1

CFA Institute Research Challenge

Hosted by

Local Challenge CFA Society of Indonesia

Universitas Padjadjaran

Construction Sector Precast Concrete Industry

Universitas Padjadjaran This report is published for educational purposes only by students

competing in The CFA Institute Research Challenge

WTON: Building The Nation Initiate BUY at IDR1,327; Potential Upside of 11,97%- The structural growth potential for Wijaya Karya Beton (WTON) is supported by dominating market share for each business segment, bright future precast concrete product, and increasing concrete consumption projection on few years ahead. In our perspective, increasing capacity production house will improve the earnings. In addition, their good historical healthy balance sheet, track record in steady earnings growth given its defensive nature, we recommend to BUY with target price of IDR1,327; a potential upside of 11.97%. Higher Sales with solid performance WTON has expansion with allocated their capital expenditure to increasing production capacity & Working Capital from IPO Proceed, and starting to gain the benefits in near future. Moreover, Precast Concrete Demand will grow with CAGR 16.3% in 2014-2018 which is higher than the historical growth of CAGR 9.9% in 2011-2013. In the past five years, the company's revenue continued to increase and recorded a 12,62% CAGR with the major contributors to the Piling sector above 50 % on revenues followed by concrete bridge sector and the sector of railroad padsWTON also had a sustained growth on the back of MP3EI, the Masterplan for Acceleration and Expansion of Indonesia’s Economic Develpoment, through 2025. WTON’s integrated plants should help pave the way for operating efficiencies, enhanced by 6 selling areas across the archipelago and supported by a wide client base.

Solid Fundamentals and Valuations We use DCF model as our primary model, and Residual Income & Abnormal Earning Growth as the robustness check. Our valuation models lead to a target price of IDR 1.327, supported by the DCF, PBR and, PER. We believe WijayaKaryaBeton may offer a long term upside from the high room to grow in its Piling division performance and underpenetrated market unit performance with the support from the established concrete bridge and railroad pads. The steady and diversified business model of WijayaKaryaBeton with a defensive nature is a big plus.

Ticker (Bloomberg):

WTON:IJ

Market Cap

Avg Vol

Share Outstanding

52-Week High

52-Week Low

Beta

ROA (%)

ROE (%)

Sources: Bloomberg

Recommendation Target Price (IDR)

Price, 17 Nov 14 (IDR)

Upside (%)

BUY 1,327.00

1,180.00

11,97

9,064,085 M

50,258,000

8,715 M

1,240

590

1.34

10.02

21.35

WTON’s Key Financial Ratios

Currency (IDR) 2010A 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F Revenue (Tn) 1,430 1,635 2,030 2,644 3,066 3,955 4,479 5,077 5,556

Net Income (Tn) 92 145 179 243 310 392 492 606 726

Earnings per Share (x) 14 22 27 36 46,05 58,19 72,81 89,66 107,53

Return on Asset 6,04% 7,86% 7,47% 8,33% 6,53% 3,72% 3,93% 4,05% 4,07%

Return on Equity 28,59% 33,62% 29,68% 33,30% 13,84% 14,88% 15,70% 16,20% 16,27%

Gross Profit Margin 10.32% 12.62% 13.07% 14.68% 16.15% 15.90% 17.83% 19.98% 23.18%

Net Profit Margin 7.59% 11.23% 11.41% 12.56% 13.85% 13.56% 14,98% 16.27% 17.82%

Analysts:

Asakita Dikarla Muhammad

Joviana Aprilia

Mario Bugchi Habe

Devananda Ega Saputra

Franklin Michael Hutasoit

2

Figure 1. Share ownership as of

December 31, 2013

Business Description n

Wijaya Karya Beton Tbk is Indonesia’s Biggest Precast Concrete Wijaya Karya Beton Tbk (WTON) which well known as WIKA Beton is construction material company that established on March 11, 1997, as a subsidiaries of Wijaya Karya Tbk which is a part of expansion in pre-cast concrete industry. Today, as a leading construction material company in Indonesia with 9 segments in piling (51.3% of total net revenue), concrete bridge (13.1% of total net revenue), railroad pads (12.2% of total net revenue), concrete piles (9.2 % of total net revenue), concrete retaining wall soil (7% of total net revenue), concrete other buildings (5.1% of total net revenue) , concrete building (0.9% of total net revenue), services (0.8% of total net revenue and ) concrete water construction (0.5% of total net revenue). Based on those percentage it implies that WTON is focused on precast concrete. As the market leader in precast concrete industry in Indonesia within the amount of market share 60% (referring to MARS Survey). WTON Manufactures and Distributes Construction Products The Company produces precast concrete structures, including bridge beams, retaining walls, pipes and bearings. WTON serves the heavy construction market in Indonesia. Within 2 million tons per year production capacity is equivalent to 38.6% of total national production capacity and currently owning 8 (eight) operating factories, WTON as the largest precast concrete producer in Indonesia and broader to South East Asia. The existing competitor of WTON is Adhimix Precast Indonesia with the amount of production capacity 0.825 million ton per year is equivalent to 15.93% and owning 4 (four) factories and Jaya Beton Indonesia with the amount of production capacity 0.52 million is equivalent to 10.04% and owning 3 operating factories.

