construction - shifting into high gear

8/16/2019 Construction - Shifting Into High Gear

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Construction and Materials│Indonesia│Equity research│September 20, 2015

Sector Note │ Alpha series

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Powered by EFA

ConstructionShifting into high gear

After the 1H15 lull, construction activities are starting to pick up, as project awards■

and government spending accelerates.Timely 2016 budget approval in Oct would signal speedier, more even project■awards and hence, improving earnings visibility for contractors.

Better balance sheets and earnings growth upside indicate room for re-rating.■

Our top picks are laggards that have room to re-rate (ADHI) and those that have■not received rights yet (PTPP & WIKA).

Scalable growth – on the road to infrastructure buildoutGiven the lacklustre progress on tax collection YTD, we recognise that an infrastructurespending cut may be on the government’s agenda in 2015. In our base-case scenario, aRp250tr shortfall in FY15 state revenue would translate into a spending cut of Rp105tr orrevised infra spending of Rp185tr. Nevertheless, the Rp185tr infrastructure spending stillrepresents a rise of above 20% yoy, largely thanks to the favourable base in 2014.

YTD new contract awards progress breeds confidenceThe four listed state-owned contractors guide for 12-76% new contract growth in FY15or 39% on an aggregate basis (higher than the 3-year CAGR of 14% in 2011-14). Wethink that this is achievable considering that 8M15 new contract signings reached Rp48tr(+37% yoy) or 47% of the FY15 new contract target for the sector. Recent positivenewsflow on contract awards such as the 177km Solo-Kertosono toll road and LRTproject points toward a more dynamic job-awarding period in the coming months.

Balance sheets are supportiveThe four listed state-owned contractors are expected to receive capital from thegovernment. Successful fund raising, along with the plausible project line-up, shouldcreate a captive job market for the contractors. Hence, providing multi-year job flows andboost near-to medium-term earnings visibility. In our view, enlarged equity base willeventually translate into higher earnings growth from greater ability to leverage.

Convergence of positivesThe sector had a good share price run in 2014 and commands a premium valuationrelative to other sectors. We think that the premium valuation is warranted due to theconvergence of positive factors like: 1) the government’s longstanding commitment toinfrastructure buildout, as reflected in the public spending boost, 2) full implementation ofthe land-clearing law and removal of bottlenecks for most infrastructure projects, and 3)fortified balance sheets from state capital injection.

Valuation at a premium over other sectors for good reasonOverall, YTD new contract achievement has been on track and the government’scontinued commitment to infrastructure buildout paints a buoyant picture for thecontractors in FY16. Indonesian contractors are trading at 13x CY16 P/E with 18% 3-year EPS CAGR (CY15-17), cheaper than regional peers but with more potential

earnings upside.

Figure 1: Construction vs. JCI

SOURCES: CIMB, COMPANY REPORTS

Overweight (no change)

Highlighted companies

Adhi KaryaADD, TP Rp2,500, Rp2,075 close

Direct appointment of being sole contractor forJakarta’s LRT project should provide ADHIwith multi-year contracts. This should answersinvestors’ concerns with regards to ADHI’sexecution risk in terms of job-fetching abilities.The stock is attractive on valuation basis.

Pembangunan PerumahanADD, TP Rp4,500, Rp3,400 close

As a state-owned contractor with the biggestlocal presence, the company is also one of thebeneficiaries of improved governmentspending Its known expertise in building

seaports stand in good stead consideringJokowi’s medium term plan for connectivitybetween islands.

Summary valuation metrics

Linda LAUWIRA

T (62) 21 3006 1734E [email protected]

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Premium (discount) Construction P/E JCI P/E

P/E (x) Dec-14A Dec-15F Dec-16F

Adhi Karya 11.53 10.31 11.19

Pembangunan Perumahan 30.94 24.16 16.41

Waskita Karya 30.94 23.22 16.77

Wijaya Karya 27.05 28.71 20.19

P/BV (x) Dec-14A Dec-15F Dec-16F

Adhi Karya 2.14 2.05 2.71

Pembangunan Perumahan 6.89 5.57 4.32

Waskita Karya 5.45 2.45 2.19

Wijaya Karya 4.17 3.79 3.30

Gross Dividend Yield Dec-14A Dec-15F Dec-16F

Adhi Karya 1.14% 0.78% 0.59%

Pembangunan P erumahan 0.56% 0.70% 0.90%

Waskita Karya 0.68% 0.71% 1.12%

Wijaya Karya 1.03% 1.11% 1.04%

http://www.efa.biz/http://www.efa.biz/http://www.efa.biz/


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KEY CHARTS

Scalable growthThe government has allocated Rp290tr to infrastructuredevelopment in 2015, almost double the infrastructurespending in 2014. The viability of such an aggressive

infrastructure spending has been questioned. Most of theconcerns stem from the risk of shortfall in thegovernment’s target revenue. Under our base-casescenario, we estimate that FY15 state revenue will missits target by Rp250tr. This is likely to lead to a governmentspending cut of Rp105tr, which would translate into anFY15 infrastructure budget cut of Rp185tr. Nonetheless,the revised FY15 infrastructure budget of Rp185trrepresents a 23% yoy increase.

YTD new contract progress breedsconfidenceThe aggregate 9M15 new contracts of Rp61tr represents62% of the FY15 aggregate new contract target, which wedeem in line with the historical average 9M achievementof 64% in the past five years. On an aggregate basis, theRp98tr FY15 new contracts signify a 39% yoy increase.This is much higher than the historical 3-years CAGR of14% (in FY11-14).

Balance sheets are supportiveThe aggregate equity for the four listed state -ownedcontractors at end-1H15 stood at Rp15.3tr (US$1bn),which implies that their investments in the next threeyears could constitute 60% of their equity base. Thecapital injected by the government should fortify the state -owned contractors’ balance sheets, enabling them topursue even larger projects in the future.

Valuation at a premium for good reason Indonesian contractors are trading at 13x CY16 P/E with18% 3-year EPS CAGR, which is cheaper than theirregional peers but with more potential earnings upside.

