Infra 2.0: on firmer foundation - brokingrfs.cimb.com · Jabodetabek LRT investment toll roads, power plants, and industrial estate investments toll roads, ports, low cost high rise

November 22, 2018

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Construction Infra 2.0: on firmer foundation

■ We expect the next infra push (infra 2.0), likely to kick-off in 2019F, to have a better structure, risk management, and working capital.

■ Formation of infra and property holding companies is a positive, which could enable more orderly funding, improve efficiency, and economies of scale.

■ New contract growth and backlog support earnings outlook. Maintain Overweight given appealing valuations. Key picks: WSKT and ADHI.

Analyst(s)

Aurelia BARUS

T (62) 21 3006 1721 E [email protected]

Namira LAHUDDIN T (62) 21 3006 1728 E [email protected]

NA

VIG

AT

IN

G IN

DO

NE

SIA

Navigating Indonesia

Construction and Materials │ Construction │ November 22, 2018

2

TABLE OF CONTENTS

INFRA 2.0: BETTER STRUCTURE AND RISK MANAGEMENT ................................................. 4

EARNINGS OUTLOOK ............................................................................................................... 16

PROJECT PROGRESS AND OUTLOOK ................................................................................... 23

CLEARER FUNDING VISIBILITY AND STATE SUPPORT REMAINS STRONG ..................... 31

PROJECT PAYMENTS ............................................................................................................... 31

VALUATION AND RECOMMENDATION ................................................................................... 38

Sector Note Navigating Indonesia │ Construction │ November 22, 2018

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFACustomEntityStatement

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Construction Infra 2.0: on firmer foundation

■ We expect the next infra push (infra 2.0), likely to kick-off in 2019F, to have a better structure, risk management, and working capital.

■ Formation of infra and property holding companies is a positive, which could enable more orderly funding, improve efficiency, and economies of scale.

■ New contract growth and backlog support earnings outlook. Maintain Overweight given appealing valuations. Key picks: WSKT and ADHI.

Infra 2.0: better funding structure and risk management The last great infra push that began in 2014 lacked adequate planning and a funding

structure, and dented investor sentiment. As such, we view the government’s latest plan

to form two state-owned holding companies for infrastructure (under Hutama Karya) and

property (under Perumnas) by end-2018 as positive, as this could improve development

planning, bridge government and minority shareholders’ interests, improve efficiency, and

boost economies of scale, leading to lower procurement and funding costs. We see a

brighter outlook for the next infra push (Infra 2.0), which we reckon will kick-off in 2019F.

Earnings and projects outlook remain positive After the sector delivered 55% aggregate core NP CAGR in 2014-17, we expect the

sector’s earnings delivery to remain on track in 4Q18F and FY19F (aggregate core NP

estimate of +21% yoy). This is underpinned by: 1) sufficient orders on hand even in the

worst-case scenario of weak new contracts booking; 2) rich projects to be awarded in

2019F (some Rp1,190tr of potential strategic national projects); and 3) strong burn rate

for carried-over contracts.

Clearer funding visibility with strong state support; improving OCF The infra budget in the approved 2019 state budget is sizeable at Rp415tr (+1% yoy), or

c.2.6% of GDP. Both Hutama Karya and PLN, which account for 13% and 5% of the

sector's total outstanding receivables, respectively, should have sufficient capital going

into 2019. More alternative funding resources for infra are expected. The materialisation

of a capital recycling plan is positive for the sector. We have yet to price in these into our

valuations. The sector expects to improve its working capital by switching to milestone

payment terms from full turnkey payments for future major size projects. This could help

improve the sector's account receivables (A/R) days substantially - 71-83% lower than

under full turnkey payment terms, based on our sensitivity analysis. This should reduce

negative OCF risk in the future.

Deserving lower risk premium; maintain Overweight The sector has been subject to investors’ risk aversion since 2016. In YTD-18, the

sector’s implied average risk premium gap over the JCI is at c.26% pts higher. We

believe an improvement in the risk management outlook would drive down such a huge

risk premium gap. Our TP for the four state-owned contractors imply weighted average

risk premium gap of 14% to the JCI index’s, or similar to the sector’s implied risk premium

over the JCI in 2010 when several issues plagued the sector. On a P/E basis, our target

TPs are undemanding, at 8.7-12.5x CY19F P/E. We maintain our Overweight rating on

the sector. Key picks: WSKT and ADHI.

Figure 1: SOE contractors' sector risk premium gap over the JCI index’s

SOURCES: CGS-CIMB RESEARCH

Indonesia

Overweight (no change)

Highlighted Companies

Adhi Karya ADD, TP Rp2,000, Rp1,375 close

ADHI is a state-owned contractor in Indonesia. It offers civil construction and engineering, procurement and construction (EPC) services. Through its subsidiaries, it develops real estate and produces precast concrete.

Waskita Karya ADD, TP Rp3,000, Rp1,590 close

WSKT is the largest state-owned contractor in Indonesia in terms of market cap. Its contracting business offers civil construction and EPC services. Through its subsidiaries, it offers precast concrete and has multiple investments in toll roads.

Wijaya Karya ADD, TP Rp2,000, Rp1,290 close

WIKA is the second-largest state-owned contractor in Indonesia in terms of market cap. Its contracting business offers civil construction and EPC services. Through its subsidiaries, it sells precast concrete and develops real estate.

Summary Valuation Metrics

Insert

Analyst(s)

Aurelia BARUS

T (62) 21 3006 1721 E [email protected]

Namira LAHUDDIN T (62) 21 3006 1728 E [email protected]

P/E (x) Dec-18F Dec-19F Dec-20F

Adhi Karya 6.72 5.97 4.92

Waskita Karya 5.50 6.61 8.63

Wijaya Karya 7.67 6.57 5.57

P/BV (x) Dec-18F Dec-19F Dec-20F

Adhi Karya 0.73 0.64 0.56

Waskita Karya 1.29 1.12 1.04

Wijaya Karya 0.83 0.75 0.67

Dividend Yield Dec-18F Dec-19F Dec-20F

Adhi Karya 2.11% 2.98% 3.35%

Waskita Karya 5.40% 3.68% 4.54%

Wijaya Karya 1.80% 2.25% 2.63%

Title:

Source:

Please fill in the values above to have them entered in your report

-30%

-20%

-10%

0%

10%

20%

30%

40%

2009-mean

2010-mean

2011-mean

2012-mean

2013-mean

2014-mean

2015-mean

2016-mean

2017-mean

YTD-18-mean

Targetpx-

mean

Higher/(lower) - in percentage pt

mean

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Construction │ November 22, 2018

4

Infra 2.0: on firmer foundation

INFRA 2.0: BETTER STRUCTURE AND RISK MANAGEMENT

The first great infra push that began in 2014 lacked coordination and a structure

for planning and funding for infra development. This arguably dented minority

investor sentiment, despite its largesse (14% of cumulative GDP spent over

2014-2019F). The government’s latest plan to form two state-owned holding

companies for infrastructure and property by end-2018 is therefore much more

positive, in our view, as it could help improve development planning, bridge

government and minority shareholders’ interests, improve efficiency, and boost

economies of scale, leading to lower procurement and funding costs. We see a

brighter outlook for the next infra push (infra 2.0), which we reckon could kick-off

in 2019F.

A less organised infra 1.0

During the first great infra push that started in 2014 (which we will call infra 1.0),

the government injected a total of Rp11.2tr capital to the four SOE contractors

through rights issues in 2015-2016. Together with government capital injections,

the four SOE contractors also received rights issue proceeds from public

investors through the same exercises in 2015-2016, totaling Rp7.5tr (see Figure

2).

Figure 2: The four SOE contractors conducted rights issues in 2015-2016 - proceeds

and allocations

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

The rationale behind the capital injections and rights issues in 2015-2016 were

to strengthen the capital structures of the four SOE contractors for them to

participate in various infra investments. This was actually in line with the

government’s funding plan for infra development through the national medium

term development plan (RPJMN or rencana pembangunan jangka menengah) in

2015-2019. In the funding plan, the government’s budget was expected to be

only sufficient to cover 41% of the total infra funding needs in 2015-2019 of

Rp4,979tr (assuming a US$/Rp rate of 13,500). The rest of the funding was to

have been provided by SOE and private entities at 22% and 37% of total needs,

respectively.

ADHI (2015) WSKT (2015) WIKA (2016) PTPP (2016)

Total proceeds (Rp bn) 2,745 5,298 6,149 4,410

from Government of Indonesia 1,400 3,500 4,000 2,250

from public investors 1,345 1,798 2,149 2,160

Allocations

from Government of IndonesiaJabodetabek LRT

investment

toll roads, power

plants, and

industrial estate

investments

toll roads, ports,

low cost high rise

residentials

investments

from public investorsTrainst oriented

development (TOD)

investment,

refinancing, &

working capital

industrial estate,

low cost high rise,

and power plant

investments

toll roads

investments in Java

and Sumatera;

working capital for

electricity

transmission

development in

Sumatera



5

Figure 3: National medium-term development infra funding requirement plan in 2015-

2019 (total of Rp4,979tr, assuming Rp13,500/US$)

SOURCES: CGS-CIMB RESEARCH, KPPIP

However, the lack of coordination and structure caused delays and consequently,

investment realisation had been slow. Additionally, there were some changes to

the investment plans and project investors from the initial plans. So far, only the

investment realisations for toll road projects are on track. Hence, WSKT had the

highest capex realisation for toll road projects. The other contractors have yet to

realise their investment plans.

The Jakarta-Bandung HSR project was the major delay, by about two and half

years, since it broke ground in early-2016, which aptly illustrates the chaos in

infra 1.0. We further highlight some of the events that deviated from the initial

plans below.

1. Change of Jabodebek LRT investor and uncertainties over funding

sources

In 2015, ADHI received Rp1.4tr in capital injection from the government,

which was initially to be allocated for the Jabodebek LRT investment.

The appointment of ADHI as the project investor for Jabodebek LRT

raised concerns from its minority shareholders. This was on the back of

the project’s total low project IRR of c.7% (unfeasible). Due to this

concern, ADHI proposed a change in the project investor to the

government.

In 2015, ADHI broke ground for the project construction. However, it

was not until early-2017 that it received the official construction contract

for the project. Additionally, over the 2015-2017 period, there were no

certainties on who the project investor for the project would be.

After about two years of long negotiations and two Presidential Decree

revisions as the legal basis for project development, at the end of 2017,

the government finally affirmed Kereta Api Indonesia (KAI) as the project

investor for Jabodebek LRT. The government also finally confirmed the

sources of funding for the project investment. ADHI's share price

performance had been volatile during the process of change in the

Jabodebek LRT investor and determination of sources of funding for the

project (see Figure 4).

Now, ADHI has yet to decide on the Rp1.4tr capital injection utilisation

from government, which was initially to be invested for the whole

Jabodebek LRT development. Based on our latest discussions with

ADHI, it may allocate the capital injection money as working capital for

the Jabodebek LRT depot. It expects the government to repay the

company under the availability payment terms. Under the availability

Title:

Source:

Please fill in the values above to have them entered in your reportState/regional budget

41%

SOEs22%

Private37%



6

payment terms, the government will pay ADHI in instalments for the LRT

depot, of which the first payment will only take place after 100% project

delivery. The instalment period will be as long as the concession period.

Figure 4: ADHI's share price performances were volatile in 2015-2017 during the process of Jabodebek LRT investor change

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

2. Large-size power plant investments yet to be realised

WIKA and PTPP have yet to allocate the bulk of their rights issue

proceeds for power plant investments (see Figures 5-6). However, now,

the government plans to delay the 35GW electricity projects due to

Indonesia’s widening current account deficits (CAD).

The delay in the 35GW electricity projects are expected for power plant

projects that have not yet reached financial close. Based on our

understanding, all the power plant projects to be invested by WIKA and

PTPP have not reached financial close yet. Hence, we think these

projects could be delayed further.

Figure 5: PTPP's progress in utilising funds from state capital injection and its rights issue, as of 9M18

SOURCE: CGS-CIMB RESEARCH, COMPANY

Title:

Source:


-

500

1,000

1,500

2,000

2,500

3,000

3,500

2-Jan-15 2-Jul-15 2-Jan-16 2-Jul-16 2-Jan-17 2-Jul-17 2-Jan-18

Rp 3-Sep-2015:

ADHI was appointed as the developer of Jabodebek LRT through issuance of

Presidential Decree No. 98/Year 2015

10-Feb-2017:

ADHI signed Jabodebek LRT contract worth

Rp23.4tr

19-May-2017:

Government issued second revision of Presidential Decree for Jabodebek LRT (Presidential Decree No.49/ Year 2017), which stated about the sources of

funding options for KAI. However, there was still no affirmation about when and

how KAI would make payment for construction progress delivered by ADHI.

28-Nov-2017:

Local news reported Ministry of SOE had asked Indonesia Railways Company (KAI) to be a project operator rather

than project investor for Jabodebek LRT. ADHI's CEO Mr.

Budi Harto was quoted by Detik.com saying that ADHI

would invest in Jabodebek LRT

8-Dec-2017:

Government reconfirmed KAI as the project investor for Jabodebek LRT.

Government as well affirmed about the

sources of funding for the Jabodebek LRT

payment, which would be through

government capital injections and bank

loan consortiums.

3-Aug-2016:

ADHI was officially only appointed as the project contractor, while KAI was appointed as the project investor for

Jabodebek LRT through issuance of first Presidential Decree

revision (Presidential Decree No.65/ Year 2016). However,

uncertainties remained about the funding sources for the

project investment.

