from their

1.5MTPA capacities and have been selling in the market since at least 4Q14. Semen Merah Putih, another

new entrant, has been in the market with imported product since May-2012. Merah Putih has been

inducted into the ICA since the start of this year and its sales estimates are now being included in the

ICA-reported numbers. We estimate that the non-inclusion of new entrants in reported data from ICA

would understate demand growth by 200-300bps in 2015-16e.

Property market remains weak; potential tax increase may hurt

Despite all the excitement surrounding a potential pickup in infrastructure activity, it is worth remembering

that the country’s cement sector is heavily reliant on its property market, not on infrastructure. Bulk

cement accounts for only c20% of industry sales and we estimate that no more than half of the bulk sales

end up being used in infrastructure projects with the rest being used in large-scale property projects.

The property sector has come under pressure over the last 18 months due to macro-economic volatility,

deteriorating economic conditions and high inflation. All of these, along with a simultaneous increase in

the loan-to-value limits and stricter mortgage disbursement standards, have resulted in first fall in pre-

sales of the top-seven listed players in the last five years.

Pre-sales of Top-7 listed property firms in Indonesia

Source: Companies’ data

The recent uncertainty around new luxury tax on property transactions has probably also been a

dampener. Property sales are likely to feel further pressure if government’s proposal to charge luxury tax

of 20% on any property priced over IDR2bn (around USD150,000) is passed. In the past, only landed

homes larger than 350 square metres (sq. mt.) or apartments larger than 150 sq. mt. were considered as

luxury properties. However, the government’s plan to shift this area-based tax to a value-based tax is

likely to hurt sales in the mid-range to high-end of the market and would incrementally be negative

cement sales.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2009 2010 2011 2012 2013 2014 2015e

APLN.JK ASRI.JK BSDE.JK CTRA.JK SMRA.JK LPKR.JK PWON.JK

10%

35%58%

53%

19%-4%

8


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Supply and price pressures to accelerate margin declines

Although property-driven demand remains soft, we remain hopeful of a pickup in infrastructure activity

as indicated by the new government. Consequently, we continue to model a relatively optimistic demand

growth of 7-16% YoY in 2015-16e despite a very weak start to the year.

Indonesia cement demand

2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e

Domestic sales (mn tons) 31.5 32.0 34.2 38.1 38.4 40.8 48.0 55.2 58.9 61.5 66.0 76.5 87.2 Property 46.9 51.5 55.7 Infra & big projects 19.1 25.0 31.5 YoY (%) chg 1.5 6.9 11.4 0.7 6.3 17.7 15.0 6.7 4.4 7.4 15.9 13.9 Property 5.5 10.0 8.0 Infra & big projects 12.3 30.5 26.2 Exports (mn tons) 6.7 7.3 7.8 4.9 4.0 2.9 1.2 0.2 0.6 0.2 0.7 1.6 1.1 Volume - domestic & exports (mn tons) 38.2 39.2 42.0 43.0 42.4 43.7 49.2 55.4 59.5 61.7 66.7 78.1 88.3 YoY (%) chg 2.8 7.0 2.5 -1.5 3.1 12.6 12.6 7.4 3.7 8.2 17.1 13.1 GDP growth 5.7 5.5 6.3 6.0 4.6 6.2 6.5 6.2 5.8 5.1 5.8 6.1 6.1 Population 221.6 224.7 227.9 231.0 234.3 237.6 240.9 244.3 247.7 251.1 254.7 258.2 261.8 YoY (%) chg 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 Consumption per capita (Kg) 142.1 142.3 150.0 164.8 163.7 171.7 199.2 226.0 237.7 244.7 259.2 296.4 333.0 YoY (%) chg 0.1 5.4 9.9 -0.7 4.9 16.1 13.4 5.2 2.9 5.9 14.3 12.4 Domestic sales - elasticity to GDP (X) 0.3x 1.1x 1.9x 0.2x 1.0x 2.7x 2.4x 1.2x 0.9x 1.3x 2.6x 2.3x

Source: Indonesia Cement Association, HSBC estimates

Despite the bullish demand forecasts, we believe excess supply would continue to put pressure on the

sector’s margins. 2014 has seen the entry of new entrants like Semen Karawang and Conch cement. Even

incumbents like Holcim Indonesia have encroached into historical strongholds of other incumbents like

Semen Indonesia (East Java). This increase in competition made it hard to offset a surge in costs during

2014. Margin evolution in 2015 is likely to be driven more by ASP compression than cost inflation, in our

view. Unlike 2014, bulk of the capacity additions this year would be from the new entrants. Sustaining

margins has been hard enough in the sector when competition was just among the incumbents and we

believe that fragmentation of incremental supply in 2015 would make it even harder.

