BH - Gajah Tunggal-Credit Suisse

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10 June 2013

Asia Pacific/Indonesia

Equity Research

Tires & Rubber

Gajah Tunggal

(GJTL.JK / GJTL IJ) INITIATION

Full of grip ■ Initiate coverage with an OUTPERFORM rating. Gajah Tunggal (GT) is the

largest integrated SEA tyre manufacturer with own production of synthetic rubber and tyre cords. We believe the Indonesian tyre industry would benefit from the growing auto industry, where we started to see an inflection point in 4W population, growing at 11% CAGR over FY13-15E. GT’s valuation is undemanding, trading at 8.0x FY13E P/E, a 13% discount to regional tyre peers and 33% discount to Indonesia auto. The stock is also a play on domestic consumption, benefitting from rising middle-high income population, where it is trading at a steep discount of around 76% to Indonesian consumer stocks.

■ Improvement in the replacement market by better penetrating into OEM business. The domestic replacement tyre market is contributing more than 50% of GT’s total tyre revenue. For radial tyres, GT has 24% market share in the replacement market. We expect its market share to improve to 27% by FY15 through better penetration into OEM tyre by: (1) being the biggest tyre supplier for Suzuki Ertiga (the new breakthrough low-end MPV after Toyota Avanza and Daihatsu Xenia), (2) supplying the potential low cost green car (LCGC) market. We expect domestic radial tyre revenue to grow at 28% CAGR.

■ Continues to dominate 2W and bias (heavy duty) tyres. More than 70%

each of 2W and bias tyre revenue is generated from replacements, a high-margin business. GT has been the biggest tyre supplier for Yamaha and Suzuki motorcycles. We expect the combined revenue to witness a 14% CAGR over FY13-15, with 2W tyres as the main growth driver.

■ Target price at Rp4,300. We use DCF and P/E to value the company. Our DCF indicates a target price of Rp4,900, implying 12.1x FY13E P/E. Given regional peers are trading at an implied P/E range of 7–15x, we use 10.5x FY13E P/E to arrive at our target price of Rp4,300. GT’s 15% earnings growth for FY13–15E is among the highest versus its peers, with margin gradually improving along with relatively stable raw material costs. Key risks: commodity price and competitions from both existing and new players.

Share price performance

40

60

80

100

120

2000

2500

3000

3500

4000

Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the JSX

COMPOSITE INDEX which closed at 4865.32 on 07/06/13

On 07/06/13 the spot exchange rate was Rp9790./US$1

Performance Over 1M 3M 12M Absolute (%) 3.3 44.2 31.9 Relative (%) 7.7 44.4 5.2

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E Revenue (Rp bn) 12,578.6 13,628.1 15,100.5 16,584.5 EBITDA (Rp bn) 2,116.8 2,296.7 2,709.3 3,051.2 EBIT (Rp bn) 1,677.2 1,837.6 2,200.6 2,492.5 Net profit (Rp bn) 1,132.2 1,410.6 1,612.7 1,876.3 EPS (CS adj.) (Rp) 325.00 404.91 462.90 538.58 Change from previous EPS (%) n.a. Consensus EPS (Rp) n.a. 335 374 404 EPS growth (%) 65.8 24.6 14.3 16.3 P/E (x) 9.5 7.7 6.7 5.8 Dividend yield (%) 0.32 0.53 0.66 0.76 EV/EBITDA (x) 6.6 6.2 5.1 4.5 P/B (x) 1.9 1.6 1.3 1.1 ROE (%) 22.6 22.6 21.0 20.1 Net debt/equity (%) 56.0 52.1 38.2 28.6

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (07 Jun 13, Rp) 3,100.00 Target price (Rp) 4,300.00¹ Upside/downside (%) 38.7 Mkt cap (Rp bn) 10,802.9 (US$ 1.1) Enterprise value (Rp bn) 14,152 Number of shares (mn) 3,484.80 Free float (%) 40.0 52-week price range 3,325.0 - 2,025.0 ADTO - 6M (US$ mn) 2.0

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Dian Haryokusumo

62 21 255 37974

[email protected]

10 June 2013

Gajah Tunggal

(GJTL.JK / GJTL IJ) 2

Focus charts Figure 1: Improving auto population… Figure 2: …to benefit Indonesia’s domestic tyre industry

4W tyre (mn units)

-

20

40

60

80

100

120

-

2

4

6

8

10

12

14

16

18

2005 2007 2009 2011 2013E 2015E

4W population (mn units, LHR) 2W population (mn units)

11% CAGR 13E-15E

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Replacement OEM

Replacement: 12% CAGR 13-15EOEM: 10% CAGR 13-15E

Source: Indonesia Tyre Association, Credit Suisse estimates Source: Indonesia Tyre association, Credit Suisse estimates

Figure 3: GT has 24% market share in replacement

market, despite having relatively small OEM business

Figure 4: Tyre revenue to grow at 11% YoY over FY13–15E

on higher replacement tyre contribution

Bridgestone33%

Dunlop28%

Gajah Tunggal24%

EP10%

Others5%

5,713

6,979 7,244

8,996

10,721

11,702

12,808 14,314

15,867

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Rp

bn

Replacement OEM Export Source: Company data FY12 Source: Company data, Credit Suisse estimates

Figure 5: Margins to gradually improve on relatively

stable raw material costs

Figure 6: Undemanding valuation

665 581

1,145 1,287

1,010

1,677 1,838

2,201

2,493

10.0%

7.3%

14.4%

13.1%

8.5%

13.3% 13.5%

14.6%15.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Operating profit (Rp bn, LHS) Operating margin

DCF valuation

Assumptions: β: 1.2 CoE 14%

WACC 11.4%

NPV (Rp bn) 20,453

TV multiple 19

TPX (Rp/share) 4,900

Implied FY13E P/E (x) 12.1

Comparisons Current FY13E P/E

Regional tire peers* 9.2

Indo auto* 12.0

Indo consumer* 33.1

Gajah Tunggal

TPX (Rp/share) 4,300

Implied FY13E P/E (x) 10.5

Current FY13E P/E (x) 8.0

Source: Company data, Credit Suisse estimates *CS coverage. Source: Credit Suisse estimates

10 June 2013

Gajah Tunggal


Full of grip Gajah Tunggal (GT) is the largest integrated SEA tyre manufacture with own production of

synthetic rubber and tyre cords. The tyre business includes radial, bias (heavy duty), and

motorcycle tyres with replacement market being the main contributor to total tyre revenue.

We initiate coverage on GT with an OUTPERFORM rating and a target price of Rp4,300.

Benefits from the growing auto sector

We estimate Indonesia’s automotive population will grow at 11% YoY over FY13-15,

benefitting from the rising middle-high income segment in Indonesia over the past years,

resulting in improving affordability. We also expect the LCGC to create a new segment

within the industry, suggesting potential room for growth. This should benefit the domestic

4W tyre industry, which we expect to grow at 11% YoY over FY13-15, with higher OEM

tyre contribution resulting in a growing replacement market. Despite a bigger export radial

tyre market, we estimate the growth will be flat due to increasing competition. Indonesia

has a huge 2W replacement tyre market, witnessing a 14% CAGR during FY05-12A,

supported by high 2W penetration. We expect it to see a 11% CAGR over FY13-15.

The largest integrated SEA tyre manufacturer

As the largest integrated tyre manufacturer in South East Asia, GT both manufactures

tyres and produces its own synthetic rubber and tyre cords. The company’s revenue is

primarily coming from the sales of radial, bias and motorcycle tyres with contribution of

35%, 36%, and 24% to total sales, respectively. The domestic market plays an important

role in GT’s tyre business, where revenue from the replacement market contributes more

than 50% of total tyre revenue, followed by export (33%), and OEM (14%). For radial tyres,

GT has 24% market share in replacement market, despite having a relatively small OEM

business. But, we expect its market share to increase to 27% by FY15 through better

penetration into OEM tyre by: (1) being the biggest tyre supplier for Suzuki Ertiga (the new

breakthrough low-end MPV after Toyota Avanza and Daihatsu Xenia), (2) supplying the

potential LCGC market. We expect the domestic radial tyre revenue to grow at 28% CAGR

during FY13–15.

We believe GT should continue dominating the 2W and bias tyre markets. More than 70%

each of 2W and bias tyre revenue is from the replacement market; the high-margin business.

We expect the steady cash flow from these businesses to continue. GT has been the biggest

tyre supplier for Yamaha and Suzuki 2W. We expect the combined revenue to grow at 14%

over FY13–15E, with 2W tyre continuing to be the main growth driver. In all, we expect total

domestic revenue for GT to grow at 14% CAGR, driven by growth in its tyre business, which

is expected to grow at 11% CAGR on the back of 8% CAGR volume growth.

Initiating with OUTPERFORM and a TP of Rp4,300

We have used DCF and P/E to value the company. Our DCF indicates a target price of

Rp4,900, implying 12.1x FY13E P/E. Given regional peers are trading at an implied P/E

range of 7–15x, we use 10.5x FY13E P/E to arrive at our target price of Rp4,300. GT’s

current valuation is undemanding, trading at 8.0x FY13E P/E, a 13% discount to regional

tyre peers and 33% discount to Indonesia auto. The stock is also a play on domestic

consumption, benefitting from rising middle-high income population, where it is trading at a

steep discount of around 76% to Indonesian consumer stocks. GT’s 15% earnings growth

for FY13–15E is amongst the highest versus its peers, with margin gradually improving

along with relatively stable raw material costs.

