Indonesia Industry Focus: Thermal Coal Sector Cruising Ahead

Indonesia Industry Focus
Thermal coal sector

Refer to important disclosures at the end of this report
DBS Group Research. Equity 30 May 2017
Cruising ahead
JCI : 5,712.30
 Reiterate our coal price benchmark of US$65 per
Analyst
ton William Simadiputra +62 2130034939
william.simadiputra@id.dbsvickers.com
 Coal miners are still reluctant to raise output
 China’s proactive supply control caps downside
 BUY calls for ITMG and ADRO
Reiterate our coal price benchmark to US$65 per ton. We STOCKS

reiterate our long-term thermal coal benchmark price to US$65 12-mth
per ton in 2017 and beyond. Despite the slower-than-expected Price Mkt Cap Target Performance (%)
Rp US$m Price Rp 3 mth 12 mth Rating
supply reaction toward seasonally high coal prices at US$80
per ton level in 1Q17, going forward, we think China’s Adaro Energy 1,465 3,529 2,100 (13.8) 110.8 BUY
proactive supply control will keep coal prices in the range of Indo Tambangraya 15,800 1,344 20,500 (6.0) 79.6 BUY
US$65-US$75 per ton to benefit both domestic coal miners Tambang Batubara 10,725 1,856 16,000 (2.7) 60.7 BUY
and power plant operators. Source: DBSVI, Bloomberg Finance L.P.
Closing price as of 29 May 2017
Coal miners are still reluctant to raise output. Beyond the
seasonal low coal output in 1Q17, due to weather, seaborne
Adaro Energy : Indonesia second largest coal producer. It also has
thermal coal exporters (mainly from Indonesia) are still subsidiaries that operate in the mining contracting, barging and ship
reluctant to react swiftly to the coal price uptrend so far. This loading business
will help to prevent coal price drop on excess supplies. Indo Tambangraya Megah : One of the largest coal mining company
Indonesia’s largest coal miners are still aiming for flat to single- Banpu. Coal consession located in Kalimantan, Indonesia
digit production volume growth this year; while smaller miners Tambang Batubara Bukit Asam : Indonesia largest coal miners with
1.99bn ton of coal reserves. Main coal mining concession located in
are facing difficulties in securing financing from financial Tanjung Enim, south Sumatera
institutions to purchase machineries and restart their mines.
Qinghuangdao port’s historical coal price trend
Indo coal stocks: Trading at attractive valuation post
800
share price correction. Given that the Indonesian coal stocks Chinese government
700 intervene domestic coal
corrected 30% in May, we believe that currently it is a good production
600
entry point for coal stocks in light of the positive earnings
500
growth prospect on the back of steady coal prices outlook. Post price spiked, production
400
Moreover, Indonesian coal stocks are still trading at single-digit days relaxation introduced to
300 cooling down the market
PEs. Pro longed over supplies
200 coal market, dragged
100
coal price
ADRO and ITMG are our top BUYs. Our top BUYs are ADRO
0
and ITMG for their track record in delivering strong EBITDA per
1‐Feb
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ton in various coal price cycles. We like ADRO for its low cost-
centric operational strategies which will benefit hugely from Coal price at Qinghuangdao port(RMB per ton) ‐ LHS
the coal price uptrend. We like ITMG for its steady dividend Source: Bloomberg Finance L.P, DBSVI
stream and remaining coal reserves of nine years. We also have
a BUY rating for PTBA as its lower mining contractor services
fee will help boost its margins.
ASIAN INSIGHTS VICKERS SECURITIES

ed: CK / sa:MA, PY
Industry Focus
Reiterate our coal price benchmark to US$65 per ton also see limited supply expansion from the major coal producing
Reiterate our coal price benchmark to US$65 per ton in 2017 countries such as Indonesia – which will also provide a short
and beyond, as we believe China’s proactive domestic supply term to medium-term cushion to coal prices. So far, Indonesia’s
control will curb any potential excess supply in the market, thus domestic coal miners are still conservative on their production
limiting the coal price downside. China’s supply control is volume expansion target and overall mining expansion strategy,
positive for China domestic and global coal prices, given that which means that we will not see any excess supply from the
China is a primary market for global coal producers. The seaborne market going to China, which could dilute the impact
domestic supply dynamics will also impact its coal imports, in of its production volume intervention.
view of the fact that China will only import coal in the event of
supply shortage. China production control implies long-term coal price
band of US$65-75 per ton
Newcastle coal price trend China will proactively manage coal supplies via maintaining its
800 120 coal miners’ working days at 270-330 days to keep China’s
750 110 domestic coal supply under control and to prevent excess
700
650
100
supply. We believe such policies will keep the long-term coal
90
600 price at US$65-75 per ton, which offers a win-win situation for
80
550
70
both coal miners and coal-fired power plant operators. This
500
60 could ultimately benefit China as a whole in view of the lower
450
400 50 default risk for local coal miners and the availability of
350 40 reasonably priced coal to fulfil the country’s energy demand.
300 30
Apr‐16
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May‐17
Qinghuangdao port’s coal price historical trend

Coal price at Qinghuangdao port(RMB per ton) ‐ LHS NWC (US$ per ton) ‐ RHS 800
Chinese government
700 intervene domestic
Source: Bloomberg Finance L.P, DBSVI coal production
600
500
As China accounts for half of global coal consumption and
400
Post price spiked,
production, it has the power to influence global coal supply- production days
300 relaxation introduced to
demand dynamics and coal prices via its domestic policies mainly Pro longed over cooling down the market
200 supplies coal market,
via coal production control. Soft global coal supply addition in dragged coal price
100
the past three years has also strengthened China’s position as a
0
global coal power house. The Chinese government also controls
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the country’s largest coal producers such as China Shenhua
Corp and China National Coal Group. Both account for around Coal price at Qinghuangdao port(RMB per ton) ‐ LHS
20% of China’s national total coal output. Source: Bloomberg Finance L.P, DBSVI
Proportion of China supply and demand vs the world China’s decision to intervene on the supply side when coal
7000 prices hit a low of US$50 per ton last year shows that China was
6000 not comfortable with the emerging systemic default risk
5000
confronting its local miners. Moreover, the Chinese government
also relaxed the coal production day limit to 330 days after coal
4000
prices spiked to above US$85 per ton in December last year.
3000
Besides the proactive supply controls mentioned above, China’s
2000 largest coal miners such as China Shenhua Corp and China
1000 National Coal Group Corp have also inked coal contracts with
0 major coal power plant generators such as China Huadian Corp
Coal consumption (mn tons) Coal production (mn tons) and State Power Investment Corp at around Rmb550-600 per
China Others ton, or US$77-84 per ton.
Source: Bloomberg Finance L.P, DBSVI
Supplies outside China seem to have reacted slowly to the

higher coal price trend. Besides the rainy season in 1Q17, we

Page 2
Industry Focus
Coal miners are still reluctant to raise output ADRO and ITMG, has remained flat this year. Meanwhile,
Besides China’s production control, slower-than-expected coal PTBA’s production volume is subject to its railway capacity
supply expansion from the major seaborne markets (mainly from development this year.
Indonesia) could also help sustain coal prices at the current level
of US$75-80 per ton in the short term. The low confidence Pamapersada’s strip ratio and coal production volume
among coal miners has led to slower-than-expected coal supply 12 12
ramp-up and rebalancing of coal prices. Moreover, aggressive 10 10

cost cutting in the past three years has also hurt global coal
8 8
reserves. Indonesia coal reserves stood at only 7.3bn-8.3bn tons
6 6
in 2015, which are only 30%-40% of the 2014 level of 32bn
tons. 4 4
2 2
Moreover, the 1Q17 rainy season hampered production in both 0 0

Australia and Indonesia, keeping coal prices at above US$80 per
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ton on the back of supply shortage, despite the end of seasonal
restocking in January. Historically, the first quarter has the Monthly coal production volume (mn tons) ‐ RHS Strip ratio (X) ‐ LHS
lowest production volume due to the rainy season. The rainy Source: Bloomberg Finance L.P, DBSVI
season translates into lower productivity and production volume
for coal miners. The chart below shows the quarterly production Our surveys with a number of smaller coal miners in Indonesia
trends of ITMG, ADRO, PTBA and HRUM, with the first quarter have also revealed that they are skeptical on the how current
usually being the lowest production volume period before coal price level could sustain going forward. Furthermore, the
production gradually ramps up in the remaining quarters smaller coal miners continue to operate defensively in order to
towards meeting the companies’ full-year targets. The avoid heavy exploitation of their mining assets. Moreover, their
production trend is also supported by the demand trend, where operational flexibility will also be inferior to that in previous
the coal demand historically is the strongest in 4Q due to winter years, given that their efficiency has hit the limit and their
restocking, on the back of higher power plant utilisation during thinning reserves pose future operational challenges.
the winter season.
Moreover, the smaller coal miners faced difficulties in securing
Quarterly production trend (mn tons)
financing from the banks, which are still in the midst
35.0
restructuring non-performing loans (NPL) and are reluctant to
30.0 offer new financing packages to the new miners. Banks have
25.0 reduced their exposure to the mining-related sectors in view of
20.0 the rising NPL. Our survey suggests that the banks are still
reluctant to offer credit to mining players.
15.0
10.0
Loans to mining-related sectors and NPL trend
5.0 160,000 8%
- 140,000 7%
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
120,000 6%
ADRO ITMG HRUM PTBA
100,000 5%
Source: Companies, DBSVI 80,000 4%
*2011-2014 figures are average quarterly coal output 60,000 3%
However, we believe the tighter-than-expected supply goes 40,000 2%
beyond seasonal factors. Listed coal miners tend to maintain 20,000 1%
their conservative stances on coal production volume. Most of 0 0%

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Jan‐11
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them have agreed to a higher strip ratio, possibly due to the

brighter coal price outlook. A higher strip ratio means that the
Mining resources loans (Rpbn) ‐ LHS NPL (%) ‐ RHS
miners can minimise the risks to its remaining reserves as they
do not need to achieve a lower cost structure, which is required Source: Bloomberg Finance L.P, DBSVI
in a low coal price environment. On the other hand, the
production volume among the largest listed coal miners, such as

Page 3
Industry Focus
The lack of financing also means that the miners could not Indonesia running out of coal reserves by 2030, as Indonesia’s
secure machinery and equipment to restart their mining activity. remaining coal reserves stood at only around 8bn tons in 2015.
UNTR’s machinery sales volume was relatively low in 4Q16 and This is only 40% of the average estimated reserves in the
1Q17 despite the coal price uptrend (see chart). UNTR is aiming previous three years, due to the limited exploration activities on
for 2,700 units (23% y-o-y) of machinery sales in 2017 despite capital spending scale-back and aggressive cost cutting via
the improving coal price volume outlook. UNTR’s relatively soft lowering the strip ratio to below the optimum concession long-
machinery sales volume performance means there is not much term strip ratio target.
capital redeployment to the sector.
Slow production also seen in other countries
UNTR’s monthly machinery sales Cyclone Darby could hurt Australia’s national production by
600 140 10%, given the disruption in railway transportation and overall
500 120 mining activities. Meanwhile, the lower Australian coal tonnage
100 could not be offset by the production of the closest alternative
400
80 coal producing countries such as Indonesia whose local miners
300
60
have chosen to stick to a defensive strategy, as highlighted
200
40
previously.
100 20
Other coal producing countries in the world are also not adding
0 0
much to global production capacity, given the capital constraints
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and limited operational flexibility as a result of their aggressive