SOURCE: CIMB, COMPANY REPORTS

FY14 infra

spending

FY15F infra

spending

Cut in infra

spending

yoy growth

(%)

150 290 - 93%

20% c ut in infra spending 150 232 58 55%

25% cut in infra spending 150 218 73 45%




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Figure 2: Sector Comparisons


Price Target Price

(local curr) (local curr) CY2015 CY2016 CY2015 CY2016 CY2015 CY2016 CY2015 CY2016 CY2015 CY2016

Adhi Karya ADHI IJ Add 2,075 2,500 260 10.3 11.2 41.1% 2.0 2.7 23.3% 27.3% 3.9 3.3 0.8% 0.6%

Nusa Raya Cipta NRCA IJ Add 675.0 950.0 117 7.9 9.7 -14.4% 1.5 1.3 21.1% 14.4% 8.9 9.7 4.2% 3.2%

Pembangunan Perumahan PTPP IJ Add 3,400 4,500 1,145 24.2 16.4 28.3% 5.6 4.3 27.1% 29.7% 8.6 6.9 0.7% 0.9%

Total Bangun Persada TOTL IJ Add 660.0 1,120 157 11.6 8.9 17.7% 2.5 2.2 24.1% 26.5% 5.6 4.5 4.4% 5.2%Wijaya Karya WIKA IJ Hold 2,710 2,900 1,159 28.7 20.2 17.2% 3.8 3.3 14.8% 17.5% 12.4 8.8 1.1% 1.0%

Waskita Karya WSKT IJ Add 1,610 2,100 1,520 23.2 16.8 40.3% 2.4 2.2 14.4% 13.8% 6.3 4.5 0.7% 1.1%

Indonesia 16.5 13.3 18.0% 3.1 2.8 22.1% 23.1% 7.9 6.6 2.2% 2.2%

Sino-Thai Eng & Construction STEC TB Reduce 25.00 18.40 1,072 27.3 25.8 0.7% 4.2 3.8 16.6% 15.6% 16.3 15.7 1.8% 1.6%

CH. Karnchang CK TB Hold 26.75 25.00 1,274 24.1 20.3 -1.6% 2.1 1.9 9.5% 9.9% 18.1 17.3 1.9% 1.9%

Italian-Thai Development ITD TB Reduce 8.45 5.10 1,255 59.9 46.5 36.4% 3.2 3.0 5.3% 6.6% 18.2 18.3 0.6% 0.6%

Thailand 32.0 27.6 4.7% 2.8 2.7 9.5% 10.0% 17.8 17.4 1.4% 1.3%

ACC Limited ACC IN Add 1,375 1,827 3,885 18.4 12.6 28.2% 3.0 2.7 16.4% 22.4% 9.9 6.6 3.0% 4.3%

Hindustan Construction HCC IN Add 17.60 44.80 206 na 19.9 na 0.8 0.7 -1.3% 3.7% 8.2 5.8 1.2% 1.5%

NCC Limited NJCC IN Add 66.40 91.30 555 15.3 9.8 na 1.1 1.0 7.5% 10.5% 5.0 3.9 1.4% 2.0%

India 19.0 12.4 28.2% 2.2 2.0 12.2% 17.1% 8.5 5.9 2.7% 3.9%

Gamuda GAM MK Add 4.63 6.04 2,654 13.8 13.5 na 1.6 1.6 11.9% 12.0% 12.8 12.7 2.5% 2.5%

IJM Corp Bhd IJM MK Add 3.41 3.82 2,903 19.5 17.6 4.5% 1.7 1.7 8.7% 9.7% 13.5 13.8 2.4% 2.6%

Malaysian Resources Corp MRC MK Add 1.14 1.17 485 21.2 15.6 23.0% 1.1 1.2 6.1% 7.3% 17.3 15.9 2.6% 2.6%

Mudajaya Group MDJ MK Hold 1.12 1.13 144 41.0 21.1 na 0.6 0.6 1.5% 2.7% 16.1 17.9 3.6% 4.0%

Sunway Bhd SWB MK Add 3.50 3.95 1,471 9.9 9.5 -5.8% 1.1 1.0 11.5% 11.0% 13.4 13.2 10.6% 3.4%

WCT Holdings WCTHG MK Hold 1.35 1.23 390 13.7 12.1 1.3% 0.7 0.7 5.6% 5.8% 12.3 13.2 2.9% 3.3%

Malaysia 14.8 13.7 5.8% 1.3 1.4 9.5% 9.9% 13.6 13.6 3.8% 2.8%

Average (all) 18.5 15.1 15.5% 1.9 1.9 11.0% 12.6% 11.4 9.7 2.6% 2.4%

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Shifting into high gear

On the road to infrastructure buildoutDoes the Indonesian government have enough dough?

On paper, the government has allocated Rp290tr (US$21bn) to infrastructuredevelopment in 2015, almost double the infrastructure spending in 2014. Thistranslates into c.2.6% of Indonesia’s GDP in 2015.

Figure 3: Energy subsidies Figure 4: Infrastructure spending

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

The viability of such an aggressive infrastructure spending has beenquestioned. Most of the concerns stem from the risk of shortfall ingovernment’s target revenue. On the revenue front, the key risk comes fromthe aggressive tax collection rate (estimated 12.5% of GDP in 2015), up fromthe estimated 10.9% in 2014 (missing the budgeted tax ratio of 12.4% of GDP).YTD revenue achievement stood at 44% of the government’s FY15 target ofRp1,761.6tr. This lends credence to concerns about the risk of Indonesia’sFY15 state revenue falling short of the government’s target. One key area thatseems to be dragging government revenue is the 7M15 VAT collection ofRp206tr, which represents 36% of the government’s FY15 VAT target ofRp577tr (vs. historical 3-year average of 52%). As VAT represented 33% of

consolidated state revenue in 7M15, any shortfall may result in spending cuts.On a more positive note, 7M15 tax collection of Rp618tr was flat yoy (vs.Rp614tr in 7M14). Considering the fact that Indonesia’s tax collection has never contracted (even during the economic slowdown in 2009), we believethat FY15 tax revenue will flatline yoy.

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Figure 5: State revenue breakdown (Rp tr)


Figure 6: Government spending breakdown (Rp tr)


We expect 2015 government spending to increase by 10% yoy or Rp200tr toRp1,984tr. The 10% increase in FY15 government spending is at risk from

revenue falling short of expectations. If history repeats itself and 2015 revenueunderperforms its target, the government is likely to cut infrastructure spending.We have tried to determine the size of the infrastructure spending cut thatwould correspond with the possible government revenue shortfall. In our worst-case scenario where FY15 state revenue misses its target by Rp300tr, weestimate that the government will cut spending by Rp155tr. If we assume thatthe spending cut will come mainly from the infrastructure spending budget ofRp290tr, the government is likely to slash the FY15 infrastructure budget toRp135tr (10% decline from FY14 realised infrastructure spending). In our base-case scenario where FY15 state revenue misses its target by Rp250tr,government spending is likely to be cut by Rp105tr. This would translate intothe FY15 infrastructure budget being slashed by Rp185tr. Nevertheless, therevised FY15 infrastructure budget of Rp185tr represents a 23% yoy increasefrom FY14 realised infrastructure spending of Rp150tr.

Even with a 40% infrastructure spending cut (or Rp116tr), we think that thegrowth prospects for the construction industry are still favourable in 2015, giventhe low base in 2014.