Risks

Key risks include: (1) commodity price risk, (2) competition from both the existing and new

players, (3) regulatory risk, and (4) macroeconomic risk.

10 June 2013

Gajah Tunggal


Gajah Tunggal GJTL.JK / GJTL IJ Price (07 Jun 13): Rp3,100.00, Rating:: OUTPERFORM, Target Price: Rp4,300.00, Analyst: Dian Haryokusumo

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside 4,800.0

0 54.84 radial tyre vol to go up by 10%

Central Case 4,300.0

0 38.71

Downside 4,000.0

0 29.03 Radial tyre vol to go down by 10%

Key earnings drivers 12/12A 12/13E 12/14E 12/15E

Tyre volume (mn units) 36.6 39.3 42.8 46.3 Rubber price (US cents/kg)

312.6 310.4 304.9 304.9 Oil price (US/bbl) 112.8 112.0 110.0 100.0 — — — — — — — —

Income statement (Rp bn) 12/12A 12/13E 12/14E 12/15E

Sales revenue 12,579 13,628 15,100 16,585 Cost of goods sold 10,142 10,891 11,975 13,076 SG&A 760 900 925 1,016 Other operating exp./(inc.) (439.7) (459.1) (508.7) (558.7) EBITDA 2,117 2,297 2,709 3,051 Depreciation & amortisation 439.7 459.1 508.7 558.7 EBIT 1,677 1,838 2,201 2,493 Net interest expense/(inc.) 331.8 373.0 364.7 344.7 Non-operating inc./(exp.) 87.9 272.6 151.0 165.8 Associates/JV 24.1 26.1 28.9 31.8 Recurring PBT 1,457 1,763 2,016 2,345

Exceptionals/extraordinaries — — — — Taxes 325.2 352.7 403.2 469.1 Profit after tax 1,132 1,411 1,613 1,876 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit 1,132 1,411 1,613 1,876 Analyst adjustments — — — — Net profit (Credit Suisse) 1,132 1,411 1,613 1,876

Cash flow (Rp bn) 12/12A 12/13E 12/14E 12/15E

EBIT 1,677 1,838 2,201 2,493 Net interest — — — — Tax paid — — — — Working capital (82.0) 20.1 (224.9) (576.8) Other cash & non-cash items 111.9 127.2 (79.3) (57.5) Operating cash flow 1,707 1,985 1,896 1,858 Capex (1,973) (1,720) (1,552) (1,552) Free cash flow to the firm (265.8) 265.0 343.9 305.7 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments (80.3) (26.1) (28.9) (31.8) Other investment/(outflows) 704.2 (9.4) (13.1) (13.2) Investing cash flow (1,349) (1,755) (1,595) (1,598) Equity raised — — — — Dividends paid (34.8) (57.5) (71.6) (81.9) Net borrowings — — — — Other financing cash flow (12.8) (195.4) 89.6 72.5 Financing cash flow (47.6) (252.9) 18.0 (9.4) Total cash flow 310.4 (23.4) 319.8 251.3 Adjustments 7.4 — — — Net change in cash 317.8 (23.4) 319.8 251.3

Balance sheet (Rp bn) 12/12A 12/13E 12/14E 12/15E

Cash & cash equivalents 905 881 1,201 1,452 Current receivables 2,227 2,155 2,388 2,623 Inventories 1,479 1,492 1,640 1,791 Other current assets 584.1 529.9 587.1 995.1 Current assets 5,194 5,058 5,816 6,861 Property, plant & equip. 6,122 7,383 8,426 9,420 Investments 793.2 819.3 848.3 880.0 Intangibles — — — — Other non-current assets 761 824 913 1,003 Total assets 12,870 14,084 16,004 18,164 Accounts payable 1,210 1,332 1,466 1,602 Short-term debt 202.2 215.4 216.5 216.5 Current provisions — — — — Other current liabilities 1,608 1,542 1,698 1,855 Current liabilities 3,020 3,090 3,380 3,674 Long-term debt 3,769 4,015 4,035 4,035 Non-current provisions — — — — Other non-current liab. 602.8 545.1 604.0 663.4 Total liabilities 7,391 7,650 8,019 8,372 Shareholders' equity 5,564 6,917 8,458 10,253 Minority interests — — — — Total liabilities & equity 12,870 14,084 16,004 18,164

Per share data 12/12A 12/13E 12/14E 12/15E

Shares (wtd avg.) (mn) 3,484 3,484 3,484 3,484 EPS (Credit Suisse) (Rp) 325 405 463 539 DPS (Rp) 10.0 16.5 20.6 23.5 BVPS (Rp) 1,597 1,986 2,428 2,943 Operating CFPS (Rp) 490 570 544 533

Key ratios and valuation

12/12A 12/13E 12/14E 12/15E

Growth(%) Sales revenue 6.2 8.3 10.8 9.8 EBIT 66.1 9.6 19.8 13.3 Net profit 65.4 24.6 14.3 16.3 EPS 65.8 24.6 14.3 16.3 Margins (%) EBITDA 16.8 16.9 17.9 18.4 EBIT 13.3 13.5 14.6 15.0 Pre-tax profit 11.6 12.9 13.3 14.1 Net profit 9.0 10.4 10.7 11.3 Valuation metrics (x) P/E 9.5 7.7 6.7 5.8 P/B 1.94 1.56 1.28 1.05 Dividend yield (%) 0.32 0.53 0.66 0.76 P/CF 6.33 5.44 5.69 5.81 EV/sales 1.10 1.04 0.92 0.82 EV/EBITDA 6.55 6.16 5.11 4.46 EV/EBIT 8.27 7.70 6.30 5.46 ROE analysis (%) ROE 22.6 22.6 21.0 20.1 ROIC 16.0 16.0 16.9 16.9 Asset turnover (x) 0.98 0.97 0.94 0.91 Interest burden (x) 0.87 0.96 0.92 0.94 Tax burden (x) 0.78 0.80 0.80 0.80 Financial leverage (x) 2.35 2.19 2.00 1.85 Credit ratios Net debt/equity (%) 56.0 52.1 38.2 28.6 Net debt/EBITDA (x) 1.45 1.46 1.13 0.92 Interest cover (x) 5.06 4.93 6.03 7.23

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2008 2009 2010 2011 2012 2013

12MF P/B multiple

Source: IBES

10 June 2013

Gajah Tunggal


Benefits from a growing auto sector Indonesia’s automotive industry has benefitted from the growing middle-high income

population over the past years. Based on Nielsen’s survey, in Indonesia’s 12 cities, the

proportion of middle and high income group’s spending population increased from 42% in

2008 to 62% in 2010, implying around 48 mn people moved into the middle-high income

segment during the period. We expect the middle-income group’s spending to continue to

grow along with an estimated rise in Indonesia’s GDP per capita from about US$2,985 in

2010 to US$4,139 in 2014E. Therefore, we expect affordability to improve.

Figure 7: Middle-income group’s spending is rising… Figure 8: … along with rising GDP per capita

10% 7% 4%

21%17%

12%

27%

25%

22%

20%24%

27%

14% 18%24%

8% 9% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010

Below Rp 700K Rp 700K - Rp1mn Rp 1 mn - Rp1.5 mn

Rp 1.5 mn - Rp 2 mn Rp 2 mn - Rp 3 mn Over Rp 3 mn

42% 62%51%

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2006 2007 2008 2009 2010 2011 2012 2013E 2014E

GD

P p

er c

apita

(U

S$)

Source: Nielsen Media Research, Media Index Source: CEIC, Credit Suisse estimates

Potential room to grow in the 4W market…

The four-wheeler (4W) industry in Indonesia has grown at 21% CAGR over the past five

years, with the MPV (multi-purpose vehicle) segment being the biggest contributor. We

remain positive on the outlook of Indonesia’s 4W industry, given the country’s improving

purchasing power, as well as the low penetration rate of the 4W market, where Indonesia

exhibits the second-lowest 4W penetration after India. This suggests a potential room to

grow further. We expect 4W industry volume to grow at 10% CAGR over 2013E-15E,

bringing the total 4W population to grow at 11% CAGR.

Figure 9: 4W industry to grow at 10% CAGR 2013E-15E Figure 10: Low 4W penetration

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Uni

ts

0%

5%

10%

15%

20%

25%

30%

35%

Korea Malaysia Thailand China Indonesia India

4W P

enet

ratio

n ra

te

Source: Gaikindo, Credit Suisse estimates Source: Company data, Credit Suisse estimates

10 June 2013

Gajah Tunggal


… to benefit 4W tyre industry

Exports play a major role in Indonesia’s 4W tyre industry, especially for the passenger car

radial tyre. North America is the main destination for tyre export, where Indonesia is the

fifth-largest passenger car tyre exporter to the US market after South Korea (based on

2009 data). In 2012, 4W tyre export market was down by around 10% YoY, mostly driven

by the global crisis in the US and Europe.