Mining machineries (units)‐ LHS Coal price (US$ per ton) ‐ RHS cost-cutting efforts in the past two years to cope with the lower
coal price trend. Apart from the lower fuel cost on the back of
the lower global crude oil price trend, global coal miners have
also successfully reduced their cash cost to another record-low
All in all, Indonesia targets a 2017 coal production of 413m
level in 2015-2016 via reducing their hauling activities and
tons, slightly lower vs. the 2016 level, according to the Ministry
lowering their strip ratio, which come at the price of reserves
of Energy and Mineral Resources (ESDM). The government’s
depletion.
target is in line with that of Indonesia’s largest coal miners.
Since all miners need to submit their one-year mining plan (that
Mining activities in the post-low price crisis period may be
is subject to revisions) to the government annually, we can see
different for some miners given that a meaningful part of their
that there is no significant production expansion among the
reserves has become hardly mineable and needs further
Indonesian miners.
rehabilitation efforts, such as removing the pile-up of
Indonesia annual coal output overburdened soil in mining concessions – which arises due to
500
the shortening of overburdened hauling distance to reduce cost.
480 474 In the past two years, miners have focused on delivering strong
460 earnings to shareholders, even amid weak coal prices – in the
440 425
434
same vein of the Indonesian coal miners that we highlighted
413
420
previously.
400 392
380
360
Global cash cost per ton changes (2015)
0% 0%
340
320 -2%
-5%
300
-7%
2013 2014 2015 2016 2017A -10%
-12%
Indonesia coal production (mn ton) -15% -13% -13%
-14%
-17%
-18%
Source: ESDM, DBSVI -20%
-20%
-25%
-26%
Indonesia will be the largest coal consumer and net importer in -30%
Venezuela
Chile
Vietnam
Australia
Colo,bia
Rusia
Canada
Indonesia
United States
South Africa
Mozambique
the world, once the 35,000MW power plant project comes

online in 2019-2020. According to Price Waterhouse Cooper
(PWC) study, such a potential surge in demand could result in
Source: Company, DBSVI

Page 4
Industry Focus
Plans to cap global pollution are rolling out Global coal-fired plant capacity
The Paris and Cancun agreements will track the reduction of 500 1,200
coal-fired power plant capacity over the next decade in order to 450
1,000
400
achieve the desired lowering of carbon emission and global 350
800
temperature. The agreements strive for zero emission in the 300
long term, which translates into a zero coal-fired power plant 250 600
200
target to maintain the desired global temperature (see chart). 150
400
100
200
World emission scenario according to both agreements 50
‐ ‐
East Asia SE Asia Africa and Middle EU28 Canada/US
East
Pre construction Construction On Hold Operating
Source: Greenpeace ‘Boom & Bust 2017’, DBSVI
Still in demand: Coal is a reliable and affordable energy

Despite the intention to cease coal in our energy mix in the long
term, we cannot deny that coal is one of the most reliable and
affordable power sources. This has enabled coal-fired power
plant to achieve the widest coverage and highest energy mix in
a large part of the world, mainly developing countries. Coal
Source: Climate Analytics, DBSVI generates the lowest cost per kWh vs. other energy sources
such as natural gas and diesel fuel, despite the former’s higher
The global shift to cleaner and more efficient energy sources is carbon emission.
happening. Coal is always thought as the dirtiest energy source
that has led to various pollution problems in many countries, Rp per kWh
particularly China. Developed countries like EU nations and the 1600
US have shifted away from coal due to environmental concerns. 1400
Going forward, we expect this trend to continue with the 1200
introduction of more efficient coal-fired power plants and 1000

renewable energy sources. 800
600
Southeast Asia and East Asia (mainly China) have the largest
coal-fired power plant capacity in the world. Both regions also 400
will be the key market for thermal coal mines in the next 200
decade, given the ongoing power plant capacity under 0
construction. Beyond Asia, only the US has a meaningful coal- Coal Natural gas Geo thermal Diesel fuel (oil)
fired power plant capacity, but going forward we believe this Source: PLN, DBSVI
will be gradually replaced by cleaner energy sources, as there is
no material coal-fired power plant capacity under construction. We do not deny that China is gradually shifting away from coal,
but the IEA is forecasting that China’s coal consumption will still
increase by 2.6% y-o-y until 2019, or an annual growth of
100m tons. In its World Energy Outlook 2015, the IEA also
believes that China will remain the coal giant in terms of being
both the producer and consumer until 2030. New coal-fired
power plants are expected to enter the pipeline and the existing
China power plants are relatively new vs. their useful life of 40-
60 years and it is unlikely that the coal-fired power plants will
cease operation before hitting their salvage value.

Page 5
Industry Focus
The same case happened in the US before. China’s plan to 35MW status (IPP only)
replace coal as the key component in its energy mix will need Planning
11.0%
some time. The US needed more than 10 years to reduce coal-
fired power plants’ share of the energy mix from above 50% to
the existing level of around 30%, and the progress has only Non construction
(contracted)
accelerated in the past five years. The tipping point for a lower Procurement
39.0%
coal mix in its power generation capacity arose from lower 24.0%
natural gas prices in the past three years – thus reinforcing the
benefits of gas, i.e. better efficiency and lower carbon emission.
Comissioning
US electricity generation by source 2.0%
Construction (signed
PPA)
24.0%
Source: PLN, DBSVI
Indonesia: Rapid growth for power usage, but undersupply still

persists
Indonesia will drive coal consumption in ASEAN via its initiatives
to raise electrification rates to support its infrastructure and
investment expansion. Indonesia’s electricity consumption is still
one of the lowest (alongside India) in the world and thus has
Source: EIA, DBSVI abundant upside given the government’s 35,000MW project
rollout.
Moreover, coal is expected to become the dominant fuel in
Southeast Asia (SEA), according to the Mineral Council of Indonesia’s per capita electricity consumption
Australia, and will reach the US’ consumption size by 2040. The 12.0
key driver for the SEA coal market is Indonesia, whose demand 10.0
is expected to reach 250m tons – equivalent to the coal
8.0
consumption size of EU 28 – by 2040, according to the EIA.
6.0
Coal will remain in demand for countries that need a lot of 4.0
energy to fuel their growth ambitions such as India, SEA nations
2.0
and even China. Moreover, we do not foresee strict
environmental regulations in SEA countries, as the key priorities ‐
Phillipines
South Korea
China
Indonesia
India
Hong Kong
Thailand
Vietnam
Singapore
Japan
Malaysia
now revolve around the meeting of electrification and capacity Pakistan
targets.
Source: PLN, DBSVI

Power plant capacity expansion execution is the key risk for coal
demand in ASEAN, in our view. ASEAN countries such as
Indonesia’s domestic coal consumption will breach the 100m
Indonesia are challenged with land clearing, securing long- term
ton barrier by 2018, in our estimation, if its 35MW power plant
financing and transmission of electricity. Only 24% of IPP
project is on track to meet the government’s target. Indonesia
projects are entering the construction phase in Indonesia, even
anticipates that coal will still become its main energy mix,
as the government insists that these projects will commence
despite the introduction of renewable energy as part of the
operations in 2019.
government’s clean energy initiatives in the long term.

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Industry Focus
Indonesia’s domestic coal consumption government to achieve the targeted electrification ratio and
90 power capacity to fuel economic growth.
80.3
80
69.8
70 PLN and IPPs’ net capacity addition (MW)
57.6
60 53 16,000 14,905
50 46.9
14,000
39.5
40
12,000
30
10,000
20
8,000
10
6,000 5,461
4,830 4,414
0 3,777
4,000
2011 2012 2013 2014 2015 2016 2,658 2,348
1,471 1,357 1,720
2,000
Indonesia coal consumption (mn tons)
‐
Source: BP Statistics , DBSVI 2015 2016 2017 2018 2019
PLN IPP
Source: ADB , DBSVI

Indonesia’s coal consumption has doubled in the past five years
due to the rollout of coal-fired power plant capacity – as the Besides being the proxy for higher domestic coal consumption,
government had prioritized coal as a primary energy mix in its Indonesian coal miners can also fit into the power plant
Fast Track Program (FTP) I through Presidential Decree No thematic play given their intention to penetrate into the power
71/2006. Currently, coal accounts for 30% of Indonesia’s sector as part of their long-term downstream diversification
energy mix and we expect coal to remain one of Indonesia plans. Adaro, via its subsidiary Adaro Power, has a 34%
primary energy sources, besides oil and gas, given the relatively participating interest in Bhimasena Power Indonesia – a 2x
affordable price of coal. 1,000MW project which is slated to commence operations
around 2020.
The Power Supply Business Plan (RUPTL) 2016-2025 also shows
that the upcoming 35,000MW project will still be dominated by ITMG last year established Banpu Power to tap into the power
coal-fired power plants, which account for around 56% of the business, and is currently seeking partnerships and project
total planned power plant capacity expansion. tenders. ITMG intends to go into the power business is part of
its long term diversification strategy beyond its core coal mining
35,000MW program – RUPTL 2016-2025 operation. Moreover, PTBA also set to unlock its multi decade
20
coal reserves life, via initiating the mine mouth power plants
18
16
project around its mining concession in southern Sumatera,
14 besides addressing transportation capacity bottlenecks.
12
10 India: Still into coal
8
Coal-fired power plants still dominate power plant projects that
6
4
are under construction, which means future demand and coal
2 imports from India will also remain strong. Moreover, in the
0 long term, we believe India's coal consumption uptrend will
Coal Gas Hydro Geothermal Other
also provide another cushion against lower demand from China
PLN IPP
and developed markets.
Source: PWC, DBSVI
Despite India’s reliance on coal, India still imports more than half
The immense capacity addition means that PLN cannot work of its coal consumption. Addressing coal imports is one of the
alone, given its balance sheet expansion limitation, even as it government key agendas, as India’s coal consumption is
has obtained external funding from the government’s budget projected to grow by 2.8% per year – thus outpacing the US’s
(APBN) and committed loans. PLN estimates there will be a coal consumption by 2020, according to the EIA. India targets to
funding gap of Rp392tr to complete the 35,000MW power double its coal production by 2020 to 1bn tons of coal to cope
plant project. Since its hard for PLN to execute the project alone, with the rising demand. Coal import growth will continue to be
IPPs should play a significant role – as partners to PLN and the driven by the expanding coal-fired power plant capacity in the
country.