2014-A 2015-F yoy (%) 7M15 Realized (%)

Revenue and grant 1,550.6 1,761.6 13.6 771.4 43.8

Tax revenue 1,140.5 1,477.5 29.5 618.0 41.8

Domestic income tax 546.1 679.4 24.4 325.5 47.9

Oil and gas 87.4 49.5 (43.3) 31.4 63.4

Non-oil and gas 458.7 629.8 37.3 294.1 46.7

Value Added Tax 409.2 576.5 40.9 205.7 35.7

Land and Building Tax 23.5 26.7 13.6 0.6 2.2

Excise duties 118.1 145.7 23.4 66.7 45.8

International trade tax 43.6 49.3 13.0 19.5 39.6

Import duties 32.3 37.2 15.2 17.2 46.2

Export taxes 11.3 12.1 6.7 2.3 19.1

Non-tax revenue 398.6 269.1 (32.5) 150.2 55.8

Natural resources 242.4 118.9 (50.9) 66.3 55.8

Oil and gas 216.9 81.4 (62.5) 50.4 61.9

Non-oil and gas 25.5 37.6 47.1 15.9 42.3

Profit from SOE 40.3 37.0 (8.3) 29.4 79.6

Other non-tax revenue 86.2 90.1 4.5 41.6 46.2

Revenue from public service 29.6 23.1 (22.0) 12.9 55.9

Others 11.5 15.0 30.5 3.2 21.3

Revenue breakdown

2014-A 2015-F yoy (%) 7M15 Realized (%)

State expenditure 1,770.6 1,984.1 12.1 913.5 46.0

Central govt expenditure 1,197.0 1,319.5 10.2 524.1 39.7

Energy subsidies 341.8 137.8 (59.7) 74.4 54.0

Fuel subsidies 240.0 64.7 (73.0) 42.5 65.7

Electricity subsidies 101.8 73.1 (28.2) 31.9 43.6 Non-energy subsidies 50.2 74.3 48.0 31.5 42.4

Interest payment 133.4 155.7 16.7 89.4 57.4

Regional transfer 573.7 664.6 15.8 389.3 58.6

Overall balance (220.0) (222.5) 1.2 (142.1) 63.9

% deficit to GDP 2.1% 2.0%

Financing 246.6 222.5 (9.8) 207.5 93.3

Domestic financing 262.2 242.5 (7.5) 234.4 96.7

Net foreign financing (15.6) (20.0) 28.2 (26.9) 134.5

Spending breakdown


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Figure 7: Tolerable government revenue shortfall


Figure 8: Possible cuts in FY15 infrastructure spending


YTD new contract achievement

The companies that hoped for tenders to be awarded earlier this year weredisappointed, as the consolidation pains and lengthy administration paperworkhindered the tender process.

However, we are encouraged by the increase in positive newsflow oninfrastructure-related projects such as the groundbreaking of Jakarta’s long-awaited light trail transit (LRT). We also saw that new contract signings for thecontractors under our coverage started to pick up in Aug, as shown below.

Waskita Karya (WSKT IJ). WSKT bagged c.Rp11tr of new contracts (+3%yoy) in 8M15 or 44% of its FY15 target of Rp25tr. This was below itshistorical average 8M achievement of 61% in the past five years. On 8 Sep2015, Jasa Marga (the majority shareholder of the Solo-Ngawi and Ngawi-

Kertosono toll road sections) announced the winner of the construction jobs.WSKT won c.Rp5.5tr in construction jobs for the two toll road sections. Thisshould raise its YTD new contracts to Rp16.5tr or 66% of its FY15 target ofRp25tr, broadly in line with its historical 9M average of 71% in the past fiveyears.

Realized

State Budget

2014

Revised

State Budget

2015

Revenue shortfalls scena rios 100 150 200 250 300

Total revenue 1,551 1,762 1,662 1,612 1,562 1,512 1,462

Total spending 1,771 1,984 1,984 1,984 1,984 1,984 1,984

Central govt spending 1,197 1,320 1,320 1,320 1,320 1,320 1,320

CG - non subsidies & interest 672 952 952 952 952 952 952

Local government transfer 574 665 665 665 665 665 665

Deficit (220) (223) (323) (373) (423) (473) (523)

Additional deficit created (100) (150) (200) (250) (300)

Additional deficit to meet 2.5% max deficit (50) (50) (50) (50) (50)

Central government spending cut (50) (100) (150) (200) (250)

Natural unspent CG (10% of non subsidy & int CG) 95 95 95 95 95

Additional spending cut needed (5) (55) (105) (155)

Scenarios for 2015 State Budget Revisions

FY14 infra spendingFY15F infra

spending

Cut in infra

spendingyoy growth (%)

Initial proposal 150 290 - 93%







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Figure 9: WSKT’s 8M15 new contracts achievement Figure 10: WSKT’s YTD new contract achievement as % of itsFY15 target


Adhi Karya (ADHI IJ). ADHI recorded c.Rp7.8tr of new contracts (+73% yoy)in 8M15 or 51% of its FY15 target of Rp15.2tr. We deem this in line with itshistorical 8M average achievement of 49% in the past five years. Apresidential decree was signed in the first week of Sep 15, directlyappointing ADHI as the contractor for the 24km-long LRT track, with anintercity route. Our discussions with the company revealed that the contractvalue may be worth up to Rp5tr. The LRT project should bring ADHI’s YTDnew contracts signed to Rp12.8tr or 84% of its FY15 target. We deem thisabove its historical 9M average achievement of 58% in the past five years.

Figure 11: ADHI's YTD new contracts signed (Rp bn) Figure 12: ADHI’s YTD new contract achievement as % of itsFY15 target


Pembangunan Perumahan (PTPP IJ). PTPP signed c.Rp16tr of newcontracts (+47% yoy) in 8M15 or 59% of its FY15 target of Rp27tr. Wedeem this in line with historical 8M average of 56% in the past five years.

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Figure 13: PTPP’s 8M15 new contracts signed (Rp bn) Figure 14: PTPP’s YTD achievement as % of its FY15 target


Wijaya Karya (WIKA IJ). WIKA bagged c.Rp12.9tr of new contracts (+49%yoy) in 8M15 or 42% of its FY15 target of Rp30.6tr. We deem this below itshistorical 8M average achievement of 54% in the past five years. Our recentdiscussions with the company revealed that it is waiting for theannouncement on the winner of the construction jobs for a 2GW powerplant located in Java. The company stated that the construction value of the2GW power plant is worth up to Rp11tr. It is still unclear whether the Rp11trwill be handed out to a single contractor or to a consortium.

Figure 15: WIKA’s 8M15 new contracts signed (Rp bn) Figure 16: WIKA YTD achievement as % of its FY15 target


The four state-owned contractors bagged new contracts of c.Rp48tr (+37% yoy)in 8M15 or 47% of their combined FY15 new contracts target. We deem thisslightly below its historical 8M average achievement of 55% in the past fiveyears. The recent newsflow and our checks with the contractors in our universebuoy our confidence in the sector, as Sep promises to be a much better monthfor job awards than Aug. Note that WSKT won Rp5.5tr in contracts for the Solo-Kertosono toll road and ADHI won Rp1.5tr in contracts for the same toll road.The approved LRT project promises to bring c.Rp5tr new contracts for ADHI.Our rough estimates reveal that the aggregate 9M15 new contracts for the four

state-owned contractors may amount to Rp61tr (+47% yoy), as we factor in thetoll road, LRT project and similar new contract wins of Rp1.5tr each in Sep forWIKA and PTPP. The estimated aggregate 9M15 new contracts of Rp61trrepresents 60% of their FY15 combined new contract targets, which we deemin line with their historical 9M average achievement of 64% in the past fiveyears.