Figure 11: Indonesia—the fifth-largest PC tyre exporter to the US market Units

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

China Japan Canada SouthKorea

Indonesia Mexico Brazil Thailand CostaRica

Germany Others

2009 2008

Source: Company data, Credit Suisse estimates

In contrast, the OEM 4W tyre industry has grown by 28% YoY last year, which was in line

with higher 4W new sales volume during the period. The higher 4W sales volume is mainly

driven by the contribution of MPV (multi-purpose vehicle) segment, which contributed

more than 60% of total 4W market. In particular, the low MPV segment has been the key

driver for the strong growth last year, where new models such as Suzuki Ertiga and Nissan

Evalia have entered the Indonesian MPV market starting last year. In addition, the

comeback of Honda into the industry has also contributed to higher growth, after its supply

was disrupted due to Thailand floods back in 2011.

We expect 4W volumes to grow at 10% CAGR over 2013E-15E. Starting this year, we

expect the LCGC to create a new market segment in Indonesia’s 4W market, which will

drive 4W volume growth, and would automatically result in potential demand growth for

4W tyres in domestic market, including both OEM and replacement tyre markets.

A higher OEM tyre contribution to the total 4W tyre market has also resulted in a higher

replacement market. Although the growth in 4W replacement tyres was only 7% YoY in

2012, the contribution to total market increased to 24% (from 22% in 2011). We believe

that the replacement market would grow by 12% CAGR over 2013E-15E, driven by OEM

market that is estimated to grow at 10% CAGR which will result in higher contribution for

both replacement and OEM to total 4W tyre market. Thus, the total domestic 4W tyre

market is estimated to grow at 11% CAGR. Combined with the expectation of a relatively

flat growth in export tyre market over the next two years, we estimate the total 4W tyre

industry (including export) will grow at 5% CAGR.

10 June 2013

Gajah Tunggal


Figure 12: 4W tyre export market still plays a major role… mn units

Figure 13: … while higher contribution in OEM resulted in

better penetration in the replacement market

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Replacement OEM Export

19% 21% 22% 21% 22% 24% 26% 27% 29%

6%8% 7% 8% 8%

11% 13% 14% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E


Source: Indonesia Tyre Association, Company data, Credit Suisse

estimates


estimates

Highly penetrated two-wheeler market…

Indonesia’s two-wheeler (2W) penetration per household recently surpassed 80% and our

analysis indicates the risk for higher volatility in the country’s 2W sales volume growth

ahead. Our analysis finds that being above 80% 2W penetration per household, Thailand’s

2W sales volume growth exhibits higher sensitivity to real GDP growth and policy rates. In

countries having below 80% penetration per household, 2W sales generally service first-

time buyers, implying 2W is perceived as a necessity product. In the case of above 80%

penetration per household, however, much of the 2W sales will be servicing replacement

and/or second 2W and thus, exhibits higher sensitivity to macroeconomic variables since it

is perceived more as discretionary rather than a necessity product.

Figure 14: 2W industry to grow at 10% CAGR 2013E-15E Figure 15: Indonesia’s motorcycle per household (%)

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Uni

ts

-

10

20

30

40

50

60

70

80

90

100

1989 1992 1995 1998 2001 2004 2007 2010

2W p

er h

ou

seh

old

(%)

Source: AISI, Credit Suisse estimates Source: CEIC, Credit Suisse estimates

…resulted in high replacement in 2W tyre industry

We believe this supports the argument of high replacement market in 2W tyre industry in

Indonesia, in which the replacement market for 2W tyre has grown at 14% CAGR over

2005-12 and we expect it would continue to grow at around 11% CAGR for next two years.

10 June 2013

Gajah Tunggal


Last year, the 2W replacement tyre market grew at an estimated 21% YoY, while the 2W

OEM tyre market softened, which was mostly as a result of the softening of 2W industry in

Indonesia. The soft 2W industry last year was led by: (1) softening commodity prices,

which we believe has impacted the purchasing power of 2W customers. As Indonesia’s

2W penetration has reached above 80%, we believe that most of the 2W customers are

secondary and/ or replacement buyers, in which fluctuation in commodity prices becomes

more sensitive to them; and (2) the introduction of minimum down payment regulation for

conventional loan for cars and motorcycles to 25–30%, and 20–25%, respectively. This

has resulted in softened 2W new sales volume as the customers preferred to postpone

their 2W purchases in order to save their money to meet the required down payment.

We believe this year 2W industry would grow at around 10% YoY on the back of low base

from last year. In addition, we expect this year’s commodity price to normalise, thus 2W

purchasing power should recover, which would also support the growth of 2W tyre

industry. We expect the 2W OEM tyre to grow at 10% CAGR over 2013E–15E. We

believe the introduction of minimum down payment regulation for Sharia auto loans would

not have a significant impact to automotive industry, particularly the 2W market, given

Sharia loans as percentage to total loans in Indonesia only accounts for less than 5%.

Unlike the 4W tyre market, export in 2W tyre industry is relatively small in terms of

contribution to total 2W tyre volume. More than 90% of the 2W tyre in Indonesia is

servicing the domestic market, given the high 2W penetration.

Figure 16: Growing replacement market in 2W tyre… mn units

Figure 17: … which contributes 67% of total domestic 2W

tyre market

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Replacement OEM

59% 55% 57% 61% 60%67% 67% 67% 68%

41% 45% 43% 39% 40%33% 33% 33% 32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Replacement OEM


estimates


estimates

10 June 2013

Gajah Tunggal


The largest integrated SEA tyre manufacturer Established in 1951, Gajah Tunggal (GT) is the largest integrated South East Asian tyre

manufacturer with own production of synthetic rubber and tyre cords. The company’s

revenue comes mainly from sales of radial, bias and motorcycle tyres with contributions of

35%, 36% and 24% to total sales, respectively. Rest of the revenue comes from sales of

synthetic rubber and tyre cords, which are mostly sold internally.

Figure 18: Tyres is the key business with 95%

contribution

Figure 19: Replacement tyres to be the major contributor

Radial tires35%

Bias tires36%

Motorcycle tires24%

Synthetic rubber

4%

Tire cord1%

Replacement53%

OEM14%

Export33%

--- GT’s tyre revenue. Source: Credit Suisse estimates FY13E Source: Credit Suisse estimates FY13E

In terms of total tyre revenue, replacement tyre is the majority contributor, where in more

than half of the revenue comes from Java, followed by Sumatra (29%), Kalimantan (11%)

and Eastern Indonesia (9%). Exports are expected to contribute 33% of FY13 tyre revenue

(mostly from radial and bias tyres), with the US as the main destination. In addition, in line

with the company’s strategy, we expect OEM revenue to increase gradually, which will

improve the performance of GT’s replacement tyre market.

Figure 20: Domestic replacement sales breakdown, FY12 Figure 21: Export sales breakdown, 1Q13

Source: Company data Source: Company data

We expect total GT revenue to see a 10% CAGR 2013-15 mostly driven by the growth in

the tyre business, which we expect to grow at 11% p.a. on the back of an 8% volume

CAGR. We expect revenue from its other businesses, i.e., synthetic rubber and tyre cords,

to decline as the company gradually reduces the proportion of sales to external parties.

10 June 2013

Gajah Tunggal


Figure 22: Tyre volume to see an 8% CAGR FY13-15E Figure 23: Total revenue to see a 10% CAGR FY13-15E

27 29 28

36 36 37 39

43 46

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

mn

un

its

Radial Bias MC tire

6,660

7,963 7,935

9,854

11,836 12,576

13,628

15,100 16,585

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Rp

bn

Radial tires Bias tires Motorcycle tires Synthetic rubber Tire cord

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Radial tyres

GT’s radial tyres are mostly exported (79% of FY13E radial tyre revenue) to more than 90

countries, with the US being the main destination, while 17% of FY13E radial tyre revenue

should come from the replacement market, and the remaining from the OEM business.

To increase the replacement market by a better penetrating OEM business

For the radial replacement market in Indonesia, GT has a market share of 24% (est. 2012

excluding Multistrada). The market is led by Bridgestone (33% market share) of PT

Bridgestone Indonesia (Not-listed) and Dunlop (28% market share) of PT Sumi Rubber

Indonesia (Not-listed). To increase its competitiveness in the replacement market, the

company aims to improve or better penetrate into the OEM market. The Indonesian

customers tend to choose their replacement tyres based on the original tyres of the

vehicles. Thus, if a tyre company successfully manages its OEM business relation, then it

would be able to control the replacement market as well.

Figure 24: GT has a 24% market share in the radial

replacement market, FY12

Figure 25: Volume of GT replacement and OEM tyres to

see a 21% CAGR FY13-15E

Bridgestone33%

Dunlop28%

Gajah Tunggal24%

EP10%

Others5%

0.9 1.0 1.0

1.2 1.3

1.5

1.7

2.1

2.5

0.0 0.1 0.0 0.0 0.2

0.4 0.6

0.8 0.8

-

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

mn

units

Replacement OEM

Source: Company data Source: Company data, Credit Suisse estimates

10 June 2013

Gajah Tunggal


GT’s OEM passenger car tyre exposure includes Suzuki Ertiga (biggest tyre supplier) and

some of Daihatsu Xenia, besides Toyota Avanza. Suzuki Ertiga has been doing very well

since it was launched in April last year. It targets the same segment as Daihatsu Xenia

and Toyota Avanza are in. GT’s exposure to Suzuki Ertiga’s OEM business plays an

important role for the company as it will drive future growth of both OEM tyres as well as

replacement tyres. In addition, the launch of LCGC should bring in additional growth to

tyre demand as a whole and GT in particular. In the global OEM tyre market, the company

supplies tyres to Proton Malaysia and Mitsubishi Thailand.