Indonesia Cement Supply

Capacity breakdown (mn tons) 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e

SMGR 17.1 16.9 16.9 16.9 18.0 19.7 20.7 26.4 29.0 29.5 29.5 35.5 35.5 INTP 16.6 16.6 17.1 17.1 17.1 18.6 18.6 18.6 18.6 20.5 20.9 24.9 24.9 SMCB 9.7 8.7 8.7 7.8 8.3 8.3 8.7 8.7 8.7 10.6 11.8 12.5 12.5 Bosowa 1.8 1.8 1.8 3.0 3.0 3.0 3.0 3.2 5.0 5.0 6.8 6.8 6.8 SMBR 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 2.0 2.0 2.0 3.9 3.9 Semen Kupang 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Others 0.0 0.0 0.0 0.0 0.0 1.6 1.6 2.0 2.0 5.0 10.8 13.3 16.9 Semen Andalas 1.6 1.6 2.0 2.0 2.0 2.0 2.0 2.0 Merah Putih 2.0 4.5 4.5 Siam Cement 1.8 1.8 1.8 Semen PanAsia Resources 2.0 2.0 2.0 Semen Karawang 1.5 1.5 1.5 1.5 Conch Cement 1.5 1.5 1.5 5.1 Total 47.0 45.8 46.3 46.7 48.2 53.0 54.4 60.7 65.9 73.2 82.4 97.4 101.0 YoY (%) 0.0 -2.6 1.1 0.7 3.4 9.9 2.7 11.6 8.5 11.1 12.6 18.3 3.7 Source: Indonesia Cement Association, HSBC estimates

9


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The ASPs in the sector have already started the year on a weak note as the government forced SoE

producers to cut prices by 5% in mid-January and competition among incumbents as well as new entrants

has driven further price pressure in March. We expect the price weakness to continue as new supply

continues to increase the imbalance in the market. Cost inflation to remain in mid-single digits in 1H15

We use the cost structure of SMGR to explain our cost assumptions. SMGR’s operating costs increased

by 11.3%YoY in 2014. This was the sharpest pace of cost inflation since 2009 and is clearly astounding

once the fall in labour and coal costs, roughly 35% of CoGS, are accounted for. The biggest jump in costs

was due to increase in fuel and electricity prices during the year and we estimate that those factors would

continue fuelling inflation in 2015 and expect unit operating costs to rise by mid-single digits in 2015.

Coal costs likely to be flattish YoY in 2015: The fall in international coal price could have neutralized a

substantial part of cost inflation but IDR depreciation offset part of the gains to SMGR’s bottom line.

Still, we estimate that the spot coal prices adjusted for currency depreciation fell by about 5%YoY in

2014, particularly in 4Q14. Going forward, 1Q14 would likely benefit from lower coal prices but

continued depreciation of IDR so far in the year suggests that this benefit isn’t likely to persist for the rest

of the year. If coal prices and IDR remain at their 1Q15 average, we are likely to coal cost inflation pick

As demand growth lags behind supply growth… …prices are likely to fall in 2015

Source: Indonesia Cement Association, HSBC estimates Source: Indonesia Cement Association, HSBC estimates

SMGR CoGS split (2014e) Coal prices may be flattish in IDR terms in 2015

Source: Company, HSBC estimates Source: Thomson Reuters DataStream, HSBC

1.5

6.9

11.4

0.76.3

17.7

15.0

6.74.4 7.4

15.9

-2.6

1.1 0.73.4

9.9

2.7

11.68.5

11.112.6

18.3

-5.0

0.0

5.0

10.0

15.0

20.0

2006

a

2007

a

2008

a

2009

a

2010

a

2011

a

2012

a

2013

a

2014

a

2015

e

2016

e

Domestic sales growth Capacity growth YoY

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2006

a

2007

a

2008

a

2009

a

2010

a

2011

a

2012

a

2013

a

2014

a

2015

e

ASP YoY Chg (%) Unit CoGS YoY chg (%)

Coal26%

Electricity13%

Distribution19%

Packaging8%

Labour9%

Deprec.9%

Others16%

600

700

800

900

1,000

1,100

1,200

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

4Q10

3Q10

2Q10

1Q10

Newcastle Spot Coal Price (IDR '000/ton)

10


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up yet again in 2H15 (on a YoY basis).

Electricity, distribution costs & depreciation to increase by mid-to-high single digits (%YoY):

SMGR’s reported manufacturing overhead costs grew by 18.5% YoY in 2014 despite only a 3% YoY

growth in its production. Manufacturing overheads, which include coal, electricity, distribution,

packaging and depreciation as its major components, were 84% of CoGS in 2014. Although, the price of

biggest component of manufacturing overhead (coal~30%) declined by 5% YoY, others like depreciation,

distribution and electricity increased by 20-30% due to capacity expansion, fuel price hikes and

unwinding of electricity subsidies respectively. If fuel and electricity prices were to remain stable at

current levels, we estimate that they would still be up by 12% YoY and 7% YoY respectively in 2015.

The case for depreciation is also likely to be the same, which should continue see the impact of recent

increase in investments.