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Figure 17: Aggregate monthly new contracts for ADHI, PTPP,WIKA and WSKT

Figure 18: Aggregate 9M15 new contract achievement as % ofFY15 target


We are confident that the contractors will meet their 2015 new contract targets,which would translate into 12-76% yoy new contract growth. On aggregatebasis, the estimated Rp98tr new contracts in 2015 signify 39% yoy growth. Thisis much higher than the historical 3-year CAGR of 14%.

Figure 19: New contract signing 2011-15


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2016 and beyond

What to expect from the government in 2016?

The government is sticking to its guns in 2016 by making infrastructure the toppriority. It has committed to spending up to Rp314tr on infrastructuredevelopment in 2016 (8% yoy increase from 2015 infrastructure budget). While

the 8% yoy increase does not seem impressive, we think that the government’sinfrastructure budget growth in 2016 may surprise on the upside, as therealised infrastructure spending in 2015 may fall short of expectations.

Figure 20: Infrastructure spending breakdown


Figure 21: Energy subsidies to take a backseat to infrastructure spending in FY16


The 2016 state budget unveiled in August 17th

underlines the currentadministration’s determination to spend at least 2.5% of GDP on infrastructure.We applaud the current administration’s commitment to infrastructuredevelopment, an area that sadly took a backseat during the previousadministration. The government projects that the construction industry will

2015F 2016F y-y (%)

Infrastructure 290 314 8

Central government spending 194 165 (15)

Ministry of Public Works and Housing 118 108 (8)

Ministry of Transportation 59 47 (20)

Ministry of Agriculture 9 6 (30)

Ministry of Energy and Mineral Resources 8 4 (56)

Non-central government spending 6 5 (11) Viabili ty gap fund 1 1 (8)

Grant 5 4 (11)

Local government transfer 38 76 100

Special allocation fund 30 57 93

Village funds for infrastructure 8 19 127

Financing 34 49 46

Government inves tment 5 9 80

State capital injection 29 40 40

Social infrastructure 7 7 2

Ministry of Education and Culture 4 6 39

Ministry of Religion 2 1 (76)

Supporting infrastructure 2 2 11

Ministry of Defense 1 2 23

Ministry of Industry 1 1 (17)

Others 10 9 (9)

Rp tr

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expand by 7% p.a. in FY15/16 or 1.2x/1.3x national GDP growth. As thegovernment ramps up infrastructure spending, we think that the constructionindustry will expand at a faster growth rate than the projected 7% p.a. inFY15/16.

Figure 22: Construction spending/GDP multiplier may breach

the 2004-14 average, as government ramps up infrastructurespending

Figure 23: The state-owned contractors’ revenue rose at a

faster pace than the construction industry as a whole


We compared the four state-owned contractors’ revenue growth to industrygrowth in 2008-14. We found that the revenue of the four state-ownedcontractors rose at a faster pace than the construction industry average in2011-13. We believe that market share accretion was the reason for therevenue growth spurt in 2011-13. The game changer for the state-owned

contractors was the previous administration’s introduction of a long-term roadmap for Indonesia’s infrastructure development, the Government AccelerationInfrastructure Programme (MP3EI), in 2010. Before the launch of MP3EI,infrastructure development was slow due to the lack of clear guidance from thegovernment. The road map provided the contractors with multi-yearinfrastructure projects. Regrettably, there was minimal improvement ininfrastructure buildout, as the previous administration struggled in execution.This was evidenced by the lack of political will to push for the land bill and themisguided focus on energy subsidies, rather than infrastructure spending.

We have reason to believe that the four state-owned contractors under ourcoverage will continue to gain market share in the near-to-medium term. Evenif they maintain status quo, the contractors should enjoy robust revenue growth,

as the industry expands as a result of the current administration’s greatercommitment and will to follow through. The capital injections into the statecompanies that aim to enhance the role of various state-owned enterprises(SOE) in speeding up economic development are a key highlight thatdifferentiates the current administration from the previous one. Around half ofthe proposed FY16 state capital injections are allocated to SOEs, withinfrastructure development mandates. We were gratified to see that anotherRp10tr will be injected into PT PLN, the national electricity producer. This isdouble the Rp5tr state capital allocation in the FY15 budget. This underlinesthe government’s urgency in efforts to accelerate the development of 35GWpower plant projects in rural areas. Further scrutiny of the full list of the statecapital injection plan revealed that the government has decided to injectRp1.3tr into PT Jasa Marga, the state-owned toll road operator and the biggest

toll road concession owner in the nation. The government has also allocatedanother Rp3tr to Hutama Karya in FY16 (vs. Rp3.6tr in FY15). Note thatHutama Karya, the unlisted state-owned contractor, has been designated bythe government to build toll roads on the outer islands of Indonesia. Toll roadson the outer islands allegedly yield lower internal rates of return (IRR) than thetoll roads located on the main island such as the Trans-Java toll road.

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Construction growth/GDP growth Average multiple of construction/GDP

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2009 2010 2011 2012 2013 2014

Aggregate SOE contractors revenue growth/construction GDP growth

Average multiple of SOE revenue/Construction GDP


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Figure 24: State-owned contractors’ revenue have expanded at faster clip than theindustry, as they gained market share


Figure 25: State capital Injection breakdown Figure 26: FY16 state capital breakdown


3.8% 4.5% 5.1%6.5% 5.8%

2.9%4.2%

5.3%

7.8% 8.3%

2.7%

3.5%

4.4%

5.3% 5.6%

3.9%

4.8%

5.9%

6.5% 6.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2010 2011 2012 2013 2014

ADHI Market Share PTPP Market Share WIKA Market Share WSKT Market Share

(Rp bn) 2014 2015 2016

State capital 3,000.0 64,883.9 39,420.7

Food sovereignty program - 8,170.0 3,221.9

Infrastructure and Martime Development Program 1,000.0 41,506.6 19,082.3

Energy Sovereignty Program - 5,607.3 11,160.0

Strategic Industry Development Program - 2,600.0 3,956.5

Nat ional Economic Independence Program 2,000.0 7,000.0 1,500.0

Financial Strengthening Program - - 500.0

8%

49%

28%

10%

4%

1%

Food sovereignty program

Infrastructure and MartimeDevelopment Program

Energy SovereigntyProgram

Strategic IndustryDevelopment Program

National EconomicIndependence Program

Financial St rengtheningProgram


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Figure 27: State capital injections


2014

APBNP APBN RAPBNP

Cash Non-Cash Cash Non-Cash

Food sovereignty program - - 8,450.0 8,170.0 - 2,500.0 721.9

Perum Bulog - - 3,000.0 3,000.0 - 2,000.0 -

PT Perikanan Nusantara - - 200.0 200.0 - - 29.4

PT Rajawali Nusantara Indonesia - - 280.0 - - - 692.5

PT Perusahaan Perdagangan Indonesia - - - - 500.0 -

PT Pertani - - 470.0 470.0 - - -

PT Sang Hyang Seri - - 400.0 400.0 - - -

Perum Perikanan Indonesia - - 300.0 300.0 - - -

PT Garam - - 300.0 300.0 - - -

PTPN III - - 3,150.0 3,150.0 - - -

PTPN VII - - 17.5 17.5 - - -

PTPN IX - - 100.0 100.0 - - -

PTPN X - - 97.5 97.5 - - -

PTPN XI - - 65.0 65.0 - - -

PTPN XII - - 70.0 70.0 - - -

Infrastructure and Martime Developme nt Program 1,000.0 3,000.0 44,256.6 23,150.0 18,356.6 18,250.0 832.3