We expect the volume of replacement radial tyre for GT to grow by 14% YoY this year to

1.7 mn units, with OEM tyres to grow by 40% YoY, which will be contributed by the growth

of domestic car sales from both non-LCGC and LCGC cars.

US import tariffs for China have expired…

In 2012 volumes of GT’s radial export tyres softened by about 13% YoY, mostly driven by

softer demand in the US and Europe markets. In addition, the three-year US import tyre

tariffs for China expired on 27 September 2012. These tariffs were enacted in 2009—35%

import tariff in the first year, 30% in the second year and 25% in the third year—to reduce

unemployment in the US tyre industry. After the tariff expired last September, imported

tyre volumes from China have doubled starting October-November 2012. As a result, we

believe the export market would become more competitive, hence expect GT’s radial

export tyre volumes to remain relatively flat over the next two years.

Off-take agreement with Michelin

GT has signed an off-take agreement with Michelin in 2004. Last year, the off-take volume

from Michelin reached 2.9 mn units, which is expected to reach around 2.8 mn units this year.

In addition, the company has a strategic relationship with GITI which allows synergies in

various marketing and technical aspects of the tyre business. In 2011 the company signed an

off-take agreement with GITI China of up to 1 mn tyres to serve the US market.

Figure 26: Export volumes to remain relatively flat Figure 27: Michelin off-take agreement

7.9

8.5

6.5

9.1

10.3

9.0 8.8 8.8 8.8

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

mn

units

Export

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

mn

units

Michelin - off take volume


Competitive pricing

We expect the average blended selling price to see a 2% CAGR 2013-15E on the back of

relatively flat export selling prices due to intense competition. Based on our channel checks,

GT Radial’s domestic selling prices are considered to be competitive versus other tyre

players’ prices. For example, for a tyre size of 165/55/16, Bridgestone’s tyres are about 46%

expensive, while Good Year’s are at a 22% premium. The company is planning to improve

its relationships with OEM players to better penetrate into the replacement market.

10 June 2013

Gajah Tunggal


We estimate radial tyre revenue from the replacement market to see a 28% CAGR over

the next two years with OEM revenue to grow by 29% YoY. Thus, total domestic radial

tyres revenue should grow at 28% YoY FY13-15E. However, we expect revenue from the

export radial market to increase by only 1% YoY given potential higher competition.

Figure 28: Competitive retail price for passenger car tyre Figure 29: GT Radial Champiro Eco

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Bridgestone Gajah Tunggal Good Year Continental

Sel

ling

pric

e pe

r un

it (R

p)

46% premium

22% premium

68% premium

*Original retail price prior to discount. Source: kiosban.com, Credit

Suisse

Source: Company data

Figure 30: Replacement and OEM revenue to post a

strong 28-29% CAGR

Figure 31: Radial export revenue to remain flat

265

350 352

446

538

647

785

1,026

1,286

-

200

400

600

800

1,000

1,200

1,400

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Rp

bn

Replacement OEM

2,054

2,531

2,208

2,775

3,972 3,807 3,727 3,793 3,793

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Rp

bn

Export


Bias tyres

Most of GT’s bias tyres serve the domestic replacement market, where the company

continues to be the dominant player. Given the advancement of radial tyres over the

period, bias tyres are now used less frequently. In the developed countries, radial tyres are

preferred for commercial vehicles as the road infrastructure is well developed. However, in

developing countries such as Indonesia, the use of bias tyres is still relatively high as they

normally contain more natural rubber versus synthetic rubber enabling the tyres to become

more flexible, and thus better manoeuvring of bad roads or poor infrastructure.

10 June 2013

Gajah Tunggal


Figure 32: Dominates the bias tyre replacement market Figure 33: Volumes to see a 5% CAGR 2013-15E

Gajah Tunggal49%

Bridgestone17%

Swallow21%

Dunlop7%

Others6%

2.2 2.3

2.2

2.5 2.6

3.0 3.2

3.3 3.5

1.1 0.9 0.9

1.1

0.8 0.7 0.7 0.8 0.8

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

mn

units



As infrastructure continues to be developed in Indonesia, the company plans to reduce the

proportion of bias tyre volumes gradually in the longer term. We expect total volumes of

bias tyres to see a 5% CAGR over the next two years. According to GT, it is able to

maintain high margins for bias tyres which we believe is due to its dominance in the

replacement market. Thus, the contribution of revenue from this segment is estimated to

remain 38% of total FY13 revenue.

Figure 34: Bias tyre volume contribution to gradually

decline…

Figure 35: …but the contribution to total revenue remains

high backed by higher margins

33% 33%27% 29% 33% 30% 28% 27% 26%

13% 13%12% 12%

11%12% 12% 11% 11%

53% 55%61% 59% 56% 58% 60% 62% 63%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Radial Bias MC tire

41% 41%35% 36%

43% 39% 37% 36% 34%

38% 36%39% 38%

35% 37% 38% 38% 38%

21% 22% 26% 26% 23% 23% 25% 27% 28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Radial tires Bias tires Motorcycle tires


We expect the average selling price to grow at 6% YoY over FY13-15E on the back of

relatively flat rubber prices ahead and estimated average inflation of around 6%. Thus,

total bias tyre revenue should increase by 11% YoY over the next two years, with

replacement tyres continuing to be the major revenue contributor.

10 June 2013

Gajah Tunggal


Figure 36: Total bias tyre revenue to see a 11% CAGR Figure 37: GT Super Grip

1,495

1,821 2,043

2,370 2,591

3,149

3,524

3,921

4,373

87 278 252

515 666 743 832 926 1,032

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Rp

bn


Source: Company data, Credit Suisse estimates Source: Company data

Motorcycle tyres

Leader in the replacement market

GT’s IRC brand is very popular among the 2W tyre customers. GT dominates the 2W tyre

replacement market with a 50% market share as of last year. It has a licence to

manufacture and sell ‘IRC’ motorcycle brand tyres in Indonesia since 1973. GT has been

one of the biggest suppliers for 2W tyre OEMs such as Yamaha, Suzuki, Kawasaki and

TVS. The company has also supplied around 10% of Honda’s total 2W tyres. However,

majority of Honda’s 2W tyres are supplied by PT Suryaraya Rubberindo Industries, a

subsidiary of Astra Honda Motor, under the brand name ‘Federal’, which has around 28%

market share.

Given high 2W penetration in Indonesia, we expect the replacement tyre market, the main

focus of 2W tyres, to continue to grow. We expect total motorcycle tyre volumes to grow at

11% YoY over the next two years.

Figure 38: Leading the motorcycle tyre market Figure 39: Continue to see a 11% CAGR over 2013-15E

Gajah Tunggal50%

Federal28%

Swallow9%

Dunlop7%

Others6%

9.5 9.5 10.5

13.2 12.6

15.2

16.9

18.7

20.8

4.8

6.4 6.4 7.8 7.6

6.2 6.9

7.6 8.3

-

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

mn

units



10 June 2013

Gajah Tunggal


Launched new brand ‘Zeneos’

The company launched its new 2W tyre brand ‘Zeneos’ in June 2012, targeting medium

and low-end customers, at about 10% lower prices compared to ‘IRC’. The company

expects to enter the export market in 1Q14, at the earliest.

Still the preferred brand

Based on our channel checks, IRC is still customers’ most preferred option for 2W

replacement tyres. The selling price of IRC is also relatively low versus its closest rival,

FDR (Federal), whose price is at about 8% premium to IRC. While brands like Swallow are

relatively cheap versus IRC and FDR, they don’t have much brand value. Branding is

crucial for any consumer product, including tyres. As IRC offers both a strong brand value

and competitive pricing, it continues to be popular.

Figure 40: IRC offers competitive pricing Figure 41: 2W tyre revenue to grow at 18% YoY

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Gajah Tunggal (IRC) FDR Swallow

Sel

ling

pric

e pe

r un

it (R

p)

8% premium

3% discount

953 1,137

1,350

1,702 1,721

2,057

2,425

2,857

3,363

269 421

525 629

738 686 808

944 1,103

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Rp

bn


*Non-tubeless back tyre. Source: Credit Suisse Source: Company data, Credit Suisse estimates

We expect the average selling price to see a 6% CAGR over 2013-15E on the back of

relatively flat rubber prices going forward and estimated average inflation of around 6%.

Thus, total motorcycle tyre revenue should increase 18% YoY over the next two years,

with replacement tyres continuing to be the major revenue contributor.

Margins to benefit from relatively stable costs

Relatively stable costs ahead…

More than 70% of total cost of a tyre company is raw materials, out of which 36% is

natural rubber and 27% is synthetic rubber. GT sources natural rubber mostly from a

domestic trader under a supply contract that is set on an annual basis based on volumes,

while the average price of the tyre is based on the average price of raw materials on the

previous month. We estimate that rubber prices will be relatively stable going forward,

benefiting the company’s natural rubber costs.

10 June 2013

Gajah Tunggal


Figure 42: More than 70% of total cost is raw materials… Figure 43: …with more than half related to rubber

Raw materials77%

Labour8%

Energy7%

Depreciation4%

Others4%

Natural rubber36%

Synthetic rubber27%

Tire cord12%

Carbon black10%

Others15%

Source: Credit Suisse estimates FY13E Source: Credit Suisse estimates FY13E

As the largest South East Asia tyre manufacturer, GT produces the synthetic rubber in-

house, accounting for around 27% of FY13E costs. The raw material for synthetic rubber

is butadiene, which is mostly imported from Korea. We expect the price of butadiene to be

relatively flat.