Labour costs also likely to increase by low-to-mid single digits: SMGR’s unit labour costs declined by

4.5% YoY in 2014 for a second consecutive year. We see limited potential for them to decline further

since they are now below their level in 2011, particularly considering the inflationary environment for last

two years.

Summary: Flattish coal costs and continued cost inflation in electricity, distribution, depreciation and

labour costs are likely to keep cost inflation particularly high in 1H15 followed by a flattish trend in 2H15

Grid electricity prices (IDR '000/kVA)* Retail fuel prices (IDR '000/Litre)

Source: PLN, HSBC; * for Industrial users with power limit over 30kVA Source: Government of Indonesia, HSBC

SMGR Quarterly metrics

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15e 2Q15e 3Q15e 4Q15e 1Q16e 2Q16e 3Q16e 4Q16e

Cement Capacity (mn tons)* 28.7 30.0 30.4 31.3 31.8 31.8 32.2 32.2 32.2 32.2 32.2 32.2 32.2 33.7 36.7 38.2 Domestic Sales (mn tons) 6.0 6.2 6.1 7.2 6.2 6.6 6.2 7.2 6.2 6.8 6.4 7.8 6.8 7.7 7.3 8.8 Export/Foreign (mn tons) 0.5 0.6 0.7 0.6 0.6 0.6 0.7 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.9 0.7 Volume YoY% 30.5 26.0 19.1 18.7 3.8 6.1 1.3 0.3 3.3 2.4 2.8 6.6 5.6 12.8 16.9 14.7 Utilization % 90.3 92.1 89.6 100.9 85.3 90.2 85.7 96.9 86.3 91.2 87.5 103.3 91.1 100.5 93.6 101.8 ASP YoY % -0.7 6.6 -0.1 -2.9 7.3 7.7 8.0 14.7 0.3 -4.2 -4.3 -6.8 -2.4 -2.0 -1.8 0.0 Unit Operating Cost YoY * -0.2 8.2 5.7 8.1 10.8 9.0 13.8 11.5 7.0 5.8 1.7 0.5 2.2 2.3 2.4 2.4 Sales YoY% 29.4 34.4 19.1 19.9 11.4 14.1 8.3 7.4 4.2 -1.4 -0.9 -0.2 2.9 10.5 14.6 14.5 Operating Profit YoY% 27.3 29.9 5.0 1.9 2.5 10.4 -9.2 -4.3 -13.2 -25.8 -18.3 -23.2 -14.4 -7.4 -6.1 1.3 Net Prof. ex. One-offs YoY% 21.5 27.3 0.9 -0.7 4.7 12.5 -6.4 -4.0 -11.6 -23.4 -15.4 -22.8 -17.6 -9.8 -8.2 1.9

Source: Company data, HSBC estimates; Note: * = Doesn't exclude inventory adjustments or non-cement sales; * Includes Thang Long capacity in Vietnam

629 654

689723

723

787

969

1,144

990

965

600

700

800

900

1,000

1,100

1,200

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15

Fuel

Pric

e (ID

R/L

itre)

Gasoline Diesel

11


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Misplaced consensus optimism finally appears to be ending

We believe that the elevated Street estimates are partly the cause for resilience of Indonesian cement

stocks since middle of 2013. The estimates make the stocks look unduly cheap. For instance, elevated

earnings expectations made the investors feel as if they were holding SMGR stock priced at 2014PE of

14.7x set to deliver 13%YoY earnings growth in 2014 at the start of last year. But if we factor in what

SMGR actually reported in 2014, the reality would be that they were holding an ex-growth stock at 16.5x.

More often than not consensus estimates remain elevated well into the results season despite persistent

weakness in fundamentals. The Street’s 2014-15 EPS forecasts being 20% higher before the downcycle

began in mid-2013 are still justifiable (as downtrend may have been difficult to perceive back then)but it’s

difficult to digest the exaggeration well into 4Q14 results after five quarters of underperformance. Note

that SMGR’s 4Q14 earnings missed consensus estimates by 9% but excluding one-off FX gains of over

IDR100bn, the company’s effective miss vs. the elevated consensus expectations was well above 15%.

We believe that consensus continues to be too bullish… …on Indonesian cement sector stocks

Source: Thomson Reuters DataStream, HSBC; as at the close of 07 April, 2014 Source: Thomson Reuters DataStream, HSBC; as at close of 07 April

It’s particularly interesting to note that consensus continually estimated 1-year forward growth in low-to-

mid teens even when company’s average net profit growth averaged a disappointing 3%YoY over the last

five quarters. In our view, the illusion of exaggerated estimates continues but investors and sell-side

-40.0-35.0-30.0-25.0-20.0-15.0-10.0

-5.00.0

2015 2016 2017

Sales EBITDA Net Profit

SMGR: HSBC vs. Consensus Estimates (%)-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

2015 2016 2017

Sales EBITDA Net Profit

INTP: HSBC vs. Consensus Estimates (%)

Indonesian cement stocks have remained resilient so far despite continuous downgrades to consensus earnings forecast

Source: Thomson Reuters DataStream, HSBC

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

900

950

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

Apr-1

2

Jun-

12

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Feb-

14

Apr-1

4

Jun-

14

Aug-

14

Oct

-14

Dec

-14

Feb-

15

2014 EPS Consensus (IDR, LHS) 2015 EPS Consensus (IDR, LHS) SMGR Stock Price (RHS)

12


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estimates finally appear to be coming around to our view. Consequently, we are starting to notice sharp

downward revisions and declining 1-yr fwd PE multiples in the sector.