Stake

Est.

value

(Rp bn)

Equity

(30%)

Debt

(70%)

Proceeds from state capital injection (PMN)

Port

Multipurpose Terminal Kuala Tanjung 3,177 166 25% 794 238 556 323 Operating

Toll roads

Medan-Kualanamu-Tebing Tinggi 4,072 174 15% 611 183 428 185 Under construction

Depok-Antasari 3,472 62 13% 451 135 316 83 Section I was completed

Balikpapan-Samarinda 9,973 449 15% 1,496 449 1,047 33 Under construction

Pandaan-Malang 5,970 627 35% 2,090 627 1,463 439 Under construction

Manado-Bitung 5,123 231 15% 768 231 538 66 Under construction

Housing

High-rise low-cost residential units 3,277 541 55% 1,802 541 1,262 92 Under construction

Total 35,064 2,250 8,013 2,404 5,609 1,222

Proceeds from rights issues

Industrial Estate

Kuala Tanjung Industrial Estate 8,000 1,260 35% 2,800 840 1,960 -

Housings

High-rise low-cost residentials 2,805 463 55% 1,543 463 1,080 -

Power plant

Coal fired power plant-Meulaboh 400MW 7,330 439 34% 2,483 745 1,738 9

As end-9M18 the total account receivable

balance from the project construction is

Rp271.7bn; the project is yet to finalise the

financial close of the project and currently

under review

Total 18,135 2,162 6,826 2,048 4,778 9

PTPP's equity

(end-9M18)Projects status as of 9M18

PTPP's investmentCapital

injection

(Rp bn)

Total

value

(Rp bn)

Project allocations



7

Figure 6: WIKA's utilisation of funds from the state capital injection as of 9M18

SOURCE: CGS-CIMB RESEARCH, COMPANY

Two newly-formed state-owned holding companies should improve coordination

The government plans to set up two infra and property holding companies by

end-2018. Hutama Karya (HK), a 100% government-owned state-owned

enterprise (SOE) contractor, will be the holding company for its infrastructure-

related ventures. Perumnas, a 100% government-owned SOE developer, will be

the holding company for its property-related ventures (housing and industrial

area). Besides the property sector, we believe Perumnas will likely also focus on

the engineering, procurement, and construction (EPC) sector, e.g. power plants

and oil and gas related businesses. The government aims to convert HK and

Perumnas into holding companies by end-2018F. Following this, the full

immersion is projected by FY2020F.

Some changes have been made to the composition of the holding companies

from the initial plan announced. The new list puts WIKA under Perumnas (vs.

HK previously) and ADHI under HK (vs. Perumnas previously).

We think the changes in WIKA and ADHI's grouping would better align their

competencies with the holding companies’ respective focus. WIKA has a strong

presence in EPC, and recently expanded into housing. ADHI is the appointed

contractor for the whole Jabodebek LRT development.

Based on the respective holding companies’ focus, we think WIKA and PTPP

would be focusing more on property (e.g. real estate and industrial estates) and

EPC projects (e.g. power plant, oil, and gas related projects), respectively. ADHI

and WSKT would focus more on non-EPC infra projects (e.g. toll roads and

water treatment); and JSMR would remain a toll road developer and operator.

Figure 7: Structure of the SOE holding companies for the government's infrastructure and property ventures, respectively (latest)

SOURCES: CGS-CIMB RESEARCH, MINISTRY OF SOE

StakeEst. value

(Rp bn)

Equity

(30%)

Debt

(70%)

Toll roads

Soreang-Pasirkoja 1,500 113 25% 375 113 263 227 Under construction

Manado-Bitung 5,123 307 20% 1,025 307 717 88 Under construction

Balikpapan-Samarinda 9,972 449 15% 1,496 449 1,047 36 Under construction

Power plants

Steamed engine power plant Banten 2

X 1,000 MW37,500 1,688 15% 5,627 1,688 3,939 -

Likely to be replaced with steam

engine power plant Jambi 1 & 2 (2 X 2

X 300 MW); but still no progress up to

now

Steamed engine power plant Aceh 2 X

200 MW10,000 893 30% 3,000 900 2,100 -

Likely to be replaced with Butu Batu

water engine power plant (2 X 100

MW); but still no progress up to now

Clean water treatments

WTP Jatiluhur 50,000L/sec 2,000 84 14% 280 84 196 0 No progress

Industrial estate

Kuala Tanjung Industrial Estate 8,000 467 19% 1,520 456 1,064 - Not started yet, might be changed to

another project located in Java area

Total 74,095 4,000 13,322 3,997 9,325 351

Project status as of 9M18

WIKA's investment

ProjectsTotal value

(Rp bn)

Capital

injection

allocations

WIKA's equity

(end-9M18)

70% 51% 66% 100% 100% 51% 65% 100% 100% 100% 100%

Infrastructure holding company Property (housing and industrial area) holding company



8

Figure 8: Strategy, plan, and focus of infra and property holding companies


Figure 9: Benefits of forming infra- and property-focused holding companies


Infrastructure holding company (Hutama Karya) Property holding company (Perumnas)

Integrated regional infrastructure development strategy Urban and suburban development strategy

Increasing national infrastructure quality through integrated development Ensuring that the national housing needs are met across all geographical areas

Increasing capabilities, scale, and innovation as infrastructure development integrator Describing company's long-term plan for national's needs

Encouraging regional economic growth Prioritising targetted projects and funding for development plan

Infra development plan with focus of accelerating national economy

developmentProperty development plan with a focus on increasing quality of life

Creating end-to-end value chainCreating a masterplan for new development and rejuvenation, while focusing on

populations needs (ie. housing, jobs, and transportation)

Supporting government plan to accelerate strategic national development to attain

acceleration of economic growth

Providing high quality goods and services through collection of business methods and

knowledge

Optimisation and effectiveness Optimisation and effectiveness

Creating a balanced integration (of both backward and forward integration) strategy

among SOEs in the infrastructure sector

Ensuring for affordable housing price by controlling secondary housing price in the

market

Strengthening capital and increasing financing capacity to manifest infrastructure

developmentPositioning as funding provider for home buyers

Managing high quality standard through direct management in commercial segment

and infrastructure

Results Results

Creating synergy to strengthen financing and investments → more (+) Building more houses to cope with low-cost housing

deficits → more (+)

Strengthening and widening expertise through implementation

of best practices → better (+)Guarantee of sustainable low-cost housing

development → more affordable (+)

Integration of regional infrastructure to become more appealing

as a whole → well-intergrated (+)Utilisation of comprehensive competence in

infrastructure and commercial sectors → well-integrated (+)

Taking over end-to-end ownerships of BOOT (build, operate,

own, transfer) projects → more sustainable (+)Providing quality services and consistency among

business units → better quality (+)

= Opening opportunities for synergy =

acceleration of

national economic

development

increasing

Indonesia's quality of

life

Infrastructure holding company (Hutama Karya) Property holding company (Perumnas)



9

Expect government and minority shareholders’ interests to be better aligned

In the next cycle of Indonesia's infrastructure development, the development of

ex-Java areas would likely be the focus as Java is already well developed, in our

view. However, projects outside of Java could offer unappealing project

feasibility (lower IRR) given that the majority of Indonesia’s population (57%) is

concentrated in Java, followed by Sumatera (22%), with the remaining spread

across the rest of Indonesia.

We think that if the next cycle of infra development (infra 2.0) focus would be in

ex-Java areas, this could raise concerns among minority shareholders (equity

stock investors) on whether the listed SOE contractors and JSMR could possibly

be asked or be assigned to invest in projects in ex-Java area with less appealing

feasibility (low project IRR). This is on the back of state budget limitations for

infra funding.

From our discussion with Hutama Karya, we understand that following the

formation of the holding companies, the government could assign projects with

less appealing feasibility to the holding companies. As an example, the

government has assigned the Trans-Sumatera toll road development to Hutama

Karya; though the project is guaranteed by the government. Hence, Hutama

Karya could receive lower financing cost from a higher AAA bond rating for the

project from PEFINDO (Indonesia’s Credit Rating Agency). This is higher than

the company’s rating of A- from PEFINDO.

Figure 10: Hutama Karya's financing cost for projects guaranteed by the government

guarantee is much lower compared to what it would get on its own


We think that if the government were to possibly only assign less appealing

projects to the holding companies following the holding companies’ formation,

this would be a win-win solution for the government and minority shareholders

and a positive for the sector in infra 2.0.

By assigning the less appealing project investments to the holding companies,

the government should be able to meet its development target (no need to wait

for willing investors to invest in these projects), keeping the infra budget

unchanged. The holding companies could possibly leverage lower financing cost

on the back of the government’s guarantee. The SOE contractors in our

coverage and JSMR would hardly be receiving any government guarantees as

they are not 100% government-owned, which would result in higher financing

costs, in our view.

Yet, the SOE contractors in our coverage would still be able to receive project

construction contracts invested by the holding companies as we believe the

holding companies would not be able to take on the construction of the entire

projects on their own.

Title:

Source:


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-

500

1,000

1,500

2,000

2,500

Bond I-Series B2013

Bond I-Series C2013

Bond PUB IPhase I-2016

Bond PUB IPhase II-2017

Bond PUB IPhase III-Series

A-2017

Bond PUB IPhase III-Series

B-2017

Value (Rp bn) Coupon rate- RHS

with government guarantee

PEFINDO rating: A-; tenure: 7 years

PEFINDO rating: A-; tenure: 5 years

PEFINDO rating: AAA; tenure: 10 years



PEFINDO rating: AAA;tenure: 10 years



10

Hope for efficiency improvements, lower funding costs and increasing scale

According to the roadmap revealed by the government, the first step in the

formation of state-owned infrastructure and property holding companies is the

transfer of the government’s current direct ownership in the respective SOEs to

the two assigned holding companies, Hutama Karya (HK) and Perumnas.

The next step, dubbed "initiation of cooperation", involves the creation of sub-

holding companies under HK and Perumnas (Figure 11).

We think the aim of forming sub-holding companies is to improve efficiency and

boost economies of scale, leading to lower procurement and funding costs.

Currently, all the four SOE contractors have a wide range of investments and

subsidiaries in their portfolios, and they do not necessarily have the expertise to

manage their highly-diversified investment portfolios (Figures 12-13).

Based on the roadmap, Hutama Karya is to have four sub-holding companies -

precast and construction materials, construction, concessions, and property

(leaning towards commercial property, e.g. transit oriented developments (TOD)

property). Perumnas would have six sub-holding companies - sub-holding

management, developer, design and technic, industry and material, construction

and EPC, and operational and maintenance (O&M).

Although we are positive on the idea of sub-holding companies, we think the

most important things to watch out for are fair values and investment structures

in the event of possible asset transfers or restructuring from the SOE contractors

and JSMR to the sub-holding companies.

Figure 11: Roadmap on the formation of Hutama Karya (HK, infrastructure) and Perumnas (property) holding companies

1. Sub-holding management 2. Developer 3. Design & technic 4. Industrial & material 5. Construction & EPC 6. O&M


11

Construction and Materials│Indonesia

Construction│ October 22, 2018

Figure 12: SOE contractors' investments portfolio


Stake (%)Equity-

Rp bnStake (%)

Equity-

Rp bnStake (%)

Equity-

Rp bnStake (%)

Equity-

Rp bn

Toll road (length in KM) 1,352 177,780 7 861 1,199 15,043

Balikpapan-Samarinda toll road 99 9,970 15% 33 15% 36 Under construction

Bekasi-Cawang-Kp. Melayu toll road 22 9,500 76% 1,513 Partially operating

Cengkareng-Kunciran toll road 14 4,980 2% 8 Under construction

Ciawi-Sukabumi toll road 54 9,200 77% 1,277 Under construction

Cibitung-Cilincing toll road 34 4,220 42% 423 Under construction

Cileunyi-Sumedang-Dawuan toll road 62 8,400 14% 1 12% 15 Under construction

Cimanggis-Cibitung toll road 25 8,200 69% 952 Under construction

Cinere-Serpong toll road 10 2,800 27% 89 Under construction

Depok-Antasari toll road 22 3,400 13% 83 10% 255 Section I development was completed

Kanci-Pejagan toll road 35 2,900 18% 193 Operating

Kayu Agung-Palembang-Betung toll road 112 14,400 46% 1,063 Under construction

Krian-Legundi-Bunder-Manyar toll road 38 12,200 42% 966 Under construction

Kuala Tanjung-Tb. Tinggi-Parapat toll road 143 13,450 23% 11 Under construction

Manado-Bitung toll road 40 5,120 15% 66 20% 88 Under construction

Medan-Kualanamu-Tebing Tinggi toll road 62 4,710 15% 185 12% 358 Partially operating

Ngawi-Kertosono toll road 87 7,800 31% 354 Partially operating

Nusa Dua-Ngurah Rai-Benoa toll road 10 2,010 1% 7 0% 3 Operating

Pandaan - Malang toll road 38 5,970 35% 439 Under construction

Pasuruan-Probolinggo toll road 31 3,800 23% 227 Under construction

Pejagan-Pemalang toll road 58 6,840 23% 5,878 Operating

Pemalang-Batang toll road 39 5,200 46% 857 Under construction

Semarang-Batang toll road 75 11,050 31% 79 Under construction

Serang-Panimbang toll road 84 5,330 15% 53 80% 642 Under construction

Solo-Ngawi toll road 90 10,800 31% 535 Operating

Soreang-Pasirkoja 32 1,500 25% 227 Under construction

Surabaya-Mojokerto toll road 36 4,030 20% 194 Operating

Investments Length or capacities Total est. inv. cost (Rp bn)

Investment participations (end-9M18)

Status (9M18)ADHI IJ PTPP IJ WIKA IJ WSKT IJ

12

Construction and Materials│Indonesia

Construction│ October 22, 2018

Figure 13: SOE contractors' investments portfolio


Stake (%)Equity-

Rp bnStake (%)

Equity-

Rp bnStake (%)

Equity-

Rp bnStake (%)