Company Production

Capacity (ton)

Capacity Share

(%)

Number of

Factories Factory Location

WIKA Beton 2,000,000 39 8

North Sumatera,

Lampung, West Java,

South Sulawesi

Adhimix

Precast

Indonesia

825,000 16 4 West Java, East Java

Jaya Beton

Indonesia 520,000 10 3

North Sumatera,

Jakarta, East Java

Total

National

Capacity

5,178,000

Precast Concrete is a Component Key For Infrastructure Project and Buildings Primary consumer of precast concrete is infrastructure project (44%), property (17%) and energy (15%). Dam and highway is infrastructure project which requires big amount of precast concrete structure. Concrete pills contribute biggest revenue inflow to the Company in percentage: 53 %. Referring to previous brief description, we consider the Company has a fine prospect in the nearly future consider as the first company in its industry which already listing. Current firm position as existing industry player which becomes today’s market leader is even stronger as a result from being supported by Indonesia’s infrastructure expense which brings the Company closer to consumer. Supported by large number of factories owned, variety of products as well as professional management, WTON has prevailed in becoming the major manufacturer and market leader of pre-cast concrete product in Indonesia. In term of assuring consistent quality, WTON has applied the “ISO 9000 Quality

78%

1%

15%

6%

PT Wijaya Karya (Persero)Tbk

Yayasan Karyawan WIKA

Koperasi Karya Mitra Satya

Saham yang dibeli kembalioleh perseroan

Wijaya Karya (WIKA)

WIKA’s Employee Foundation

Karya Mitra Satya Cooperative

Buyback Share Capital

Source: Company Profile

3

Figure 2. Revenue Breakdown 2013

Management System”. Gain that is resulted by IPO funding will be allocated to build a concrete factory,enlarge the capacity will strengthen its position as market leader. The factory spreads over strategic locations in Indonesia brings the Company closer to the consumer. Furthermore, well financial performance is reflected from the increase of profit margin, 90% acquisition of Citra Lautan Teduh (CLT) in September 2014 as Bloomberg shows that the largest IPO this year raised by WTON in March also already signed contract for the development of a commercial tower in Myanmar implies its overseas expansion marking three times to overseas contract in 2013, and the double-digit growth referring to revenue and net profit leads the Company to gain potency to grow even better and progressively in the nearly future. Business Segment : Significant Piling Trader; Highly Dominate on Precast Concrete Product

Piling/PC Piles - The largest contributor for the revenue came from the sales of PC piles, which contributed 51.31 percent to the revenue or Rp1,356,405 million. PC Piles sales surged 111.67 percent as of December 31, 2013, compared to 2013 RKAP and 18.7 percent higher compared to the same period last year, which was Rp1,142,032 million. WTON has a significant presence in the integrated concrete and construction related business in Indonesia and become leader market share in Indonesia (42%) and It produce 38,6 % of total national production capacity. The company has planned build some manufacture to increasing production capacity to expanding its precast concrete raw unit vigorously in Indonesia due to the ever growing demand for concrete and other material related.

Concrete Bridge – The second largest contributor was from the sales of Bridge Concrete Products that reached Rp345,758 million, or took 13.08 percent out of the Company’s revenue this year and 175.35 percent compared to 2013 RKAP. The Bridge Concrete Products sales also saw a 43.84 percent higher than last year, which amounted to Rp240,381 million. This concrete road and bridge components have been widely used in both private and public projects, both in Indonesia andoverseas, including North Africa (Algeria). The latest projects that used WTON’s box girder was the inner ring nontoll flyover in Jakarta and Bogor Outer Ring Road (BORR). The project that usedthe Company’s T-Girder was Algeria’s East West Motorway Project. This division generate second biggest revenue with 240 billion Rupiahs, and grew over 59 % in 2012 (YoY). The company has dominant player in the concrete bridge market. This is mainly due to the company’s long history in the business and the widespread recognition that the company’s concrete offer fast growth and are disease resistant.

Railroad Pads– Railway sleepers were the third largest contributor to the Company’s revenue with 12.16 percent out of the revenue. this year’s sales reached Rp321,377 million, which was 106.77 percent of RKAP, and had been increasing gradually since last year, which was Rp82,154 million or 291.19 percent higher. The concrete-based railway sleepers are the substitutes for wooden railway sleepers. WTON’s railway sleepers are mono-block pretension system using a single line production system. This production method is very flexible and suitable for the condition in Indonesia. The Company’s railway sleepers have been used for various projects in Indonesia and have been tested in static and dynamic testing by the Construction Test Laboratory – the Agency for the Assessment and Application of Technology in Serpong. This division generate third biggest growth revenue with 82 billion Rupiahs, with grew over 12 % in 2012 (YoY). WTON is also building a manufacture for railroad pads as a project of their expansion on 2015.