Sector’s 12m fwd PE band reflects downward EPS revisions Sector 12m fwd PE now below historical average

Source: Thomson Reuters DataStream, HSBC Source: Thomson Reuters DataStream, HSBC

Minor changes to our estimates; establish new ratings model

There are almost no changes in our estimates for Indocement and only minor changes in Semen Indonesia

forecasts (we also introduce 2017 forecasts for 2017). We cut our 2015-17e EPS for Holcim Indonesia by

4-10% as we factor in the impact of intense competition on the most vulnerable of the three incumbents.

The following tables summarize the key operating metrics for the three companies: SMGR: Key operating metrics

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e

Cement Capacity (mn tons)* 16.9 16.9 16.9 18.0 19.7 20.7 28.7 31.3 32.2 32.2 38.2 38.2 Cement Sales (mn tons) 16.3 16.9 17.7 17.8 17.9 19.7 22.6 27.8 28.6 29.6 33.4 37.0 Volume YoY% 3.2 3.8 4.6 0.5 0.9 9.8 14.6 23.2 2.8 3.8 12.6 10.9 Utilization % 95.6 99.8 104.4 101.7 95.1 97.5 91.3 92.6 89.9 92.1 94.8 96.9 ASP YoY % 12.3 6.0 20.9 17.1 -1.3 3.6 3.5 0.5 9.6 -3.9 -1.5 1.9 Operating Cost YoY %* 12.8 -0.1 17.1 13.3 -2.8 6.7 2.0 4.4 11.3 4.6 2.4 2.5 CoGS YoY % 12.8 -0.1 17.0 10.5 -2.0 7.5 1.1 5.4 10.6 4.7 2.2 2.4 SG&A YoY % 13.0 -0.2 17.3 23.0 -5.4 3.9 5.0 1.1 13.8 4.1 3.0 3.0 Sales YoY% 15.9 10.0 27.2 17.8 -0.3 14.2 19.7 25.0 10.1 0.3 10.8 12.9 Operating Profit YoY% 13.8 34.7 41.3 28.2 3.4 7.8 26.3 14.1 -0.3 -20.5 -6.7 8.8 Net Profit excl. One-offs YoY% 25.0 37.7 45.5 31.6 8.5 7.2 23.3 10.6 1.6 -18.6 -8.7 9.9

Source: Company data, HSBC estimates; * Includes Thang Long capacity in Vietnam

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15

Mcap (USD bn) 10.0x12.0x 14.0x16.0x 18.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

17.0x

18.0x

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

PE -2σ -1σ

Avg +1σ +2σ

INTP: Key operating metrics

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e

Cement Capacity (mn tons) 16.6 17.1 17.1 17.1 18.6 18.6 18.6 18.6 20.5 20.9 24.9 24.9 Cement Sales (mn tons) 12.9 14.3 14.3 13.2 13.6 15.7 17.7 17.8 18.2 18.8 21.3 23.3 Volume YoY% 9.3 11.1 -0.1 -8.0 3.0 15.5 12.7 0.6 2.3 3.5 13.1 9.4 Utilization % 77.7 85.1 83.8 77.1 76.1 84.3 95.1 95.7 93.1 91.0 93.1 93.6 ASP YoY % 3.5 4.2 33.6 17.5 2.2 8.0 10.5 7.4 4.6 -5.7 1.7 1.8 Operating Cost YoY % 14.1 -1.8 27.6 2.2 0.3 15.1 7.3 10.4 8.7 1.5 2.9 3.0 CoGS YoY % 7.0 -1.6 26.0 3.2 -0.7 15.7 7.1 10.6 6.3 1.1 3.0 3.0 SG&A YoY % 53.3 -2.6 34.0 -1.7 4.3 13.2 8.3 9.8 17.9 2.7 2.8 2.8 Sales YoY% 13.1 15.8 33.5 8.1 5.3 24.7 24.5 8.1 7.0 -2.4 15.1 11.3 Operating Profit YoY% -22.4 48.4 55.2 50.1 8.8 10.1 32.0 2.2 -2.0 -20.3 10.8 7.0 Net Profit excl. One-offs YoY% -33.2 83.9 82.3 50.4 17.7 13.8 31.1 4.1 4.6 -19.0 7.3 6.1

Source: Company data, HSBC estimates

13


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We establish Reduce ratings on Semen Indonesia, Indocement and Holcim Indonesia and set fair value

target prices of IDR9,700, IDR16,500 and IDR900, respectively, based on target 2015e PEs of 13.0x,

14.3x and 15.1x. The target multiples are each stock’s average one-year forward multiple for the peak-to-

peak cycle from mid-2008 to mid-2013 and represent where we believe fair value to be. Previously, our

target prices were set on a 12-month forward basis. For SMGR, the move to current value and the decline

in EPS estimates cause a 4% decline in our target price, although we note that the new and old target

prices are not comparable because of the difference in time value.