Equity-

Rp bn

Power plant (capacities in MW) 660 9,553 - 270 92 115

Coal fired power plant -Meulaboh, Aceh 400 7,330 34% 9 Construction started in 2018

Mini hydro power plant-Lau Gunung, No. Sum. 15 288 38% 33 Construction progress: 60.3%

Gas engine power plant- Talang Duku, Palembang 56 - 99% 137 Operating since 2011

Waste to energy power plant-Surakarta, Central Java 10 400 40% 25

Coal fired power plant-Central Lampung 14 - 75% 67 Operating since 2014

Micro gas power plant-Rengat 20 160 100% 46 Operating

Gas engined power plant-Borang 60 806 100% 26 Operating

Micro gas power plant-Rawa Minyak 25 204 70% 20 Operating

Mini hydro power plant-Sangir, W. Sumatera 10 266 95% 113 Operating

Hydroelectric power plant-Wado, W. Java 50 100 100% 2 Under construction

Oil, gas, and asphalt - 4,900 - - - -

Bantaeng storage - 4,900 30% 18

Asphalt mining - - 99% 41 Operating

Upstream and downstream oil and gas - - 70% 15 Operating

Water infrastructure 2,000 - 20 0 -

Water treamemt plant-Jatiluhur 50,000L/sec 2,000 14% 0

Perusahaan Air Indonesia Amerika 25% 20

Port 3,177 - 323 96 273

Multipurpose Terminal Kuala Tanjung 25% 323 20% 273 Operating

Belawan International Container Port 15% 96 Operating

Railway or city train 79,330 - - (187) -

Jakarta-Bandung HSR 78,000 38% (187) Under construction

Metro Kapsul 1,330 51% -

Total 276,740 7 1,474 1,199 15,430

Investments Length or capacities Total est. inv. cost (Rp bn)

Investment participations (end-9M18)

Status (9M18)ADHI IJ PTPP IJ WIKA IJ WSKT IJ



13

How operational cost efficiency could be created

Currently, the Trans-Java Toll Road is owned by three majority shareholders -

JSMR, Waskita Toll Road (WTR, a subsidiary of WSKT), and Astra Infra (a

subsidiary of Astra International, ASII, ADD, TP Rp8,500).

Figure 14: Trans-Java Toll Road concessions


WTR started investing in the toll road business in 2015, while JSMR has been in

this business since 1978 (it was initially a toll road regulator, from 1978, and

turned into a toll road developer and operator in 2004). Given JSMR's very long

track record in the toll road business, we believe it has the most expertise in

operating toll roads vs. other SOE contractors in our coverage.

Hence, we think that if the whole stretch of Trans-Java Toll Road is managed

under a sub-holding company and operated by JSMR, its operational cost

should be much more efficient due to economies of scale. A single operator

would significantly reduce the number of employees needed to operate the

whole stretch.

JSMR WTR Astra Infra

Jakarta-Cikampek 83.0 Jasa Marga 100% - -

Cikampek-Palimanan 114.0 Lintas Marga Sedaya - - 45%

Palimanan-Kanci 26.3 Jasa Marga 100% - -

Kanci-Pejagan 35.0 Semesta Marga Raya - 78% -

Pejagan-Pemalang 57.5 Pejagan Pemalang Toll Road - 100% -

Pemalang-Batang 39.00 Pemalang Batang Toll Road - 60% -

Batang-Semarang 75.0 Jasamarga Semarang Batang 60% 40% -

Semarang 24.8 Jasa Marga 100% -

Semarang-Solo 72.6 Trans Marga Jateng 59% - -

Solo-Ngawi 90.1 Solo Ngawi Jaya 60% 40% -

Ngawi-Kertosono-Kediri 114.9 Ngawi Kertosono Jaya 60% 40% -

Kertosono-Mojokerto 41.0 Marga Harjaya Infrastruktur - - 100%

Mojokerto-Surabaya 36.3 Jasamarga Surabaya Mojokerto 55% - -

Surabaya-Gempol 49.0 Jasa Marga 100% - -

Gempol-Pandaan 13.6 Jasamarga Pandaan Tol 92% -

Gempol-Pasuruan 34.2 Transmarga Jatim Pasuruan 99% - -

Pasuruan-Probolinggo 31.3 Trans Jawa Paspro Jalan-Tol - 80% -

Probolinggo-Banyuwangi 172.0 Jasamarga Probolinggo Banyuwangi 55% - -

Total 1,110

Length (km) Concession holderStake ownerships

Toll roads



14

How enlarged scale could translate into lower cost

Hutama Karya’s GPM improved to 10.2% in 9M18 vs. 8.6% in 9M17. From our

discussion with its management, we understand that this was due to the

implementation of an integrated procuring system at the beginning of 2018.

Figure 15: Improvement of Hutama Karya's GPM


We think if Hutama Karya’s case could be a benchmark, in the future, the

formation of a precast and construction material sub-holding company under the

infrastructure holding could have a positive impact on the procurement cost of all

the members of the sub-holding company. This should not only result in higher

operational cost efficiency (e.g. fewer number of employees needed), but also in

larger orders (economies of scale). Economies of scale could perhaps give

additional bargaining power to the group of companies under the sub-holding

company when dealing with suppliers.

Potentially lower funding cost

We believe lower cost of funding can be attained through sub-holding

companies formation.

As an example, the Trans-Java Toll Road includes the Jakarta-Cikampek toll

road, which is already a mature toll road with stable cash flow. If the Jakarta-

Cikampek toll road is combined with new toll road assets of the highway to raise

funds for the whole highway stretch, we believe the cost of funding should be

lower vs. separately raising funds for each new toll road asset.

Enlarging room for leverage

We think the total room of leverage for the holding companies and holding

members should remain the same after the formation of the holding companies.

Our channel checks indicate that this can be achieved through using an equity

method of accounting at the holding company level. This is despite the fact that

holding companies need to have a majority stake in its subsidiaries. Normally,

the parent company needs to apply a full-consolidation accounting method if it

has a majority stake in its subsidiaries.

This is possible, in our view. Based on ED PSAK 4 (Indonesia’s Financial

Accounting Standards), a subsidiary cannot be consolidated if it is subject to the

control of the government, court, administrator, or regulator.

We estimate that a full-consolidation accounting method for both holding

companies could increase total debt of Hutama Karya to Rp111tr (11x from the

level as at end-FY17 and Perumnas to Rp27.5tr (10x from the level as at end-

FY17, post-holding companies’ formation. We estimate Hutama Karya’s and

Title:

Source:


8.61%

10.15%

9M17-construction GPM 9M18-construction GPM

Hutama Karya



15

Perumnas’ gearing (DER) could shoot up to 7.0x (or fall to 4.2x if we factor in

additional equity injection from the FY19F state budget) and 4.5x, respectively.

Figure 16: HK’s total DER under full-consolidation accounting

method, post-holding company formation (CGS-CIMBe)

Figure 17: Perumnas’ DER under a full-consolidation accounting

method, post-holding company formation (CGS-CIMBe)

*Total debt post-holding = total debts of ADHI, JSMR, and WSKT in FY18F + HK’s total debt at end-FY17; Total equity post-holding = HK’s total equity at end-FY17+NP of ADHI, JSMR, and WSKT in FY18F

**Total debt post-holding + injections = total debts of ADHI, JSMR, and WSKT in FY18F + total debt Hutama Karya in FY17; *Total equity post-holding + injections= HK’s total equity at end-FY17+NP of ADHI, JSMR, and WSKT in FY18F+government equity injections in FY19F


*Total debt post-holding = total debts of WIKA and PTPP in FY18F + total debt Perumnas in FY17; Total equity post-holding = Perumnas’ total equity in end-FY17+ NP of WIKA and PTPP in FY18F


On the other hand, under an equity accounting method, post-holding companies’

formation, we estimate Hutama Karya’s gearing to decrease slightly to 0.8x (vs.

1.2x prior to the holding company), and further to 0.4x after accounting for the

government’s equity injection in FY19F. We estimate Perumnas’ gearing could

decrease to 0.54x (vs. 0.84x prior to the holding company).

Decreasing gearing of both holding companies, post-holding companies’

formation, could be contributed by a higher total equity balance of both Hutama

Karya and Perumnas by 0.6x. Our estimates assume that both holding

companies will receive additional proportionated net profit from the subsidiaries.

Meanwhile, both holding companies could maintain unchanged total debt

balances as they do not need to consolidate their subsidiaries’ debts.

Figure 18: HK’s DER under equity accounting method, post-

holding company formation (CGS-CIMBe)

Figure 19: Perumnas’ DER under equity accounting method,

post-holding company formation (CGS-CIMBe)

* Total equity post-holding = HK’s total equity at end-FY17 + proportionated NP of ADHI, JSMR, and WSKT in FY18F

** Total equity for DER calculation = HK’s total equity at end-FY17 + proportionated NP of ADHI, JSMR, and WSKT in FY18F


* Total equity for DER calculation = Perumnas’ total equity at end-FY17 + proportionated NP of WIKA and PTPP in FY18F


Title:

Source:


-

20,000

40,000

60,000

80,000

100,000

120,000

Hutama Karya's total debt-pre-holding (based on 2017

equity balance)

Hutama Karya's total debt-post-holding*

Hutama Karya's total debt-post-holding+injections**

Hutama Karya (holding company) Trans Sumatera Operating Co.

Adhi Karya (ADHI) Jasa Marga (JSMR)

Waskita Karya (WSKT) Indra Karya

Yodya Karya

DER: 7.0x

DER: 1.2x

Rp bnDER: 4.2x

Title:

Source:


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Perumnas' total debt- pre-holding (basedon 2017 equity balance)

Perumnas' total debt- post-holding*

Perum Perumnas (holding company) Pembangunan Perumahan (PTPP)

Wijaya Karya (WIKA) Amarta Karya

Indah Karya Virama Karya

Bina Karya

DER: 4.5x

DER: 0.8x

Rp bn

Title:

Source:


-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

-

2,000

4,000

6,000

8,000

10,000

12,000

Hutama Karya's totaldebt- pre-holding (based

on 2017 equity balance)

Hutama Karya's totaldebt- post-holding*

Hutama Karya's totaldebt- post-

holding+injections**

Hutama Karya (holding company) DER (x) -RHS

Rp bn

DER: 1.2x DER: 0.8x DER: 0.4x

Title:

Source:


-

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

0

500

1,000

1,500

2,000

2,500

3,000

Perumnas' total debt- pre-holding(based on 2017 equity balance)

Perumnas' total debt- post-holding*

Perum Perumnas (holding company) DER (x) -RHS

Rp bn

DER: 0.84x DER: 0.54x



16

EARNINGS OUTLOOK

Robust outlook in 4Q18F

SOE contractors in our coverage reported decent 9M18 results despite lower-

than-expected new contracts booking. This was on the back of 9M18 order book

delivery coming in line, boosted by strong delivery of contracts carried over. We

have a positive outlook on 4Q18F earnings as many projects are in the

completion stage. During the completion stage, project delivery should be faster

than in the early stages of development as there should be fewer non-technical

hurdles (e.g. land acquisition).

Brief review of 9M18 financials

In 9M18, SOE contractors in our coverage reported operational and bottomline

results in line with and above our expectations. This was despite some lower-

than-expected non-joint operations (JO) revenue for PTPP and WIKA, which

was compensated by an improvement in margins and/or higher-than-expected

JO income.

Figure 20: 3Q18 results recap

SOURCES:CGS-CIMB RESEARCH, COMPANY REPORTS

9M18 new contracts booking

The sector’s new contracts booking in 9M18 was below our/companies’

expectations. However, only WSKT has lowered its new contracts target for

FY18F, while the other three SOE contractors in our coverage (ADHI, PTPP,

and WIKA) remain confident they can achieve their targets.

The companies suggested that the weak new contracts booking in 9M18 was

mostly due to delays in the bidding process. Hence, if some contracts are not

received by end-FY18F, this is expected to be delayed until FY19F.

Additionally, we think changes in the management of SOE contractors in Apr 18

were another reason for the weak new contracts booking. We think the new

management needed some time to transition and review the projects to be

tendered.

For example, WSKT’s new management decided to pull out from its investment

in the Pasuruan-Probolinggo toll road. Hence, it no longer expects to receive

construction contracts for the project, and estimates lower new contracts

achievement.

Details are as follows:

ADHI - below expectations. It booked Rp11.4tr new contracts (+10.7%

yoy vs. 9M17’s ex-LRT contracts) in 9M18. This accounted for 56%/49%

of our/company’s new contracts estimates for FY18F, or below its three-

year average 9M achievement of 66%.

PTPPs - in line. It booked Rp32.4tr (+1.6% yoy) new contracts in 9M18.

This accounted for 77%/66% of our/company’s new contracts estimates

for FY18F. This was ahead of our expectation, but remained behind

PTPP’s target for FY18F (three-year average achievement in 9M: 73%).

WIKA – below expectations. It booked Rp25.3tr new contracts (-19.5%

yoy) in 9M18. This accounted for 44%/44% of our/company’s new

contracts estimates for FY18F, or below its three-year average 9M

achievement of 58%.

ADHI PTPP WIKA WSKT

Revenue In line Behind Behind Ahead

GPM (vs. previous year's) Improved Improved Improved Lower

JO income Ahead Ahead Behind Ahead

EBIT Ahead In line In line Ahead

Core NP Ahead In line In line Ahead



17

WSKT – below expectations. It booked Rp11.7tr new contracts (-74%

yoy) in 9M18. This accounted for 25%/23% of our estimate/company’s

revised guidance for FY18F, or below its three-year average 9M

achievement of 73%.

After revising its targets in Sep 18, it now expects to only achieve 60-

70% of its revised Rp50tr-55tr target. This implies Rp30tr-38.5tr new

contracts booking in FY18F.