Based on our report, Auto Parts Sector: Bridgestone & Sumitomo Rubber Industries have

firm grip on profits (refer Appendix 2), according to the International Rubber Study Group

(IRSG), global inventories of natural and synthetic rubber are on the rise. In other words,

given lingering uncertainties on the demand side, the current supply-demand balance

makes a sudden sharp rise in materials prices unlikely. In particular, we believe the current

increase in production of natural rubber by such major producing countries as Thailand will

contribute to more stable natural rubber prices.

Figure 44: Global natural rubber production and

consumption ’000 tonnes

Figure 45: Global synthetic rubber production and


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2010 2011 2012

NR Production (LHS) NR Consumption (LHS) NR Stock (RHS)

3,500

3,600

3,700

3,800

3,900

4,000

4,100

4,200

4,300

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

3,900

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2010 2011 2012

SR Production (LHS) SR Consumption (LHS) SR Stock (RHS)

Source: IRSG (International Rubber Study Group) Source: IRSG (International Rubber Study Group)

https://doc.research-and-analytics.csfb.com/doc?sourceid=em&document_id=x477589


10 June 2013

Gajah Tunggal


Figure 46: Historical natural rubber prices Figure 47: High correlation between butadiene and oil

prices

100

150

200

250

300

350

400

450

500

2005 2006 2007 2008 2009 2010 2011 2012

Rub

ber p

rice

(US

cen

ts/ k

g)

0

20

40

60

80

100

120

140

160

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13

Butadiene (US$/t, LHS) Brent oil price (US$/barrel)

Source: Malaysian Rubber Board Source: Bloomberg

In addition to synthetic rubber, GT has in-house production of tyre cords, which is based

on polyester or nylon. The cord filament is sourced from Filamendo Sakti (Not-listed), a

subsidiary of Polychem Indonesia (25.6% owned by GT). Carbon black is added to rubber

as both filter and as a strengthening or reinforcing agent. It is an oil-based product sourced

from a US firm located in Indonesia called Cabot.

Margins to benefit

The relatively stable raw material costs, which account for more than 70% of GT’s total

costs, should benefit the company’s overall margins, which are expected to improve

gradually with a higher contribution from the replacement market due to GT’s growing tyre

OEM business.

We estimate GT’s earnings this year will grow by 25% YoY. We continue to believe that

the company’s earnings will continue to see positive strong growth—a 15% CAGR over

the next two years—given relatively stable costs.

Figure 48: Gross profit to see a 13% CAGR… Figure 49: …with a gradual improvement in margins

1,175 1,135

1,822

1,939

1,669

2,437 2,737

3,126 3,508

17.6%

14.3%

23.0%

19.7%

14.1%

19.4% 20.1%20.7% 21.2%

0%

5%

10%

15%

20%

25%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Gross profit (Rp bn, LHS) Gross margin

665 581

1,145 1,287

1,010

1,677 1,838

2,201

2,493

10.0%

7.3%

14.4%

13.1%

8.5%

13.3% 13.5%

14.6%15.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Operating profit (Rp bn, LHS) Operating margin


10 June 2013

Gajah Tunggal


Sensitivity of rubber prices to earnings

We have done a sensitivity analysis of rubber prices to the company’s total earnings.

Assuming other variables remain constant, if rubber prices move up by 1%, total earnings

will decline by 2%. Conversely, if rubber prices go down by 1%, the company will enjoy

lower costs, and thus earnings will go up by 2%.

On an expansion mode

GT’s radial tyre production facility is running at 45,000 units/day, with an approximately

64% utilisation rate. The company plans to increase its capacity to 55,000 units/day by

2014 through debottlenecking. GT’s bias tyre production facility is about 14,300 units/day,

with 90% utilisation. It targets to increase the production to 14,500 units/day by this year

through debottlenecking. Motorcycle tyre capacity is 90,000 units/day (79% utilisation),

which is planned to be expanded to 105,000 units/day by 2014E. The company is also

planning to build a new facility for TBR (truck & bus radial) tyres, which would be a new

revenue contributor. Its current capacity is still minimal at 350 units/day, and expected to

reach 2,200 units/day by 2016.

In addition, the company is building a new R&D centre in Tangerang, West Java, which

will be used to develop new tyre products. GT is also building its own tyre proving ground

at the recently acquired Karawang land (approximately 60 ha).

The company’s capex for this year is estimated to reach US$170 mn, out of which US$50

mn will be used for TBR facility, US$40 mn for debottlenecking, US$30 mn for R&D and

the remaining for maintenance.

We estimate the company’s total debt will reach Rp4.2 tn in 2013. In February 2013 GT

issued US$500 mn bond with a five-year tenor, expiring in 2018, with a 7.75% coupon.

The proceeds are used to refinance its matured bond, while the remaining will be used for

expansion.

Figure 50: GT—Capital expenditure Figure 51: GT—Net debt

382

669

346

840 913

1,973

1,720

1,553 1,553

-

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Cap

ital e

xpen

ditu

re (R

p bn

)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Net

deb

t (R

p bn

)


10 June 2013

Gajah Tunggal


Initiating with OUTPERFORM and a target price of Rp4,300 We initiate coverage on Gajah Tunggal (GT) with an OUTPERFORM rating and a target

price of Rp4,300. We use DCF and P/E to value the company. Our DCF indicates a target

price of Rp4,900, implying 12.1x FY13E P/E. Given regional peers are trading at an implied

P/E range of 7–15x, we use 10.5x FY13E P/E to arrive at our target price of Rp4,300. Over

the past three months, the stock has traded at an average of US$2.9 mn per day.

Figure 52: Peers’ valuation comparisons

Ticker Company name Mkt cap Rating Curr. Target Upside P/E (x) EV/EBITDA (x) Implied P/E (x) EPS

US$ mn price price 13E 14E 13E 14E 13E 14E CAGR

13E-15E

2105.TW Cheng Shin Rubber 8,451 O 89 105 18% 12.8 10.9 9.2 7.9 15.1 12.9 14%

5108.T Bridgestone 25,797 O 3,210 4,000 25% 9.2 8.7 6.3 5.8 11.5 10.8 7%

5110.T Sumitomo Rubber

Industries

4,102 O 1,523 2,000 31% 8.0 7.5 5.3 5.0 10.5 9.9 6%

APLO.BO Apollo Tyres 827 U 93 89 -5% 7.0 6.1 4.8 4.3 6.8 5.9 14%

MICP.PA Michelin 16,259 N 67 60 -11% 7.8 7.8 5.2 5.1 7.0 7.0 6%

Weighted average 9.2 8.6 6.3 5.8 10.6 9.8 6%

GJTL.JK Gajah Tunggal 1,157 O 3,250 4,300 32% 8.0 7.0 6.4 5.3 10.5 9.3 15%

Source: Credit Suisse estimates

We derive our DCF valuation by assuming 11.4% WACC (a 7.5% risk-free rate, 1.2 beta,

and 5% risk premium) with 5.8% terminal growth. The Rp4,900/share equates to 12.1x

FY13E P/E.

Figure 53: DCF valuation

Rp bn 2013E

Risk-free rate 7.5%

Beta 1.2

Risk premium 5%

Ke 14%

Kd 11%

Tax 22%

Debt/Capital 0.4

Equty/Capital 0.6

WACC 11.4%

Terminal value multiple 19

Growth 5.8%

Net Present Value (Rp bn) 20,453

Add: Cash (Rp bn) 881

Minus: Debt (Rp bn) (4,231)

Shareholder value (Rp bn) 17,104

Shareholder value (Rp/share) 4,909

Implied FY13E P/E 12.1x


Undemanding valuation

GT’s current valuation is undemanding, trading at 8.0x FY13E P/E, a 13% discount to

regional tyre peers and 33% discount to Indonesia auto. The stock is also a play on

domestic consumption, benefitting from rising middle-high income population, where it is

trading at a steep discount of around 76% to Indonesian consumer stocks. GT’s 15%

earnings growth for FY13–15E is amongst the highest versus its peers, with margin

gradually improving along with relatively stable raw material costs.

10 June 2013

Gajah Tunggal


Figure 54: Undemanding valuation

8.0 9.2

12.0

33.1

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Gajah Tunggal Regional tire peers* Indo auto* Indo consumer*

FY13

E P/

E (x

)


Figure 55: GJTL—Fwd P/E band Figure 56:Currently trades at 7.5x fwd P/E vs. historical

peak of 13.1x

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

Price 4 X 6 X 8 X 10 X

13.1

7.5

6.1

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

Fw

d P

/E (x

)

Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

10 June 2013

Gajah Tunggal


Risks Commodity prices

Natural rubber and synthetic rubber comprise more than 50% of total raw material costs.

Synthetic rubber is positively correlated with oil prices. Thus, fluctuations in prices of

natural rubber, synthetic rubber and oil would have a significant impact on the total cost of

a tyre company.

Competition

A number of tyre companies manufacture four-wheel and two-wheel tyres in Indonesia.

They include Gajah Tunggal (GT Radial, GT, IRC), Goodyear Indonesia (Good Year),

Bridgestone Tyre Indonesia (Bridgestone), Sumi Rubber Indonesia (Dunlop), Multistrada

(Achiles, Corsa), and Suryaraya Rubberindo Industries (specialises in 2W tyres – Federal,

FDR).