Key upside risks to our view for all three stocks:

Use of cash for value-accretive acquisitions in case of SMGR and INTP.

Acquisition by the parent company at a premium for Holcim Indonesia (SMCB).

IDR appreciation, stronger than-expected revival in property demand, earlier-than-expected impetus

on infrastructure spending as well as the reversal of a recently announced price cuts

There are no changes to our estimates for INTP and the key changes to SMGR and SMCB estimates are

detailed below.

SMGR: New vs. Old estimates

_________ Old Estimates ___________ ______ Actual/New Estimates ______ __________ New vs. Old ___________ 2014e 2015e 2016e 2014a 2015e 2016e 2014e 2015e 2016e

Revenue 26,677 28,323 31,501 26,987 27,079 29,995 1.2 -4.4 -4.8 EBITDA 8,253 7,073 7,127 8,295 7,073 6,835 0.5 0.0 -4.1 EBIT 6,930 5,561 5,474 6,954 5,532 5,163 0.3 -0.5 -5.7 PBT 6,975 5,451 5,187 7,091 5,633 5,163 1.7 3.3 -0.5 Net Profit 5,471 4,247 4,036 5,566 4,406 4,028 1.7 3.7 -0.2 EPS 922 716 680 938 743 679 1.7 3.7 -0.2

Source: HSBC estimates; We introduce 2017 estimates for SMGR in this report

Holcim Indonesia: New vs. Old estimates

_________ Old Estimates ___________ _________ New Estimates _________ __________ New Vs. Old ___________ 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e

Revenue 11,728 13,882 14,532 10,607 12,143 13,442 -9.6 -12.5 -7.5 EBITDA 1,763 1,884 1,924 1,728 1,802 1,820 -2.0 -4.3 -5.4 EBIT 1,000 1,071 1,108 970 1,000 1,019 -3.0 -6.6 -8.1 PBT 643 661 691 620 607 620 -3.5 -8.3 -10.2 Net Profit 468 482 503 452 442 452 -3.6 -8.3 -10.2 EPS 61 63 66 59 58 59 -3.6 -8.3 -10.2

Source: HSBC estimates

SMCB: Key operating metrics

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e

Cement Capacity (mn tons) 8.7 8.7 7.8 8.3 8.3 8.7 8.7 8.7 10.6 11.8 12.5 12.5 Cement Sales (mn tons) 6.0 7.0 7.0 7.1 7.1 7.9 8.6 8.4 8.8 8.9 10.1 11.0 Volume YoY% -6.3 15.0 0.0 1.5 1.3 10.1 9.1 -1.8 3.8 1.7 13.4 9.3 Utilization % 65.7 79.9 84.2 87.6 86.1 92.6 98.7 96.9 90.7 79.5 83.1 88.3 ASP YoY % 5.9 9.0 27.9 22.0 -1.0 14.7 9.8 9.4 4.7 -1.0 1.0 1.3 Operating Cost YoY % 10.9 -5.9 18.0 17.9 0.5 13.8 9.1 12.4 15.9 2.8 2.0 2.0 CoGS YoY % 9.4 -8.0 17.6 24.9 -0.9 13.7 11.1 13.8 14.1 2.8 1.7 1.7 SG&A YoY % 16.8 2.2 19.2 -5.1 6.2 14.1 1.0 6.2 24.5 2.9 3.3 3.3 Sales YoY% -0.8 25.4 27.9 23.7 0.3 26.2 19.8 7.5 8.7 0.7 14.5 10.7 Operating Profit YoY% -95.7 8,324.5 89.5 39.6 -4.7 29.7 22.2 -2.2 -35.2 -26.3 3.1 1.9 Net Profit excl. One-offs YoY% NM NM 92.7 -26.1 36.1 42.4 25.6 4.9 -49.3 -38.9 -2.2 2.3

Source: Company data, HSBC estimates


14

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Financials & valuation: Semen Indonesia Reduce Financial statements

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Profit & loss summary (IDRb)

Revenue 26,987 27,079 29,995 33,850EBITDA 8,295 7,073 6,835 7,306Depreciation & amortisation -1,341 -1,542 -1,672 -1,688Operating profit/EBIT 6,954 5,532 5,163 5,618Net interest -97 42 -60 1PBT 7,091 5,633 5,163 5,680HSBC PBT 6,889 5,593 5,123 5,640Taxation -1,517 -1,227 -1,135 -1,256Net profit 5,566 4,406 4,028 4,423HSBC net profit 5,364 4,366 3,988 4,383