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Industry Focus
means that ITMG’s remaining coal resources can be feasibly

Coal-fired power plants will continue to be India’s electricity converted into mineable reserves. We estimate that every
generation backbone. The underdevelopment energy capacity is US$10 per ton of coal price change could add around 40m
also dominated by coal-fired generation (see chart).Though tons to ITMG’s coal reserves or around two years of long-
there will be a spike in renewable energy initiatives, coal will term reserves life. A higher reserves life, coupled with its
continue to dominate India’s power generation capacity disciplined mining operation, means that ITMG could
expansion as coal is the most economical energy source relative deliver a strong and sustainable cash margin of US$10-11
to others like gas and nuclear. Moreover, it is easier to gain per ton for its remaining reserves life, while paying steady
meaningful economies of scale for coal-fired power plants dividends to its investors.
whose power generation system and construction technique are
more common in India.  Tambang Batubara Bukit Asam (PTBA IJ), BUY, TP of
Rp16,000. We like PTBA for its strong approach when
India's under construction power plant negotiating with mining contractors, which enables PTBA
to achieve strong efficiency. Its coal production volume will
also improve over time, in view of its railway capacity
expansion. The ability to execute is the key thing to watch
in 2017 given PTBA’s production volume expansion is tied
to its railway capacity expansion. Moreover, PTBA’s profit
performance also depends on how quickly it can convert its
mining activities in-house (to bring them under its internal
mining contractor), if it fails to negotiate down the fee
further with third-party mining contractors.
Overall, our coal miners’ TPs implies an average FY17 PE of

Source: Australia Energy Update, DBSVI
10.0x-12.0x. We believe coal stocks’ valuation are still
undemanding even at our conservative coal price assumption.
We believe that Indonesian coal miners deserve to be re-rated
Stock pick upward in view of a stable long-term coal price outlook and
resilient earnings growth outlook. This improving outlook bodes
Reiterate ITMG and ADRO as our top picks well for the miners’ financial performance in the form of 1)
We reiterate ITMG and ADRO as our top picks for the sustainable and strong profitability, arising from better ASP and
Indonesian coal sector, given their capability to deliver strong mining activity optimisation programs, 2) steady dividends, with
performances amid the various coal price cycles. We also believe attractive yields of 2%-3% on average – ex. ITMG, the dividend
both coal miners have the least performance overhang issues, yield of miners could reach 8% in the next seven years, in our
such as domestic coal pricing and railway transportation estimation, and 3) strong balance sheets, which can ensure high
bottlenecks, which could affect PTBA’s ability to execute. We financial flexibility and survivability in various coal price cycles.
reiterate our overall earnings forecast, TP and rating for three
coal stocks under our coverage. Though coal prices are still hovering at around US$72-75 per
ton, we believe the market is aware of the possibility that coal
 Adaro Energy (ADRO IJ), BUY, TP of Rp2,100. We like prices will trade at US$65-US$75 per ton moving ahead. The
ADRO for its proven execution track record in maintaining market assumes that coal prices will not drop below US$65 per
strong profitability in various coal price cycles. We ton, given the Chinese government’s proactive control on
witnessed ADRO’s profitability expansion last year, even in domestic coal production. However, on the other hand, the
the face of a challenging coal price environment. ADRO Chinese government also will prevent coal prices from spiking
intends to venture into coking coal and power plant above US$85 per ton, as this will hurt the domestic power plant
businesses, which could act as re-rating catalysts in the long generators’ profitability and electricity consumption.
term.
This is also reflected in the current valuation of coal stocks,
 Indo Tambangraya Megah (ITMG IJ), BUY, TP of Rp20,500. which is still in an undemanding range. Despite coal prices
Besides the ability to sustain its cash margin (thanks to hovering at around US$75 per ton, Indonesian coal stocks are
efficiency-enhancing programs), a higher coal price also trading at a 2017 PE range of 8.0x-9.5x , or lower than its

Page 8
Industry Focus
historical level when coal prices hit a current similar level of coal miners can get to enjoy earnings stability, and optimise
US$72-US$75 per ton. We believe that the market thinks coal their mining operational activities and reserves life to deliver
prices should correct sometime this year as the seasonally low robust returns to their shareholders.
production period of 1Q17 has ended, coupled with the lack of
significant demand catalysts post winter restocking. Coal price performed well in 1Q17 on undemanding valuation
and stronger-than-expected 4Q16 (thanks to higher-than-
PTBA’s five-year forward PE band expected coal ASP). The coal miners’ positive performance
continued in 1Q17, as seen in ADRO and PTBA’s financial
results, given that coal prices in 1Q17 have also trounced
consensus expectation. Besides the seasonally low production
period of 1Q17 keeping coal prices above US$75 per ton, the
onset of cyclone Darby that will potentially affect 10% of
Australia’s production volume this year has led to a persistent
share price rally for coal miners. Such a development has also
buoyed coal prices to US$85 per ton.
Coal miners' share price performance YTD

Source: Bloomberg Finance L.P, DBSVI 1.4
1.3
ITMG’s five-year forward PE band 1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
2‐Feb
9‐Feb
29‐Dec
6‐Apr
11‐May
18‐May
25‐May
12‐Jan
19‐Jan
26‐Jan
16‐Feb
23‐Feb
13‐Apr
20‐Apr
27‐Apr
2‐Mar
9‐Mar
5‐Jan
16‐Mar
23‐Mar
30‐Mar
4‐May
PTBA ITMG ADRO JCI
Source: Bloomberg Finance L.P , DBSVI

Performance delivery to boost earnings and share price
ADRO’s five-year forward PE band Going forward, we believe there are still further earnings and
share price upside for the Indonesian coal miners this year on
the back of a brighter earnings performance outlook, thanks to
solid top line growth performance and relatively stable
operational cost this year.
We believe 2017 financial performance will be a short-term

catalyst for coal stocks. After seeing a strong financial
performance in 1Q17, we expect coal miners’ financial
performance to top consensus estimates in the remaining
quarters of 2017 due to higher-than-expected ASP and
Source: Bloomberg Finance L.P, DBSVI normalising production trend. Indonesia coal miners locked
more than half of its 2017 coal sales volume at favourable coal
prices according to our check due to higher than expected coal
Share price corrected, opportunity emerged benchmark price trend in 4Q16 and 1Q17.
Coal stocks underwent a correction last month after performing
solidly in 1Q17. We believe this share price correction provides a Moreover, the market has not priced in the profitability
good entry point for coal counters, given that PTBA, ADRO and improvement of the largest coal miners on the back of structural
ITMG are trading at single-digit PEs despite their solid earnings changes in their mining operations to cope with the low coal
outlook this year. A steady coal price outlook also means that price environment in the last two years. The largest coal miners

Page 9
Industry Focus
have established very efficient mining plans in the past five

years, including stringent mining contractor fee renegotiation
rules as well as reserves optimisation program which enabled
the coal miners to lower their strip ratio and cash cost without PTBA’s share price and profitability performance
significantly damaging their long-term coal reserves. 20,000 35%
18,000
30%
Solid profitability even amid the worst coal price cycle 16,000
14,000 25%
We believe that coal price is not the key driver for coal stocks’
12,000
share price performance in the long term, as profitability is a 20%
10,000
critical factor for re-rating catalyst. Profitability is determined by 8,000
15%
a whole range of factors, including the combination of ASP 6,000 10%

trend and coal miners’ ability to maintain operational efficiency 4,000
5%
in various coal price cycles. We have discovered that profitability 2,000
per ton coal mined is the most critical factor for coal stocks, and 0 0%
Jul‐08
Jul‐09
Jul‐10
Jul‐11
Jul‐12
Jul‐13
Jul‐14
Jul‐15
Jul‐16
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
Jan‐17
not just coal prices.
Share price (Rp) ‐LHS NPATM ‐ RHS
ADRO’s share price and profitability performance
Source: Bloomberg Finance L.P , company, DBSVI
ADRO (Rp) ‐ LHS NPATM (%) ‐ RHS
2,500 18%
16% Key risk
2,000 14% The key risk to our coal price assumption is faster-than-expected
12% coal supply expansion in the ex. China region, which implies
1,500
10%
that the impact of China’s proactive supply control will not be as
8%
1,000 strong as in 2H16, given the upcoming volume numbers will
6%
4%
lead to a dilution of China’s production volume contribution to
500
2% global supply, and China’s influence over domestic and global
0 0% coal prices.
Jul‐08
Jul‐09
Jul‐10
Jul‐11
Jul‐12
Jul‐13
Jul‐14
Jul‐15
Jul‐16
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
Jan‐17
Coal supply-demand dynamics will undergo structural changes,

Source: Bloomberg Finance L.P , company, DBSVI in light of the lower coal-fired power plant project pipeline
around the world, particularly China. Nonetheless, long-term
ITMG’s share price and profitability performance
coal demand will still come from ASEAN countries and India,
ITMG (Rp) ‐ LHS NPATM (%) ‐ RHS
which have sizeable new coal-fired power plant projects in the
40,000 25%
pipeline. In our view, a slower-than-expected coal-fired power
35,000
20% plant rollout in ASEAN and India could pose a long-term threat
30,000
to coal prices.
25,000 15%
20,000
15,000 10%
10,000
5%
5,000
0 0%
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
Jan‐17
Jul‐08
Jul‐09
Jul‐10
Jul‐11
Jul‐12
Jul‐13
Jul‐14
Jul‐15
Jul‐16
Source: Bloomberg Finance L.P , company, DBSVI

Page 10
Industry Focus
Company Guides

Page 11
Indonesia Company Guide
Adaro Energy
Version 6 | Bloomberg: ADRO IJ | Reuters: ADRO.JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 30 May 2017
BUY Maintain BUY on stronger

Last Traded Price ( 29 May 2017): Rp1,465 (JCI : 5,712.30) performance ahead
Price Target 12-mth: Rp2,100 (43% upside)
Potential Catalyst: Quarterly earnings performance
Maintain BUY and TP of Rp2,100. We reiterate our Buy rating
Where we differ: We believe ADRO deserves a valuation re-rating on
and TP of Rp2,100 for ADRO (FY17F P/E of 11.7x). Stable long-
stronger earnings performance going forward
term coal prices ensure the coal miners’ ability to monetise their
Analyst remaining reserves life. We believe ADRO deserves to be re-
William Simadiputra +62 2130034939 rated in view of its ability to maintain its strong profitability and
william.simadiputra@id.dbsvickers.com earnings performance in various coal price cycles.
What’s New Retaining our FY17/18 forecast at this point. We believe that we
 Maintain BUY and TP of Rp2,100 have already baked in a conservative coal production volume
assumption. Our FY17 assumptions include operational EBITDA
 Our TP implies higher PE of 11.7x
forecast of Rp1.1tr and NPAT forecast of Rp430bn which are
 Sticking to our earnings forecast in FY17/18 pretty much in line with management guidance and 1Q17
 Stronger earnings growth ahead financial performance.
Stronger performance outlook for the remaining quarters. We