9%

52% 14%

12%

13%

Concrete Piles Piling

Others Railroad Pads

Concrete Bridge

Source: Company’s Annual Report

4

Figure 3. Indonesia GDP

Figure 4. Total Rupiah Bank Loans

to Construction Sector

Figure 5. Demand of Precast

Concrete in Indonesia

Industry Overview and Competitive Analysis s Indonesia Macro Economic Performance Recorded a Surplus Balance Despite the Negative Trend in Emerging Market (EM) Countries Global economy slumped by 3.1% in 2012 to 3.0% in 2013 as the effects of U.S monetary policy that deliver negative impact on emerging market (EM) countries, except the Indonesia which recorded a current account deficit declined significantly and a surplus on balance of payments. The Government successfully achieved economic growth of 5.8% in 2013, exceeding the IMF forecast of 5.3%. Although the economy is expected to weaken in Q4 of 2014, IMF forecasted that Indonesia will managed strong in 2015, back to its GDP positive trend by handling the economy right through tight and structural monetary policy. Indonesian Central Bank (BI) believes that economic growth in the future will be more balanced so that it will further strengthen the economic stability. Priority Policy of the New Government Infrastructure sector looks very promising because this sector is national priority for the Indonesian government at the moment. Measured from The State Budget allocation for this sector has positive trend from IDR78.7 trillion (USD6.4 billion) in 2008 to IDR206 trillion (USD16.8 billion) in 2014. The new government of Jokowi even stated that the allocation for infrastructure will reach IDR469 trillion per year by 2019. Money Injection to Accelerate the Realization Development in the construction sector is affected by the injection of funds for the realization of the project. Based on data released by Indonesian Central Bank, seen the total loans from the banking sector for construction has increased from year to year. In 2007, total number of loans is 36,799 and this number increased to 132,604 on September 2014. The data showed an increase in the number of loans of 260% between 2007-2014. Vigorous Infrastructure Realization in Indonesia to be Continue Infrastructure sector also effected by the Masterplan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI) from 2011 to 2025, which already realizing 204 infrastructure projects with a total investment of IDR412.3 trillion (USD33.9 billion) within a period of 3 years (2011 to June 2014). The target investment value of this infrastrucutre project is IDR1,786 trillion (USD147 billion) by the end of 2025. Infrastructure Development Creates Demand for the Industry The total contribution of GDP from the cement and concrete industry sector rose by 6.7% from the first half of 2013. This uptrend of contribution strongly believe effected the demand for precast concrete to experience the same thing. The demand is currently at 3,748,000 ton and predicted to reach 7,965,000 ton demand by 2018 with Compounded Annual Growth Rate (CAGR) at 16.3% . The same situation happen in WTON annual net profit which also increasing. WTON booked a rise of 24% in 2014’s first semester net profit than last year’s net profit at the same period. Investment Regulation Expected to Reform High dependence on government that run the MP3EI, the realization of investments in the infrastructure sector slow down as a result of the election in the middle of 2014. During this project realization, it hampered in inter-agency coordination and officer at local levels. However, because the new government has been formed, the process is expected to be back to normal as the result of reformation in the bureaucracy. This will allow the infrastructure sector to recover and grow because more than half the infrastructure projects run by private contractors which requires permission from the state officer .

020406080

100120140

Jan

-07

Jan

-08

Jan

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-11

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-12

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-13

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-14

Nu

mb

er o

f L

oan

s (t

ho

usa

nd

) Bank Loans to ConstructionSector

3,176

3,748

4,572 5,670

6,422

7,279

7,965

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

12A 13A 14F 15F 16F 17F 18F

Th

ou

san

d T

on

Total Demand of PrecastConcrete in Indonesia

Source: BCI Asia Estimates, Company

1451 1682

1922 2092

2368

5.2 5.5

0

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%

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Tri

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n

GDP Current Prices

Real GDP

Source: IMF

Source: Indonesian Central Bank

5

012345

Threat ofNew

Entrants

Threat ofSubstituteProducts

BargainingPower ofBuyers

BargainingPower ofSupplier

Intensity ofCompetitive

Rivalry

Figure 7. Precast Concrete

Capacity Share in Indonesia

Competitive Positioning WTON has a Sustainable Business Model for Expansion and strong future growth The company’s growth is supported by the increasing demand of infrastructure products especially in Indonesia, its precast concrete stock which has big capacity production to compete under penetrated market, its strong balance sheet, its precast concrete product which is the company has a lot of experience to prevent risk, also precast concrete from WIKA Beton has dominate indonesian market share. Moreover, part of the company’s expansion plan is financed by the share capital from the market. Competitive in Precast Concrete Industry The Porter’s Five Forces model indicates that WIKA Beton has a strong advantage in Precast Concrete industry ,especially in the threat of new entrants, bargaining power of supplier, and intensity of competitive rivalry. WIKA Beton enjoys its dominance due to the high barrier of entry to precast concrete industry, making it as the largest precast concrete company in Indonesia. Bright Expansion Outlook in Indonesia Massive development in infrastructure sector and its growing demand is predicted give WTON at least a total value of IDR4 trillion (USD326.8 million) new contract in 2015. Using the money from IPO process, WTON use 85% of share for the expansion by developing new factories in three locations that already had its groundbreaking in 2014. Beside that, WTON developed quarries in four existing factories. The company’s development of stone quarry sites secures the main raw material while the building of near-to-shore factories should enhance profitability going forward once economies of scale are reached. High Dominating in Market Share Leading in Industry Sales and Production – Recorded a rise in sales in the first half of 2014 by 13%, wika BETON increasingly dominate the national market share of precast concrete. The amount of 42.7% national market share controlled by wika beton and produces 38.6% of the total national production capacity of Indonesia. With 8 factories operating, WTON is expected to produce 2.05 million tons of precast concrete in 2014. Strategic National Distribution Landscape - Owns 8 existing factories with a strategic location such as in North Sumatra, Lampung, Bogor, Karawang, Majalengka, Boyolali, Pasuruan and South Sulawesi, WIKA BETON has its own distribution system. Relying on its professional management and high quality of human resources, WIKA BETON will deliver products for projects in land to sea. In addition, WIKA BETON can provide installation assistance and guidance that the process can be efficient and achieve competitive cost.

Legend:

5 – No threat to the business

0 – High threat to the business

Source: MARS

0

200

400

600

800

1000

1200

1400

Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

IDR

Per

Sh

are

Indonesia's Opposition Coalition Won the Legislature's Speaker Position

Acquires Concrete Company, Citra autan Teduh

39%

16% 10%

35%

WTON

Adhimix

Jaya Beton

Figure 6. Five Porter

Analysis

Figure 8. WTON Share Prices

Rises 36% in

IPO Debut

Two Indonesia’s Politic

Coalition Make a Peace

Movement

First Half Net

Profit Increases

26.3%

6

Table 1. Target Price Breakdown

Method Price Weight Price x Weight

DCF 1,464 40% 586

PBR 1,115 30% 334

PER 1,356 30% 407

Total 1,327

UPSIDE 11.97%

Investment Summary y Intiate Buy Target Price of IDR1,327 Potential Upside 11.97% Currently WTON trading at IDR1,180 per share which we believe is discounted to our 12 months target price which is at IDR1,327 per share. Our valuation is based on our estimation that WTON growth will be higher in the future due to WTON aggresive expansion and Initial Public Offering (IPO). Earnings Up 30% (YoY) As a market leader in the precast concrete product industry, the Company’s growth is closely linked to the trends of infrastructure development in Indonesia Construction services sector enjoyed a 7.50% growth (BPS data related to Indonesia’s gross domestic products in 2012) and as we known precast concrete products become main components of each infrastructure development; Comparing WTON financial statement year 2012 to 2013, the company managed to increase its net income to IDR241.206 million as of December 31, 2013, or 34.48% higher than 2012 net income of IDR179,368 million. Such an increase in net income was due to the increase in Company’s revenue, Improving Revenue on Concrete Piles Growth The innovation on Two-Layered PC Piles is a method of pile production that is developed by Head Office. The method enables the use of PC bar and join plate with a smaller diameter on piles to produce PC Piles, which eventually improved the efficiency of raw materials and products. Through this inovation and other factors, WTON estimated revenue of IDR 3,543 billion, up 25-30%y-y. First half 2014 revenue growth 24%y-y CAGR. Concrete piles are WTON’s main revenue Contributor (66% of first half of 2014 total revenue). Followed by bridge concrete (13 % in first half of 2014 total revenue). Higher 2014 Operating Margin The Company has also increased its production capacity and new additional lines, new business expansion, particularly quarry and post-tensioning, as well as opened an integrated factory in South Lampung and another factory in East Kalimantan. In addition, the Company has teamed up with PT Krakatau Engineering to establish a joint-venture company in 2014, The realization of the Company’s sales was accounted to IDR2.64 trillion as of Dec. 2013, or 112.62% from RKAP that is worth IDR2.34 trillion. WTON booked operating income of IDR717 billion up 34% y-y with 24 % CAGR.

Valuation y We use 5-years forecast for WTON valuation by allocating proportion of each valuation. We believed this method present better result compare to Discounted Cash flow or Residual Earnings or Abnormal Earning Growth solely since each model has its own weakness. Such as Discounted Cash Flow have problem in its treatment to the capital expenditure and Residual Earnings & abnormal Earning Growth will not be accurate if the revenue recognition and discretionary accrual are being set as company wish. So by combining the method, we could neutralize the weakness of each valuation method. We divide the proportion same each method. Our team divide the proportion with giving more weight on Discounted Cash Flow (40%) and PBR & PER Term forecast it could explain in more precise way. We choose blended method since all valuation method is equally able to explain the same variation of change in WTON price.

Source: Team Estimates

7

Table 2. Valuation Assumption

Valuation Assumption

Risk Free Rate 7.50%

Risk Premium 6.50%

Return Market 14%

Beta 1.3

Cost of Equity 16.2%

Marginal Tax Rate 25%

Figure 9. Sales Forecast 2014-2018

Figure 10. Sales 2009-2018

Figure 11. Net Income After Tax

Valuation assumption 5 Years Projected Net Income, Proportion for Each Method, Cost of Capital, and Continuing Value 5-year projected Net income assumption : we use 5 years forecast because Construction Business have stable growth in medium term. The revenue projection was based on projection of revenue driver by categorizing Demand and the government policy. Looking at all division outlook, we believed that WTON could improve the growth of revenue by 14,65% CAGR Forecasted Sales The five-year projected cash flows are derived from increasing sales due to the Demand of Indonesia Precast Concrete. It is assumed that the capacity production is equal to the sales production. The increased in production capacities are as stated in allocation of Usage IPO Proceed. Based on our calculation, sales are expected to grow at the CAGR of 12,62 % over the next 5 years. Company Outlook & Strategy In 2014, the demand for precast concrete will grow with CAGR 16,3% in 2014-2018 which is higher than the historical growth of CAGR 9,9% in 2011-2013. Moreover, MP3EI will increase demand precast for infrastructure which is equally 50% on average of total demand in 2014-2018. Cost of Capital There are several components and assumption to calculate Cost of Capital. The cost of Equity was derived from CAPM, the risk free rate was get from BI Rate, the market return was 14% with excluding special event. For the beta, it was calculated from unlevered beta WIKA multiply by debt to Equity team’s Estimation WTON. For the cost of debt, it was derived from corporate bonds with rating AA which is 9.5%.

5-Year Proportion Method This is generated from DCF, PBR, &PER valuation method by allocating each proportion of contribution. During the time projection, we forecast the company sales grow will be determined by MP3EI and Demand Precast Concete in Indonesia. This will have significant impact to the company sales revenue growth for the next 5 year projection. Weighted Cost of Capital WTON has capital structure 85% of equity and 15% of debt. We can find that WTON weighted cost of capital is 14.82%. Continuing Value: The perpetual growth is set at 5% which is logically conservative as it is below the inflation and close to the GDP growth rate. Weighting of The Models: We put each Valuation method same with the ratio of 40:30:30 for DCF : PBR : PER Conclusion: Considering the current WTON performance and its potential growth, we are sure that the intrinsic price for WTON at IDR 1,327 compare to IDR 1,185. There are potensial upside 11,97% exclude dividend yield.