PT Sarana Multi Infrastrukt ur - 2,000.0 20,356.6 2,000.0 18,356.6 5,000.0 -

PT Sarana Multigriya Finansial 1,000.0 1,000.0 1,000.0 1,000.0 - 1,000.0 -

PT Penjaminan Infrastrukt ur Indonesia - - 1,500.0 1,500.0 - 1,000.0 -

PT Hutama Karya - - 3,600.0 3,600.0 - 3,000.0 -

PT Wijaya Karya - - - - - 3,000.0 -

PT Pembangunan Perumahan - - - - - 2,000.0 -

Perum Perumnas - - 2,000.0 1,000.0 - - 235.4

PT Angkasa Pura II - - 3,000.0 2,000.0 - 2,000.0 -

PT Jasa Marga - - - - - 1,250.0 -

PT Pelayaran Nasional Indonesia - - 500.0 500.0 - - 564.8

PT Amarta Karya - - - - - - 32.1

PT Waskita Karya Tbk - - 3,500.0 3,500.0 - - -

PT Adhi Karya Tbk - - 1,400.0 1,400.0 - - -

PT Kereta Api Indonesia - - 2,750.0 2,000.0 - - -

PT Djakarta Lloyd - - 350.0 350.0 - - -

PT Pelindo IV - - 2,000.0 2,000.0 - - -

PT Angkutan Sungai, Danau dan Penyeberangan - - 1,000.0 1,000.0 - - -

PT Dok dan Perkapalan Surabaya - - 200.0 200.0 - - -

PT Dok dan Perkapalan Kodja Bahari - - 900.0 900.0 - - -

PT Industri Kapal Indonesia - - 200.0 200.0 - - -

Energy Sovereignty Program - 607.3 607.3 5,607.3 - 11,160.0 -

PT Perusahaan List rik Negara - - - 5,000.0 - 10,000.0 -

PT Geo Dipa Energi - 607.3 607.3 607.3 - 1,160.0 -

Strategic Industry Developme nt Program - 1,500.0 3,556.5 2,600.0 - 3,000.0 956.5

PT Krakatau Steel - - 956.5 - - 1,500.0 956.5

PT Industri Kereta Api - - - - - 1,000.0 -

PT Barata Indonesia - - - - - 500.0 -

PT Pindad - - 700.0 700.0 - - -

PT Dirgantara Indonesia - - 400.0 400.0 - - - PT PAL Indonesia - 1,500.0 1,500.0 1,500.0 - - -

National Economic Independence Program 2,000.0 - 10,500.0 6,750.0 250.0 1,500.0 -

PT Bahana Pembinaan Usaha Indonesia (BPUI) - - 250.0 - 250.0 500.0 -

PT Askrindo 700.0 - - 500.0 - 500.0 -

Perum Jakrindo (d.h PT Sarana Pengembangan Usaha) 1,300.0 - - 500.0 - 500.0 -

PT Permodalan Nasional Madani - - 1,000.0 1,000.0 - - -

PT Perusahaan Pengelola Aset - - 2,000.0 1,000.0 - - -

PT Pengembangan Pariwisat a Indonesia - - 250.0 250.0 - - -

PT Antam - - 7,000.0 3,500.0 - - -

Financial Strengthening Program - - - - - 500.0 -

PT Reasuransi Indonesia Utama - - - - - 500.0 -

Total 3,000.0 5,107.3 67,370.4 46,277.3 18,606.6 36,910.0 2,510.7

SOE receiving state capital budget2015 2016

APBNP APBN

64,883.9 39,420.7


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Power projects in the pipeline

Indonesia has made some progress in the development of electricitygeneration capacity, with around 17GW of capacity added over the past fiveyears (8.4% CAGR). However, the current electrification ratio of 82% is stillbelow the government’s target and reflects under-capacity in several areas(mainly beyond the islands of Java and Bali). This stems from the delays in the

completion of the power plant programme under the previous governments.

The current electrification ratio makes it imperative for electricity capacitydevelopment to continue. Indonesia’s electricity consumption has grown at 7%CAGR over the past five years and, based on PLN’s (the state-ownedelectricity producer) projections on customer demand, it is likely to expand by8% p.a. in 2016-22.

PLN’s demand growth forecasts translate into the need for additional installedcapacity of 59GW by 2022. The current government’s plan aims to install35GW of additional capacity by 2019. This plan includes the continuation ofprojects under the previous government’s fast-track programme (FTP), withtotal installed capacity target of 17.5GW (none of which has completedconstruction). While there is low likelihood of the government delivering the35GW target by the end of 2019, the current progress suggests that 60% of thetarget could be achieved by end-2019. This assumes that the contracts for the21GW of projects would be awarded by the end of 2015 and these projectswould secure financing in the following 12 months.

Our energy analyst met with a senior official in charge of electricity supply inthe Ministry of Mining and Mineral resources. The meeting revealed that therehave been positive developments towards meeting the government’s 5-year35GW power plant target. There are currently 134 projects that have enteredthe “procurement” stage, which could translate into contracts for up to 21GW ofprojects being awarded by end-2015. The 21GW of projects are likely toinclude large contracts such as Java-I (2,000MW), Java-V (2,000MW), Java-VII(2,000MW), South Sumatra-VI (600MW), South Sumatra-IX (1,200MW) and

South Sumatra-X (600MW). Even more good news- 112 of the projects havecompleted the land-clearing phase, which is usually the main hurdle to aproject moving forward. For more details, please refer to our energy analystErindra Krishnawan’s note titled “Power progress” published on 30 Jun 2015.

We project that around 50% of the 35GW of additional power capacity willcome from coal-fired power plants. Our channel checks revealed that theinvestment cost for a coal-fired power plant is up to US$1.5m per MW, whichtranslates into total investment cost of US$53bn. If we assume thatconstruction cost makes up c.40% of total investment cost, this would translateinto jobs worth up to US$21bn. Even if we take a more conservative view andassume that only 60% of the planned 35GW power plant projects will beawarded by end-2019, we would still see 21GW of power plants built in thenext five years. Using the same assumption that 50% of the 21GW powerplants will be coal-fired power plants, the construction industry should see jobsworth US$6.3bn for the coal-fired power plants alone. To put it in perspective,the aggregate FY14 new contract achievement by the four listed state-ownedcontractors amounted to US$5bn. The government’s stronger commitment andbetter execution on-the-ground should easily translate into ample jobs for thecontractors going forward.