expect ADRO’s strong earnings performance to continue for the
Price Relative
rest of the year in the absence of seasonality factors. We expect
higher coal production and sales volume moving forward, in the
direction of management’s FY17 target of around 53m tons.
Valuation:
We are maintaining our BUY rating with DCF-based target
price of Rp2,100 (WACC of 12.1% and terminal growth rate
Forecasts and Valuation of 0%). This implies an FY17F PE of 11.7x, which is in line with
FY Dec (US$ m) 2015A 2016A 2017F 2018F ADRO’s five-year average P/E multiple.
Revenue 2,685 2,524 2,945 3,104
EBITDA 550 813 1,105 1,174
Pre-tax Profit 280 547 823 881 Key Risks to Our View:
Net Profit 153 335 430 459 2017 coal pricing. Our forecast is dependent on ADRO’s
Net Pft (Pre Ex.) 153 335 430 459 capability to secure favourable coal prices from buyers, which
Net Pft Gth (Pre-ex) (%) (14.2) 119.1 28.3 7.0
should be seen in the rest of the year.
EPS (Rp) 63.6 139 179 191
EPS Pre Ex. (Rp) 63.6 139 179 191
EPS Gth Pre Ex (%) (14) 119 28 7 At A Glance
Diluted EPS (Rp) 63.6 139 179 191 Issued Capital (m shrs) 31,986
Net DPS (Rp) 31.4 30.5 89.4 95.6 Mkt. Cap (Rpm/US$m) 46,859,434 / 3,529
BV Per Share (Rp) 1,184 1,318 1,408 1,503 Major Shareholders (%)
PE (X) 23.1 10.5 8.2 7.7 Adaro Strategic Investment 43.9
PE Pre Ex. (X) 23.1 10.5 8.2 7.7 Thohir Garibaldi 6.5
P/Cash Flow (X) 12.5 5.2 5.1 4.5
EV/EBITDA (X) 8.8 5.5 3.9 3.4 Soeryadjaya Edwin 4.3
Net Div Yield (%) 2.1 2.1 6.1 6.5 Free Float (%) 45.3
P/Book Value (X) 1.2 1.1 1.0 1.0 3m Avg. Daily Val (US$m) 4.5
Net Debt/Equity (X) 0.2 0.1 0.0 CASH ICB Industry : Basic Materials / Mining
ROAE (%) 5.4 11.1 13.1 13.1
Earnings Rev (%): 0 0 0
Consensus EPS (Rp): N/A 173 173
Other Broker Recs: B: 21 S: 3 H: 1
Source of all data on this page: Company, DBSVI, Bloomberg Finance
L.P

ed: CK / sa:MA, PY
Company Guide
Adaro Energy
WHAT’S NEW
Maintain BUY on stronger performance ahead
Earnings forecast: Maintaining our earnings forecast coal hauling technique that could be hampered by the rainy
season, which typically takes place in 1Q17.
We believe that we have already baked in a conservative coal
production volume assumption. Our FY17 assumptions include
On track to meet our forecast and management guidance. We
operational EBITDA forecast of Rp1.1tr and NPAT forecast of
expect higher coal production and sales volume moving
Rp430bn which are pretty much in line with management
forward, in the direction of management’s FY17 guidance of
guidance and 1Q17 financial performance.
around 53m tons. A y-o-y ASP recovery for coal will also be seen
for the rest of this year (given the higher benchmark coal price
Our ASP assumption of US$52 per ton is also in line with
trend in the last six months), which will have a positive impact
management’s latest YTD guidance for coal prices. We expect
on coal ASP for contracts this year. On the other hand, ADRO
ADRO to book relatively steady coal ASP moving ahead in view
will also implement a higher strip mining strategy, in response to
of its positive mix of coal contract prices in the medium to long
the better ASP outlook, resulting in a higher cash cost level vs.
term.
1Q17. Net-net, the company is on track to meet our forecast
and management’s guidance.
1Q17 performance: A good start to the year
Earnings largely in line with our and consensus’ forecasts.
ADRO’s earnings recovered y-o-y on higher ASP despite weaker
Revenue and profitability trend
coal production in 1Q17 due to the rainy season. Reported
900 35%
NPAT came in at US$97m (+63% y-o-y, -23% q-o-q), while core
800 30%
NPAT excluding non-operational items net of tax stood at 700 25%
US$132m. Its operating EBITDA of US$276m (+44% y-o-y, +3% 600 20%
q-o-q) met our forecast, as ADRO continued to emphasise 500 15%
profitability amid the rising coal ASP trend. Its strip ratio reached 400 10%
4.6x in 1Q17, still below its FY17 target of 4.85x, as ADRO 300 5%
maintained a relatively low strip ratio to cope with the seasonal 200 0%
100 ‐5%
operational trend in 1Q17.
0 ‐10%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
Revenue met our forecast; higher ASP offset seasonal low Revenue (US$mn) ‐ LHS GPM ‐ RHS NPATM ‐ RHS
production volume in 1Q17. Revenue reached US$727m (+24%

Source: Company , DBSVI
y-o-y, -3% q-o-q) mainly on higher ASP. ASP came in at US$56
per ton in 1Q17, representing a 39% y-o-y jump. On the other
Coal production and strip ratio trend
hand, the rainy season hindered ADRO’s overall mining activity,
16 7
as evidenced by lower y-o-y coal production of 11.9m tons (-6% 14.1 14.0
14 13.2 13.5 13.3
13.1
y-o-y) and sales volume of 12m tons (-11% y-o-y). 12.0 11.8
12.5 12.7
11.6
12.6
11.8
6
12
5
10
4
What to look for : Stronger performance expected in the 8
3
rest of the year 6
2
4
Stronger performance outlook for the remaining quarters. We
2 1
expect ADRO’s strong earnings performance to continue for the
0 0
rest of the year in the absence of seasonality factors. Note that 2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
unlike Tambang Batubara Bukit Asam (PTBA) that uses the Coal production volume (mn tons) - LHS Strip ratio (X) - RHS
conveyor belt coal hauling method, ADRO uses trucking-based Source: Company , DBSVI

Page 20
Company Guide
Adaro Energy
Sales volume (m tons)

CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Flat production outlook. We assumed coal output growth
would be relative flat over FY16-18F, premised on ADRO’s
defensive strategy of profitability prioritisation over production
expansion. Tutupan and Paringin concessions will remain the
largest contributors (48m tons) at 96% of ADRO's coal
production.
Improved coal price outlook. Coal ASP will improve alongside ASP (US$/ton)
the better Newcastle coal benchmark price outlook. We expect
ASP to climb to US$52 per ton in FY17 before rising further to
US$54 per ton in FY18, in line with our higher coal benchmark
price forecast of US$65 per ton next year. A higher coal ASP will
allow ADRO to expand its profitability and deliver better
earnings growth.
Lower cash cost on better operational efficiency. We have

assumed slightly lower cash cost of U$33.6 per ton in FY17,
while conservatively imputing similar mining contracting rates
for this year. We have factored in lower fuel cost in our cash Cash cost/ ton (US$/ton)
cost estimate. ADRO’s cost-saving measures would help to
boost its earnings. Lower fuel cost will also help ADRO to lower
cash cost per ton. ADRO’s fuel cost reached US$0.7/litre last
year and at current coal prices, fuel cost is US$0.5 per litre, half
of its 5-year average.
Ongoing refinancing efforts to reduce cost of debt. ADRO will

continue to reduce borrowing cost via refinancing. Its interest
dropped by 16% in FY16 to US$41m. ADRO's access to
competitive financing terms bodes well for the company; it has
recently refinanced its existing debt with Adaro Indonesia EBITDA margin (%)
(involving a US$1bn loan facility) at a lower borrowing cost.
Interest expenses (US$mn)

Page 21
Company Guide
Adaro Energy
Leverage & Asset Turnover (x)

Balance Sheet:
Reliance on third-party financing. ADRO will continue to
deleverage its balance sheet in the absence of plans to acquire
new coal assets. However, its foray into power plants means
that ADRO cannot fully be a debt-free coal miner because it
would need to rely on third-party financing to supplement weak
internal cashflow generation.
Modest capex outlook, ample reserves. We forecast ADRO will

spend US$200m per year on capex in 2017-2018 mainly to
expand output at existing concessions, for its downstream
Capital Expenditure
power plant project, and maintenance of machineries. Our
capex assumption is in line with management’s new guidance
for FY17. ADRO has 1.1bn tons of coal reserves, sufficient to
last 20 years at the current extraction rate. As such, ADRO can
focus its capex on its power plant project.
Share Price Drivers:

Better profitability leads to higher share price. ADRO’s share
price tracks its profitability outlook. A better profitability outlook
leads to a higher share price and vice versa. ADRO successfully ROE (%)
boosted its profitability in 2016, getting close to the levels prior
to the coal price downtrend in 2015.
Key Risks:
Coal price. Coal price is the key upside/downside risk for coal
miners, as they are price takers with minimal pricing power.
Despite the impact of higher or lower coal prices not being
fully reflected in ADRO’s quarterly earnings, the coal price
sentiment can affect ADRO’s stock price.
Execution risk. If ADRO fails to meet its targeted production Forward PE Band (x)
volume and cash cost per ton, ADRO could miss our earnings
estimate.
Company Background
ADRO is Indonesia's second largest coal producer. It sells 75%
of its production to the export market and the rest in the
domestic market. It has subsidiaries that operate in the mining
contracting, barging and ship-loading, and water-tolling
businesses.
PB Band (x)

Page 22
Company Guide
Adaro Energy
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Sales volume (m tons) 56.2 51.4 52.6 53.5 54.0
ASP (US$/ton) 55.2 46.9 43.4 51.7 53.9
Cash cost/ ton (US$/ton) 40.7 39.2 35.8 33.6 34.0
EBITDA margin (%) 20.1 27.2 35.4 37.5 37.8
Interest expenses (US$mn) 190 48.9 40.9 33.7 38.9
Segmental Breakdown
FY Dec 2014A 2015A 2016A 2017F 2018F
Revenues (US$m)
Coal Mining 3,102 2,492 2,347 2,765 2,909
Mining Contracting 139 123 111 145 160
Others 84.2 70.4 66.0 35.0 35.0
Total 3,325 2,685 2,524 2,945 3,104
Income Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F
Revenue 3,325 2,685 2,524 2,945 3,104
Cost of Goods Sold (2,605) (2,141) (1,839) (1,926) (2,014)
Gross Profit 720 543 685 1,019 1,091
Other Opng (Exp)/Inc (226) (211) (97.7) (162) (171)
Operating Profit 494 332 588 857 920
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (3.7) (3.0) (0.2) (0.2) (0.2)
Net Interest (Exp)/Inc (165) (48.9) (40.9) (33.7) (38.9)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 325 280 547 823 881
Tax (142) (129) (206) (387) (414)
Minority Interest (5.4) 1.40 (6.1) (6.7) (7.3)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 178 153 335 430 459
Net Profit before Except. 178 153 335 430 459
EBITDA 665 550 813 1,105 1,174
Growth
Revenue Gth (%) 1.2 (19.3) (6.0) 16.7 5.4
EBITDA Gth (%) (4.1) (17.3) 47.8 35.9 6.3
Opg Profit Gth (%) (8.5) (32.7) 76.9 45.8 7.3
Net Profit Gth (Pre-ex) (%) (24.0) (14.2) 119.1 28.3 7.0
Margins & Ratio
Gross Margins (%) 21.7 20.2 27.2 34.6 35.1
Opg Profit Margin (%) 14.8 12.4 23.3 29.1 29.6
Net Profit Margin (%) 5.4 5.7 13.3 14.6 14.8
ROAE (%) 6.5 5.4 11.1 13.1 13.1
ROA (%) 2.7 2.5 5.4 6.4 6.7
ROCE (%) 4.7 3.1 6.3 7.4 7.7
Div Payout Ratio (%) 50.0 49.4 21.9 50.0 50.0
Net Interest Cover (x) 3.0 6.8 14.4 25.4 23.7

