Indopremier Kundur Site Visit –Tin Solder Factory

Tin Solder Business Factored in

We visited TINS’s production and processing facilities at Kundur, where they built a tin solder factory in their efforts to venture into downstream tin products. The factory has the capacity to produce 2100Mt/year and is expected to start commercialization in 2010. TINS is planning to expand the capacity to 4,200 Mt/year in 2012. Used for circuit boards of electronic products, tin solder industry faces good prospects as electronics usage continues to grow and many manufacturers are switching from lead to higher tin usage. Tin solders are generally priced at US$2,000/Mt above LME price and has a floor value, offering better margins and earnings stability. Factoring in the tin solder business in our forecasts, we expect contributions of 4% to revenue till FY12 and 8% subsequently.

Industry Outlook – Recovering Consumption

There has been a recovery in global demand for tin in 2Q09 as consumption rose 28.6% QoQ to 81,400 Mt, driven mainly by China. Nevertheless, there is still an oversupply in the market and LME inventory reached a high of 26,450 Mt. Based on CRU’s report, increased consumption in China and USA in the future could be offset by higher supply from China and Indonesia. However, because of bad weather and recent police crackdown, Indonesia’s production could be lower than expected. We expect refined tin prices to stabilize around US$15,000/Mt for FY10, but as the world economy picks up going forward, there is potential for higher prices.

Stronger Profitability Ahead

TINS’ profitability suffered since 3Q08 as a result of falling tin prices, with gross margins falling to 6% and 11% in 4Q08 and1H09 respectively. The winding down on inventory with high costs carried over from last year depressed margins as they had to be sold at lower LME prices. Going forward, we expect margins to improve as tin prices have recovered above COGS. Higher proportion of offshore production could also boost margins as its costs are relatively fixed and the social costs associated with illegal mining can be avoided. In FY10, we expect better margins from higher ASP and contributions from tin solder segment.

Valuation – TP Rp 2,555 BUY

Although we factored in the tin solder business, we have revised down our assumptions of tin prices and sales volume, cutting our TP slightly from Rp2,625 to Rp2,555. Using risk-free rate of 9.97%, risk premium of 5.26% and beta of 1.19, our TP is derived by applying WACC of 15.51%. With 17.5% potential upside, we maintain our BUY rating. Our TP implies 11.9x FY10 PER and 6.95x FY10 EV/EBITDA.