Gajah Tunggal is the market leader in motorcycle and bias replacement tyres with 50%

and 49% shares, respectively. It is No 3 in terms of market share (24%) in the radial

replacement market, behind Bridgestone (33%) and Dunlop (28%).

Many foreign players, such as Hankook Tyre (South Korea), recently entered the

Indonesia tyre industry. Hankook started the construction of its first factory in Cikarang in

4Q12. This year, total capacity of the Hankook factory in Indonesia is expected to reach

17,000 units/day. Total investment is estimated to reach US$1.1 bn till 2018. Most of the

production is going to be exported to North America, the Middle East, ASEAN and

Australia, while only around 20% of it would be sold in the domestic market.

Figure 57: Tyre companies in Indonesia

Company name 4W tyre 2W tyre

1 PT Goodyear Indonesia Good Year n.a

2 PT Bridgestone Indonesia Bridgestone, Turanza,

Ecopia, Potenza

n.a

3 PT Gajah Tunggal GT Radial, GT IRC

4 PT Industry karet Deli Delium Spectra Swallow Deli Tyre

5 PT Sumi Rubber Indonesia Dunlop Dunlop

6 PT Suryaraya Rubberindo Industries n.a Federal (OEM Honda), FDR

7 PT Elangperdana Tyre Industry EP n.a

8 PT Banteng Pratama Rubber Co. n.a Mizzle

9 PT Hung-A Indonesia n.a Thunderbird

10 PT United King-Land n.a King-Land

11 PT Surabaya Kencana Tyre Industri n.a Skityre

12 PT Multistrada Corsa, Achilles, Strada Corsa

Source: APBI (Indonesia tyre companies’ association), Company data, Credit Suisse

Regulations

The three-year US import tyre tariffs for China expired on 27 September 2012. These

tariffs were enacted in 2009—35% import tariff in the first year, 30% in the second year

and 25% in the third year—to reduce unemployment in the US tyre industry. After the tariff

expired last September, imported tyre volumes from China have doubled starting October-

November 2012. As a result, we believe the export market would become more

competitive.

Macroeconomic risks

The other risks that the company may face would be macroeconomic risks such as

changes in inflation and exchange rate.

10 June 2013

Gajah Tunggal


Appendix 1: Financial summary Figure 58: GT—Profit & loss

(As at 31 Dec 2012) CAGR

Rp bn 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 13E-15E

Volume (mn units)

Radial 8.8 9.6 7.5 10.3 11.8 10.9 11.0 11.7 12.1 5%

Replacement 0.90 1.00 1.00 1.20 1.30 1.50 1.71 2.11 2.49 21%

OEM 0.04 0.06 0.04 0.04 0.16 0.41 0.57 0.81 0.85 21%

Export 7.90 8.50 6.50 9.10 10.30 9.00 8.75 8.75 8.75 0%

Bias 3.6 3.7 3.4 4.2 3.9 4.3 4.5 4.7 5.0 5%

Replacement 2.20 2.30 2.20 2.50 2.60 3.00 3.16 3.31 3.48 5%

OEM 0.30 0.50 0.30 0.60 0.50 0.60 0.63 0.66 0.70 5%

Export 1.10 0.90 0.90 1.10 0.80 0.70 0.74 0.77 0.81 5%

MC tyre 14.3 15.9 16.9 21.0 20.2 21.4 23.8 26.3 29.2 11%

Replacement 9.50 9.50 10.50 13.20 12.60 15.20 16.88 18.72 20.75 11%

OEM 4.80 6.40 6.40 7.80 7.60 6.20 6.88 7.57 8.33 10%

Export - - - - - - - 0.05 0.10

Total tyres 26.7 29.2 27.8 35.5 35.9 36.6 39.3 42.8 46.3 8%

Net sales 6,660 7,963 7,936 9,854 11,841 12,579 13,628 15,100 16,585 10%

Tyre 5,713 6,979 7,244 8,996 10,721 11,702 12,808 14,314 15,867 11%

Radial tyres 2,324 2,892 2,571 3,230 4,560 4,587 4,709 5,114 5,408 7%

Bias tyres 2,167 2,529 2,798 3,435 3,702 4,373 4,866 5,391 5,977 11%

Motorcycle tyres 1,222 1,558 1,875 2,331 2,459 2,742 3,233 3,809 4,482 18%

Synthetic rubber 503 361 225 318 642 577 613 644 627 1%

Tyre cord 444 623 466 540 473 297 206 142 90 -34%

COGS 5,485 6,828 6,115 7,915 10,172 10,142 10,891 11,975 13,076 10%

Gross profit 1,175 1,135 1,822 1,939 1,669 2,437 2,737 3,126 3,508 13%

Selling expenses 304 308 473 435 408 479 573 590 648 6%

G&A expenses 207 245 204 216 252 280 327 335 368 6%

Operating profit 665 581 1,145 1,287 1,010 1,677 1,838 2,201 2,493 16%

Other income (charges) (524) (1,356) 129 (167) (153) (220) (74) (185) (147) 41%

Pre-tax profit 140 (774) 1,274 1,120 857 1,457 1,763 2,016 2,345 15%

Income tax (49) 149 (368) (290) (172) (325) (353) (403) (469) 15%

Minority interest - - - - - - - - -

Net profit 91 (625) 905 831 685 1,132 1,411 1,613 1,876 15%

Margins:

Gross margin 17.6% 14.3% 23.0% 19.7% 14.1% 19.4% 20.1% 20.7% 21.2%

Operating margin 10.0% 7.3% 14.4% 13.1% 8.5% 13.3% 13.5% 14.6% 15.0%

Net margin 1.4% -7.8% 11.4% 8.4% 5.8% 9.0% 10.4% 10.7% 11.3%

%YoY

Net sales 22% 20% 0% 24% 20% 6% 8% 11% 10%

Tyre 24% 22% 4% 24% 19% 9% 9% 12% 11%

Radial tyres 29% 24% -11% 26% 41% 1% 3% 9% 6%

Bias tyres 17% 17% 11% 23% 8% 18% 11% 11% 11%

Motorcycle tyres 27% 27% 20% 24% 5% 12% 18% 18% 18%

Synthetic rubber 45% -28% -38% 41% 102% -10% 6% 5% -3%

Tyre cord -11% 40% -25% 16% -12% -37% -30% -31% -36%

Gross profit 61% -3% 60% 6% -14% 46% 12% 14% 12%

Operating profit 82% -13% 97% 12% -22% 66% 10% 20% 13%

Pre-tax profit -40% -652% -265% -12% -24% 70% 21% 14% 16%

Net profit -23% -788% -245% -8% -18% 65% 25% 14% 16%


10 June 2013

Gajah Tunggal


Figure 59: GT—Balance sheet

(As at 31 Dec 2012) Rp bn 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Current assets

Cash and cash equivalents 573 170 815 843 587 905 881 1,201 1,452

Accounts receivable 821 670 728 1,549 1,861 2,227 2,155 2,388 2,623

Inventory 936 1,399 862 1,089 1,660 1,479 1,492 1,640 1,791

Others 1,029 818 970 1,007 965 584 530 587 995

Total current assets 3,359 3,057 3,375 4,489 5,073 5,194 5,058 5,816 6,861

Non-current assets

Non-trade receivable 760 736 850 710 718 648 703 778 855

Investment in associates 396 296 315 361 713 793 819 848 880

Fixed assets 3,270 3,619 3,609 4,076 4,588 6,122 7,383 8,426 9,420

Other non-current assets 669 1,005 728 735 516 112 122 135 148

Total non-current assets 5,095 5,656 5,502 5,882 6,536 7,676 9,026 10,188 11,303

Total assets 8,455 8,714 8,877 10,372 11,610 12,870 14,084 16,004 18,164

Current liabilities

Bank loans - 34 - - 13 - - - -

Accounts payable 607 1,345 811 1,194 1,395 1,210 1,332 1,466 1,602

Sales advances 117 346 261 244 188 178 187 196 206

Dealer's guarantee - - 483 884 885 952 954 1,057 1,161

Current maturities

Bonds payable 524 12 - 98 97 202 215 216 216

Other current liabilities 312 334 263 227 322 478 401 444 488

Total current liabilities 1,560 2,071 1,818 2,647 2,900 3,020 3,090 3,380 3,674

Non-current liabilities

Long-term debt – net of current

Bonds payable 3,939 4,581 4,044 3,779 3,722 3,769 4,015 4,035 4,035

Post-employment benefits

obligations

271 312 345 419 501 603 545 604 663

Others 299 100 - - - - - - -

Total non-current liabilities 4,509 4,993 4,389 4,198 4,223 4,371 4,560 4,639 4,698

Total liabilities 6,069 7,064 6,206 6,845 7,123 7,391 7,650 8,019 8,372

Shareholders' equity

Capital stock 1,742 1,742 1,742 1,742 1,742 1,742 1,742 1,742 1,742

Additional paid-in capital 52 52 52 52 52 52 52 52 52

Diff arising from restructuring trx (495) (495) (495) (495) (495) (554) (554) (554) (554)

Retained earnings 654 12 1,330 2,108 2,673 3,770 5,123 6,664 8,459

Others 433 338 42 119 514 468 71 81 94

Total equity 2,386 1,649 2,671 3,527 4,486 5,478 6,434 7,985 9,793

Total liabilities & equity 8,455 8,714 8,877 10,372 11,610 12,870 14,084 16,004 18,164