Figure 21: ADHI's new contracts achievement trend; 9M18

booking was below our/company's targets

Figure 22: PTPP's new contracts achievement trend; 9M18

booking was ahead of our estimate but behind company's target

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Figure 23: WIKA's new contracts achievement trend; 9M18


Figure 24: WSKT's new contracts achievement trend; 9M18



Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018F (CGS-CIMBe)

2018F (ADHI's)

1Q-achievement 2Q-achievement


Remaining to FY18F (CGS-CIMBe) Remaining to FY18F (ADHI's)

3-year mean in 6M

3-year mean in 9M

3-year mean in 3M

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018F (CGS-CIMBe)

2018F (PTPP's)



Remaining to FY18F (CGS-CIMBe) Remaining to FY18F (PTPP's)

3-year mean in 6M

3-year mean in 9M

3-year mean in 3M

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018F (CGS-CIMBe)

2018F (WIKA's)



Remaining to FY18F (CGS-CIMBe) Remaining to FY18F (WIKA's)

3-year mean in 6M

3-year mean in 9M

3-year mean in 3M

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018F (CGS-CIMBe)

2018F (WSKT's)



Remaining to FY18F (CGS-CIMBe) Remaining to FY18F (WSKT's)

3-year mean in 6M

3-year mean in 9M

3-year mean in 3M



18

9M18 order book delivery

Order book (OB) burn rate to revenue (JO and non-JO revenues) ratio for SOE

contractors in our coverage in 9M18 was in line with the three-year mean.

Figure 25: The SOE contractor sector's weighted average order book burn rate to

revenue ratio in 9M18 vs. 3-year average achievement: in line


Details are as follows:

ADHI: order book burn rate ratio was in line (LRT revenue delay in

2H18 is priced in).

ADHI’s burn rate ratio trend in 3Q18 slowed down, but 9M18 overall

order book burn rate to revenue ratio was in line with its three-year

mean (Figure 26). We think this was due to the expected delay of

Jabodebek LRT revenue delivery in 2H18. In Sep 18, the company

revised down its LRT revenue target for FY18F to Rp7tr-8tr vs. Rp10tr at

the beginning of the year. We factor this into our forecasts by lowering

our LRT revenue forecast to Rp7.5tr (the median of ADHI’s revised LRT

revenue target range in FY18F). We previously discussed this in our

note “Strong EPS growth intact despite LRT delay” dated 2 Oct 2018.

Figure 26: ADHI's order book to revenue burn rate ratio in 9M18 vs. 3-year mean: in

line


Title:

Source:


7%

15%

23%

7%

14%

22%

3M 6M 9M

2018 (weighted average sector) 3-year average

Title:

Source:


9%

16%

25%

7%

16%

26%

3M 6M 9M

2018 (ADHI) 3-year average

https://brokingcrm.cimb.com/script/Event/downloadFile.asp?iLng=0&iBul=0&iUky=8891643771&sUsn=Aurelia%20Barus&iFmt=0&iLcs=6&iPri=3000009&iSes=129405529&q=1542603267584&atype=0&iObjId=164662&iVerNo=1&iObjLangId=0



19

PTPP: 9M18 order book burn rate ratio was in line with its three-

year mean despite concerns over a slowdown in EPC projects.

Despite booking lower-than-expected non-JO revenue, its overall order

book to revenue burn rate ratio was on track in 9M18. This was due to

faster-than-expected JO revenue realisation resulting in higher-than-

expected JO income and in-line EBIT in 9M18.

There were market concerns over a significant miss in PTPP’s earnings

in FY18F due to government initiatives to slow down EPC project

development in Sep 18 (on the back of Indonesia’s widening current

account deficit). Despite this, our discussions with the company suggest

that its EPC project delivery remains on track. This was further

evidenced by its order book to revenue burn rate ratio remaining in line

with its three-year mean in 9M18.

Figure 27: PTPPs order book to revenue burn rate ratio in 9M18 vs. 3-year mean: in

line


WIKA: 9M18’s order book burn rate ratio was in-line (excluding

Jakarta-Bandung HSR contract).

WIKA’s order book burn rate to revenue ratio in 9M18 was 3% below

(including HSR) its three-year mean (Figure 28). We think this was due

to the slow progress of the Jakarta-Bandung HSR in 9M18.

In 9M18, revenue realisation from the project was minimal. However, we

expect to see faster revenue realisation for the project in FY19F. The

land acquisition for the trackway reached 80% as at end-Oct 18; hence

there should be no further issues in loan disbursements from China

Development Bank (CDB).

If we exclude the HSR contract (Rp15.6tr) in our order book burn rate

calculation, WIKA’s order book to revenue burn rate ratio was in line

with its three-year mean in 9M18 (Figure 29).

Title:

Source:


4%

10%

17%

4%

11%

18%

3M 6M 9M

2018 (PTPP) 3-year average



20

Figure 28: WIKA’s order book burn rate to revenue ratio in 9M18

(incl. HSR) vs. 3-year mean (incl. HSR): below expectations

Figure 29: WIKA’s order book burn rate to revenue ratio in 9M18

(ex-HSR contract) vs. 3-year average achievement (ex-HSR

contract): in line


WSKT: 9M18’s order book burn rate ratio above expectations. Its

order book burn rate to revenue ratio was much higher in 9M18 vs. its

three-year mean. We think this was because many of its carryover

contracts were already in the completion stage. As we mentioned earlier,

it should achieve a faster burn rate during the completion stage.

Figure 30: WSKT’s order book burn rate to revenue ratio in 9M18 vs. 3-year average

achievement: above expectations


Title:

Source:


6%

13%

22%

7%

16%

25%

3M 6M 9M

2018 (WIKA) 3-year average

Title:

Source:


7%

15%

26%

7%

17%

27%

3M 6M 9M

2018 (WIKA) ex-HSR 3-year average

Title:

Source:


9%

16%

25%

7%

13%

20%

3M 6M 9M

2018 (WSKT) 3-year average



21

Stabilising earnings outlook in FY19F

In FY19F, we estimate the sector will deliver +21% yoy aggregate core NP

growth due to a low base in FY18F; we estimate -9% yoy core NP in FY18F.

Negative core NP growth for the sector in FY18F is likely to be dragged by

negative core NP growth estimates for WSKT (-32% yoy). We expect WSKT’s

core NP growth to be negative in FY18F as we exclude gains from its first RDPT

issuance, while WSKT’s headline NP in FY18F is expected to show positive

growth of +1% yoy.

We think our core NP growth estimates for the sector can be achieved as: 1) the

sector should have enough orders on hand at the beginning of FY19F, even in

the worst-case scenario; 2) enough projects should be awarded in FY19F and 3)

order book burn rate should remain strong as more projects are expected to be

completed in FY19F.

Figure 31: SOE contractors' core NP growth (yoy) - historical and estimates


Enough orders on hand even in the worst-case scenario

Based on our sensitivity analysis, in the worst-case scenario, we estimate the

sector’s aggregate outstanding order book at the end of FY18F (through the

beginning of FY19F) to be Rp362tr. The implied order book (at end-FY18F

through the beginning of FY19F) to revenue (average in FY19-20F) ratio for

SOE contractors is still at 1.1x-1.4x (Figure 32).

In the worst-case scenario, we estimate the sector’s aggregate outstanding

order book at the end of FY18F (through the beginning of FY19F) includes no

additional new contracts booking in 4Q18F and our estimate of Rp63.8tr

revenue in 4Q18F.

Based on our sensitivity analysis, in the best-case scenario, we estimate the

sector’s aggregate outstanding order book at the end of FY18F (through the

beginning of FY19F) to be Rp449tr. The implied order book (at end-FY18F

through the beginning of FY19F) to revenue (average in FY19-20F) ratio for

SOE contractors is 1.2x-2.5x (Figure 33).

In the best-case scenario, our assumption for the sector’s outstanding order

book at the end of FY18F through the beginning of FY19F includes achieving

100% of our FY18F new contracts estimate and our estimate of Rp63.8tr

revenue in 4Q18F.

Title:

Source:


-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2015 2016 2017 2018F 2019F

ADHI PTPP WIKA WSKT Sector



22

Figure 32: OB at the end of FY18F (our estimate: worst-case

scenario) vs. average annual revenue estimates in FY19-20F

Figure 33: OB at the end of FY18F (our estimate: best-case

scenario) vs. average annual revenue estimates in FY19-20F


New contracts outlook in FY19F

We estimate FY19F new contracts growth of between -20% yoy and +20% yoy

for the four SOE contractors in our coverage. We expect negative new contracts

growth for WSKT on a high base, while the remaining three contractors are

expected to achieve 14-20% yoy new contracts booking in FY19F. Project

outlook is discussed in the following section.

Figure 34: SOE contractors’ new contracts booking - historical

and estimates

Figure 35: SOE contractors new contracts growth (yoy) -

historical and estimates


Title:

Source:


-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

ADHI PTPP WIKA WSKT

OB at the end of FY18F (CGS-CIMBe)- worst case: no contracts booking in 4Q18F

Avg. annual revenue FY19-20F

Rp bnTitle:

Source:


-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

ADHI PTPP WIKA WSKT

OB at the end of FY18F (CGS-CIMBe)-best case: 100% estimate

Avg. annual revenue FY19-20F

Rp bn

Title:

Source:


13,965 16,500 17,100 20,459 24,083

27,07332,600 38,800

42,25050,700

25,222

37,08042,402

57,515

65,456

32,160

69,97455,834

47,459

37,967

2015 2016 2017 2018F 2019F

ADHI PTPP WIKA WSKT

Rp bnTitle:

Source:


-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2015 2016 2017 2018F 2019F

ADHI PTPP WIKA WSKT Sector



23

PROJECT PROGRESS AND OUTLOOK

Project progress

Strategic national projects progress well

Between 2016 and Sep 18, a total of 33 strategic national projects were

completed, with total investment cost of Rp96.9tr (implying 13% of strategic

national projects are completed), out of 253 total strategic national projects.

In Jan-Sep 2018, three strategic national projects were completed (i.e. two DAM

projects and one railway project with total value of Rp2.1tr). The government

expects an additional 18 projects to be completed between Sep and Dec 18,

bringing the total to 48 completed projects (implying 19% of strategic national

projects completed).

At the end of Sep 19, the government targets another 31 projects to be

completed, bringing total completed strategic national projects to 79 (implying

31% of strategic national projects completed). This is higher than the

government’s target at the beginning of the year of 68 completed projects by the

end of 2019 (implying 27% of strategic national projects completed). This implies

that progress delivery on some projects may be accelerated.

Figure 36: Progress and government’s target of strategic national projects until the

end of Sep 19


35GW electricity projects progress

As at end Sep-18, the operating capacity of the 35GW electricity programme

reached 7%, or c.2.6GW. There were c.14GW of projects that have not yet

reached the financial close stage.

In Sep 18, the Minister of Energy and Mineral Resources, Ignasius Jonan,

announced that the government plans to delay the project delivery for power

plants that have not yet reached financial close. This was on the back of

Indonesia’s widening current account deficit (CAD).

The delivery could be delayed another one or two years. We do not expect this

to affect the progress of power plants that are already in SOE contractors’ books

as projects under construction should have completed the financial close stage.

Title:

Source:


9% 11% 13%19%

31%

0%

14%20%

23%

33%

43%

45%

44%

43%

35%

6%

2%

2%

2%

0%

36%

28%20%

12%0%

7% 0% 0% 0% 0%

2016 2017 At the end of Sep-18 Target at the end of 2018 Target at the end of Sep-19

Completed (cummulative from end of 2016) Construction and partially operating

Construction stage Transaction stage

Preparation stage Review stage



24

Figure 37: Progress of 35GW power plant development


Major progress on infra projects

Figure 38: Progress of major rail projects in Indonesia

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, VARIOUS NEWS

Title:

Source:


2% 3% 7%

41%46%

52%

24%

36%

31%13%

9%6%

19%

6% 3%

End Aug-17 2017 End Sep-18

Operating Construction Signed power purchase agreement, not yet financial close Procurement Planning

(Rp)per km

(Rp)

Soekarno-Hatta International

Airport Railink 37.6 5.0 5.0

70,000-

100,000

1,861-

2,660Operating

Actual: Dec-

17Listed: WSKT

Kereta Api Indonesia,

Angkasa Pura II

Soekarno-Hatta Automated People

Mover System (APMS) 1.7 3.0 1.0 n.a n.a Operating Actual: Nov-17

Listed: WIKA

Non-listed:

Indulexco

Kereta Api Indonesia,

Angkasa Pura II

South Sumatera (Palembang) LRT 23.4 13.0 10.9 7,000 304 Operating Actual: Oct-18 Listed: WSKT Kereta Api Indonesia

Jakarta MRT North-South phase I:

Lebak Bulus-Bundaran HI 16.0 13.0 16.0

8,000 -

,9000

(proposed)

500-563

(proposed)

End Sep-18:

97%Target: Mar-19

Listed: WIKA and

JKON

Non-listed: Hutama

Karya, Obayashi,

Shimizu, Sumitomo,

Mitsui, Tokyu

MRT Jakarta (owned by

Regional government of DKI

Jakarta)

Jakarta LRT phase I: Kelapa

Gading-Velodrome 5.8 6.0 6.8

10, 800

(proposed)

1,862

(proposed)

End Sep-18:

91%

Target: Dec -

18Listed: WIKA

Jakarta Propertindo (owned by

Regional government of DKI

Jakarta)

Jabodebek LRT phase I:

Cawang-Cibubur, Cawang-Dukuh

Atas, Cawang-East Bekasi

44.5 18.0 29.9 12,000

(propose)

667

(proposed)

End Oct 18:

48.6%

Cawang-

Cibubur:

70.5%

Cawang-

Dukuh Atas:

36.7%

Cawang-E.