Cash flow summary (IDRb)

Cash flow from operations 6,724 5,792 5,112 5,583Capex -2,581 -4,764 -1,961 -2,275Cash flow from investment -3,094 -4,764 -1,961 -2,275Dividends -2,417 -2,783 -2,203 -2,014Change in net debt -915 1,755 -948 -1,295FCF equity 4,285 1,028 3,151 3,309

Balance sheet summary (IDRb)

Intangible fixed assets 0 0 0 0Tangible fixed assets 20,221 23,443 23,732 24,319Current assets 11,649 9,392 10,280 12,075Cash & others 4,926 3,000 3,304 4,599Total assets 34,315 35,341 36,577 39,019Operating liabilities 5,393 4,967 5,023 5,055Gross debt 3,861 3,690 3,045 3,045Net debt -1,065 690 -259 -1,553Shareholders funds 24,042 25,665 27,491 29,900Invested capital 21,550 24,868 25,686 26,740

Ratio, growth and per share analysis

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Y-o-y % change

Revenue 10.1 0.3 10.8 12.9EBITDA 2.4 -14.7 -3.4 6.9Operating profit -0.3 -20.5 -6.7 8.8PBT 2.5 -20.6 -8.3 10.0HSBC EPS 1.6 -18.6 -8.7 9.9

Ratios (%)

Revenue/IC (x) 1.3 1.2 1.2 1.3ROIC 26.5 18.6 15.9 16.7ROE 23.9 17.6 15.0 15.3ROA 18.0 13.4 11.9 12.3EBITDA margin 30.7 26.1 22.8 21.6Operating profit margin 25.8 20.4 17.2 16.6EBITDA/net interest (x) 85.6 113.7 Net debt/equity -4.3 2.6 -0.9 -5.0Net debt/EBITDA (x) -0.1 0.1 0.0 -0.2CF from operations/net debt 840.0

Per share data (IDR)

EPS Rep (fully diluted) 938.35 742.84 679.17 745.76HSBC EPS (fully diluted) 904.31 736.10 672.42 739.01DPS 452.69 469.18 371.42 339.58Book value 4053.27 4326.93 4634.68 5040.85

Key forecast drivers

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Cement Capacity ('000 ton) 32,200 32,200 38,200 38,200Domestic ASP (IDR '000/ton) 937 900 886 904GP/ton (IDR '000) 405 343 318 321EBITDA/ton (USD) 24 19 16 16Export Volume - % of Total 8 8 8 9Capacity Utilization (%) 90 92 95 97

Valuation data

Year to 12/2014a 12/2015e 12/2016e 12/2017e

EV/sales 2.9 2.9 2.6 2.3EV/EBITDA 9.4 11.2 11.5 10.5EV/IC 3.6 3.2 3.0 2.9PE* 15.1 18.6 20.3 18.5P/Book value 3.4 3.2 3.0 2.7FCF yield (%) 5.4 1.3 4.0 4.2Dividend yield (%) 3.3 3.4 2.7 2.5

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (IDR)13675.00 Target price (IDR)9700.00 -

29.1

Reuters (Equity) SMGR.JK Bloomberg (Equity) SMGR IJMarket cap (USDm) 6,245 Market cap (IDRb) 81,114Free float (%) 49 Enterprise value (IDRb) 79298Country Indonesia Sector Construction MaterialsAnalyst Shishir Singh Contact +852 2822 4292

Price relative

Source: HSBC Note: price at close of 07 Apr 2015

9271

11271

13271

15271

17271

19271

9271

11271

13271

15271

17271

19271

2013 2014 2015 2016Semen Indonesia Rel to JAKARTA S E COMPOSITE


15

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Financials & valuation: Indocement Tunggal Prakar Reduce Financial statements

Year to 12/2014a 12/2015e 12/2016e 12/2017e


Revenue 19,996 19,521 22,466 25,011EBITDA 6,732 5,801 6,548 7,063Depreciation & amortisation -878 -1,138 -1,380 -1,535Operating profit/EBIT 5,854 4,663 5,167 5,528Net interest 790 801 712 719PBT 6,790 5,552 5,967 6,334HSBC PBT 6,669 5,472 5,887 6,254Taxation -1,516 -1,299 -1,411 -1,507Net profit 5,271 4,252 4,555 4,826HSBC net profit 5,150 4,172 4,475 4,746


Cash flow from operations 5,337 5,615 5,603 6,028Capex -3,459 -3,372 -2,724 -2,393Cash flow from investment -3,403 -3,372 -2,724 -2,393Dividends -3,312 -3,479 -2,806 -3,006Change in net debt 1,322 1,236 -73 -629FCF equity 2,563 2,163 2,799 3,555