Source: Team Estimates

3.066

3.955

4.479

5.077

5.556

2014F2015F2016F2017F2018F

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

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Table 3. Discount Rate (WACC)

Discount Rate (WACC)

Risk Free Rate 7.50%

Risk Premium 6.50%

Return Market 14%

Unlevered Beta 1.3

Cost of Equity 16.2%

Cost of Debt 9.5%

Marginal Tax Rate 25%

WACC 14.82%

Figure 12. Operating Profit Margin & Gross Profit Margin

Financial Analysis y Income Statement Performance Wijaya Karya Beton recorded sales CAGR 13.30% from 2009-2013, and our team believe that CAGR sales will become 12.62% in 2014F-2018F, driven by the revenue of precast concrete. MP3EI also have biggest stakes in determining WTON sales growth. Good Revenue and Earnings Growth Prospect Ahead We forecast sustained revenue growth for WTON on the back of the government’s MP3EI, the masterplan for acceleration and Expansion of Indonesia’s economic Development, though 2025. WTON’s Integrated plants should help pave the way for operating efficiencies, enhanced by 6 selling areas across the archipelago and supported by a wide client base.The forecasted WTON YoY sales growth 14,65 % CAGR. Good Liquidity WTON has a good ability to pay off its short-term debt obligations. Current ratio of WTON is stable around 1,057 in the next five years. While the cash ratio and quick ratio is also steady around 0.23 to 0.482 for quick Ratio & cash ratio. The greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. Margin Improved Although COGS raised as BBM Increase in 2014, the company still can maintain its profit margin. The Piling will have improvement because of Jokowi’s program (MP3EI). It has good utilization in generating shareholder value. We estimate the gross profit margin will increasing 16,15-23.18 % from 2014-2018 . WTON also prove that it has an increase avegare 19 % from 2014-2018. Usage of IPO Proceed WTON has use IPO Proceed for business expansion (85%) and working capital (15%). In september 30th 2014, Wika Beton has used 36,5% for processing of natural materials quarry in Cigudeg, donggala, Boyolali and South Lampung, Development of New factories in South Lampung, Pasuruan, and Kalimantan (20.7%), Capacity Expansion of Existing factories (23.9%), and the services business development such as purchase of inner boring pile equipment and addition of post tensioning equipment (18.7%). We forecast sustained revenue growth for WTON on the back of the government’s MP3EI, the masterplan for acceleration and Expansion of Indonesia’s economic Development, through 2025. WTON’s Integrated plants should help pave the way for operating efficiencies, enhanced by 6 selling areas across the archipelago and supported by a wide client base.The forecasted WTON YoY sales growth 24 % CAGR, is expected to grow at a CAGR of 24%.

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%

20

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12

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F

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F2

01

6F

20

17

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F

Source: Team Estimates

9

Figure 13. Cement Consumption in Indonesia

Investment Risk and Sensitivity y Macroeconomic Risk Fluctuated price of steel. One of the raw material used to produce concrete is steel. The price of steel is fluctuating and it is implied to the production cost.

Price of Cement Increasing Every Year. The price of cement is increasing every year, this means that WTON has to adjust their price due to this condition. Cement used as one of the raw material to produce concrete.

Unstable Political Situation. Indonesia have already choose the new president for the next five years. The problem is the executive and legislative are coming from different coalition party. The executive come from “Great Indonesia Coalition” and legislative from “Red and White Coalition”. This political environment will lead to a condition that the new president will find it more difficult to make a decisions and conduct regulations. Although the situation may get better, but still political is a dynamic thing which can change everytime. Operational Risks Decreasing Supplies of Natural Raw Material. This is caused by the limited of natural resources that used to be the raw material for WTON. It’s implied to the price of the raw material which will be increasing every year. Risk of a Labor Strike. As a concrete company which works in an industrial production, then labor is one of important sources. In Indonesia, there are a lot of labor strike happened to some companies that didn’t give a good treatment to their labor. So, there is always a possibility that labor strike will happened in Wijaya Karya Beton, but as long as they can make a good profit and treat their labor well, it will not be happened. Competition Risks The Decline of Project Ordered. Although the company is a market leader, but there is always a possibility for other competitors, such as Adhimix and Jayabeton Indonesia. For this time, Wika Beton is the concrete company with biggest production level, up to 2 million ton/year, meanwhile on the other hand, the other competitor just under 1 million ton/year. Other Risk. There are several other risks that lies in the activity and the nature of this business, such as production failure rate that may produce additional cost or late payment from the customers.

Source: Bloomberg

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Appendices

Appendix 1: Income Statement

Income Statement (In Million Rupiah)

2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Net Revenue 1.430.435 1.635.087 2.030.597 2.643.724 3.066.720 3.955.344 4.479.933 5.077.769 5.556.317

COGS 1.282.793 1.428.781 1.765.145 2.255.749 2.571.554 3.326.484 3.681.280 4.063.480 4.268.169

Gross Profit 147.642 206.306

265.452 387.975 495.166 628.861 798.653 1.014.289 1.288.147

Total Operating Expense

27.438 22.750 33.670 55.833 70.486 92.456 127.764 188.302 297.767

Operating Income 108.575 183.556 231.782 332.142 424.680 536.405 670.889 825.987 990.380

Interest expense - - - 3.620 3.946 4.301 4.688 5.110 5.570

Interest income 9.287 6.211 1.900 1.900 1.948 1.996 2.046 2.097 2.150

Income before tax 117.862 189.767 233.682 330.422 422.682 534.100 668.247 822.975 986.960

Net tax expense 25.788 45.325 54.313 87.315 111.694,94 141.138 176.586 217.474 260.807

Net Income after tax 92.074 144.442 179.369 243.107 310.987 392.963 491.661 605.501 726.153

11

Appendix 2: Balance Sheet

Financial Position (in Million Rp)

2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

ASSETS

Current Asset

Cash and cash equivqlent 286.940 225.720 340.319 413.026 1.301.359 5.790.971 7.049.884 8.482.262 10.720.316

Account receivables - net 194.173 306.955 309.419 421.906 424.169 547.077 619.635 702.324 768.513

Inventories, net 547.337 704.070 881.217 846.027 1.174.105 1.514.318 1.715.159 1.944.043 2.127.257

