UBS Adaro Lock-up period has ended

High probability of a sell-down
On 8 March 2009, the post-IPO 8-month lock-up period ended for the cornerstone
shareholders of Indonesia’s second largest coal producer, Adaro Energy. We
believe 25-30% of Adaro is held by an investor consortium consisting of Citigroup,
Farallon, Goldman Sachs, GIC and Kerry Group. We think the likelihood of a selldown
is high considering: 1) the current investor preference for cash over equity;
and 2) the approximately 3,600% return since the consortium’s initial investment.

Two scenarios with high likelihood
Scenario no 1; a major Asian utility company buys a block in order to ensure future
coal supply, but preference would be to take stake in the mine asset rather than the
holding company (low-liquidity scenario). Scenario no. 2; a block is sold in the
equity markets (high-liquidity scenario).

Two scenarios with low likelihood
Scenario no. 3; none of the shareholders sell down (low liquidity scenario).
Scenario no. 4; a coal producer buys a block stake (low liquidity scenario).

Valuation
We believe a stake sale could be a key positive for liquidity, as free float remains
relatively low at 5% with a daily turnover US$1-2m. However, we highlight that
only one in four of the scenarios above would increase liquidity immediately. Our
Rp1,100 price target is based on a 7.5x 2009E target PE valuation, which
incorporates a weighted cost of capital of 11.9%.