Page 23
Company Guide
Adaro Energy
Quarterly / Interim Income Statement (US$m)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016
Revenue 572 586 589 603 746

Cost of Goods Sold (466) (432) (441) (440) (526)
Gross Profit 107 154 149 163 220
Other Oper. (Exp)/Inc (94.3) (36.9) (29.3) (17.1) (14.3)
Operating Profit 12.3 117 119 146 205
Other Non Opg (Exp)/Inc (14.8) (11.5) (10.4) (11.0) (8.2)
Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit (2.5) 106 109 135 197
Tax (26.4) (44.9) (46.7) (46.9) (67.4)
Minority Interest 2.10 (1.1) 0.20 (1.3) (3.8)
Net Profit (26.8) 59.7 62.4 86.6 126
Net profit bef Except. (26.8) 59.7 62.4 86.6 126
EBITDA 118 192 206 227 268
Growth
Revenue Gth (%) (19.8) 2.5 0.5 2.2 23.8
EBITDA Gth (%) (28.0) 62.7 7.3 10.2 18.1
Opg Profit Gth (%) (87.4) 854.2 1.8 22.2 40.9
Margins
Gross Margins (%) 18.6 26.3 25.2 27.0 29.5
Opg Profit Margins (%) 2.1 20.0 20.2 24.2 27.5
Net Profit Margins (%) (4.7) 10.2 10.6 14.4 16.9
Balance Sheet (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 3,715 3,494 3,981 3,933 3,878

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 1,427 1,372 949 951 954
Cash & ST Invts 745 680 1,098 1,199 1,501
Inventory 96.7 72.8 73.4 44.6 46.7
Debtors 286 196 301 404 380
Other Current Assets 144 122 142 244 252
Total Assets 6,414 5,937 6,543 6,776 7,011
ST Debt 193 123 154 56.3 56.3

Creditor 351 196 208 264 276
Other Current Liab 231 135 283 297 312
LT Debt 1,688 1,384 1,280 1,293 1,239
Other LT Liabilities 693 768 811 811 811
Shareholder’s Equity 2,766 2,844 3,167 3,382 3,612
Minority Interests 492 487 639 671 705
Total Cap. & Liab. 6,414 5,937 6,543 6,776 7,011
Non-Cash Wkg. Capital (55.4) 58.5 24.9 131 91.0

Net Cash/(Debt) (1,135) (826) (337) (150) 206
Debtors Turn (avg days) 32.7 32.7 35.9 43.6 46.1
Creditors Turn (avg days) 50.9 52.0 45.7 51.3 56.0
Inventory Turn (avg days) 15.0 16.1 16.5 12.8 9.5
Asset Turnover (x) 0.5 0.4 0.4 0.4 0.5
Current Ratio (x) 1.6 2.4 2.5 3.1 3.4
Quick Ratio (x) 1.3 1.9 2.2 2.6 2.9
Net Debt/Equity (X) 0.3 0.2 0.1 0.0 CASH
Net Debt/Equity ex MI (X) 0.4 0.3 0.1 0.0 CASH
Capex to Debt (%) 10.6 (3.1) 49.7 14.8 15.4
Z-Score (X) 1.8 1.9 2.0 NA NA

Page 24
Company Guide
Adaro Energy
Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Profit 325 280 547 823 881

Dep. & Amort. 176 221 226 248 255
Tax Paid (142) (129) (206) (387) (414)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. 54.2 (88.0) (94.2) (17.9) 33.4
Other Operating CF 1,033 (3.1) 208 25.3 26.2
Net Operating CF 1,447 281 681 692 781
Capital Exp.(net) (200) 47.1 (712) (200) (200)
Other Invts.(net) 6.40 68.2 281 (2.3) (2.5)
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (692) 8.90 122 (103) (8.1)
Net Investing CF (886) 124 (309) (305) (211)
Div Paid (89.1) (75.5) (73.2) (215) (230)
Chg in Gross Debt (269) (374) (72.2) (84.6) (54.6)
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (138) (21.0) 192 14.2 14.9
Net Financing CF (497) (471) 46.2 (285) (269)
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash 64.5 (65.2) 418 102 301
Opg CFPS (Rp) 580 154 322 295 311
Free CFPS (Rp) 519 137 (13.2) 205 242
Target Price & Ratings History
Source: DBSVI
Analyst: William Simadiputra

Page 25
Indo Tambangraya Megah
Version 6 | Bloomberg: ITMG IJ | Reuters: ITMG.JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 30 May 2017
BUY A good entry point

Last Traded Price ( 29 May 2017): Rp15,800 (JCI : 5,712.30)
Maintain BUY rating with TP of Rp20,500. We believe the share
Price Target 12-mth: Rp20,500 (30% upside)
price correction in the last two weeks provides a good entry
Potential Catalyst: Quarterly earnings performance
Where we differ: We believe ITMG’s dividend yield can offset concerns point, as ITMG’s valuation looks undemanding at 7.7x FY17 PE.
over its limited coal reserves life Our earnings forecast is conservative, as we have modelled
ITMG’s earnings using a modest coal benchmark price
Analyst assumption of US$65-70 per ton moving forward.
William Simadiputra +62 2130034939
william.simadiputra@id.dbsvickers.com High margins will sustain. We are more confident about ITMG’s
long-term profitability given its ability to maintain a relatively
What’s New healthy cash margin despite the higher strip ratio. This is largely
 Maintain BUY and TP of Rp20,500 due to its reserves optimisation program, and better profitability
 Share price correction provides good entry point that implies stronger cash flow generation prospects and higher
dividends whose sustainability should trounce our previous
 Maintain our overall FY17/18 earnings forecast
expectations. We raise our long-term coal production and cash
 Expect steady dividends moving forward margin assumption to 29.5m tons and US$11.5 per ton,
respectively, for 2019 and beyond (from 26.0m tons and US$9
per ton previously) – due to a slower production decline rate in
Price Relative the next eight years and its efficiency-enhancing program.
Reserves life a concern, but offset by attractive dividend yield.

We stick to our reserves life assumption of eight years, but raise
our long-term cash margin forecast to US$11.5 per ton, as we
believe concerns over its low reserves can be offset by its
undemanding valuation and attractive dividend yield.
Forecasts and Valuation Valuation:
FY Dec (US$ m) 2015A 2016A 2017F 2018F
We maintain our BUY rating with a new DCF-based TP of
Revenue 1,589 1,368 1,578 1,707
EBITDA 200 272 292 343 Rp20,500 (WACC: 16.0% and TG: 0%), which implies 10.3x
Pre-tax Profit 139 192 232 282 FY17F PE, lower than ADRO's 11.7x and PTBA’s 11.4x
Net Profit 63.1 131 170 206 valuations. We believe its dividend yield can be sustained in the
Net Pft (Pre Ex.) 63.1 131 170 206
Net Pft Gth (Pre-ex) (%) (68.5) 107.1 29.7 21.4
long term, thus allaying any concerns over its limited reserves.
EPS (Rp) 744 1,540 1,998 2,426
EPS Pre Ex. (Rp) 744 1,540 1,998 2,426 Key Risks to Our View:
EPS Gth Pre Ex (%) (68) 107 30 21 Drop in coal price. A lower-than-expected ASP can lead to
Diluted EPS (Rp) 744 1,540 1,998 2,426 lower operational flexibility for ITMG. A dimmer ASP outlook
Net DPS (Rp) 1,489 489 1,398 1,698
can also hurt ITMG’s long-term coal reserves, which is negative
BV Per Share (Rp) 9,842 10,680 11,279 12,007
PE (X) 21.3 10.3 7.9 6.5 for valuation and target price.
PE Pre Ex. (X) 21.3 10.3 7.9 6.5
P/Cash Flow (X) 7.0 6.0 5.0 5.3 At A Glance
EV/EBITDA (X) 5.4 3.7 3.1 2.4 Issued Capital (m shrs) 1,130
Net Div Yield (%) 9.4 3.1 8.8 10.7 Mkt. Cap (Rpm/US$m) 17,852,815 / 1,344
P/Book Value (X) 1.6 1.5 1.4 1.3 Major Shareholders (%)
Net Debt/Equity (X) CASH CASH CASH CASH
Banpu Minerals (%) 65.1
ROAE (%) 7.3 15.0 18.2 20.8
Sigma Buana Cemerlang 2.4
Earnings Rev (%): 0 0 0
Free Float (%) 29.1
Consensus EPS (Rp): N/A 2,383 2,370
Other Broker Recs: B: 18 S: 1 H: 4 3m Avg. Daily Val (US$m) 3.0
ICB Industry : Basic Materials / Mining
L.P

ed: CK / sa:MA, PY
Company Guide
WHAT’S NEW
A good entry point
We reiterate our forecast in the meantime. Despite the ASP vs. Newcastle benchmark price (US$ per ton)
stronger-than-expected performance, we maintain our overall 120 15%
operational and financial forecasts for 2017 and 2018. We 10%
believe ITMG will continue to deliver strong earnings 100
5%
performance for the remaining quarters in 2017 given the 0%
higher ASP trend and ITMG’s ability to maintain its low cost 80
-5%
structure. Another upside potential could emerge if ITMG is 60 -10%
able to ramp up its production capacity faster than the -15%
seasonally slow pace of 1Q. 40
-20%
-25%
20
High margin will sustain -30%
We are more confident about ITMG’s long-term profitability 0 -35%

2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
given its ability to maintain a relatively healthy cash margin ITMG ASP (US$ per ton) - LHS Newcastle coal index (US$ per ton)-LHS
despite the higher strip ratio. This is largely due to its reserves Discount/premium to benchmark price -RHS
optimisation program, and better profitability that implies Source: Company, DBSVI
stronger cash flow generation prospects and higher dividends
whose sustainability should trounce our previous expectations. Strip ratio (x)
We raise our long-term coal production and cash margin 14 13.1
assumption to 29.5m tons and US$11.5 per ton, respectively, 12.2
12 11
for 2019 and beyond (from 26.0m tons and US$9 per ton 10
9.5
previously) – due to a slower production decline rate in the 10
8.7 8.6 8.6
9.4
8.1 8.3
next eight years and its efficiency-enhancing program. 8 7.1 7.4
6
Undemanding valuation, double-digit dividend yield. We
believe the share price correction in the last two weeks 4
provides a good entry point, as ITMG’s valuation looks 2

undemanding at 7.7x FY17 PE. Our earnings forecast is
0
conservative, as we have modelled ITMG’s earnings using a 2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
modest coal benchmark price assumption of US$65-70 per ton Strip ratio (X)
moving forwards, coupled with the fact that 1QFY17 earnings

already accounted for 33% of our full-year forecast. Besides
the share price upside potential, the stock also offers a Coal production volume (m tons)
dividend yield of 9.1% in 2017 at the current share price. 8
7.35 7.4
7.125 7.1 7
6.875 6.9
7 6.5 6.5 6.6
6.2 6.3
6
5.4
0
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Coal production volume (mn ton)