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Figure 28: 35GW power plant projects Figure 29: Number of 35GW projectsbased on ownership scheme

Figure 30: 35GW project breakdownbased on ownership scheme (MW)

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Toll road projects in the pipeline

Toll road development in Indonesia stalled after the 1998 Asian Financial Crisis(AFC). Nearly all the toll roads in Indonesia or 575.8km of the total 762km(75%) were built before the 1998 AFC. Growth sputtered before picking upagain in 2005, when annual toll road construction (total km) in Indonesia

jumped to 8.9% from a mere 1.1% in 1999-2005. The spike in new toll roadconstruction was a reflection of the government’s commitment to providing afriendly regulatory environment for toll road investment projects. In 2004, RoadLaw No.38/2004 provided a platform for future public-private partnershipschemes and effectively guaranteed minimum IRR for new toll road projects.

Road Law No.38/2004 introduced the following key reforms:

The establishment of the Indonesian Toll Road Authority (BPJT),ending Jasa Marga’s dual role as commercial toll road operator andregulator of private sector toll roads. This ensures fairness during thetender of new projects.

Toll road investments were opened to both SOE and privatecompanies, ending Jasa Marga’s sole right to develop toll roads.

Public-private partnership schemes were introduced for toll roadinvestment.

Initial tariffs were set based on investment return calculations.

Land acquisition became the government’s responsibility.

2008 was another defining year for the Indonesian toll road regulatoryenvironment, as a revolving land fund was made available to private investorswith funds capped at 110% of the initial project cost estimate. This created amore conducive environment for investors, as land acquisition could drag onand put a strain on the investors’ balance sheets.

2014 was another game-changing year, as presidential decree No.71/2012limited the land acquisition process to 583 days and this applied to all projects-both existing and new. The signed decree was passed in 2012 and stated thatthe deadline would only apply to new projects that have not been tendered andcould not be applied retroactively to existing projects until the end of 2014. This

was successfully applied to the South Sumatra project (Trans-Sumatra toll road,Palembang-Indralaya section).

Ownership

scheme

PLN 102 48% 9,945 0.28

IPP 110 52% 25,584 0.72

212 35,529

# of projects MW

102

110

PLN IPP

9,945

25,584

PLN IPP


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Figure 31: Evolution of toll road regulation


Of late, we have started to see a breakthrough in the toll road industry withmore groundbreaking for stalled toll road projects. In Apr, the presidentattended a groundbreaking ceremony for the 140km-long Bakauheni-TerbanggiBesar toll road. In Sep, we witnessed the contract award for the 177km-longSol-Kertosono toll road and 59km-long Cileunyi-Sumedang-Dawuan toll road.

Jasa Marga currently has 13 new toll roads under development with total lengthof 460km. Some of the projects are in the initial stages of construction and

some are in the land-clearing process. We estimate the cost of building a tollroad at Rp70bn per km. Assuming that these toll roads will be built in the nextfive years, construction jobs from Jasa Marga alone could amount to Rp32.2tr(US$2.3bn).

Fortified balance sheets

Capital enhancement from the government

The state-owned contractors have a history of investing in infrastructureprojects that they are interested in bidding for as part of the so-called “paying-for-getting” strategy. This move aimed to boost the contractors’ win rate, asminority equity ownership gives them a certain right-to-match offer that comes

in handy during the tender process.

While this strategy may help the contractor boost its win rate, there areconcerns about the investment possibly leading to a heavier balance sheet.This is a legitimate concern, as a construction business has high workingcapital needs and this is especially true for the state-owned contractors.Sometimes, government-related project owners would not provide anydownpayment at the beginning of construction work and thus, force thecontractor to put up the initial working capital needed. If the contractor has itsfunds tied up in too many minority investments, this would hamper its ability tosecure new jobs. The capital injections by the government provide thecontractors with the means to employ the “paying-for-getting” strategy withoutputting too much strain on their balance sheets.

The aggregate equity for the four listed state-owned contractors at end-1H15stood at Rp15.3tr (US$1bn), which implies that their investments in the nextthree years could constitute 60% of their equity base. Capital injection from thegovernment should then fortified their balance sheet in pursuit of larger jobs.

Time Toll road regulation

1980 Road Law No. 13/1980 assigns sole right to build, operate, and manage toll roads to Jasa Marga

New road law No.38/2004 replaced old road law, new legal framework providing more certainty on investment in the sector and ends JM's dual role

Establishes BPJT

Presidential decree No.36/2005 empowers toll road operators to seize land for toll road purposes at a calculated price based on average of market and tax land price

Presidential decree No. 67/2005 public private partnership regulation

Kepmenpu No.374/KPTS/M/2005 regulation about toll road tariff classification per vehicle and once in every two years tariff increase based on inflation

First tariff hike

2006 Presidential decree No.65/2006 further elucidates issues like independent party appraiser appointment and land price settlement

PERMEN PU No.12/PRT/M/2008 signifies government commitment in toll road projects by:

1) providing land revolving fund

2) land cap of 110% (investors are to pay up to 110% of initial investment cost, excess will be foot by government

Establishment of Sarana Multi Infrastruktur (SMI), a holding entity of Indonesia Infrastructure Finance operating under Indonesia Ministry of Finance

Acts more as an intermediary between project owners (both government and private) and banks

2010 Indonesia Infrastructure Finance launched. Initial capital of Rp600bn and loan options of up to Rp2tr from World Bank and Asian Development Bank

Presidential decree No.56/2011 clarifies PD No.67/2005

1) allowing transfer of shares between investors during the construction phase as long as its below 25%

2) government assistance in the form of fiscal help or land or construction

3) simplification of tender process

Presidential decree No.71/2012 clarification of land acquisition time line set at 583 days.

The land acqusition time line will only apply to new projects while ongoing projects adhere to old rule until end-2014

2004

2005

2008

2009

2011

2012


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Premium valuation is warranted

Convergence of positives

Poised for a re-rating. The sector had a good share price run in 2014 andcommands a premium valuation relative to other sectors. We think that thepremium valuation is warranted due to the convergence of positive factors like:

1) the government’s longstanding commitment to infrastructure buildout, asreflected in the public spending boost, 2) full implementation of the land-clearing law and removal of bottlenecks for most infrastructure projects, and 3)fortified balance sheets from state capital injection.

Set to outperform in FY16. Overall, YTD new contract achievement has beenon track and the government’s continued commitment to infrastructure buildoutpaints a buoyant picture for the contractors in FY16. All in all, the whole sectoris set to Outperform once again in 2016.

Public over private. A near-term sector driver would be the public sector,given the government’s proclamation to realize the aggressive spending onpublic infrastructure. As some preferential treatment is invariably given to state-related companies in terms of contract award, state contractors may have

better growth prospects.

Indonesian contractors are trading at 13x CY16 P/E with 18% 3-year EPSCAGR (CY15-17), cheaper than regional peers but with more potentialearnings upside.