Other current assets 215.001 155.196 263.024 215.059 256.417 309.717 367.645 435.608 511.638

Total Current Asset 1.243.451 1.391.941 1.793.979 1.896.018 3.156.050 8.162.084 9.752.323 11.564.237 14.127.724

Non-current Asset

Property, plant and equipment, net

271.094 429.644 584.605 1.012.107 1.597.698 2.378.486 2.750.737 3.355.899 3.691.488

Other non-current assets 8.965 17.258 22.515 9.276 10.892 12.844 15.195 17.906 20.779

Total Non-current Asset 280.059 446.902 607.120 1.021.383 1.608.590 2.391.330 2.765.931 3.373.804 3.712.267

Total Assets 1.523.510 1.838.843 2.401.099 2.917.401 4.764.640 10.553.414 12.518.255 14.938.041 17.839.991

LIABILITIES

Current Liabilities

Short Term loans 11.168 15.857 19.492 172.519 172.519 172.519 172.519 172.519 172.519

Trade payables 119.104 333.231 421.000 325.100 441.978 570.047 645.651 731.811 800.780

Accrued expenses 301.010 311.892 278.076 254.434 301.759 357.886 424.453 503.401 597.033

Advancce received 30.060 50.315 35.407 78.456 91.009 117.380 132.948 150.689 164.891

Unearned Revenue 688.269 631.954 962.660 911.803 1.057.691 1.364.172 1.545.099 1.751.289 1.916.337

Other Current Liabilities 44.433 59.655 61.381 52.035 58.829 67.034 76.913 88.308 100.384

Total Current Liabilities 1.194.044 1.402.904 1.778.016 1.794.347 2.123.785 2.649.038 2.997.583 3.398.017 3.751.944

Non-current Liabilities

-

Medium Term Notes payable

- - - 366.000 366.000 5.236.568 6.361.204 24.483 24.483

Other non-current Liabilities

7.365 6.244 18.754 27.035 27.035 27.035 27.035 7.777.606 9.599.477

Total Non-current Liabilities

7.365 6.244 18.754 393.035 393.035 5.263.603 6.388.239 7.802.089 9.623.960

Total Liabilities 1.201.409 1.409.148 1.796.770 2.187.382 2.516.820 7.912.641 9.385.822 11.200.106 13.375.904

EQUITY

Share capital 115.000 115.000 115.000 667.000 871.545 871.545 871.545 871.545 871.545

Additional paid-in capital, net

- - - - 1.002.269 1.002.259 1.002.259 1.002.259 1.002.259

Retained Earning 314.695 314.695 488.880 119.597 430.584 823.547 1.315.207 1.920.708 2.646.861

Treasury stock - - - (58.246) (58.246) (58.246) (58.246) (58.246) (58.246)

Sub Total 429.695 429.695 603.880 728.351 2.246.151 2.639.105 3.130.765 3.736.266 4.462.419

Non-controlling Interest - - 449 1.668 1.668 1.668 1.668 1.668 1.668

Total Equity 322.101 429.695 604.329 730.019 2.247.819 2.640.773 3.132.433 3.737.934 4.464.087

Total Liabilities and Equity

1.523.510 1.838.843 2.401.099 2.917.401 4.764.639 10.553.414 12.518.255 14.938.041 17.839.992

12

Appendix 3: Statement of Cash Flow

Statement of Cash Flow 2014F 2015F 2016F 2017F 2018F

Cash flow provided by Operating

449.625 527.608 640.374 787.039 920.340

Cash flow to Investing Activities 583.974 778.836 369.901 602.451 332.717

Cash flow to financing activities 1.366.628 5.145.642 1.468.798 1.837.701 2.330.178

Change in Cash 2.400.227 6.452.086 2.479.073 3.227.191 3.583.234

Beginning Cash Balance 1.322.158 1.301.359 5.790.971 7.049.884 8.482.262

Ending Cash Balance 1.301.359 5.790.971 7.049.884 8.482.262 10.720.316

13

Appendix 4: Income Statement (Common Size)e)

Income Statement

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Net Revenue 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00%

COGS 89,71% 89,68% 87,38% 86,93% 85,32% 83,85% 84,10% 82,17% 80,02% 76,82%

Gross Profit 10,29% 10,32% 12,62% 13,07% 14,68% 16,15% 15,90% 17,83% 19,98% 23,18%

Total Operating Expense

2,42% 1,92% 1,39% 1,66% 2,11% 2,30% 2,34% 2,85% 3,71% 5,36%

Operating Income

7,95% 7,59% 11,23% 11,41% 12,56% 13,85% 13,56% 14,98% 16,27% 17,82%

Interest expense

-0,16% 0,00% 0,00% 0,00% -0,14% -0,13% -0,11% -0,10% -0,10% -0,10%

Interest income 0,00% 0,65% 0,38% 0,09% 0,07% 0,06% 0,05% 0,05% 0,04% 0,04%

Income before tax

7,79% 8,24% 11,61% 11,51% 12,50% 13,78% 13,50% 14,92% 16,21% 17,76%

Net tax expense 1,98% 1,80% 2,77% 2,67% 3,30% 3,64% 3,57% 3,94% 4,28% 4,69%

Net Income after tax

5,81% 6,44% 8,83% 8,83% 9,20% 10,14% 9,93% 10,97% 11,92% 13,07%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

Comprehensive Income

5,81% 6,44% 8,83% 8,83% 9,20% 10,14% 9,93% 10,97% 11,92% 13,07%

14

Appendix 5 Financial Ratio 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Liquidity ratio

Current Ratio 104,20% 104,14% 99,22% 100,90% 105,67% 105,67% 105,67% 105,67% 105,67% 105,67%

Quick Ratio 40,84% 42,67% 38,39% 39,32% 48,17% 48,17% 48,17% 48,17% 48,17% 48,17%