Intangible fixed assets 0 0 0 0Tangible fixed assets 12,144 14,378 15,722 16,579Current assets 16,087 14,404 14,923 16,005Cash & others 11,256 10,044 10,118 10,747Total assets 28,885 29,445 31,316 33,263Operating liabilities 3,328 3,090 3,211 3,337Gross debt 76 100 100 100Net debt -11,180 -9,944 -10,018 -10,647Shareholders funds 24,785 25,558 27,306 29,126Invested capital 13,646 15,648 17,316 18,500


Year to 12/2014a 12/2015e 12/2016e 12/2017e

Y-o-y % change

Revenue 7.0 -2.4 15.1 11.3EBITDA -0.8 -13.8 12.9 7.9Operating profit -2.0 -20.3 10.8 7.0PBT 2.9 -18.2 7.5 6.2HSBC EPS 4.6 -19.0 7.3 6.1

Ratios (%)

Revenue/IC (x) 1.6 1.3 1.4 1.4ROIC 37.3 24.4 23.9 23.5ROE 21.6 16.6 16.9 16.8ROA 19.1 14.6 15.0 15.0EBITDA margin 33.7 29.7 29.1 28.2Operating profit margin 29.3 23.9 23.0 22.1EBITDA/net interest (x) Net debt/equity -45.1 -38.9 -36.7 -36.5Net debt/EBITDA (x) -1.7 -1.7 -1.5 -1.5CF from operations/net debt




Year to 12/2014a 12/2015e 12/2016e 12/2017e

Cement Capacity ('000 ton) 20,500 20,900 24,900 24,900Domestic ASP (IDR '000/ton) 1,091 1,036 1,054 1,073GP/ton (IDR '000) 499 430 430 430EBITDA/ton (USD) 31 24 24 24Export Volume - % of Total 0 0 0 0Capacity Utilization (%) 93 91 93 94

Valuation data

Year to 12/2014a 12/2015e 12/2016e 12/2017e

EV/sales 3.6 3.8 3.3 2.9EV/EBITDA 10.8 12.7 11.3 10.4EV/IC 5.3 4.7 4.3 4.0PE* 16.4 20.3 18.9 17.8P/Book value 3.4 3.3 3.1 2.9FCF yield (%) 3.1 2.6 3.3 4.2Dividend yield (%) 3.9 4.1 3.3 3.6


Issuer information


28.1

Reuters (Equity) INTP.JK Bloomberg (Equity) INTP IJMarket cap (USDm) 6,505 Market cap (IDRb) 84,484Free float (%) 35 Enterprise value (IDRb) 73877Country Indonesia Sector Construction MaterialsAnalyst Shishir Singh Contact +852 2822 4292

Price relative


15627

17627

19627

21627

23627

25627

27627

15627

17627

19627

21627

23627

25627

27627

2013 2014 2015 2016Indocement Tunggal Prakar Rel to JAKARTA S E COMPOSITE


16

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Financials & valuation: Holcim Indonesia Reduce Financial statements

Year to 12/2014a 12/2015e 12/2016e 12/2017e


Revenue 10,529 10,607 12,143 13,442EBITDA 2,013 1,728 1,802 1,820Depreciation & amortisation -697 -759 -802 -801Operating profit/EBIT 1,316 970 1,000 1,019Net interest -238 -350 -394 -399PBT 1,009 620 607 620HSBC PBT 1,018 620 607 620Taxation -339 -167 -164 -167Net profit 670 452 442 452HSBC net profit 740 452 442 452


Cash flow from operations 1,709 906 928 951Capex -2,838 -1,644 -486 -538Cash flow from investment -2,838 -1,644 -486 -538Dividends -667 -314 -324 -361Change in net debt 1,910 1,052 -119 -52FCF equity -970 -738 442 413


Intangible fixed assets 0 0 0 0Tangible fixed assets 14,498 15,384 15,068 14,804Current assets 2,291 2,528 2,798 3,076Cash & others 215 400 400 400Total assets 17,195 18,318 18,272 18,286Operating liabilities 2,527 2,273 2,227 2,201Gross debt 5,374 6,612 6,494 6,442Net debt 5,160 6,212 6,094 6,042Shareholders funds 8,755 8,892 9,010 9,101Invested capital 14,048 15,238 15,239 15,279


Year to 12/2014a 12/2015e 12/2016e 12/2017e

Y-o-y % change

Revenue 8.7 0.7 14.5 10.7EBITDA -23.5 -14.1 4.3 1.0Operating profit -35.2 -26.3 3.1 1.9PBT -24.5 -38.5 -2.2 2.3HSBC EPS -49.3 -38.9 -2.2 2.3

Ratios (%)

Revenue/IC (x) 0.8 0.7 0.8 0.9ROIC 6.7 4.8 4.8 4.9ROE 8.4 5.1 4.9 5.0ROA 5.2 4.0 4.0 4.1EBITDA margin 19.1 16.3 14.8 13.5Operating profit margin 12.5 9.1 8.2 7.6EBITDA/net interest (x) 8.5 4.9 4.6 4.6Net debt/equity 58.9 69.8 67.6 66.3Net debt/EBITDA (x) 2.6 3.6 3.4 3.3CF from operations/net debt 33.1 14.6 15.2 15.7