Figure 32: Comparison of company operations


2014 2015F 2016F 2014 2015F 2016F 2014 2015F 2016F 2014F 2015F 2016FFinancial statement (Rp bn)

Revenue 8,653.6 14,306.9 18,743.4 12,427.4 16,093.9 21,497.5 12,463.2 13,419.6 19,075.9 10,286.8 15,461.3 21,802.0

Gross profit (before JO) 998.2 1,644.3 2,263.6 1,532.7 2,041.2 2,736.1 1,424.6 1,279.7 1,865.7 1,108.9 1,718.5 2,481.7

Operating profit 655.4 1,047.5 1,425.2 1,327.7 1,688.8 2,248.7 1,400.9 1,293.2 1,813.1 943.0 1,365.9 1,984.3

Core profit 253.9 424.3 665.0 531.0 681.5 1,003.5 616.5 579.6 824.0 504.0 795.1 1,276.1

Growth

Revenue -11.7% 65.3% 31.0% 6.6% 29.5% 33.6% 4.9% 7.7% 42.2% 6.2% 50.3% 41.0%

Core profit -21.1% 67.1% 56.7% 24.3% 28.3% 47.2% 4.6% -6.0% 42.2% 42.5% 57.8% 60.5%

Profitability metrics

Gross margin 11.5% 11.5% 12.1% 12.3% 12.7% 12.7% 11.4% 9.5% 9.8% 10.8% 11.1% 11.4%

Operating margin 7.6% 7.3% 7.6% 10.7% 10.5% 10.5% 11.2% 9.6% 9.5% 9.2% 8.8% 9.1%

Core profit margin 2.9% 3.0% 3.5% 4.3% 4.2% 4.7% 4.9% 4.3% 4.3% 4.9% 5.1% 5.9%

Gearing position

Total debt 2,019.1 2,019.2 2,439.7 2,595.0 2,945.0 3,295.0 3,014.7 3,016.2 4,368.8 3,162.8 4,512.8 4,512.8

Net debt (cash) 1,207.7 (1,766.9) (1,342.9) (15.6) (525.4) (426.3) 1,017.0 1,664.7 2,637.2 1,487.5 (4,908.8) (4,807.8)

Debt to Equity (x) 1.2 0.4 0.4 1.1 1.0 0.9 0.8 0.7 0.9 1.1 0.5 0.5

Net gearing (x) 0.7 (0.4) (0.2) (0.0) (0.2) (0.1) 0.3 0.4 0.6 0.5 (0.6) (0.5)

Working capital comparisons

Receivable days 110.9 110.9 110.9 212.8 218.7 210.0 116.0 117.7 118.0 229.1 228.8 228.4

Payable days 191.8 191.8 191.8 235.2 215.0 215.0 97.1 97.1 97.1 96.7 96.4 95.8

Inventory days 7.0 7.0 7.0 10.0 10.0 10.0 39.0 39.0 39.0 17.8 16.2 14.9

Driver

New contract, ex-JO (Rp bn) 9,200.0 18,800.0 22,560.0 19,976.0 25,968.8 33,759.4 14,105.6 18,337.2 24,755.2 22,610.0 22,789.3 27,670.8

Backlog (Rp bn) 11,316.6 11,863.0 16,356.2 26,901.9 36,216.4 49,011.2 13,569.3 15,211.7 20,129.3 12,830.0 26,489.1 35,501.5

ADHI PTPP WIKA WSKT


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Regulations, 2014 ("Regulations").This report does not take into account the particular investment objectives, financial situations, or needs of the recipients. It is not intended forand does not deal with prohibitions on investment due to law/jurisdiction issues etc. which may exist for certain persons/entities. Recipientsshould rely on their own investigations and take their own professional advice before investment.

The report is not a “prospectus” as defined under Indian Law, including the Companies Act, 2013, and is not, and shall not be , approved by, orfiled or registered with, any Indian regulator, including any Registrar of Companies in India, SEBI, any Indian stock exchange, or the ReserveBank of India. No offer, or invitation to offer, or solicitation of subscription with respect to any such securities listed or proposed to be listed inIndia is being made, or intended to be made, to the public, or to any member or section of the public in India, through or pursuant to this report.

The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the otheractivities of CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firmprofitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked toinvestment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.

Indonesia: This report is issued and distributed by PT CIMB Securities Indonesia (“CIMBI”). The views and opinions in this research report areour own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of theFinancial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMBI has no obligation to updateits opinion or the information in this research report. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesiancitizens wherever they are domiciled or to Indonesian residents except in compliance with applicable Indonesian capital market laws andregulations.

This research report is not an offer of securities in Indonesia. The securities referred to in this research report have not been registered with theFinancial Services Authority (Otoritas Jasa Keuangan) pursuant to relevant capital market laws and regulations, and may not be offered or soldwithin the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offerwithin the meaning of the Indonesian capital market law and regulations.

Ireland: CIMB is not an investment firm authorised in the Republic of Ireland and no part of this document should be construed as CIMB actingas, or otherwise claiming or representing to be, an investment firm authorised in the Republic of Ireland.

Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (“CIMB”) solely for the benefit of and for the exclusive use of

our clients. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient,our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update, revise or reaffirm its opinion or the information inthis research reports after the date of this report.

New Zealand: In New Zealand, this report is for distribution only to persons who are wholesale clients pursuant to section 5C of the Financial Advisers Act 2008.

Singapore: This report is issued and distributed by CIMB Research Pte Ltd (“CIMBR”). CIMBR is a financial adviser licensed under the Fin ancial Advisers Act, Cap 110 (“FAA”) for advising on inves tment products, by issuing or promulgating research analyses or research reports, whether inelectronic, print or other form. Accordingly CIMBR is a subject to the applicable rules under the FAA unless it is able to avail itself to anyprescribed exemptions.

Recipients of this report are to contact CIMB Research Pte Ltd, 50 Raffles Place, #19-00 Singapore Land Tower, Singapore in respect of anymatters arising from, or in connection with this report. CIMBR has no obligation to update its opinion or the information in this research report.This publication is strictly confidential and is for private circulation only. If you have not been sent this report by CIMBR directly, you may not rely,use or disclose to anyone else this report or its contents.

If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility forthe contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. If the recipient is an accredited investor,expert investor or institutional investor, the recipient is deemed to acknowledge that CIMBR is exempt from certain requirements under the FAAand its attendant regulations, and as such, is exempt from complying with the following :

(a) Section 25 of the FAA (obligation to disclose product information);

(b) Section 27 (duty not to make recommendation with respect to any investment product without having a reasonable basis where you may bereasonably expected to rely on the recommendation) of the FAA;

(c) MAS Notice on Information to Clients and Product Information Disclosure [Notice No. FAA-N03];

(d) MAS Notice on Recommendation on Investment Products [Notice No. FAA-N16];

(e) Section 36 (obligation on disclosure of interest in securities), and

(f) any other laws, regulations, notices, directive, guidelines, circulars and practice notes which are relates to the above, to the extent permittedby applicable laws, as may be amended from time to time, and any other laws, regulations, notices, directive, guidelines, circulars, and practice

notes as we may notify you from time to time. In addition, the recipient who is an accredited investor, expert investor or institutional investoracknowledges that a CIMBR is exempt from Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for anyloss or damage arising from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right tha t is availableto the recipient under Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arisingfrom the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under


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Section 27 of the FAA.