Page 20
Company Guide
Sales volume (m tons)
Earnings Drivers:
Earnings to grow by 29% in FY17, on higher coal ASP. We
forecast earnings will grow by 29% y-o-y to US$170m in FY17
before growing further by 21% y-o-y to US$206m in FY18. The
higher revenue and earnings in FY17 would be mainly driven by
the better coal ASP outlook, coupled with a higher cash margin
per ton, despite ITMG's flat production and sales volume
Avg selling price (US$/ton)
growth.
Flat production growth. In line with guidance and the group’s

focus on profitability rather than production, we assume flat
coal production and sales volume of 26m tons in FY17, before
growing by 8% y-o-y to 28m tons in FY18. As ITMG’s mines
have a remaining life of eight years, ITMG prefers to maintain a
flat production volume to ensure stable profitability. We assume
ITMG's strip ratio will increase to 10.0x in 2017 vs. 8.6x in 2016
given the brighter coal ASP outlook – hence, ITMG should be
able to mine coal in the more pricey concessions (in terms of
Cash cost (US$/ton)
operational cost).
ASP recovery underway. We expect persistent oversupply ahead,

and we forecast the benchmark coal price will remain at US$65
per ton beyond 2017. This will affect ITMG’s coal pricing ahead.
We assume ASP of US$62 per ton in 2017 and 2018. Our ASP
assumption implies a 5% discount to our forecast benchmark
price.
Higher cash cost on higher strip ratio. Cash cost will increase to
US$36.4 per ton in FY17 due to a better strip ratio outlook and Fuel cost (US$/liter)
higher fuel cost. We also assume fuel cost would increase to
US$0.7 per litre (+49% y-o-y) in FY17, on the back of a higher
crude oil price outlook vs. 2016. However, we see limited room
for mining contracting fees to be renegotiated lower given
ITMG’s flat volume growth.
Miners with higher strip ratios will benefit from lower fuel
prices. Miners, including ITMG, will be the largest beneficiary of
lower fuel cost given their high usage of machineries, in our
view. A low crude price environment has a positive impact on
ITMG’s profitability, as seen last year. EBITDA margin (%)

Page 21
Company Guide

Balance Sheet:
Net cash position. ITMG’s has a net cash balance sheet as a
strategy to cope with the challenging coal price environment. Its
net cash position also means that ITMG will be able to pursue
acquisition of reserves when opportunities present.

Stock valuation had de-rated on bleak industry outlook in the
past three years. ITMG’s share price has de-rated because of
concerns over its depleting reserves, which could be dispelled by
potential sizeable acquisitions moving ahead. Its limited reserves
Capital Expenditure
could also hurt earnings if it needs to cut output further, thus
restricting its ability to lower its strip ratio.
Key Risks:
Drop in coal prices. Coal miners are price-takers, with little
pricing power. Furthermore, the pricing outlook is more
challenging now, given the abundant supply and slower coal
demand growth due to environmental concerns.
Regulatory changes such as an export ban and increase in

royalty fees. The coal industry is strictly regulated. Potential ROE (%)
changes in policies such as an export ban, higher royalty fees,
and production limits could have an adverse impact on coal
miners’ earnings.
Operational risk. If ITMG fails to secure meaningful coal

reserves in the future, it may have to halt operations.
Moreover, its efficiency-focused strategy may not lead to
meaningful reductions in cash cost.
Profitability risk. We have assumed that ITMG would maintain

its cash margin by lowering its production. It is possible that Forward PE Band (x)
ITMG may need to further cut its coal production volume if the
remaining profitable concessions do not meet management
expectations.
Company Background
ITMG is one of the largest coal mining companies owned by
Banpu. The scope of the business includes coal mining
operation, processing and logistics. ITMG owns majority stakes
in seven subsidiaries and operates six mining concessions in
Kalimantan Island. PB Band (x)

Page 22
Company Guide
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Sales volume (m tons) 29.1 25.0 25.7 26.0 28.0
Avg selling price (US$/ton) 65.6 63.6 56.6 62.0 62.0
Cash cost (US$/ton) 43.6 38.2 35.6 36.4 36.2
Fuel cost (US$/liter) 1.00 0.70 0.50 0.70 0.70
EBITDA margin (%) 16.0 12.6 19.9 18.5 20.1
Income Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F
Revenue 1,943 1,589 1,368 1,578 1,707
Gross Profit 408 350 331 354 397
Other Opng (Exp)/Inc (172) (157) (122) (126) (120)
Operating Profit 236 194 209 228 278
Other Non Opg (Exp)/Inc 20.7 (57.4) (18.0) 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 262 139 192 232 282
Tax (61.8) (76.3) (61.3) (62.7) (76.2)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net Profit 200 63.1 131 170 206
Net Profit before Except. 200 63.1 131 170 206
EBITDA 310 200 272 292 343
Growth
Revenue Gth (%) (10.8) (18.2) (14.0) 15.4 8.2
EBITDA Gth (%) (0.9) (35.5) 35.7 7.5 17.5
Opg Profit Gth (%) (30.1) (18.0) 7.7 9.3 21.9
Margins & Ratio
Gross Margins (%) 21.0 22.0 24.2 22.4 23.3
ROAE (%) 22.3 7.3 15.0 18.2 20.8
ROA (%) 15.2 5.1 10.9 13.3 15.0
ROCE (%) 19.0 9.5 15.2 16.7 19.2
Div Payout Ratio (%) 39.1 63.1 65.7 90.8 85.0
Net Interest Cover (x) NM NM NM NM NM

Page 23
Company Guide
Quarterly / Interim Income Statement (US$m)

FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017
Revenue 331 278 349 409 368

Cost of Goods Sold (261) (232) (272) (272) (253)
Gross Profit 69.7 46.7 77.3 137 115
Other Oper. (Exp)/Inc (31.2) (26.7) (30.7) (33.5) (25.8)
Operating Profit 38.5 20.1 46.5 104 89.2
Other Non Opg (Exp)/Inc (5.2) (0.3) (1.3) (11.1) (1.5)
Pre-tax Profit 33.5 20.1 45.5 93.0 88.3
Tax (10.5) (6.6) (12.4) (31.8) (31.2)
Net Profit 23.0 13.5 33.1 61.1 57.2
Net profit bef Except. 23.0 13.5 33.1 61.1 57.2
EBITDA 39.0 32.0 59.0 104 89.2
Growth
Revenue Gth (%) (13.5) (15.9) 25.4 17.2 (10.1)
EBITDA Gth (%) (38.7) (17.9) 84.4 75.5 (13.9)
Opg Profit Gth (%) (18.5) (47.8) 132.0 122.5 (13.9)
Net Profit Gth (Pre-ex) (%) (216.1) (41.6) 146.1 84.6 (6.5)
Margins
Gross Margins (%) 21.0 16.8 22.1 33.5 31.2
Net Profit Margins (%) 7.0 4.8 9.5 14.9 15.5
Balance Sheet (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 286 255 224 192 167

Other LT Assets 452 412 447 469 493
Cash & ST Invts 226 269 327 444 512
Inventory 150 117 62.0 60.9 65.2
Debtors 170 119 125 143 155
Other Current Assets 23.2 8.40 23.7 24.9 26.1
Total Assets 1,307 1,179 1,209 1,334 1,418
ST Debt 0.0 0.0 0.0 0.0 0.0

Creditor 166 121 94.0 158 169
Other Current Liab 199 164 145 152 160
LT Debt 0.0 0.0 0.0 0.0 0.0
Other LT Liabilities 44.6 59.5 63.5 66.7 70.0
Shareholder’s Equity 899 835 906 957 1,019
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab. 1,307 1,179 1,209 1,334 1,418
Non-Cash Wkg. Capital (20.7) (39.8) (27.9) (80.9) (82.3)

Net Cash/(Debt) 226 269 327 444 512
Asset Turnover (x) 1.5 1.3 1.1 1.2 1.2
Current Ratio (x) 1.6 1.8 2.3 2.2 2.3
Quick Ratio (x) 1.1 1.4 1.9 1.9 2.0
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) N/A N/A N/A N/A N/A
Z-Score (X) 5.3 5.3 5.8 NA NA

Page 24
Company Guide
Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Profit 262 139 192 232 282

Dep. & Amort. 53.6 64.0 63.0 64.1 65.4
Tax Paid 0.0 0.0 0.0 0.0 0.0
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (25.5) 53.9 6.90 45.7 (6.2)
Other Operating CF (57.9) (66.2) (36.8) (71.9) (85.8)
Net Operating CF 232 191 225 270 256
Capital Exp.(net) (106) (32.9) (32.2) (32.2) (40.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (79.1) 30.5 (60.1) (13.1) (13.8)
Net Investing CF (185) (2.4) (92.3) (45.3) (53.8)
Div Paid (90.1) (126) (41.5) (119) (144)
Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (19.6) (19.9) (33.0) 10.4 10.9
Net Financing CF (110) (146) (74.5) (108) (133)
Chg in Cash (62.6) 42.5 58.4 117 68.5
Opg CFPS (Rp) 3,038 1,618 2,571 2,644 3,082
Free CFPS (Rp) 1,486 1,865 2,274 2,803 2,539
Source: DBSVI

Page 25
Tambang Batubara Bukit Asam
Version 5 | Bloomberg: PTBA IJ | Reuters: PTBA.JK Refer to important disclosures at the end of this report
DBS Group Research. Equity 27 Apr 2017
BUY Internal efficiencies boost TP

