BNIS Short

BNIS Short Notes

Notes
Coal Sector

Analyst:
EQUITY RESEARCH
Firman Hidayat
[email protected] November 25, 2019

KTAs from Katadata’s Coal Discussion Forum

NEUTRAL
What’s New?
Coal price vs. China’s six major power plant stockpile
 We recently attended Katadata’s discussion forum on Indonesia’s coal industry
with the theme of “Investment Climate and Competitiveness of the Indonesian
Coal industry”. The forum’s speakers were representatives from the coal
association and the Ministry of Energy and Mineral Resources (MEMR). The
key speakers were Director General of Mineral and Coal, Bambang Gatot
Ariyono, and APBI’s Executive Director, Hendra Sinadia.
Key Highlights

 No necessity to rush into renewable energy as well as developed countries that

haven't coal mines as a mighty resources as country income
 Improving legal certainty is the key to attracting investments into Indonesia's
coal sector Source: Bloomberg, BNIS Research
Urgency of a long-term energy roadmap and improving legal certainty
Mr. Hendra Sinadia opined that the Indonesian coal industry has a score below the
peers’ average in Asia on the back of: 1) Regulation uncertainty; 2) Issue of contract USD/IDR exchange rate movement
extension; 3) Lack of deregulation for foreign investment; 4) The royalty rate is
relatively high than the regional peers’. Investment in the coal sector is a long-term in
nature, capital-intensive and high risk. Hence, policy risks that would potentially have
an effect of increasing costs would concern potential investors as it would have an
impact on capital return amid coal price fluctuations. Moreover, many commodities
analysts predicted that in the long run renewables energy would replace coal energy.
Based on these predictions, government required a road map of long-term energy mix
and full commitment for implementation. In turn, industrial energy needs would be
more measurable and energy security could be achieved with the clear roadmap on
the mix of fossil and renewable energy.
Striving to accommodate all stakeholders
In his presentation, Mr. Bambang Gatot Ariyono explained the factual dilemma in the Source: Bloomberg, BNIS Research
field wherein all regulations issued by the MEMR have been based on many inputs
from coal associations and companies. Still, it would be impossible to issue a
regulation that pleases all stakeholders. Take an example about DMO regulation,
many factors make it difficult to make it fair for all coal companies, such as coal calorie
specification or State Electricity Company’s (PLN) zone system. Nevertheless, the
government strives to create policies that are close to fair for all. He underlined that
before there was a change in policy, the DMO cap remains at a price of USD 70/ton
and a volume of 25% of total production. This is an aim to secure coal supply for PLN.
In the medium term, the DMO wouldn’t be eliminated as Indonesia is not ready yet to
endure the consequences of having to provide higher electricity subsidies.
The government has provided a lot of regulatory relaxing
Furthermore, Mr. Bambang stressed that the MEMR had given leniency of policy for
coal players, such as for coal companies whose DMO obligation is still 0%, MEMR still
gives permission to export even though the penalty would cut their coal production
permits to be a maximum of 4x of the DMO capacity for the following year. MEMR has
relaxed the penalty based on economical factors, the benefit of royalties, and labor
issues. Hence, for 2020F is likely that a new formula of the penalty for violating the
DMO would be devised, such as the carrying out of a penalty payment of which the
proposal came from the coal association.
Conclusions: The mainly upside from new investment related
There are two main conclusions we obtained from this discussion. First, there is a
huge potential in the sector’s downstream project, which must be the government's
top priority. Nonetheless, downstream coal projects in Indonesia have a problem in
capex which was always more expensive than in other countries as Indonesia needs to
import the technology. We suggest to the MEMR to implement free royalty and tax
holiday for downstream coal projects. Next, encourage coal players to develop new
portfolio in the renewables energy sector. Second, we think to put forward reduction
in royalties to be at par with other countries’ would indeed bring in more investment
flow, but this would substantially reduce government revenue from royalties, which
Indonesia still relies heavily on as a source of development funding.
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APPENDIX
Exhibit 1. Katadata’s coal discussion forum in Dharmawangsa Hotel Exhibit 2. APBI’s executive director, Hendra Sinadia, MBA

Source: BNIS Research Source: BNIS Research

Exhibit 3. On YTD basis, estimated lower coal production to end year Exhibit 4. On YTD basis, realization of DMO still low

Source: MEMR, BNIS Research Source: MEMR, BNIS Research

Exhibit 5. Comparison matrix of select listed coal companies in Indonesia Stock Exchange (IDX)

Market cap ROE (%) P/E (x) P/B (x)

Company Ticker
(IDR bn) 2019F 2020F 2019F 2020F 2019F 2020F
Adaro Energy Tbk ADRO IJ 42,705 10.4 9.1 7.4 7.1 0.8 0.7
Bukit Asam Tbk PTBA IJ 28,235 25.0 21.4 6.2 6.9 1.4 1.3
Indo Tambangraya Megah Tbk ITMG IJ 13,563 15.0 15.6 7.0 7.1 1.0 1.1
Kapuas Prima Coal Tbk ZINC IJ 9,398 26.6 32.7 14.6 23.2 15.9 19.4
Indika Energy Tbk INDY IJ 6,517 2.9 4.6 6.8 5.6 0.5 0.6
Bumi Resources Tbk BUMI IJ 4,986 19.1 17.4 2.9 2.6 5.9 1.2
Harum Energy Tbk HRUM IJ 3,668 3.9 3.6 23.1 20.8 0.8 0.7
Toba Bara Sejahtera Tbk TOBA IJ 2,906 12.8 13.1 9.6 10.2 1.2 1.3

Sources: Bloomberg, BNIS Research

Analyst:
Firman Hidayat
[email protected]

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APPENDIX
Exhibit 6. Energy mix target in 2050, coal still 25% Exhibit 7. Coal and mineral investment breakdown

Source: MEMR, BNIS Research Source: MEMR, BNIS Research

Exhibit 8. Mineral and coal investment movement Exhibit 9. Government’s revenue non tax from mineral and coal

Source: MEMR, BNIS Research Source: MEMR, BNIS Research

Exhibit 10. Domestic coal requirement plan 2020F-2024F Exhibit 11. Indonesia coal production plan 2020F-2024F

Source: MEMR, BNIS Research Source: MEMR, BNIS Research

Analyst:
Firman Hidayat
[email protected]

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APPENDIX
Exhibit 12. Coal resources and reserves based on quality Exhibit 13. Domestic coal requirement based on quality

Source: MEMR, BNIS Research Source: MEMR, BNIS Research

Exhibit 14. Potentially Indonesian coal by region

Source: MEMR, BNIS Research

Analyst:
Firman Hidayat
[email protected]

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