Cash Ratio 18,76% 24,03% 16,09% 19,14% 23,02% 23,02% 23,02% 23,02% 23,02% 23,02%

Solvency ratio

Debt/Equity Ratio 516,97% 372,99% 327,94% 297,32% 299,63% 111,97% 299,63% 299,63% 299,63% 299,63%

Debt/Assets ratio 83,79% 78,86% 76,63% 74,83% 74,98% 74,98% 74,98% 74,98% 74,98% 74,98%

Times Interest Earned Ratio

4974,80%

4974,80%

4974,80%

4974,80%

9175,19%

9175,19%

9175,19% 9175,19% 9175,19% 9175,19%

Debt coverage ratio 8,41% 9,04% 13,03% 12,90% 15,18% 15,18% 15,18% 15,18% 15,18% 15,18%

Activity Ratio

Inventory Turnover 178,05% 212,55% 228,35% 222,69% 261,20% 261,20% 261,20% 261,20% 261,20% 261,20%

Days sales in inventory 0,02% 0,02% 0,02% 0,02% 0,01% 0,01% 0,01% 0,01% 0,01% 0,01%

Account receivable turnover

527,99% 618,71% 652,56% 658,88% 723,00% 723,00% 723,00% 723,00% 723,00% 723,00%

Days sales in receivables 0,02% 0,01% 0,02% 0,01% 0,01% 0,01% 0,01% 0,01% 0,01% 0,01%

Account Payable Turnover

797,20% 1077,04%

428,77% 419,27% 693,86% 693,86% 693,86% 693,86% 693,86% 693,86%

Average Collection Period

6912,95%

5899,36%

5593,33%

5539,66%

5048,44%

5048,44%

5048,44% 5048,44% 5048,44% 5048,44%

15

Appendix 6: Key Metric Ratio

Profitablity Ratio 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Gross Profit Margin

10,29% 10,32% 12,62% 13,07% 14,68% 16,15% 15,90% 17,83% 19,98% 23,18%

Operating Profit Margin

7,95% 7,59% 11,23% 11,41% 12,56% 13,85% 13,56% 14,98% 16,27% 17,82%

Net Profit Margin 5,81% 6,44% 8,83% 8,83% 9,20% 10,14% 9,93% 10,97% 11,92% 13,07%

EBITDA Margin 8,83% 8,74% 13,11% 13,61% 14,87% 17,73% 18,04% 19,55% 21,19% 22,77%

OCF Margin 15,43% 11,30% 8,27% 14,47% 4,68% 19,04% 14,76% 17,38% 7,28% 10,84%

ROA 5,15% 6,04% 7,86% 7,47% 8,33% 6,53% 3,72% 3,93% 4,05% 4,07%

ROE 31,78% 28,59% 33,62% 29,68% 33,30% 13,84% 14,88% 15,70% 16,20% 16,27%

OCF/Assets 13,68% 10,61% 7,35% 12,24% 4,24% 12,26% 5,53% 6,22% 2,48% 3,38%

OCF/Equity 84,41% 50,19% 31,45% 48,62% 16,95% 25,98% 22,11% 24,86% 9,90% 13,50%

Others

Assets/Sales ratio 112,75

% 106,51

% 112,46

% 118,25

% 110,35

% 155,37

% 266,81

% 279,43

% 294,19

% 321,08

%

Earning Quality

-4,46% 0,55% -5,40% 4,42% -3,61% -1,76% -1,29% -1,32% -1,18%

Dividend payout ratio

0,00% 0,00% 0,00% 0,00% 0,00% 30,00% 30,00% 30,00% 30,00% 30,00%

Internal Growth Rate

5,43% 6,43% 8,52% 8,07% 9,09% 4,79% 2,68% 2,83% 2,92% 2,93%

Sustainable Growth Rate

46,59% 40,03% 50,64% 42,21% 49,93% 10,72% 11,63% 12,34% 12,79% 12,85%

16

Appendix 7

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Current Ratio 104,20% 104,14% 99,22% 100,90% 105,67% 105,67% 105,67% 105,67% 105,67% 105,67%

Debt coverage ratio 8,41% 9,04% 13,03% 12,90% 15,18% 15,18% 15,18% 15,18% 15,18% 15,18%

Cash Ratio 18,76% 99,27% 165,89% 140,52% 98,31% 112,04% 141,36% 179,84% 224,81% 274,63%

17

Appendix 8 : Valuation Analysis

Discount Rate (WACC) Worksheet

Public Market Price/Share 1.185

Diluted Shares O/S (TS Method) 8.715

Public Market Capitalization 10.327.832

Debt 2014F 633.316

Cash 2014F 1.301.359

Net Debt 2014F (668.043)

Public Market Enterprise Value 9.659.789

E/(D+E) @ Public Mkt Value 85%

D/(D+E) @ Public Mkt Value 15%

Corporate bond with rating AA 9,5%

Marginal Tax Rate 25,0%

Cost of Equity= rf+beta( Rm-Rf) 16,1%

Risk Free rate: Rf 7,5%

Unlevered Beta 1,3

Risk premium (Rm-Rf) 6,5%

WACC=E/(D+E)* Re+ D/(D+E)*Rd(1-T) 14,786%

Valuation Assumption

Risk free rate 7,50%

Risk premium 6,50%

Beta 1,33

Cost of Equity 16,14%

Marginal tax rate 25%

Perpetual growth rate 5,0%

Assumptions

Long term growth rate in EBIT 5,0%

Terminal Value

Sum of PV of FCF (5 years) 4.961.685

WACC 14,8%

Long term growth rate in EBIT 5,0%

Present value of terminal Value 7.132.686

Terminal Value as % of Total Value 59,0%

18

DCF (Intrinsic Value) Calculation

EV (Equity Value + Net Debt) 12.094.371

- Debt 633.316

+ Cash 1.301.359

Net Debt (668.043)