Bekasi:

41.4%

Target: end-

2019 or beg.-

2020

Listed: ADHI Kereta Api Indonesia

Jakarta-Bandung HSR 142.0 5.0 82.0

200,000-

250,000

(proposed)

1,408-

1,761

(proposed)

End Sep-18:

5%Target: 2021 Listed: WIKA

Kereta Cepat Indonesia China

(Indonesia's consortium: 60%;

China's consortium: 40%)

Total 208.3 42.0 134.7

Contractors Investor/operator

Ticket price Track

length

(km)

Stations

Investment

cost (Rp tr)

ProgressCommercial

operating



25

Figure 39: Progress of Trans-Java toll roads


Figure 40: Progress of Trans-Sumatera toll roads


JSMR WTR Astra Infra

Jakarta-Cikampek 83 Jasa Marga 100% - - Operating since 1988

Cikampek-Palimanan 114 Lintas Marga Sedaya - - 45% Operating since 2015

Palimanan-Kanci 26 Jasa Marga 100% - - Operating since 1998

Kanci-Pejagan 35 Semesta Marga Raya - 78% - Operating since 2010

Pejagan-Pemalang 58 Pejagan Pemalang Toll Road - 100% - Partially operating in 1H16 (20km); the rest to be operating in

2018

Pemalang-Batang 39 Pemalang Batang Toll Road - 60% - Targeted to be operating in 2018

Batang-Semarang 75 Jasamarga Semarang Batang 60% 40% - Targeted to be operating in 2018

Semarang 25 Jasa Marga 100% - - Operating since 1983

Semarang-Solo 73 Trans Marga Jateng 59% - - Partially operating in 2011 (20km); section III operating in 2017;

section IV-V targeted to be operating in 2019

Solo-Ngawi 90 Solo Ngawi Jaya 60% 40% - Targeted to be operating in 2018

Ngawi-Kertosono-Kediri

115

Ngawi Kertosono Jaya 60% 40% -

Section I-III operating since 1Q18; section IV targeted to be

operating in 2019; section V targeted to be operating in 2020 or

above

Kertosono-Mojokerto 41 Marga Harjaya Infrastruktur - - 100% Operating in three stages in 2014, 2016, and 2017

Mojokerto-Surabaya 36 Jasamarga Surabaya Mojokerto 55% - - Operating in three stages in 2011, 2016, and 2017

Surabaya-Gempol 49 Jasa Marga 100% - - Operating since 2006

Gempol-Pandaan 14 Jasamarga Pandaan Tol 92% - - Operating since 2015

Gempol-Pasuruan34

Transmarga Jatim Pasuruan 99% - -

Partially operating in 2017 (14 km); section II operating in 2Q18;

section III targeted to be operating in 2019

Pasuruan-Probolinggo 31 Trans Jawa Paspro Jalan-Tol - 80% - Targeted to be operating in 2018

Probolinggo-Banyuwangi 172 Jasamarga Probolinggo Banyuwangi 55% - - Targeted to be operating in 2020 or above

Total 1,110

Length (km) Concession holder StatusToll roadsStake ownerships

Sections Length (km)

Priority

sections- length

(km)

Operating status

Medan-Binjai 17 17 Under construction; targeted to be operating in 2019

Palembang-Simpang Indralaya 22 22 Under construction; targeted to be operating in 2019

Bakauheni-Terbanggi Besar 140 140 Under construction; targeted to be operating in 2019

Pekanbaru-Dumai 131 131 Under construction; targeted to be operating in 2019

Palembang-Tanjung Api Api 90 70 Under construction; targeted to be operating in 2024

Kisaran-Tebing Tinggi 60 Under design and planning

Terbanggi Besar-Pematang Panggang 100 100 Under construction; targeted to be operating in 2019

Pematang Panggang-Kayu Agung 85 85 Under construction; targeted to be operating in 2019

Dumai-Simpang Sigambal-Rantau Prapat 175 Under design and planning

Rantau Prapat-Kisaran 100 Under design and planning

Bukit Tinggi-Padang 55 Under design and planning

Batu Ampar-Bandara Hang Nadim 25 Under design and planning

Jambi-Rengat 190 Under design and planning

Rangat-Pekanbaru 175 Under design and planning

Betung (Sp Sekayu)-Tempino-Jambi 191 Under design and planning

Pekanbaru-Bukit Tinggi 185 Under design and planning

Simpang Indralaya-Muara Enim 88 88 Under design and planning

Tebing Tinggi-Sibolga 200 Under design and planning

Sigli-Banda Aceh 75 Under design and planning

Lubuk Linggau-Curup Bengkulu 95 Under design and planning

Muaran Enim-Lahat-Lubuk Linggau 125 Under design and planning

Binjai-Langsa 110 Under design and planning

Langsa-Lhoksumawe 135 Under design and planning

Lhoksumawe-Sigli 135 Under design and planning

Kisaran-Indrapura 47 Under construction; targeted to be operating in 2020

Medan-Banda Aceh 470 Under construction; targeted to be operating in 2025

Padang-Pekanbaru 255 Under construction; targeted to be operating in 2025

Kuala Tanjung-Tebing Tinggi-Parapat 143 Under construction; targeted to be operating in 2021

Total 2,704 1,568



26

Progress on One Million Houses programme

The One Million Houses programme is part of the government’s efforts to reduce

the current housing backlog in Indonesia, and in anticipation of additional annual

housing backlog of c.800,000 units. In FY15, total housing backlog in Indonesia

was 11.5m units, of which 7.6m units (66%) were low-cost housing. The

government targets to lower the low-cost housing backlog to 5.4m units in

FY19F.

Since 2015, the government’s progress on the One Million Houses programme

has gradually increased. We expect this to continue to improve, supported by

implementation of the TAPERA savings programme (tabungan perumahan

rakyat, or public housing savings) in 2019.

Figure 41: Achievement of One Million Houses development programme

SOURCES: CGS-CIMB RESEARCH, MINISTRY OF PUBLIC WORKS AND HOUSING

Title:

Source:


-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2015 2016 2017 2018F

Target Achievement

Achievement as of Oct-18

unit of house



27

FY19F project outlook

The government expects all strategic national projects that are still in the

preparation and transaction stages to reach the construction stage by end-Sep

19. According to the Committee for Acceleration of Priority Infrastructure

Delivery’s (KPPIP or Komite Percepatan Pembangunan Infrastruktur Prioritas)

latest target, a total of 36 strategic national projects (ex-35GW electricity projects)

with total value of Rp1,190tr are expected to reach the preparation and

transaction stages by the end of 2018. Hence, we think these projects are highly

likely to be awarded in FY19F (Figure 42).

On top of the national strategic projects, SOE contractors in our coverage still

expect more unsolicited project investments in FY19F. Investing in these

projects could result in construction project contracts.

Figure 42: Strategic national projects to be potentially awarded in FY19F


Infra is still key to boost growth

Despite an acceleration in infra development over the past four years,

Indonesia’s total infra spending still lags behind other countries in the region. We

estimate Indonesia’s infra spending realisation, including the state budget and

non-state budget (which represents capex of 16 SOE companies that have

major exposure to infra development), was only in the range of 2.9-4.3% in

2015-2017. This remains below the regional average infra spending as a

percentage of GDP of 5%.

Figure 43: Infra spending (state and non-state budgets) to GDP


Estimated investment cost

(Rp tr)

Toll road projects 174.72

Railway projects 189.57

Airport and seaport projects 8.57

Oil and gas projects 686.79

Water infrastrucure projects 88.24

Satelite project 6.92

Industrial area projects 35.90

Total 1,190.71

Title:

Source:


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

-

100

200

300

400

500

600

700

2015 2016 2017

Non-state budget capex (Rp tr) Realised infra budget (Rp tr) Infra spending to GDP



28

Based on data analytics provided by the Global Infrastructure Hub, in order for

Indonesia to achieve sustainable 4.7% annual GDP growth until 2040F,

Indonesia’s infra spending as a percentage of GDP needs to be maintained

above 4% until 2028F (Figure 44).

Figure 44: Sensitivity analysis of infra spending requirements and realisation (based on current trend) in 2019-2040F, as % of GDP

SOURCES: CGS-CIMB RESEARCH, GLOBAL INFRASTRUCTURE HUB

Figure 45: Sensitivity analysis of infra spending requirements and realisation (based on current trend) in 2019-2040F

SOURCES: CGS-CIMB RESEARCH, GLOBAL INFRASTRUCTURE HUB

Our sensitivity analysis from the data set suggests that Indonesia needs to

increase/decrease its infra spending by c.0.2% pt to GDP p.a. on average in

order to attain 10% higher/lower annual GDP growth from the base case GDP

growth assumption of 4.7% (Figure 45).

For example:

1) In FY19F, in our base-case scenario, in order to attain 4.7% GDP growth,

Indonesia needs to achieve 5% infra spending as a percentage of GDP.

2) In FY19F, in order for Indonesia to attain 5.2% annual GDP growth (10%

above our base-case GDP growth assumption of 4.7%), it needs to achieve

5.2% infra spending as a percentage of GDP.

3) In FY19F, if Indonesia only achieves 4.8% infra spending as a percentage of

GDP, its annual GDP growth could decline to 4.2% (10% below our base-case

GDP assumption growth of 4.7%).

Title:

Source:


-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F 2031F 2032F 2033F 2034F 2035F 2036F 2037F 2038F 2039F 2040F

Infra spending realisation trend (GDP growth higher by +20% yoy: 5.6%) Infra spending need (GDP growth higher by +20% yoy: 5.6%)

Infra spending realisation trend (GDP growth higher by +10% yoy: 5.2%) Infra spending need (GDP growth higher by +10% yoy: 5.2%)

Infra spending realisation trend (base case growth: 4.7% GDP) Infra spending need (base case growth: 4.7% GDP)

Infra spending realisation trend (GDP growth lower by 10% yoy: 4.2%) Infra spending need (GDP growth lower by 10% yoy: 4.2%)

Infra spending realisation trend (GDP growth lower by 10% yoy: 3.8%) Infra spending need (GDP growth lower by 10% yoy: 3.8%)

as % to GDP

Title:

Source:


-

20

40

60

80

100

120

2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F 2031F 2032F 2033F 2034F 2035F 2036F 2037F 2038F 2039F 2040F

Infra spending realisation trend (growth higher by 20% yoy: +5.6% yoy GDP) Infra spending need (growth higher by 20% yoy: +5.6% yoy GDP)

Infra spending realisation trend (growth higher by 10% yoy: +5.2% yoy GDP) Infra spending need (growth higher by 10% yoy: +5.2% yoy GDP)

Infra spending realisation trend (base case growth: +4.7% GDP) Infra spending need (base case growth: +4.7% GDP)

Infra spending realisation trend (growth lower by 10% yoy: +4.2% yoy GDP) Infra spending need (growth lower by 10% yoy: +4.2% yoy GDP)

Infra spending realisation trend (growth lower by 20% yoy: +3.8% yoy GDP) Infra spending need (growth lower by 20% yoy: +3.8% yoy GDP)

US$ bn



29

Figure 46: Sensitivity analysis of additional infra spending requirements (as a % of

GDP) to attain higher/lower annual GDP growth in 2019-2040


Project outlook beyond FY19F

More toll road developments

If Jokowi is elected for a second term after the Presidential election, slated for

Apr 19, our channel checks suggest that the government may aim to develop the

Trans-Sulawesi and Trans-Kalimantan toll roads.

More rail projects

We think the potential rail projects that could be awarded beyond FY19F include

Jakarta MRT phase II (East-West), the next phase of the Jakarta LRT

development and the next phase of the Jabodebek LRT (38.5 km).

Continuation of One Million Houses programme progress

We expect the One Million Houses programme to continue beyond FY19F as

the low-cost housing backlog is likely to remain at 5.4m by the end of FY19F

(according to the government’s estimate).

The BP TAPERA (TAPERA governing body) and implementation of the

TAPERA savings programme (tabungan perumahan rakyat or public housing

savings) starting in FY19 could speed up the implementation of the One Million

Houses programme.

The role of BP TAPERA includes the collection of TAPERA savings from

employees in Indonesia, managing the TAPERA fund, and disbursing the funds

to banking or financial institutions to purchase, renovate and build low-cost

housing. The investment management (reinvestment) of TAPERA fund could be

done with the help of investment managers and asset securitisation (or collective

investment contracts) (see Figure 47).

The government has proposed that 3% from each employee’s monthly salary

will be automatically deducted and put towards the TAPERA savings programme,

2.5% of which would be contributed by the employee and the remaining 0.5% by

the employer.

Initially, the government plans to only deduct savings from civil servants and

employees of government agencies. The government has proposed deducting

savings from employees in the private sector within the first seven years once

the programme is implemented.

Additional/(re

duction) infra

spending

(% to GDP)

Average LT-

infra

spending in

2019-40F

(% to GDP)

Infra spending realisation trend (growth higher by 20% yoy: +5.6% yoy GDP) 0.21 0.41

Infra spending need (growth higher by 20% yoy: +5.6% yoy GDP) 0.21 0.41

Infra spending realisation trend (growth higher by 10% yoy: +5.2% yoy GDP) 0.20 0.20

Infra spending need (growth higher by 10% yoy: +5.2% yoy GDP) 0.20 0.20

Infra spending realisation trend (base case growth: +4.7% GDP) - -

Infra spending need (base case growth: +4.7% GDP) - -

Infra spending realisation trend (growth lower by 10% yoy: +4.2% yoy GDP) (0.19) (0.19)

Infra spending need (growth lower by 10% yoy: +4.2% yoy GDP) (0.19) (0.19)

Infra spending realisation trend (growth lower by 20% yoy: +3.8% yoy GDP) (0.18) (0.37)

Infra spending need (growth lower by 20% yoy: +3.8% yoy GDP) (0.18) (0.38)



30

Figure 47: TAPERA programme


To optimise TAPERA programme implementation, the government has

proposed two principles, namely:

The value capture principle

There are two concepts proposed under the value capture principle:

mixed-use and cross subsidy development. Based on our understanding,

these concepts are to provide incentives for private developers to

participate in the development of low-cost houses.