10 June 2013

Gajah Tunggal


Figure 60: GT—Cash flows

(As at 31 Dec 2012) Rp bn 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Net cash provided by

operating activities

450 571 1,137 1,011 304 1,707 1,985 1,896 1,858

Acquisition of fixed

assets (capex)

(382) (669) (346) (840) (913) (1,973) (1,720) (1,553) (1,553)

Others (577) 175 (48) (41) 407 624 (35) (42) (45)

Net cash used in

investing activities

(959) (494) (394) (882) (506) (1,349) (1,755) (1,595) (1,598)

Free cash flows 68 (98) 792 171 (609) (266) 265 344 306

Net cash used in

financing activities

840 (513) (50) (59) (32) (48) (253) 18 (9)

Net increase in cash and

cash equivalents

330 (437) 693 70 (234) 310 (23) 320 251

Cash and cash equivalents

at beginning of year

240 573 170 815 843 587 905 881 1,201

Net effects of changes in

exchange rate

2 34 (47) (42) (22) 7 - - -

Cash and cash equivalents

at end of year

573 170 815 843 587 905 881 1,201 1,452


10 June 2013

Gajah Tunggal


Appendix 2: Global industry outlook An excerpt from our report titled: Auto Parts Sector: Bridgestone & Sumitomo Rubber

Industries have firm grip on profits: initiate coverage of both at OUTPERFORM by

Masahiro Akita (24 October 2012).

Global tyre demand continues to expand

Tyre sector is a defensive growth sector

The tyre sector represents a large market with a large commercial aftermarket business. In

that sense, tyre companies are defensive stocks. At the same time, the continuing

expansion of the global tyre market makes the sector a growth sector. From 1995 to 2011,

the global tyre market witnessed a CAGR of 7.4%. That growth has become even more

pronounced since 2004 amid the motorisation of newly emerging countries. The trend has

not only pushed up annual demand for tyres used in new vehicles but has also contributed

to the progressive growth of the key determinant of aftermarket demand, the total number

of vehicles in operation throughout the world.

Figure 61: Global tyre market has expanded significantly Figure 62: Increase of vehicles in operation contributing

to expansion of global tyre demand

0

20

40

60

80

100

120

140

160

180

200

Global Tire Market Demand

Billion Yen

CAGR 7.4%

0

200

400

600

800

1000

1200

Vehicles in Operation

Million Vehicles

Source: Tyre Business, Credit Suisse Source: Wards, Credit Suisse estimates

Global tyre demand has softened, with demand in Europe and Asia particularly being

weak. Although the tyre sector is a relatively defensive sector, especially within the auto

parts sector, it is not immune to macroeconomic weakness and economic cycles. Indeed,

global tyre demand softened recently, reflecting the impact of weak demand in Europe and

Asia in particular. In 1H 2012, global demand for tyres used in new passenger cars and

light trucks increased 10% YoY, with key contributions from the North American and Asian

markets. However, aftermarket demand in Europe and Asia was weak across all vehicle

types. As a result, global aftermarket sales of replacement tyres used in passenger cars

and light trucks fell 5% YoY, while sales of replacement tyres for trucks and buses

declined 7%.

Global tyre demand should grow steadily over the medium term

Although currently weak, global tyre demand should rebound next year and grow steadily

over the medium term. We expect the global tyre market to witness a CAGR of a bit more

than 3% during 2011-14 (unit sales base). By region, we expect the Japanese and

European markets to be stable or perhaps shrink somewhat, while we foresee a 2-3%

CAGR in the North American market and a more than 8% CAGR in Asia including China.



10 June 2013

Gajah Tunggal


Figure 63: Stable growth expected both for OE and

replacement tyre demand

Figure 64: Asia and North America expected to lead

global tyre demand

-10%

-5%

0%

5%

10%

15%

FY09/12 FY10/12 FY11/12 FY12/12E FY13/12E FY14/12E

Global Replacement OE

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012E 2013E 2014E

Japan US EU Asia / Others


Material prices likely to linger at high levels but

further sharp increases unlikely

Tyre makers have in no small measure been affected by the sharp and sustained climb

since 2002 of prices of their key raw materials, including natural rubber used in tyres

(RSS#3 and TSR20) and butadiene and crude oil used to produce synthetic rubber. While

prices of these materials have plateaued, we expect them to remain at current lofty levels

over the medium term. On a slightly more positive note, we also believe they are unlikely

to rise much from these levels.

According to the International Rubber Study Group (IRSG), global inventories of natural

and synthetic rubber are on the rise. In other words, given lingering uncertainties on the

demand side, the current supply-demand balance makes a sudden sharp rise in materials

prices unlikely. In particular, we believe the current increase in production of natural rubber

by such major producing countries as Thailand will contribute to more stable natural

rubber prices in the future.

For example, Thai natural rubber production statistics show that from 2000 to 2010

planted area expanded at a CAGR of 3.8% but harvested area grew only 2.4% and

production rose only 2.5%. In 2011, however, planted area increased by the same 3.8%

YoY but harvested area expanded 5.4% and actual production was up 8.6% YoY.

In August 2012, Thailand, Indonesia and Malaysia agreed to reduce their exports of

natural rubber by a combined total of 300,000 tonnes beginning this October in an effort to

halt the recent fall in natural rubber prices. At the same time, the three countries agreed to

reduce output by a total of 150,000 tonnes by cutting down older trees at natural rubber

plantations. Natural rubber prices have already reacted to the agreement by the world’s

three leading producers but, while these measures are affecting prices in the near term,

we think they will have limited impact over the medium term. The export restrictions by the

three countries are to be implemented over a two-year period ending in 2014. Considering

the current annual global natural rubber output of about 11 mn tonnes, removing a total of

450,000 tonnes from supply over a two-year span should have little impact on the market.

10 June 2013

Gajah Tunggal


Figure 65: Global natural rubber production &


Figure 66: Global synthetic rubber production &


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2010 2011 2012

NR Production (LHS) NR Consumption (LHS) NR Stock (RHS)

3,500

3,600

3,700

3,800

3,900

4,000

4,100

4,200

4,300

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

3,900

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

2010 2011 2012

SR Production (LHS) SR Consumption (LHS) SR Stock (RHS)

Source: IRSG (International Rubber Study Group) Source: IRSG (International Rubber Study Group)

10 June 2013

Gajah Tunggal


Appendix 3: Corporate ownership structure Figure 67: Gajah Tunggal’s ownership structure

Denham PTE Ltd Michelin (France) Public shareholders

Gajah Tunggal

Tire Business Synthetic Rubber Tire Cord

Polychem Indonesia (Chemicals - Textile)

Prima Sentra Megah (External SBR/TC)

49.7% 40.3%10.0%

25.6% 99.0%


10 June 2013

Gajah Tunggal


Appendix 4: GJTL’s management Figure 68: Gajah Tunggal’s management

Name Positions

Board of Commissioners

Sean Gustav Standish Hughes President Commissioner

Mulyati Gozali Vice President Commissioner

Gautama Hartarto Commissioner

Benny Gozali Commissioner

Sang Nyoman Suwisma Independent Commissioner

Doktorandus Sunaria Tadjuddin Independent Commissioner

Board of Directors

Christopher Chan Siew Choong President Director

Budhi Santoso Tanasaleh Vice President Director

Tan Enk Ee Director

Irene Chan Director

Catharina Widjaja Director

Hendra Soerijadi Director

Kisyuwono Director

Ferry Lawrentius Hollen Director

Michel Dube Director

Lin Jong Jeng Independent Director


Christopher Chan Siew Choong – President Director

Joined the company in 1991 and was appointed as President Director in 2004. Mr. Chan

graduated from Kolej Tunku Abdul Rahman, Kuala Lumpur, Malaysia in 1979. Prior to

joining Gajah Tunggal, he had held positions as internal audit manager, Head of Budget

and Financial Accounting Manager with Nestle Malaysia Berhad, Malaysia.

Budi Santoso Tanasaleh – Vice President, Director

Joined the company as an export manager in 2001 and was appointed as a Director in

2004, and currently serves as VP Director of Gajah Tunggal. Mr. Tanasaleh received his

Bachelor’s and Master’s of Science degrees in Electrical Engineering from University of

Texas Arlington in 1983 and 1989, respectively. Prior to joining the company, he worked in

Motorola, Inc, USA for eight years, and PT Motorola Indonesia for six years, last position

as country manager at the pager division. He had also spent one year as VP for marketing

at Citibank, N.A, Jakarta in 1998.

Tan Enk Ee – Director

Appointed as Director of the company in 2006. He serves as executive chairman of GITI Tyre, a position he has held since 2009. Furthermore, he is a member of several boards, including Conservation International and the MIT Asia Executive Board. Prior to joining GT, he had served as chief executive director of Gul Technologies Singapore Ltd., a SGX-ST listed company, for three years. Mr. Tan obtained Master of Business Administration from the Massachusetts Institute of Technology in 2000. Mr. Tan is one of the three beneficial owners of the company.