CIMB Research Pte Ltd ("CIMBR"), its affiliates and related companies, their directors, associates, connected parties and/or employees may ownor have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time addto or dispose of, or may be materially interested in, any such securities. Further, CIMBR, its affiliates and its related companies do and seek to dobusiness with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwritingcommitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek

to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicitsuch investment, advisory or other services from any entity mentioned in this report.

As of September 19, 2015, CIMBR does not have a proprietary position in the recommended securities in this report.

CIMB Securities Singapore Pte Ltd and/or CIMB Bank does not make a market on the securities mentioned in the report.

South Korea: This report is issued and distributed in South Korea by CIMB Securities Limited, Korea Branch (“CIMB Korea”) which is license das a cash equity broker, and regulated by the Financial Services Commission and Financial Supervisory Service of Korea. In South Korea, thisreport is for distribution only to professional investors under Article 9(5) of the Financial Investment Services and Capital Market Act of Korea(“FSCMA”).

Spain: This document is a research report and it is addressed to institutional investors only. The research report is of a general nature and notpersonalised and does not constitute investment advice so, as the case may be, the recipient must seek proper advice before adopting anyinvestment decision. This document does not constitute a public offering of securities.

CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services.

Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. Thedistribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instrumentsdescribed herein and may not be forwarded to the public in Sweden.

Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports ofbanks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research).

Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report havenot been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws andregulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer ora placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of theFinancial Supervisory Commission of the Republic of China.

Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (“CIMBS”) based upon sources believed to bereliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived atafter due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CIMBS has no

obligation to update its opinion or the information in this research report.If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, ourobligations owed to such recipient are unaffected.

CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker and issuer including offering of Derivative Warrants Underlying securitiesof the following securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before makinginvestment decisions.

AAV, ADVANC, AMATA, ANAN, AOT, AP, ASP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BECL, BH, BJCHI, BLAND, BMCL, BTS,CBG, CENTEL, CK, CPALL, CPF, CPN, DELTA, DEMCO, DTAC, EARTH, EGCO, ERW, GFPT, GLOBAL, GLOW, GUNKUL, HANA, HMPRO,ICHI, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LOXLEY, LPN, M, MAJOR, MC, MINT, MONO, NOK, PACE,PS, PSL, PTT, PTTEP, PTTGC, QH, RATCH, RCL, ROBINS, RS, S, SAMART, SAPPE, SAWAD, SCB, SCC, SF, SGP, SIRI, SOLAR, SPALI,SPCG, STEC, STPI, SVI, TCAP, THAI, THCOM, TICON, TISCO, TMB, TOP, TPIPL, TRC, TRUE, TTA, TTCL, TTW, TUF, U, UNIQ, UV, VGI,WHA

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to thepolicy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on theStock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general publicinvestor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result maybe changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensingauthorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by,deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report

is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other thanthe original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended tolead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territoryof the United Arab Emirates.

United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited


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(“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knight sbridge, London,SW1X7YB. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligiblecounterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5)of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d)(“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom, or (e) are pe rsons to whom aninvitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in

connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all suchpersons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted o n or relied onby persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant personsand will be engaged in only with relevant persons.

Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does notconstitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any suchnon-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investmentresearch and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent reportmust be considered as a marketing communication.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealerand a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand)Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. InstitutionalInvestors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose

ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professionalexperience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on thiscommunication. The delivery of this research report to any person in the United States of America is not a recommendation to effect anytransactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPCmember and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentionedsecurities please contact a registered representative of CIMB Securities (USA) Inc.

CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution toprofessional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2014.

AAV – Very Good, ADVANC – Very Good, AEONTS – not available, AMATA - Good, ANAN – Very Good, AOT – Very Good, AP - Good, ASK – Very Good, ASP – Very Good, BANPU – Very Good , BAY – Very Good , BBL – Very Good, BCH – not available, BCP - Excellent, BEAUTY – Good, BEC - Good, BECL – Very Good, BGH - not available, BH - Good, BIGC - Very Good, BJC – Good, BLA – Very Good, BMCL - Very Good, BTS - Excellent, CCET – Good, CENTEL

– Very Good, CHG – not available, CK – Very Good, CPALL – not available, CPF – Very Good, CPN - Excellent, DELTA - Very Good, DEMCO – Good, DTAC – Very Good, EA - Good, ECL – not available, EGCO - Excellent, GFPT - Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA - Excellent,HEMRAJ – Very Good, HMPRO - Very Good, ICHI - not available, INTUCH - Excellent, ITD – Good, IVL - Excellent, JAS – not available, JUBILE – notavailable, KAMART – not available, KBANK - Excellent, KCE - Very Good, KGI – Good, KKP – Excellent, KTB - Excellent, KTC – Good, LH - Very Good, LPN

– Very Good, M - not available, MAJOR - Good, MAKRO – Good, MBKET – Good, MC – Very Good, MCOT – Very Good, MEGA – Good, MINT - Excellent,OFM – Very Good, OISHI – Good, PS – Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent, PTTGC - Excellent, QH – Very Good, RATCH – Very

Good, ROBINS – Very Good, RS – Very Good, SAMART - Excellent, SAPPE - not available, SAT – Excellent, SAWAD – not available, SC – Excellent, SCB -Excellent, SCBLIF – Good, SCC – Very Good, SCCC - Good, SIM - Excellent, SIRI - Good, SPALI - Excellent, STA – Very Good, STEC - Good, SVI – VeryGood, TASCO – Good, TCAP – Very Good, THAI – Very Good, THANI – Very Good, THCOM – Very Good, THRE – not available, THREL – Good, TICON – Good, TISCO - Excellent, TK – Very Good, TMB - Excellent, TOP - Excellent, TRUE – Very Good, TTW – Very Good, TUF - Good, VGI – Very Good, WORK – not available.

Rating Distribution (%) Investment Banking clients (%)

Add 56.5% 6.7%Hold 30.7% 4.5%

Reduce 12.6% 1.7%

Distribution of stock ratings and investment banking clients for quarter ended on 30 June 2015

1508 companies under coverage for quarter ended on 30 June 2015


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CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forwardnet dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

*Prior to December 2013 CIMB recommendation framework for stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand,Jakarta Stock Exchange, Australian Securities Exchange, Taiwan Stock Exchange and National Stock Exchange of India/Bombay Stock Exchange were

based on a stock’s total return relative to the relevant benchmarks total return. Outperform: expected to exce ed by 5% or more over the next 12 months.Neutral: expected to be within +/-5% over the next 12 months. Underperform: expected to be below by 5% or more over the next 12 months. Trading Buy:expected to exceed by 3% or more over the next 3 months. Trading Sell: expected to be below by 3% or more over the next 3 months. For stocks listed onKorea Exchange, Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Outperform: Expected positive total returns of 10% ormore over the next 12 months. Neutral: Expected total returns of between -10% and +10% over the next 12 months. Underperform: Expected negative totalreturns of 10% or more over the next 12 months. Trading Buy: Expected positive total returns of 10% or more over the next 3 months. Trading Sell: Expectednegative total returns of 10% or more over the next 3 months.

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