Local news media reported that the government might offer tax

incentives to participating developers of 1% sales tax (vs. 2.5% sales

tax typically).

The capex scheduling principle

There are two concepts proposed under the capex scheduling principle:

availability payment scheme and mortgage backed security.

We think the availability payment scheme is not sufficiently attractive to

entice developers to join the TAPERA housing development. Under the

scheme, the government will pay developers in instalments, for which

the first payment will only take place after 100% project delivery. The

instalment period will be as long as the concession period.

The mortgage-backed security option could be more effective, in our

view. Under this scheme, the government proposes to securitise running

TAPERA mortgage through Sarana Multigriya Finansial or SMF. In other

words, they will put the running TAPERA mortgage payments as

underlying assets to issue a mortgage-backed security. The proceeds of

the mortgage-backed security issuance could be utilised to finance the

next property development’s capex needs.

Sarana Mutligriya Finansial (SMF) is a 100% government owned SOE,

which was established in 2005. It is a secondary housing financial

institution. Going forward, Ministry of Finance expects SMF’s business

directions include: 1) to support for housing programs in tourist

destination area; 2) to intensively cooperating in the TAPERA

programme to support for public housing projects; 3) repair housing,

facilities, and infrastructure in the slums.



31

Figure 48: Government principles to optimise TAPERA

SOURCES: CGS-CIMB RESEARCH,

CLEARER FUNDING VISIBILITY AND STATE SUPPORT REMAINS STRONG

2019 approved infra budget remains sizeable

The government slightly lowered its infra budget in the 2019 approved state

budget to Rp415tr (up 1% yoy from 2018 infra budget in the 2018 approved

budget) vs. Rp420.5tr in the state budget draft 2019. This remains sizeable,

accounting for 2.6% of estimated GDP in 2019.

Figure 49: Infra spending/budget vs. energy subsidy

SOURCES: CGS-CIMB RESEARCH, MINISTRY OF FINANCE

The key difference between the 2019 approved infra budget and the draft was

3% lower transfers to regional and village funds. We do not expect the lower

transfers to regional and village budgets to have any impact on the outlook for

SOE contractors winning new projects in 2019 as SOE contractors in our

coverage do not usually participate in small projects, i.e. those funded by village

budgets.

Title:

Source:


0%

1%

2%

3%

4%

5%

6%

-

50

100

150

200

250

300

350

400

450

2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017A 2018F 2019F

Energy subsidy in Rp tr-LHS Realised infra spending in Rp tr-LHS

Infra budget in Rp tr-LHS Energy subsidy (% to GDP)-RHS

Infra spending (A)/budget (F) as % to GDP-RHS



32

Figure 50: Changes in infra budget 2019 (state budget vs. draft)

SOURCES: CGS-CIMB RESEARCH, MINISTRY OF FINANCE

State budget (2018)State budget draft

(2019F)

State budget

(2019F)

In Rp tr

Transfer to region and village fund 179.3 201.7 196.2

Village fund for infrastructure 24 29.2 28

Transfer to region for infrastructure 122.1 129 130.4

Special funding allocation 33.9 39.1 33.5

Ministries/institutions 183 173.8 173.8

Ministry of Public Works and Housing 104.7 108.2 108.2

Ministry of Transportations 44.2 38.1 38.1

Financing 48.1 45 45

State capital injections 6.1 17.8 17.8

LMAN (National Assets Manager) 35.4 22 22

Total infra budget 410.4 420.5 415

Annual growth (vs. 2018 state budget)

Transfer to region and village fund 12% 9%

Village fund for infrastructure 22% 17%

Transfer to region for infrastructure 6% 7%

Special funding allocation 15% -1%

Ministries/institutions -5% -5%

Ministry of Public Works and Housing 3% 3%

Ministry of Transportations -14% -14%

Financing -6% -6%

State capital injections 192% 192%

LMAN (National Assets Manager) -38% -38%

Total infra budget 2% 1%

Changes (2019 state budget vs. 2019 state budget draft)

Transfer to region and village fund -3%

Village fund for infrastructure -4%

Transfer to region for infrastructure 1%

Special funding allocation -14%

Ministries/institutions 0%

Ministry of Public Works and Housing 0%

Ministry of Transportations 0%

Financing 0%

State capital injections 0%

LMAN (National Assets Manager) 0%

Total infra budget -1%



33

Well capitalised Hutama Karya and PLN

The SOE contractors in our coverage have substantial outstanding receivables

from Hutama Karya and PLN (National Electricity Company). As at end-9M18,

total outstanding receivables of both Hutama Karya and PLN in the SOE

contractors’ books were Rp15.2tr and Rp6tr, or contributing 13% and 5% of the

sector’s total outstanding receivables, respectively. Investors were concerned

about whether both entities would have sufficient capital to cover their payables

obligations to SOE contractors.

Figure 51: Hutama Karya and PLN's total outstanding receivables in SOE

contractors’ books as at 9M18


We think concerns over receivables payments from both companies to SOE

contractors should ease as we estimate that going into 2019, both Hutama

Karya and PLN (National Electricity Company) should have total additional

capital of Rp45tr and Rp29.3tr, respectively. This should be sufficient to meet

both companies’ payables obligations to SOE contractors.

The details are as follows:

1) Government allocates capital injections to both companies in 2019.

In the 2019 approved state budget, the government allocated total state

capital injection of Rp17.8tr (+192% yoy). Of this, Rp10.5tr will be

allocated to Hutama Karya (an unlisted SOE contractor, which will be

the holding company for infrastructure and ground transportation) and

Rp6.5tr to PLN (National Electricity Company).

2) Hutama Karya secured a US$2.3bn loan agreement, while PLN

issued US$1.5bn global bonds. During the IMF World Bank 2018

event, Hutama Karya secured a loan agreement totaling US$2.3bn

(equivalent to Rp34.5tr, assuming US$1 = Rp15,000) from both local

SOE and non-SOE banks. Meanwhile, PLN issued US$1.5bn global

bonds (equivalent to Rp22.8tr) in Oct 18.

Title:

Source:


0

20

40

60

80

100

120

140

0%

5%

10%

15%

20%

25%

ADHI PTPP WIKA WSKT Total sector

Total outstanding receivables (Rp tr) - RHS Hutama Karya's receivables portion

PLN's receivables portion



34

Government support remains intact for infra lending

The government continues to support lending for national development purposes.

The legal lending limit for banks to SOE companies for national development

projects is 30% of each bank’s equity. This is higher compared to the regular

legal lending limit, at 20%-25% of each bank’s equity.

Additionally, projects or entities that are guaranteed by the government should

be exempt from legal lending limits.

Figure 52: Indonesia's infra sector has strong government support for obtaining bank loans


Room for more loans

As at end-9M18, total bank loans for the four SOE contractors in our coverage

and JSMR were at Rp77tr. This accounted for 7.1% of Indonesia’s banking

sector total equity of Rp1,089tr. We believe the SOE contractors and JSMR are

eligible for the 30% legal lending limit from the banking sector. Hence, there is

still plenty of room for the sector to obtain more loans from the banks.

Figure 53: The SOE contractors and JSMR's total loan only accounted for

6% to the total Indonesian's banks equity


Indonesia's banking legal lending limit (LLL)

Regulation: BI Regulation No. 7/3/PBI/2005 and No. 8/13/PBI/2006

Counterparty Maximum exposures

To related party Total related party portfolio cannot exceed more than 10% of equity

Max exposure 20% of total equity to one debtor

Max exposure 25% of total equity to one group obligor

*) Exposure measured based on outstanding exposure

**) Exposure includes purchase of securities, reverse repo, derivatives, acceptance receivables, off-balance sheet

***) Exposure to SOEs for the purpose of national development is set at max 30% of total equity

Exposures exempted from the LLL calculation

Purchase of securities issued by the Government of Indonesia

Exposure guaranteed by the Government of Indonesia

Exposure colaterised by cash/deposits/savings/margin deposit/gold/Indonesia government bonds *)

Exposure from/guaranteed by a prime bank **)

Exposure guaranteed by the multilateral organisations

*) the collateral must be placed with the loan provider or a prime bank

**) Prime Bank: Investment grade credit rating, and top 200 in the world in terms of total asset

To non-related party

Title:

Source:


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2015 2016 2017 9M18

Total bank loans- SOE contractors and JSMR As % to total Indonesian's banks equity (RHS)

in Rp bn



35

Good appetite in banking sector for infra lending

As at end-Aug 18, Indonesia’s total infra banking loans were at Rp674.4tr, or

accounting for 13% of Indonesia’s total bank loans of Rp5,120tr. This was the

highest proportion of infra banking loans to total bank loans since 2008 (Figure

54).

Additionally, Indonesia’s total infra banking loan growth has outpaced

Indonesia’s total bank loan growth (Figure 55).

This indicates strong appetite for infra lending by the banks. Our banking

analysts suggest that the NPL ratio of SOE companies is very low, at nearly 0%.

Figure 54: Indonesia's total infra bank loan as a % of

total system loans

Figure 55: Indonesia's total infra bank loans and total

system loan growth


Figure 56: Composition of infra bank loans – by sector

(in value)

Figure 57: Contribution of infra bank loans to total

system loans – by sector


Title:

Source:


9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

Indonesia's bank loan - total system (Rp tr)

Total infra bank loan (as % of total system loan) - RHS

Title:

Source:


16%

7%

27%26%

29%

11%

12%

16%

13%11%

23% 23% 23%22%

12%

10%

8%8%

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Indonesia's bank loan- total infra growth (yoy)

Indonesia's bank loan- total system growth (yoy)

Title:

Source:


58 64 63 75 96 116 147 173 215

259 291

62 73 75 98

122 163

172 178

172

183 210

18 24 34

46

59

79 81

99

135

146

173

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Sep-18

Utilities - loan (Rp tr)

Transport, warehouse, communication - loan (Rp tr)

Construction - loan (Rp tr)

Title:

Source:


4% 4%4% 3% 4% 4% 4% 4%

5% 5% 6%

5% 5%

4% 4% 5% 5%5% 4%

4%4%

4%

1%2%

2% 2% 2%2% 2% 2%

3%3%

3%

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Sep-18

Construction - loan Transport, warehouse, & communication - loan Utilities - loan



36

More alternative funding could be expected

Going forward, alternative funding resources remain an option for SOE

contractors in our coverage and JSMR to fund infra developments.

Figure 58: Comparisons of new infra alternative funding resources


Instruments IssuersValue

(Rp bn)Tenure

Type of

instruments

Adding room

for

conventional

leverage

Interest/

coupon

rate

Cost of funds

vs.

conventional

instruments

Repurchase/

repayment

obligations

Impacts to cash

flows

Materialised

Revenue backed securities

(Jagorawi)JSMR 2,800 5 years debt yes 8.4% lower yes

in similar manner to

conventional debt

Project bonds (Marga Lingkar

Jakarta)JSMR 1,500 3-12 years debt no 7.5%-8.9% lower yes


conventional debt

Close end fund (Kanci-

Pejagan, Pejagan-Pemalang,

Pasuruan-Probolinggo toll

roads)

Divestment P/BV valuation:

3.1x

WSKT 5,000 5 years hybrid yes

• promised

IRR: 10%

(paid based

on units

repurchased)

• implied

overall cost of

fund after tax

on gain is

8.7%

lower

not obligated to

repurchase, and

trying to seek for

third parties to

repurchase

better than

conventional debt as

lower interest

payment during the

tenure; interest

payment is based on

repurchase units

Komodo bonds JSMR 4,000 3 years debt no

7.5% (pre-tax)

9.2% (after-

tax)

on par

(including 20%

tax)

yesin similar manner to

conventional debt

Komodo bonds WIKA 5,400 3 years debt no

7.7% (pre-tax)

9.2% (after-

tax)

on par

(including 20%

tax)

yesin similar manner to

conventional debt

Close end fund phase I (Solo-

Ngawi, Ngawi-Kertosono, and

Batang-Semarang toll roads)

Divestment valuation: 1.8x

P/BV

JSMR 1,400 5 years hybrid yes

• promised

IRR: 10.25%

(paid based

on units

repurchased)

• implied

overall cost of

fund after tax

on gain is

8.8%

lower

not obligated to

repurchase, but

likely to

repurchase the

options

better than


lower interest

payment during the

tenure; interest

payment is based on

repurchase units

Perpetual notes PTPP 250

no tenure,

cost of fund

should

increase

after year 3

(step-up

rate: 5%) if it

doesn’t

repurchase

hybrid (treated

in similar

manner to

preferred

shares)

yes 9.0%

higher if

compared to

cost of debt;

but lower if

compared to

cost of equity

and WACC

not obligated. If

not repurchase

the instrument's

cost of fund may

increase, but

remains lower

compared to its

cost of equity


conventional debt

Pipelines

Perpetual notes WIKA 1,000

no tenure,

cost of fund

should

increase

after year 3

(step-up

rate: 1-3%) if

it doesn’t

repurchase

hybrid (treated

in similar

manner to

preferred

shares)

yes

higher if

compared to

cost of debt;

but lower if

compared to

cost of equity

and WACC

not obligated. If

not repurchase

the instrument's

cost of fund may

increase, but

remains lower

compared to its

cost of equity


conventional debt

Perpetual notes phase II PTPP 250

no tenure,

cost of fund

should

increase

after year 3

(step-up

rate: 5%) if it

doesn’t

repurchase

hybrid (treated

in similar

manner to

preferred

shares)

yes

higher if

compared to

cost of debt;

but lower if

compared to

cost of equity

and WACC

not obligated. If

not repurchase

the instrument's

cost of fund may

increase, but

remains lower

compared to its

cost of equity


conventional debt

Dana Investasi Infrastruktur /

DINFRA (Gempol-Pandaan toll

road)

JSMR 1,100 5 years hybrid yes lower yes


conventional debt for

the debt instrument

Close end fund phase II (Solo-

Ngawi, Ngawi-Kertosono, and

Batang-Semarang toll roads)

JSMR 1,600 5 years hybrid yes lower

not obligated to

repurchase, but

likely to

repurchase the

options

better than


lower interest

payment during the

tenure; interest

payment is based on

repurchase units



37

Divestment with foreign participation is an alternative

During the International Monetary Fund (IMF)-World Bank annual meeting 2018,

the government offered a total of 78 projects amounting to investment

opportunities worth US$42.1bn to foreign investors. This included direct and

capital market investment.