Last Traded Price ( 27 Apr 2017): Rp12,850 (JCI : 5,707.00)
Price Target 12-mth: Rp16,000 (25% upside) (Prev Rp13,600) Lower mining contracting fees to boost earnings. We believe
Potential Catalyst: Quarterly earnings performance the low mining contracting expense trend will sustain, thanks to
Where we differ: We believe PTBA’s low mining contracting fee will PTBA’s initiatives to be strict in negotiations with third-party
sustain, thus boosting its earnings performance mining contractors, coupled with its plan to expand its in-house
mining contractor’s operations. PTBA aims to achieve a 50:50
Analyst
ratio for its in-house and third-party mining contractors by
around 2025.
William Simadiputra +62 2130034939
william.simadiputra@id.dbsvickers.com Raise TP for new forecast. We raise our DCF-based target price
to Rp16,000 for higher earnings forecast – mainly due to lower
What’s New mining contractor expenses, which boost our earnings forecast
 Raise our earnings forecast for higher margins for FY17 by 18% to Rp3.2tr and FY18 by 10% to Rp3.6tr. PTBA
has successfully maintained a low cash cost structure as seen in
 Low mining contracting fees trend will sustain the last three quarters, mainly on the back of its better
 Expect higher production volume going forward economies of scale vs. smaller miners and stable mining
contracting fees. Our lower cash cost assumption lifts PTBA’s
 Higher TP of Rp16,000 and maintain BUY rating
overall operating profitability and we believe our forecast is still
conservative as it is still within the 5-year average profitability
level.
Price Relative
NPAT in 1Q17 beat our and consensus estimates. Top-line
performance was in line with expectations on higher ASP and
sales volume y-o-y. However, PTBA’s lower-than-expected
overall mining costs (mainly mining contracting fees) allowed it
to deliver a decent earnings performance in 1Q17.
Valuation:
Forecasts and Valuation We maintain our BUY rating with a higher target price of
FY Dec (Rp m) 2015A 2016A 2017F 2018F Rp16,000. Our DCF-based target price (WACC: 11.6%, LT
Revenue 13,734 14,059 16,875 18,742 growth: 0%) implies 11.4x FY17F PE.
EBITDA 2,699 2,948 4,298 4,694
Pre-tax Profit 2,664 2,734 4,315 4,791
Net Profit 2,036 2,006 3,235 3,592 Key Risks to Our View:
Net Pft (Pre Ex.) 2,036 2,006 3,235 3,592 Production volume expansion. If PTBA is able to boost its coal
Net Pft Gth (Pre-ex) (%) 1.0 (1.5) 61.2 11.0 production volume in line with management guidance, its top-
EPS (Rp) 884 871 1,404 1,559
line and earnings may beat our forecasts.
EPS Pre Ex. (Rp) 884 871 1,404 1,559
EPS Gth Pre Ex (%) 1 (1) 61 11
Diluted EPS (Rp) 884 871 1,404 1,559 Higher-than-expected cost. If PTBA fails to maintain its low
Net DPS (Rp) 398 361 632 701 cash cost trend, such as failing to clinch a favourable mining
BV Per Share (Rp) 3,982 4,523 5,295 6,152
PE (X) 14.5 14.8 9.2 8.2 contracting rate from third-party contractors, its earnings could
PE Pre Ex. (X) 14.5 14.8 9.2 8.2 miss our expectation.
P/Cash Flow (X) 10.9 20.3 7.3 8.3
EV/EBITDA (X) 10.1 9.7 6.4 5.7 At A Glance
Net Div Yield (%) 3.1 2.8 4.9 5.5 Issued Capital (m shrs) 2,304
P/Book Value (X) 3.2 2.8 2.4 2.1 Mkt. Cap (Rpbn/US$m) 29,608 / 2,226
Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders (%)
ROAE (%) 23.0 20.5 28.6 27.2 Republic of Indonesia (%) 65
Earnings Rev (%): 0 18 10 Free Float (%) 35
Consensus EPS (Rp): N/A 1,263 1,305 3m Avg. Daily Val (US$m) 2.9
Other Broker Recs: B: 22 S: 2 H: 2 ICB Industry : Basic Materials / Mining
L.P.

ed: CK / sa:MA, PY
Company Guide
WHAT’S NEW
Internal efficiencies boost TP
Lower mining contracting fees to boost earnings

Revenue reached Rp4.5tr (+28.3% y-o-y, +13.2% q-o-q), in line
We believe the low mining contracting expense trend will
with our and consensus forecasts. The strong revenue
sustain, thanks to PTBA’s initiatives to be strict in negotiations
momentum was driven by higher coal production and sales
with third-party mining contractors, coupled with its plan to
volume, coupled with the higher ASP on a y-o-y basis. A lower-
expand its in-house mining contractor’s operations. PTBA aims
than-expected overall cash cost per ton, with total cash cost
to achieve a 50:50 ratio for its in-house (PT Satria Bahana
reaching Rp557k per ton (flat y-o-y) in 1Q17 (which is driven by
Sejahtera (SBS) and third-party mining contractors by around
lower mining contracting fees and a low strip ratio of 4.0x)
2025.
enabled PTBA’s 1Q17 profit to come in ahead of our and
consensus forecasts.
Such efforts are positive for PTBA’s earnings performance this
year amid concerns of limited coal ASP upside this year given its
exposure to domestic coal markets. PTBA’s cost management
efforts also attest to management’s commitment to deliver
stronger profitability, which is a critical factor for coal miners’
stock price performance.
New forecast leads to higher target price of Rp16,000

We raise our DCF-based target price to Rp16,000 (FY17F P/E of
11.4x) for higher earnings forecast – mainly due to lower mining
contractor expenses, which boost our earnings forecast for FY17
by 18% to Rp3.2tr and FY18 by 10% to Rp3.6tr. Our new
earnings forecast is above consensus and we believe consensus
has yet to price in the low mining contracting fees going
forward.
We left our top-line related numbers such as coal ASP,

production and sales volume unchanged, as we believe our
forecast is still intact – as seen in its 1Q17 financial results.
Moreover, we believe PTBA’s ASP should remain solid (as seen in
3Q17) as PTBA will stick to its existing coal pricing scheme with
PLN for domestic coal sales (50% of revenue) for the rest of this
year.
Beyond benefiting from a higher ASP trend, PTBA has

successfully maintained a low cash cost structure as seen in the
last three quarters, mainly on the back of its better economies
of scale vs. smaller miners and its strong bargaining power to
clinch favourable mining contracting fees. Our lower cash cost
assumption lifts PTBA’s overall operating profitability and we
believe our forecast is still conservative as it is still within the 5-
year average profitability level.
Earnings double y-o-y in 1Q17, beating our and consensus

forecasts
NPAT came in at Rp871bn (+162% y-o-y, -12.2% q-o-q), ahead
of our and consensus forecasts on better-than-expected
profitability even though its top-line performance was in line
with our and consensus forecasts – thanks to higher ASP and
sales volume y-o-y. However, PTBA’s lower-than-expected
overall mining costs (mainly mining contracting fees) allowed it
to deliver a decent earnings performance (that trumped our and
consensus expectations) in 1Q17.

Page 27
Company Guide
PTBA share price vs. NPATM Profitability trend

20,000 35% 900
18,000 800
30%
16,000
700
14,000 25%
600
12,000
20%
500
10,000
8,000
15% 400
6,000 10% 300
4,000 200
5%
2,000 100
0 0%
-
Jul‐08
Jul‐09
Jul‐10
Jul‐11
Jul‐12
Jul‐13
Jul‐14
Jul‐15
Jul‐16
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
Jan‐17
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Share price (Rp) ‐LHS NPATM ‐ RHS ASP (Rp/ton) Cash cost ex. Royalty (Rp/ton)
Source: Companies, DBSVI Source: Companies, DBSVI
Revenue, Op. Profit and NPAT trend Strip ratio trend

5,000 1,400 6.0 5.6 5.6 5.5 5.4
4,500 5.2
1,200 5.0 4.6 4.5
4,000 4.4
4.2 4.1 4.0
3,500 1,000 4.0 4.0
4.0
3,000
800
2,500 3.0
600
2,000
2.0
1,500 400
1,000 1.0
200
500
0 0 0.0
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Dec‐11
Dec‐12
Dec‐13
Dec‐14
Dec‐15
Dec‐16
Sep‐11
Sep‐12
Sep‐13
Sep‐14
Sep‐15
Sep‐16
Jun‐11
Jun‐12
Jun‐13
Jun‐14
Jun‐15
Jun‐16
Mar‐11
Mar‐12
Mar‐13
Mar‐14
Mar‐15
Mar‐16
Mar‐17
Strip ratio (X)

Revenue Operating profit Net profit
Source: Companies, DBSVI
Profitability trend Quarterly production volume trend

60% 9.0
7.8
8.0
50%
7.0
5.8
40% 6.0 5.2 5.3
5.1
5.0 4.5 4.6
4.1
30% 3.8
4.0 3.4 3.5 3.3 3.2
20% 3.0
2.0
10%
1.0
0% -
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Dec‐11
Dec‐12
Dec‐13
Dec‐14
Dec‐15
Dec‐16
Sep‐11
Sep‐12
Sep‐13
Sep‐14
Sep‐15
Sep‐16
Mar‐11
Jun‐11
Mar‐12
Jun‐12
Mar‐13
Jun‐13
Mar‐14
Jun‐14
Mar‐15
Jun‐15
Mar‐16
Jun‐16
Mar‐17
Production volume (mn tons)

GP OP NP
Source: Companies, DBSVI *2011-2014 is average quarterly production volume

Page 28
Company Guide
Quarterly / Interim Income Statement (Rpbn)

FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq
Revenue 3,545 4,017 4,547 28.3 13.2

Cost of Goods Sold (2,731) (2,061) (2,855) 4.5 38.5
Gross Profit 814 1,956 1,692 107.9 (13.5)
Other Oper. (Exp)/Inc (162) (203) (257) 58.2 26.6
Operating Profit 461 1,197 1,223 165.2 2.2
Net Interest (Exp)/Inc (47.7) (36.7) (56.1) (17.6) (52.8)
Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm
Pre-tax Profit 480 1,289 1,218 153.7 (5.5)
Tax (147) (283) (335) 127.0 18.1
Minority Interest (0.3) (14.7) (13.0) (4,408.3) (11.9)
Net Profit 333 991 871 161.8 (12.2)
Net profit bef Except. 333 991 871 161.8 (12.2)
Margins (%)
Gross Margins 23.0 48.7 37.2
Opg Profit Margins 13.0 29.8 26.9
Net Profit Margins 9.4 24.7 19.2
Source of all data: Company, DBSVI
Earnings revision summary (PTBA)

2016A 2017F 2018F
Old New Changes Old New Changes Old New Changes
Revenue (Rpbn) 14,059 14,059 0% 16,875 16,875 0% 18,742 18,742 0%

Gross profit (Rpbn) 4,401 4,401 0% 4,834 5,498 14% 5,589 6,040 8%
EBITDA (Rpbn) 2,797 2,797 0% 3,634 4,298 18% 4,242 4,694 11%
Net profit (Rpbn) 2,006 2,006 0% 2,736 3,235 18% 3,253 3,592 10%
Production volume (m ton) 19.8 19.8 0% 22.2 22.2 0% 25 24.8 0%

ASP (Rp per ton) 707.2 707.2 0% 761.2 761.2 0% 755 754.8 0%
Cash cost per ton (Rpbn) 607 607 0% 540 510 -6% 545 525 -4%
Source : Company, DBSVI

Page 29
Company Guide
Sales Volume-mn tons

Earnings Drivers:
NPAT growth will turn positive on better ASP outlook. PTBA’s
earnings will grow at 54% CAGR over FY16-FY18, on earnings
recovery on the back of higher coal ASP outlook from both
domestic and export markets, while PTBA will maintain its strict
efficiency policies and production volume expansion of 12% y-
o-y in FY17 and FY18. A higher ASP will allow PTBA to
normalise its profitability in FY17 after hitting an all-time low in
FY16. Avg selling price(Ro000/ton)
Better export market coal pricing on better coal benchmark

price outlook. PTBA’s blended ASP will rise to Rp762k per ton in
FY17 on higher coal price benchmark prices. Amid the better
coal price benchmark environment, PTBA’s export prices can
outpace domestic prices, which tend to be fixed in the prior
year.
Production CAGR of 12% over FY16-18F on railway capacity

expansion. We assume that PTBA’s coal production and sales
volume will grow by 12% CAGR (FY16-18F) to 24.8m tonnes in Cash cost/ton (Rp000/ton)
FY18 on railway capacity expansion. Our projected production
and sales volume is lower than management’s guidance, as our
assumption for railway capacity expansion is less bullish, at an
11% CAGR (FY16-18F) to 30m tonnes. PTBA’s sales volume
growth is backed by long-term committed volumes of 574m
tons with major buyers, mainly PLN (45% of long-term sales).
Stable cash cost outlook given PTBA’s strict cost control and
large operational scale. PTBA’s total cash cost (including royalty
fees) is estimated to decrease by 8% y-o-y, thanks to lower
mining contracting fees and stable overall other operating cash Capex (Rpbn)
cost given that the strip ratio will remain stable at 4.5x.
Railway capacity (mn ton)

Page 30
Company Guide

Balance Sheet:
Low gearing balance sheet. PTBA has low gearing balance
sheet on the back of the low capex spending outlook going
ahead. This will give its financial flexibility such as the ability to
accelerate power plant projects or pay special dividends amid
the low coal price environment. Most of PTBA additional loans
are allocated to its subsidiaries such as for its mining contracting
subsidiary’s equipment and fleet expansion.