Year to 12/2014a 12/2015e 12/2016e 12/2017e

Cement Capacity ('000 ton) 10,600 11,800 12,500 12,500Domestic ASP (IDR '000/ton) 1,001 991 1,000 1,012GP/ton (IDR '000) 346 310 307 307EBITDA/ton (USD) 19 15 14 13Export Volume - % of Total 0 0 0 0Capacity Utilization (%) 91 80 83 88

Valuation data

Year to 12/2014a 12/2015e 12/2016e 12/2017e

EV/sales 1.6 1.6 1.4 1.3EV/EBITDA 8.2 10.1 9.6 9.5EV/IC 1.2 1.1 1.1 1.1PE* 15.8 25.9 26.5 25.9P/Book value 1.3 1.3 1.3 1.3FCF yield (%) -8.6 -6.5 3.9 3.7Dividend yield (%) 3.5 2.7 2.8 3.1


Issuer information


41.0

Reuters (Equity) SMCB.JK Bloomberg (Equity) SMCB IJMarket cap (USDm) 900 Market cap (IDRb) 11,686Free float (%) 19 Enterprise value (IDRb) 17492Country Indonesia Sector Building ProductsAnalyst Shishir Singh Contact +852 2822 4292

Price relative


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2013 2014 2015 2016Holcim Indonesia Rel to JAKARTA S E COMPOSITE

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Shishir Singh

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

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Rating distribution for long-term investment opportunities

As of 08 April 2015, the distribution of all ratings published is as follows: Buy 40% (30% of these provided with Investment Banking Services)

Hold 41% (28% of these provided with Investment Banking Services)

Sell 19% (19% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

Share price and rating changes for long-term investment opportunities

Holcim Indonesia (SMCB.JK) Share Price performance IDR Vs HSBC rating

history

Recommendation & price target history

From To Date

N/A Underweight 21 April 2013 Underweight Underweight (V) 27 March 2014 Target Price Value Date

Price 1 2700.00 21 April 2013 Price 2 2300.00 01 May 2013 Price 3 2400.00 10 July 2013 Price 4 2200.00 25 September 2013 Price 5 1900.00 30 October 2013 Price 6 2400.00 27 March 2014 Price 7 2300.00 04 June 2014 Price 8 2200.00 28 August 2014 Price 9 1600.00 30 October 2014 Price 10 1500.00 19 November 2014 Price 11 900.00 19 January 2015

Source: HSBC

Source: HSBC Indocement Tunggal Prakar (INTP.JK) Share Price performance IDR Vs HSBC

rating history


From To Date

N/A Overweight 21 April 2013 Overweight Neutral 25 September 2013 Neutral Underweight (V) 27 March 2014 Target Price Value Date

Price 1 30700.00 21 April 2013 Price 2 31100.00 30 April 2013 Price 3 25900.00 10 July 2013 Price 4 21900.00 25 September 2013 Price 5 20600.00 27 March 2014 Price 6 20300.00 04 June 2014 Price 7 20800.00 28 August 2014 Price 8 20100.00 02 November 2014 Price 9 19300.00 19 November 2014 Price 10 16500.00 19 January 2015

Source: HSBC

Source: HSBC

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Semen Indonesia (SMGR.JK) Share Price performance IDR Vs HSBC rating

history


From To Date

N/A Neutral 21 April 2013 Neutral Underweight 10 July 2013 Target Price Value Date

Price 1 19800.00 21 April 2013 Price 2 19300.00 30 April 2013 Price 3 13800.00 10 July 2013 Price 4 11100.00 25 September 2013 Price 5 11500.00 24 February 2014 Price 6 11600.00 27 March 2014 Price 7 11800.00 28 August 2014 Price 8 11300.00 19 November 2014 Price 9 9300.00 19 January 2015

Source: HSBC

Source: HSBC HSBC & Analyst disclosures

None of the below disclosures applies to any of the stocks featured in this report.

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 28 February 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 28 February 2015, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 28 February 2015, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 28 February 2015, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

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Additional disclosures 1 This report is dated as at 09 April 2015. 2 All market data included in this report are dated as at close 07 April 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 30 May 2014 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report

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Hong Kong SAR

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Mark Webb Regional Head of Conglomerate and Transport Research +852 2996 6574 [email protected]

Parash Jain Analyst +852 2996 6717 [email protected]

Shishir Singh Analyst +852 2822 4292 [email protected]

Stephen Wan Analyst +852 2996 6566 [email protected]

Rajani Khetan Analyst +852 3941 0830 [email protected]

Aric Hui Associate +852 2822 3165 [email protected]

Conglomerate and Transport (Asia-Pacific)

mailto:[email protected]

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