Direct investment opportunities involved, among other forms, strategic

partnerships and equity participation in infra, energy and oil and gas projects,

including WSKT’s plans to divest a total 11 toll road assets.

Figure 59: Government offered total of US$42.1bn investment opportunities during IMF-World Bank annual meeting in 2018




38

PROJECT PAYMENTS

Entering the payment cycle of turnkey receivables

The sector is entering the payment cycle of turnkey projects awarded in 2015-

2017. We continue to expect that three of the four SOE contractors in our

coverage will have positive operating cashflows (OCF) by the end of FY18F,

except for WIKA. However, WIKA mentioned that it also expects to achieve

positive OCF by the end of FY18F. For now, we prefer to stick with our estimate

for WIKA as its turnkey project payments are not due until FY19-20F.

Details of the expected turnkey project payments for the SOE contractors are as

follows:

ADHI

It currently only has one project on a turnkey payment basis for the

Jabodebek LRT. We expect ADHI to receive a total of Rp7tr for the

Jabodebek LRT until the end of FY18F. Despite missing its target for the

second payment (Rp3.6tr) from the project twice, it still expects to

receive the second payment by the end of FY18F. We think this should

materialise as it is just waiting on the audit results from BPKP for the

project payment.

According to our channel checks, the National Railways Company (KAI

or Kereta Api Indonesia), or the project owner, has received the last

tranche of capital injection money for the project from the government,

and is waiting for the audit results before disbursing the money to ADHI.

We expect it to continue to receive more payments from the project in

FY19-20F, hence OCF could still be positive at the end of FY19-20F -

unless it adds more turnkey projects in the future.

Figure 60: ADHI's OCF outlook


Title:

Source:


(2,500)

(2,000)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F

OCF (Rp bn)



39

PTPP

It has the lowest number of turnkey projects among the other SOE

contractors in our coverage, with only one turnkey project currently.

Figure 61: PTPP's OCF outlook


WIKA

It currently has a total of four turnkey projects (three toll roads and one

port) with total value of Rp8.8tr. We expect WIKA to only receive one

turnkey project payment in FY18F from Belawan Multipurpose Port,

totaling Rp209.3bn. Hence, we expect it to have a negative OCF

balance by the end of FY18F.

However, we expect its OCF balance to turn positive at the end of FY19-

20F as we estimate a total of Rp6.6tr and Rp7.3tr turnkey receivables

due in FY19F and FY20F, respectively.

Figure 62: WIKA's OCF outlook


Title:

Source:


-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F

OCF(Rp bn)

Title:

Source:


(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F

OCF (Rp bn)



40

WSKT

For FY18F, WSKT expects to receive Rp26tr in turnkey receivable

payments, comprising Rp6tr from the State Asset Management Agency

(LMAN, the public agency that manages the programme to fund land

acquisitions for national strategic projects), Rp8.7tr from South

Sumatera LRT (Rp4.0tr from state budget and Rp4.7tr from the sale of

receivables) and the remaining from Waskita’s, Jasa Marga’s and Astra

Infra’s toll road projects. WSKT expects major turnkey receivable

payments in FY19F of Rp6tr to come from electricity transmission

network phases I-II (from PLN) and Rp8tr from the Trans-Sumatera toll

road (from Hutama Karya).

Figure 63: WSKT's OCF outlook


Switching to milestone payment terms should improve cash flow

Going forward, the SOE contractors in our coverage expect to improve working

capital by switching to milestone payment terms for future projects.

WIKA has already implemented the new payment terms at its Serang-

Panimbang toll road project, which it had previously considered taking on a full

turnkey payment basis. PTPP also successfully switched the payment terms for

the Kulonprogo Airport from full turnkey to milestone. WSKT and ADHI also

mentioned that they would negotiate more milestone payment terms for toll road

projects in the future.

Under the milestone payment scheme, contractors do not receive a down

payment at the beginning of the project, similar to full turnkey projects. However,

the key difference is that contractors will receive payments based on the agreed

progress of completion once certain milestones are achieved, before the project

is fully completed.

Based on our sensitivity analysis, the account receivables (A/R) days of a

project (over a three-year construction period) on a milestone payment basis (for

every 25% of the project completed) could be reduced to 61 days during the first

and 183 days during the second year of construction (vs. 365 days and 639

days based on full turnkey payment terms), respectively.

There would be no difference in the A/R days for a project (over a three-year

construction period) on a milestone payment basis with payments due when

50% of the project is completed vs. full turnkey payments during the first year of

construction. Project completion usually does not surpass 50% during the first

year. However, a more meaningful impact is expected during the second year,

when A/R days for a project can be reduced to 183 days on a milestones

payment basis (payment for every 50% completed). This is much lower

compared to the A/R days of a project on a turnkey payment basis, which can

reach 639 days during the second year of construction.

Title:

Source:


(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F

OCF (Rp bn)



41

Figure 64: Sensitivity analysis of impact of switching from full turnkey payment terms to milestone payment terms


VALUATION AND RECOMMENDATION

Valuations move in cycles

Based on our study, the sector’s valuation cycle can be grouped into two phases:

Risk-aversion cycle

Investors tend to assign a higher risk premium to the sector due to

concerns over specific risks (Figure 65), and are likely to

underappreciate earnings growth momentum (Figures 66 & 68). This

results in a low valuation cycle despite decent earnings growth

momentum.

Bull cycle

Investors tend to give assign a lower risk premium to the sector as

specific concerns are alleviated by game changer(s) (Figure 65). This

results in a high valuation cycle as investors tend to overappreciate

earnings growth momentum (Figure 67).

Figure 65: SOE contractors' risk premium over the JCI during the three cycles

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Assumptions Rp bn

Projects contract 1,000

Full turnkey payment term

Progress-

cummulative

Progress-

additions

Revenue-

cummulative

(Rp bn)

Revenue -

additions

(Rp bn)

Payment

(Rp bn)

Outstanding-

Receivables

(Rp bn)

A/R

days

End of yr-1 30% 30% 300 300 - 300 365

End of yr-2 70% 40% 700 400 - 700 639

Yr-3 (project completion) 100% 30% 1,000 300 1,000 - -

Milestones payment term (payment every 25% progress completion)

Progress-

cummulative

Progress-

additions

Revenue-

cummulative

(Rp bn)

Revenue -

additions

(Rp bn)

Payment

(Rp bn)

Outstanding-

Receivables

(Rp bn)

A/R

days

A/R days (as % to full

turnkey payment)

End of yr-1 30% 30% 300 300 250 50 61 17%

End of yr-2 70% 40% 700 400 250 200 183 29%

Yr-3 (project completion) 100% 30% 1,000 300 500 - - 0%

Milestones payment term (payment every 50% progress completion)

Progress-

cummulative

Progress-

additions

Revenue-

cummulative

(Rp bn)

Revenue -

additions

(Rp bn)

Payment

(Rp bn)

Outstanding-

Receivables

(Rp bn)

A/R

days

A/R days (as % to full

turnkey payment)

End of yr-1 30% 30% 300 300 - 300 365 100%

End of yr-2 70% 40% 700 400 500 200 183 29%

Yr-3 (project completion) 100% 30% 1,000 300 500 - - 0%

Title:

Source:


-80%

-60%

-40%

-20%

0%

20%

40%

60%

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

-18

SOE contractors risk premium gap to JCI index's-higher/(lower) JCI risk premium SOE contractors risk premium

risk-aversion cycle v.01 bull cycle v.01 risk-aversion cycle v.02



42

Figure 66: Sector’s P/E vs. core NP

growth (yoy) during 2009-2011 (risk-

averse cycle v.01)


growth (yoy) during 2012-2015 (bull cycle

v.01)


growth (yoy) during 2016-2017 (risk-

averse cycle v.02)

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Since 2009, the sector has gone through three valuation cycles:

1. Risk-aversion cycle v.01 in 2009-2011

During this cycle, the main overhang on the sector was uncertainty over

land acquisition and the state budget. This resulted in investor concerns

over the earnings delivery outlook for the sector.

The sector’s implied risk premium was on average 14-28% pts higher

than the JCI index.

In fact, during this period, the sector delivered decent earnings growth of

+28% to +41% yoy.

2. Bull cycle v.01 in 2012-2015

During this cycle, the key re-rating catalysts for the sector were the

issuance of the reformed land law (Law No.2/2012) and higher infra

budget as a percentage of GDP, offset by lower energy subsidy (which

was first implemented in 2015). This eased investors’ concerns over the

earnings delivery outlook for the sector.

The sector’s implied average risk premium over the JCI during this

period was between -19% pts to 10% pts.

In fact, during this period, the sector delivered lower earnings growth of

+12% to +39% yoy (vs. +28% to +41% yoy and +48% to + +86% yoy in

both risk-averse cycles).

3. Risk-aversion cycle v.02 in 2016-2017

During this cycle, the key concerns included uncertainties over business

direction, higher leverage (due to high investments and turnkey projects),

and negative operating cashflow (OCF).

The sector’s implied risk premium over the JCI in 2016-2017 was 7%-

16% pts higher.

In fact, during 2016-2017, the sector delivered the highest earnings

growth compared to the past two cycles (+48% to +86% yoy).

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

5

10

15

20

25

2008 2009 2010 2011 2012

SOE contractors sector's end of year P/E-(LHS)

SOE contractors sector's core NP growth (yoy)

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

5

10

15

20

25

2011 2012 2013 2014 2015 2016



Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

5

10

15

20

25

2015 2016 2017 2018





43

In a risk-aversion cycle, despite improving outlook

In YTD 18, the sector remains in a risk-aversion cycle, the SOE contractors’

share prices fell by 17%-42% and underperformed the JCI by 10%-35% (Figure

69). The sector’s P/E valuation continued to de-rate from the peak in 2015 and

bottomed out at end-Oct 18 (Figure 70). The sector’s de-rating valuations were

on the back of uncertainties over business direction and negative OCF.

Figure 69: SOE contractors’ share price vs. JCI index

performance in YTD 18

Figure 70: SOE contractor's premium (discount) to market

SOURCES: CGS-CIMB RESEARCH, BLOOMBERG SOURCES: CGS-CIMB RESEARCH, BLOOMBERG

Between 30 Oct and 21 Nov 2018, the share prices of SOE contractors

rebounded by 10.4%-22.2%, and outperformed the JCI by 8.3%-20.1%. We

think this was in response to the decent 9M18 results for the sector, which was

previously deemed to be lagging due to slow contracts booking.

Title:

Source:


40

60

80

100

120

140

160

PTPP ADHI WSKT WIKA JCI Index

Title:

Source:


-60%

-40%

-20%

0%

20%

40%

60%

-

5

10

15

20

25

30

Premium (Discount) to Market-RHS SOE Const P/E JCI P/E



44

Risk-reward underpins our Overweight rating

Although SOE contractors’ share prices have rebounded strongly at this point,

we believe the sector’s valuations remain attractive, with substantial upside.

Currently, the sector’s implied risk premium gap over the JCI index is at (36%

pts higher) is within its widest range compared to the past bull and risk aversion

cycles. Diminishing risks should translate into a lower risk premium gap to the

JCI index for the sector, in our view.

The formation of infra and property holding companies could be the answer to

concerns over uncertainty in the sector’s business direction. Holding companies

could also offer a better outlook for funding. Additionally, we still forecast an

improvement in OCF by the end of FY18F as the sector is entering the payment

cycle for turnkey projects. Going forward, SOE contractors expect to see

improved working capital by switching from turnkey payments to milestone

payments. If this materialises, the sector could reduce the risk of negative OCF

balance in the future.

Our TP for the four state-owned contractors imply a weighted average risk

premium gap of 14% to the JCI index’s (assuming the JCI index’s risk premium

is 12%). The weighted average implied risk premium for the sector is 26%. We

view this as undemanding as it is similar to the sector’s implied risk premium

over the JCI in 2010 when several issues plagued the sector.

On a P/E basis, our TP for the four SOE contractors are undemanding, or at

8.7x FY19F P/E to 12.5x FY19F P/E. We reiterate our Overweight rating for the

sector with WSKT (Add; TP Rp3,000) and ADHI (Add; TP Rp2,000) as our key

picks.