Irene Chan – Director

Appointed as Director of the company in 2007. Prior to this, she was director at PT Polychem Indonesia Tbk from 2004 to 2007. From 1970 to 1974, she served as auditor staff at Kenden, Mills, Muldon & Browne Public Accountants in New Zealand. From 1975 to 1976, she was an internal audit manager at Drs. Agus Hanadi Akuntan and, from 1979 to 1983, she was manager of reinsurance accounts at Central Asia Insurance. Her career at the Gajah Tunggal group began in 1983 as Finance Manager of the company.

10 June 2013

Gajah Tunggal


Catharina Widjaja – Director

Appointed as Director of the company in 2004. Ms. Widjaja was Executive Vice President, Corporate Communications of the Gajah Tunggal group from 2000 to 2004. Prior to joining the Gajah Tunggal group, Ms. Widjaja had worked for various multinational companies including The Hongkong and Shanghai Banking Corporation, Jakarta, for nine years, where she last held the position of country treasurer, and Deutsche Bank AG, Jakarta, as a foreign exchange dealer for two years.

Kisyuwono Prawirohardjo – Director

Appointed as Director of the company in 2004. He joined the company as Assistant Accounting Manager in 1992. Prior to joining the company, Mr. Kisyuwono Prawirohardjo worked as an auditor with the Government’s Internal Audit Financial and Development Supervisory Board (Badan Pengawasan Keuangan dan Pembangunan, or BPKP) from 1982 to 1992. Mr. Kisyuwono Prawirohardjo graduated with a Bachelor of Accounting from Sekolah Tinggi Akuntansi Negara.

Ferry Lawrentius Hollen – Director

Appointed as Director of the company in 2010. Prior to this, he was General Manager of Human Resources and General Affairs, beginning in 2006. He had previously held several managerial positions in the areas of finance and administration, as well as sales, marketing and operations. Mr. Hollen has a Master’s Degree in Management from the Asian Institute of Management in Manila, Philippines.

Michel Dube – Director

Appointed as Director of the company in 2012. Prior to this, he had been Executive Vice President Manufacturing since 2010. He was also Executive Quality Director for GITI China from 2007 to 2011. Dr. Dube had previously worked for the Michelin Tyre group of companies in Europe, North America and Asia from 1983 to 2007. Prior to this, he was Senior Research Group Manager at American Enka Company in Asheville, North Carolina, from 1979 to 1983. He holds a Ph.D. in Chemistry from the University of Montreal in Canada.

Lin Jong Jeng – Director

Appointed as Director of the company in 2007. He has been with the company since 1983, starting as Research and Development Manager. He subsequently became Plant Manager and Executive Vice President Manufacturing and finally the Head of Production in 2006. Before joining the company, he had worked for Tay Feng (Federal) Tyre Co. Ltd in Taiwan as research and development manager. He has a Bachelor’s Degree in Chemical Engineering from the Chung-Yuan College of Science and Technology.

10 June 2013

Gajah Tunggal


Appendix 5: GJTL’s milestones Figure 69: Gajah Tunggal’s milestones

1951 Gajah Tunggal was established to produce bicycle tyres and inner tubes.

1973 Technical assistance agreement was signed with Inoue Rubber Company of Japan to produce motorcycle tyres.

1981 Company started producing bias tyres for passenger and commercial vehicles with technical assistance from Yokohama Rubber

Company of Japan.

1990 PT Gajah Tunggal Tbk was listed on the Jakarta and Surabaya Stock Exchange.

1991 PT Gajah Tunggal Tbk acquired GT Petrochem Industries, a producer of tyre cord and nylon filament.

1993 Company started producing radial tyres for passenger cars and light trucks.

1994 PT Gajah Tunggal Tbk received quality certifications such as the E-Mark from the European community and passed the

regulatory requirement of the US Department of Transportation.

1995 PT Gajah Tunggal Tbk acquired Langgeng Baja Pratama (LBP), a steel and bead wire producer.

PT Gajah Tunggal Tbk received ISO 9002 international quality certification for its radial tyre production quality control system, as

well as receiving the TUV CERT quality certification from Germany.

1996 PT Gajah Tunggal Tbk acquired Meshindo Alloy Wheel Corporation, the second largest manufacturer of aluminium alloy wheels

in Indonesia.

PT Gajah Tunggal Tbk’s main subsidiary, PT GT Petrochem Industries, expanded its operations to include synthetic rubber,

ethylene glycol, polyester filament and polyester staple fibre.

1997 PT Gajah Tunggal Tbk entered into an off-take agreement with Pirelli Tyre to produce Pirelli designed passenger car radial tyres

for North America and Europe. This agreement was mutually terminated in 2001.

PT Gajah Tunggal Tbk’s radial tyre plant obtained ISO 9001 certification for its quality design, development and installation

systems.

2001 The company entered into a manufacturing agreement with Nokian Tyres Group, a leading tyre manufacturer based in Finland,

to produce a selected range of passenger car tyres, including winter (snow) tyres, for markets outside Indonesia.

2002 The company received QS 9000 quality certification, one of the requirements to supply to US "Big Three".

PT Gajah Tunggal Tbk completed its restructuring, enabling the company to lower its debt burden by more than US$200 mn and

convert debt in to FRN.

2004 Completion of corporate restructuring in which PT GT Petrochem Industries was deconsolidated, and at the same time acquired

the TC and SBR assets.

Divestment of Steel Wire Producer Langgeng Bajapratama.

Start of off-take agreement with Michelin, in which Gajah Tunggal is to produce 5 million tyres per year for Michelin in export

markets by the year 2010. Launch of TyreZone outlets.

2005 The company issued a US$325 mn Maiden Global Bond, and used the proceeds to buy back some of its notes as well as to

finance the expansion.

Divestment of aluminium alloy wheels producer Meshindo Alloy Wheel.

The company received ISO/TS 16949 quality certification, an upgrade form the QS 9000 achieved in 2002.

Start of the production of tyres for the Michelin off-take program.

2006 PT Gajah Tunggal Tbk was awarded “Best Managed Company in Indonesia” by Euromoney Magazine

2007 Additional US$95 mn Bond re-tap, to finance the remainder of the expansion as well as capital expenditures relating to its

research and development activities.

The company also re-entered the equity market with a 10-to-1 Rights issue, totalling Rp158.4 bn (around US$17 mn) for working

capital needs.

2008 The company received the Primaniyarta award from The President of Republic Indonesia.

Michelin off-take reached 2.8 mn tyres.

2009 The company successfully completed an Exchange Offer of its outstanding bonds. Gajah Tunggal also was the proud recipient of

numerous awards, most notably the ‘Anugerah Produk Asli Indonesia’ Award 2009 from Bisnis Indonesia. The company also

achieved ISO 14001 certification for its management systems.

2010 The company's net sales surpassed US$1 bn for the first time in its corporate history. Furthermore, Gajah Tunggal receives

three prestigious awards from Museum-Rekor Dunia Indonesia (MURI) for first green/ecological tyre produced in Indonesia, first

studded/snow tyre and first multi-colour smoke tyre made in Indonesia.


10 June 2013

Gajah Tunggal


Appendix 6: 4W Tyre Figure 70: Tyre in details

Source: Good Year Indonesia

10 June 2013

Gajah Tunggal


Appendix 7: HOLT® Figure 71: Gajah Tunggal Terbuka—HOLT default showing 37% upside

1

Relative Wealth ChartTires & Rubber Price: 3,250 (Jun 6, 2013)

Market Cap: 1.156 USD Warranted Price: 4,438 IDR (+37%)

Source: Credit Suisse HOLT Lens

TM

10 June 2013

Gajah Tunggal


Companies Mentioned (Price as of 07-Jun-2013)

Apollo Tyres (APLO.BO, Rs90.95) Astra International (ASII.JK, Rp6,800) Bridgestone (5108.T, ¥3,055) Cheng Shin Rubber (2105.TW, NT$90.5) Gajah Tunggal (GJTL.JK, Rp3,100, OUTPERFORM, TP Rp4,300) Michelin (MICP.PA, €68.4) Multistrada Arah (MASA.JK, Rp380) Polychem IDN (ADMG.JK, Rp250) S Giti Tire (600182.SS, Rmb12.43) Sumitomo Rubber Industries (5110.T, ¥1,463)

Disclosure Appendix

Important Global Disclosures

I, Dian Haryokusumo, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple se ctors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (54% banking clients)

Neutral/Hold* 39% (48% banking clients)

Underperform/Sell* 15% (39% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other i ndividual factors.

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Gajah Tunggal


Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Gajah Tunggal (GJTL.JK)

Method: We derive our target price of Rp4,300 for Gajah Tunggal by assumming 10.5x FY13E P/E (price-to-earnings), the regional average implied P/E of tire companies under our coverage.

Risk: Risks that could impede achievement of our Rp4,300 target price for Gajah Tunggal include: Fluctuation in commodity prices such as rubber; competition from existing and new players; regulations; and macroeconomic risks.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (APLO.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (5108.T, 5110.T, APLO.BO) within the next 3 months.

Credit Suisse may have interest in (GJTL.JK, ASII.JK)

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2105.TW).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GJTL.JK, 2105.TW, APLO.BO, MICP.PA, ASII.JK) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (MICP.PA).

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

PT Credit Suisse Securities Indonesia ....................................................................................................................................... Dian Haryokusumo

Important Credit Suisse HOLT Disclosures

With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.

The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-part data (including consensus earnings estimates) are systematically translated into a number of

10 June 2013

Gajah Tunggal


default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.

Additional information about the Credit Suisse HOLT methodology is available on request.

The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.

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Gajah Tunggal


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