Share price move in tandem with coal prices. PTBA's share price
Capital Expenditure
is correlated to its profitability outlook, which is determined by
two critical factors – coal ASP and its cash cost outlook. A
higher coal price trend is historically followed by higher share
price for coal miners on the back of better earnings growth and
an improved profitability outlook.
Key Risks:
Slower-than-expected production expansion. A slower-than-
expected railway capacity expansion can lead to disappointing
production and sales volume. PTBA relies a lot on the
execution and scale of PT KAI’s railway capacity expansion ROE (%)
plan. The slower railway capacity expansion will translate into
lower sales volume and revenue growth trend vs. our forecast.
Higher-than-expected cash cost. PTBA’s margin will face

contraction if it fails to maintain its low cash cost trend, such
as failing to renegotiate favourable railway transportation and
mining contracting fees with third-party mining contractors, or
if PTBA’s new equipment fleet fails to achieve meaningful
operating efficiencies. A higher-than-expected cash cost means
that PTBA’s margin and earnings growth could be lower than
our forecast. Forward PE Band (x)
Company Background
PTBA is one of Indonesia's largest coal miners with 1.99bn
tons of coal reserves. Its main coal mining concession is located
in Tanjung Enim, South Sumatra. It is a state-owned company
with the government being its major shareholder.
PB Band (x)

Page 31
Company Guide
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Sales Volume-mn tons 16.4 19.3 19.8 22.2 24.8
Avg selling 724 769 707 761 767
Cash cost/ton (Rp000/ton) 631 632 607 510 525
Total Capex (Rpbn) 328 1,742 931 1,484 1,120
Railway capacity (mn ton) 14.8 22.0 24.0 27.0 30.0
Income Statement (Rpbn)

FY Dec 2014A 2015A 2016A 2017F 2018F
Revenue 13,078 13,734 14,059 16,875 18,742
Gross Profit 4,022 4,140 4,402 5,498 6,041
Other Opng (Exp)/Inc (1,712) (1,725) (1,871) (1,519) (1,687)
Operating Profit 2,310 2,414 2,531 3,980 4,354
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 146 134 150 169 188
Net Interest (Exp)/Inc 219 116 52.9 166 250
Pre-tax Profit 2,675 2,664 2,734 4,315 4,791
Tax (656) (627) (709) (1,079) (1,198)
Minority Interest (3.0) (1.2) (18.2) (1.5) (1.6)
Net Profit 2,016 2,036 2,006 3,235 3,592
Net Profit before Except. 2,016 2,036 2,006 3,235 3,592
EBITDA 2,584 2,699 2,948 4,298 4,694
Growth
Revenue Gth (%) 16.7 5.0 2.4 20.0 11.1
EBITDA Gth (%) 11.3 4.4 9.2 45.8 9.2
Opg Profit Gth (%) 7.3 4.5 4.8 57.2 9.4
Net Profit Gth (Pre-ex) (%) 10.4 1.0 (1.5) 61.2 11.0
Margins & Ratio
Gross Margins (%) 30.8 30.1 31.3 32.6 32.2
ROAE (%) 25.2 23.0 20.5 28.6 27.2
ROA (%) 15.2 12.8 11.3 16.2 15.9
ROCE (%) 16.5 15.6 14.4 19.5 18.3
Div Payout Ratio (%) 45.0 45.0 41.5 45.0 45.0
Net Interest Cover (x) NM NM NM NM NM

Page 32
Company Guide
Quarterly / Interim Income Statement (Rpbn)

FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017
Revenue 3,545 3,214 3,283 4,017 4,547

Gross Profit 814 836 795 1,956 1,692
Other Oper. (Exp)/Inc (162) (187) (145) (203) (257)
Operating Profit 461 457 417 1,197 1,223
Net Interest (Exp)/Inc (47.7) (30.9) (33.5) (36.7) (56.1)
Pre-tax Profit 480 512 452 1,289 1,218
Tax (147) (131) (111) (283) (335)
Minority Interest (0.3) (2.4) (0.8) (14.7) (13.0)
Net Profit 333 379 340 991 871
Net profit bef Except. 333 379 340 991 871
EBITDA 0.0 0.0 0.0 0.0 0.0
Growth
Revenue Gth (%) 9.7 (9.3) 2.2 22.3 13.2
EBITDA Gth (%) nm nm nm nm nm
Opg Profit Gth (%) (25.2) (1.0) (8.7) 187.1 2.2
Net Profit Gth (Pre-ex) (%) (37.3) 14.0 (10.3) 191.6 (12.2)
Margins
Gross Margins (%) 23.0 26.0 24.2 48.7 37.2
Net Profit Margins (%) 9.4 11.8 10.4 24.7 19.2
Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 3,988 5,579 6,088 6,097 6,085

Other LT Assets 3,408 3,717 4,139 5,189 6,066
Cash & ST Invts 4,039 3,115 3,675 5,551 6,940
Inventory 1,033 1,233 1,102 1,298 1,449
Debtors 1,439 1,596 2,285 1,857 2,063
Other Current Assets 905 1,654 1,288 1,288 1,288
Total Assets 14,812 16,894 18,577 21,280 23,890
ST Debt 467 0.0 490 0.0 0.0

Creditor 546 1,146 539 685 765
Other Current Liab 2,561 3,777 4,013 4,013 4,013
LT Debt 962 623 2,141 3,409 3,964
Other LT Liabilities 1,605 2,061 841 841 841
Shareholder’s Equity 8,554 9,175 10,421 12,200 14,176
Minority Interests 117 113 131 131 131
Total Cap. & Liab. 14,812 16,894 18,577 21,280 23,890
Non-Cash Wkg. Capital 271 (440) 122 (255) 21.5

Net Cash/(Debt) 2,610 2,492 1,044 2,141 2,976
Asset Turnover (x) 1.0 0.9 0.8 0.8 0.8
Current Ratio (x) 2.1 1.5 1.7 2.1 2.5
Quick Ratio (x) 1.5 1.0 1.2 1.6 1.9
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 22.9 279.5 29.5 9.6 8.3
Z-Score (X) 5.2 4.5 3.9 4.0 4.0

Page 33
Company Guide
Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Profit 2,675 2,664 2,734 4,315 4,791

Dep. & Amort. 129 150 267 318 340
Tax Paid (656) (627) (709) (1,079) (1,198)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (69.6) 245 (1,165) 378 (277)
Other Operating CF (31.8) 285 336 105 (85.9)
Net Operating CF 2,046 2,717 1,462 4,037 3,571
Capital Exp.(net) (328) (1,742) (776) (328) (328)
Other Invts.(net) (1,307) (134) (155) (1,156) (792)
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (255) 90.0 (1,147) 0.0 0.0
Net Investing CF (1,889) (1,786) (2,078) (1,484) (1,120)
Div Paid (907) (1,050) (832) (1,456) (1,616)
Chg in Gross Debt 1,429 (806) 2,008 779 555
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF 17.0 0.0 0.0 0.0 0.0
Net Financing CF 539 (1,855) 1,175 (677) (1,062)
Chg in Cash 696 (924) 559 1,876 1,389
Opg CFPS (Rp) 918 1,073 1,140 1,588 1,670
Free CFPS (Rp) 746 423 298 1,610 1,408
Source: DBSVI

Page 34
Industry Focus
DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
* Share price appreciation + dividends
Completed Date: 30 May 2017 13:20:59 (WIB)

Dissemination Date: 30 May 2017 14:18:10 (WIB)
Sources for all charts and tables are DBSVI unless otherwise specified.
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Page 35
Industry Focus
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Page 13
Industry Focus
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Industry Focus
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DBS Group Research. Equity 30 May 2017

 China’s proactive supply control caps downside

 BUY calls for ITMG and ADRO

Reiterate our coal price benchmark to US$65 per ton. We STOCKS

ASIAN INSIGHTS VICKERS SECURITIES

Qinghuangdao port’s coal price historical trend

Supplies outside China seem to have reacted slowly to the

ASIAN INSIGHTS VICKERS SECURITIES

ramp-up and rebalancing of coal prices. Moreover, aggressive 10 10

Moreover, the 1Q17 rainy season hampered production in both 0 0

Source: Companies, DBSVI 80,000 4%

*2011-2014 figures are average quarterly coal output 60,000 3%

However, we believe the tighter-than-expected supply goes 40,000 2%

beyond seasonal factors. Listed coal miners tend to maintain 20,000 1%

their conservative stances on coal production volume. Most of 0 0%

them have agreed to a higher strip ratio, possibly due to the

ASIAN INSIGHTS VICKERS SECURITIES

and limited operational flexibility as a result of their aggressive

the world, once the 35,000MW power plant project comes

ASIAN INSIGHTS VICKERS SECURITIES

Pre construction Construction On Hold Operating

Source: Greenpeace ‘Boom & Bust 2017’, DBSVI

Still in demand: Coal is a reliable and affordable energy

US have shifted away from coal due to environmental concerns. 1400

Going forward, we expect this trend to continue with the 1200

introduction of more efficient coal-fired power plants and 1000

decade, given the ongoing power plant capacity under 0

ASIAN INSIGHTS VICKERS SECURITIES

Source: PLN, DBSVI

Indonesia: Rapid growth for power usage, but undersupply still

now revolve around the meeting of electrification and capacity Pakistan

Source: PLN, DBSVI

ASIAN INSIGHTS VICKERS SECURITIES

Source: ADB , DBSVI

ASIAN INSIGHTS VICKERS SECURITIES

means that ITMG’s remaining coal resources can be feasibly

Overall, our coal miners’ TPs implies an average FY17 PE of

ASIAN INSIGHTS VICKERS SECURITIES

Coal miners' share price performance YTD

ITMG’s five-year forward PE band 1.2

Source: Bloomberg Finance L.P , DBSVI

We believe 2017 financial performance will be a short-term

ASIAN INSIGHTS VICKERS SECURITIES

have established very efficient mining plans in the past five

a whole range of factors, including the combination of ASP 6,000 10%

Coal supply-demand dynamics will undergo structural changes,

Source: Bloomberg Finance L.P , company, DBSVI

ASIAN INSIGHTS VICKERS SECURITIES

ASIAN INSIGHTS VICKERS SECURITIES

DBS Group Research . Equity 30 May 2017

BUY Maintain BUY on stronger

Stronger performance outlook for the remaining quarters. We

ASIAN INSIGHTS VICKERS SECURITIES

Maintain BUY on stronger performance ahead

production volume in 1Q17. Revenue reached US$727m (+24%

ASIAN INSIGHTS VICKERS SECURITIES

Sales volume (m tons)

Lower cash cost on better operational efficiency. We have

Ongoing refinancing efforts to reduce cost of debt. ADRO will

Interest expenses (US$mn)

Source: Company, DBSVI