Figure 71: SOE contractors' sector risk premium gap over the JCI index’s


Figure 72: Sector / Peers Comparison


Title:

Source:


-30%

-20%

-10%

0%

10%

20%

30%

40%

2009-mean

2010-mean

2011-mean

2012-mean

2013-mean

2014-mean

2015-mean

2016-mean

2017-mean

YTD-18-mean

Target px-mean

Higher/(lower) - in percentage pt

mean

ffff

PriceTarget

Price

(local curr) (local curr) 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F

Adhi Karya ADHI IJ ADD 1,375 2,000 335 6.7 6.0 20.6% 0.73 0.64 12.2% 11.4% 2.1% 3.0%

Pembangunan Perumahan PTPP IJ ADD 1,545 3,700 656 6.4 5.0 19.9% 0.76 0.67 12.8% 14.2% 3.1% 4.0%

Waskita Karya WSKT IJ ADD 1,590 3,000 1,478 8.1 6.6 -16.6% 1.29 1.12 18.0% 18.1% 5.4% 3.7%

Wijaya Karya WIKA IJ ADD 1,290 2,000 792 7.7 6.6 16.8% 0.83 0.75 11.7% 12.0% 1.8% 2.3%

P/BV (x) Recurring ROE (%) Dividend Yield (%)Company

Bberg.

TickerRecom.

Market Cap

(US$ m)

Core P/E (x) 3-year EPS

CAGR (%)



45

Key picks: WSKT and ADHI

Going into 2019, our key picks for the sector are WSKT (Add; TP Rp3,000) and

ADHI (Add; TP Rp2,000). Overall, we believe both companies will adopt an

infrastructure holding company model. Hence, we think both companies should

retain their businesses as contractors and infra players. Additionally, infra project

construction contracts’ ticket sizes are usually much bigger compared to the

ticket sizes of property projects. Bigger value contracts suggest fewer projects to

be managed. This should improve efficiency and cost, in our view.

Our TP for WSKT implies a -1% pt risk premium gap to the JCI index. This is

because we arrive at WSKT’s target price using an SOP valuation, where its toll

road assets contribute 22% of its total targeted equity value. Additionally, our

current estimate for WSKT’s NP is already very conservative or 78% of the

Bloomberg consensus estimate. Hence, all else being equal, we believe there is

no further downside risk for WSKT’s earnings in FY19F from our forecast.

Potential earnings upside for WSKT could come from the materialisation of its

asset recycling plan, which could lift our FY19F NP forecast by 64% to 89%. We

discussed this in our report “NDR takeaways: lower growth, focus on

deleveraging” published on 13 Sep 2018.

Figure 73: ADHI's LT forward P/E band Figure 74: ADHI's LT forward P/BV band


Figure 75: PTPP's LT forward P/E band Figure 76: PTPP's LT forward P/BV band


Title:

Source:


-

5

10

15

20

25

30

35

40

ADHI P/E 3YR MA +1 St Dev

+2 St Dev -1 St Dev -2 St Dev

31.0x

23.3x

15.6x

7.9x

0.2x

(x)Title:

Source:


-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

ADHI P/BV 3YR MA +1 St Dev


1.9x1.6x

1.3x

0.9x

0.6x

(x)

Title:

Source:


4

8

12

16

20

24

28

PTPP P/E 3YR MA +1 St Dev


19.8x

16.3x

12.7x

5.6x

9.2x

(x) Title:

Source:


-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

PTPP P/BV 3YR MA +1 St Dev


2.3x

1.9x

1.5x

1.1x

0.7x

(x)





46

Figure 77: WIKA's LT forward P/E band Figure 78: WIKA's LT forward P/BV band


Figure 79: WSKT's LT forward P/E band Figure 80: WSKT's LT forward P/BV band


Title:

Source:


0

5

10

15

20

25

30

35

40

WIKA P/E 3YR MA +1 St Dev


22.6x

18.3x

14.0x

9.7x

5.4x

(x)Title:

Source:


-

1.0

2.0

3.0

4.0

5.0

6.0

WIKA P/BV 3YR MA +1 St Dev


1.9x

1.6x1.3x1.0x

0.7x

(x)

Title:

Source:


5

7

9

11

13

15

17

19

21

23

25

WSKT P/E Mean +1 St Dev


14.4x

12.5x

10.5x

8.6x

6.6x

(x) Title:

Source:


-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

WSKT P/BV 3YR MA +1 St Dev


3.0x

2.6x

2.1x

1.6x

1.1x

(x)



47

How are investors positioned on the sector

At end of Oct 2018, local investors had higher ownership in the SOE contractors

sector compared to foreign investors.

Figure 81: Local-foreign investor ownership in the SOE contractors sector (end of

Oct-18)

SOURCES: CGS-CIMB RESEARCH, KSEI

At end of Oct 2018, as a total, local investors had Overweight positions in the

SOE contractors sector while, as a total, foreign investors were Underweight.

Figure 82: As a total, local investors had overweight positions on SOE contractors

(end of Oct-18)


Title:

Source:


0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60%

Total local investorsownership in SOE

contractors sector-weighted to JCI index

Total foreigninvestors ownership

in SOE contractorssector- weighted to

JCI index

SOE contractorssector - weighted to

JCI index

Title:

Source:


0.0% 0.2% 0.4% 0.6% 0.8%

Total foreign investors ownership in SOE contractors sector- weighted to their total portfolioin JCI index

Total local investors ownership in SOE contractors sector-weighted to their total portfolio in JCI index

SOE contractors sector- weighted to JCI index



48

Figure 83: Local pension funds have the largest ownership in the sector (end of Oct-

18)


Figure 84: Local-foreign investor ownership in ADHI (end of Oct-18)


Figure 85: As a total, local investors had overweight positions

on ADHI (end of Oct-18)

Figure 86: Local mutual funds have the largest ownership in

ADHI (end of Oct-18)

SOURCES: CGS-CIMB RESEARCH, KSEI SOURCES: CGS-CIMB RESEARCH, KSEI

Title:

Source:


0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Local-insurance

Local-pension funds

Local-mutual fund

Local-others

SOE contractors sector- weighted to…

Foreign-insurance

Foreign-pension funds

Foreign-mutual fund

Foreign-others

Local-insurance Local-pension funds

Local-mutual fund Local-others

SOE contractors sector- weighted to JCI index Foreign-insurance

Foreign-pension funds Foreign-mutual fund

Foreign-others

weighted to their total portfolio in JCI index


Title:

Source:


0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07%

Total local investors ownership in ADHI- weighted to JCIindex

Total foreign investors ownership in ADHI- weighted to JCIindex

ADHI - weighted to JCI index

Title:

Source:


0.00% 0.03% 0.05% 0.08% 0.10%

Total local investors ownership in ADHI -weighted to their total portfolio in JCI index

Total foreign investors ownership in ADHI -weighted to their total portfolio in JCI index


Title:

Source:


0.00% 0.10% 0.20% 0.30%

Local-insurance

Local-pension funds

Local-mutual fund

Local-others


Foreign-insurance


Foreign-mutual fund

Foreign-others





49

Figure 87: Local-foreign investor ownership in PTPP (end of Oct-18)



on PTPP (end of Oct-18)

Figure 89: Local pension funds have the largest ownership in

PTPP (end of Oct-18)


Figure 90: Local-foreign investor ownership in WIKA (end of Oct-18)


Title:

Source:


0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12% 0.14%

Total local investors ownership in PTPP- weighted to JCIindex

Total foreign investors ownership in PTPP- weighted to JCIindex

PTPP - weighted to JCI index

Title:

Source:


0.11% 0.12% 0.12% 0.13% 0.13%

Total local investors ownership in PTPP -weighted to their total portfolio in JCI index

Total foreign investors ownership in PTPP -weighted to their total portfolio in JCI index


Title:

Source:


0.00% 0.10% 0.20% 0.30% 0.40% 0.50%

Local-insurance

Local-pension funds

Local-mutual fund

Local-others


Foreign-insurance


Foreign-mutual fund

Foreign-others



Title:

Source:


0.00% 0.02% 0.04% 0.06% 0.08% 0.10% 0.12%

Total local investors ownership in WIKA- weighted to JCIindex

Total foreign investors ownership in WIKA- weighted to JCIindex

WIKA - weighted to JCI index



50


on WIKA (end of Oct-18)


WIKA (end of Oct-18)


Figure 93: Local-foreign investor ownership in WSKT (end of Oct-18)



on WSKT (end of Oct-18)


WSKT (end of Oct-18)


Title:

Source:


0.00% 0.05% 0.10% 0.15% 0.20%

Total local investors ownership in WIKA -weighted to their total portfolio in JCI index

Total foreign investors ownership in WIKA- weighted to their total portfolio in JCI

index


Title:

Source:


0.00% 0.20% 0.40% 0.60%

Local-insurance

Local-pension funds

Local-mutual fund

Local-others


Foreign-insurance


Foreign-mutual fund

Foreign-others



Title:

Source:


0.00% 0.05% 0.10% 0.15% 0.20% 0.25%

Total local investors ownership in WSKT- weighted to JCIindex

Total foreign investors ownership in WSKT- weighted to JCIindex

WSKT - weighted to JCI index

Title:

Source:


0.00% 0.10% 0.20% 0.30%

Total local investors ownership in WSKT -weighted to their total portfolio in JCI index

Total foreign investors ownership in WSKT -weighted to their total portfolio in JCI index


Title:

Source:


0.00% 0.20% 0.40% 0.60% 0.80% 1.00%

Local-insurance

Local-pension funds

Local-mutual fund

Local-others


Foreign-insurance


Foreign-mutual fund

Foreign-others





51

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Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution 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 instruments described 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 of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research).

Thailand: This report is issued and distributed by CGS-CIMB Securities (Thailand) Co. Ltd. (“CGS-CIMB Thailand”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CGS-CIMB Thailand has no obligation to update its opinion or the information in this research report.

CGS-CIMB Thailand may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AMATA, AOT, AP, BANPU, BBL, BCH, BCP, BCPG, BDMS, BEAUTY, BEM, BGRIM, BJC, BH, BLA, BLAND, BPP, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EA, EGCO, EPG, ERW, ESSO, GGC, GFPT, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, INTUCH, IRPC, ITD, IVL, KBANK, KCE, KKP, KTB, KTC, LH, LPN, MAJOR, MEGA, MINT, MTLS, ORI, PRM, PSH, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, RS, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPRC, STA, STEC, SUPER, TASCO, TCAP, THAI, THANI, TISCO, TKN, TMB, TOA, TOP, TPIPL, TPIPP, TRUE, TTW, TU, TVO, UV, WHA, WHAUP, WORK.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. 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 may be changed after that date. CGS-CIMB Thailand does not confirm nor certify the accuracy of such survey result.



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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 licensing authorities 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 than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom and European Economic Area (EEA): In the United Kingdom and European Economic Area, this material is also being distributed by CGS-CIMB Securities (UK) Limited (“CGS-CIMB UK”). CGS-CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. The material distributed by CGS-CIMB UK has been prepared in accordance with CGS-CIMB’s policies for managing conflicts of interest arising as a result of publication and distribution of this material. This material is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CGS-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 subject to relevant regulation in each jur isdiction, material(all such persons together being referred to as “relevant persons”). This material is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this material relates is available only to relevant persons and will be engaged in only with relevant persons.

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

United States: This research report is distributed in the United States of America by CGS-CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CGS-CIMB Research Pte Ltd, PT CGS-CIMB Sekuritas Indonesia, CGS-CIMB Securities (Thailand) Co. Ltd, CGS-CIMB Securities (Hong Kong) Limited, CGS-CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” 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 professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CGS-CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CGS-CIMB Securities (USA) Inc.

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

CGS-CIMB Securities (USA) Inc. has not managed or co-managed a public offering of any of the securities mentioned in the past 12 months.

CGS-CIMB Securities (USA) Inc. has not received compensation for investment banking services from any of the company mentioned in the past 12 months.

CGS-CIMB Securities (USA) Inc. neither expects to receive nor intends to seek compensation for investment banking services from any of the company mentioned within the next 3 months.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, 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 2017, Anti-Corruption 2017

AAV – Very Good, n/a, ADVANC – Excellent, Certified, AEONTS – Good, n/a, AMATA – Very Good, n/a, ANAN – Excellent, n/a, AOT – Excellent, Declared, AP – Excellent, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Excellent, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – Good, Declared, BCP - Excellent, Certified, BCPG – Very Good, n/a, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, n/a, BEC – Very Good, n/a, , BGRIM – not available, n/a, BH - Good, n/a, BJC – Very Good, Declared, BJCHI – Very Good, Declared, BLA – Very Good, Certified, BPP – Good, n/a, BR - Good, Declared, BTS - Excellent, Certified, CBG – Good, n/a, CCET – Good, n/a, CENTEL – Very Good, Certified, CHG – Very Good, Declared, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, n/a, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, n/a, ECL – Very Good, Certified, EGCO - Excellent, Certified, EPG – Very Good, n/a, GFPT - Excellent, Declared, GGC – not available, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Excellent, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Certified, ICHI – Excellent, n/a, III – not

Rating Distribution (%) Inv estment Banking clients (%)

Add 60.5% 4.2%

Hold 25.8% 2.4%

Reduce 13.7% 0.4%

Distribution of stock ratings and inv estment banking clients for quarter ended on 30 September 2018

759 companies under cov erage for quarter ended on 30 September 2018



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available, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD – Very Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Very Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Certified, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Certified, M – Very Good, n/a, MACO – Very Good, n/a, MAJOR – Very Good, n/a, MAKRO – Very Good, Declared, MALEE – Very Good, n/a, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Certified, MEGA – Very Good, n/a, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Excellent, Declared, PLAT – Very Good, Certified, PSH – Excellent, Certified, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Certified, RATCH – Excellent, Certified, ROBINS – Excellent, Certified, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Very Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Very Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI – Very Good, Declared, SPA - Good, n/a, SPALI - Excellent, n/a, SPRC – Excellent, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, n/a, TCAP – Excellent, Certified, THAI – Very Good, n/a, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Excellent, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Very Good, Declared, TMB - Excellent, Certified, TNR – Good, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Excellent, Declared, TTW – Very Good, n/a, TU – Excellent, Declared, TVO – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into:

- Companies that have declared their intention to join CAC, and

- Companies certified by CAC

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 forward net 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.

#03



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