Equity Value (Market Capitalization) 12.762.414

Diluted Shares O/S 8.715,47

Fair Value Per Share 1.464

PBR (Intrinsic Value) Calculation

Book Value 9.045.583

-Debt 633.316

+Cash 1.301.359

Net Debt (668.043)

Equity Value (Market Capitalization) 9.713.626

Diluted Shares O/S 8.715,47

Fair Value Per Share 1.115

AEG (Intrinsic Value) Calculation

Book Value 11.148.376

- Debt 633.316

+ Cash 1.301.359

Net Debt (668.043)

Equity Value (Market Capitalization) 11.816.419

Diluted Shares O/S 8.715,47

Fair Value Per Share 1.356

Weight Method Price E (Price)

40% DCF 1.464

1.327 30% PBR 1.115

30% AEG 1.356

Sensitivity Perpetual Growth

WACC 4% 5% 6%

13,79% 1.378 1.450 1.541

14,79% 1.271 1.327 1.395

15,79% 1.184 1.228 1.280

19

Appendix 9 : Peers Analysis Company Market Cap. PER (x) PBV (x) EV/EBITDA (x) ROE (%)

(USDb) 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F

China 0.8 21.0 16.8 2.3 2.2 10.3 7.7 11.9 13.1

XINJIANG GUOTONG PIPELINE-A

0.3 19.6 15.5 1.7 1.5 0 0 8.0 9.0

SHANDONG LONGQUAN PIPELINE-A

0.6 21.7 17.4 2.6 2.5 10.3 7.7 13.8 15.1

Japan 1.3 23.9 21.6 2.1 2.0 12.7 11.3 9.1 10.0

SHO-BOND HOLDINGS CO LTD

1.3 23.9 21.6 2.1 2.0 12.7 11.3 9.1 10.0

Malaysia 0.3 25.2 12.5 0.7 0.6 9.2 7.0 3.3 5.7

SOUTHERN STEEL BERHAD

0.2 30.4 14.3 0.7 0.7 9.7 7.5 2.4 4.7

TRC SYNERGY BHD 0.1 12.7 8.3 0.7 0.6 8.1 5.9 5.6 8.2

Thailand 0.9 19.6 17.8 0.4 0.4 8.1 7.4 2.2 2.6

TPI POLENE PUBLIC CO LTD

0.9 19.6 17.8 0.4 0.4 8.1 7.4 2.2 2.6

Indonesia 0.6 22.4 19.1 3.6 3.2 14.3 11.6 38.1 17.7

WIJAYA KARYA BETON 0.6 22.4 19.1 3.6 3.2 14.3 11.6 38.1 17.7

Regional Average 3.9 22.1 18.6 1.9 1.8 11.1 9.4 12.3 9.9

20

Appendix 10 : The largest Capacity and Leading Market

21

Appendix 11 : Wide Coverage and Well Integrated Production Facilities

22

Appendix 12 : Experienced Management Team with Extensive Track Record in Precast concrete Industry

23

Appendix 13 : Pioneer in Indonesian Precast Concrete with Continous Innovation

24

Appendix 14 :Most Complete Sets of Product In Indonesia

25

Appendix 15 : Revenue Contribution

26

Appendix 16 : Corporate Structure

27

Probability

Appendix 17 : Risk Matrix

Impact

Low Medium High

Minor The Decline of Project Ordered

Unstable political situation

Moderate Fluctuated price of steel Increasing price of

cement every year

Significant

Decreasing Supplies of

Natural Raw Material

Risk of a Labor Strike

Macroeconomic Risks Fluctuated price of steel. One of the raw material used to produce concrete is steel. The price of steel is

fluctuating and it is implied to the production cost.

Price of Cement Increasing Every Year. The price of cement is increasing every year, this means that WTON has

to adjust their price due to this condition. Cement used as one of the raw material to produce concrete.

Unstable Political Situation. Indonesia have already choose the new president for the next five years. The

problem is the executive and legislative are coming from different coalition party. The executive come from

“Koalisi Indonesia Hebat” and legislative from “Koalisi Merah Putih”. This political environment will lead to a

condition that the new president will find it more difficult to make a decisions and conduct regulations.

Operational Risks

Decreasing Supplies of Natural Raw Material. This is caused by the limited of natural resources that used to be

the raw material for WTON. It’s implied to the price of the raw material which will be increasing every year.

Risk of a Labor Strike. As a concrete company which works in an industrial production, then labor is one of

important sources. In Indonesia, there are a lot of labor strike happened to some companies that didn’t give a good

treatment to their labor. So, there is always a possibility that labor strike will happened in Wijaya Karya Beton, but

as long as they can make a good profit and treat their labor well, it will not be happened.

Competition Risks

The Decline of Project Ordered. Although the company is a market leader, but there is always a possibility for other competitors, such as Adhimix and Jayabeton Indonesia. For this time, Wika Beton is the concrete company with biggest production level, up to 2 millions ton/year, meanwhile on the other hand, the other competitor just under 1 million ton/year.

Other Risk. There are several other risk that lies in the activity and the nature of this business, such as production failure rate that may produce additional cost or late payment from the customers.

28

CFA Institute Research Challenge

Definition of Ratings This research uses the following rating system: BUY - Total return is expected to be above 5% in the next 12 months HOLD - Total return is expected to be between -5% to 5% in the next 12 months SELL - Total return is expected to be below -5% in the next 12 months

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that

might bias the content or publication of this report. Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subj ect

company.

Market making:

The author(s) does notact as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the

author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its a ccuracy or

completeness. The information is not intended to be used as the basis of any investment decisions by