NISP Bukit Asam Settles Agreement for New Railway Project TP 20900

• TB Bukit Asam announced in its recent release that the company has settled on an agreement with China Railway Group Limited for its new railway project. The EPC (Engineering, Procurement and Construction) agreement was signed on 23 March 2010, by China Railway Group Limited and Bukit Asam Transpacific Railway. Bukit Asam Transpacific Railways is currently owned by TB Bukit Asam (10%), Transpacific Railway Infrastructure (80%) and China Railway Engineering Corporation (10%). This update erased recent uncertainty clouding the project as previously the ministry of SOE had suggested that TB Bukit Asam explore the possibility of partnering with other
companies for its new railway project.

• The railway project, when completed, should increase Bukit Asam’s production volume to 42mn tons in 2014F, where 22mn tons transportation capacity will be provided by PT KAI and a minimum of 20mn tons additional capacity will be provided by the new railway. Nevertheless, the impact from this railway project will not occur immediately as implementation is scheduled to increase gradually with 5mn tons in the first year, 10mn tons in the second year, before reaching full utilization rate in the third year.

• This 307km railway project will be the key factor for TB Bukit Asam to boost production and sales volume as this project may double the company’s existing production capacity from its original target. With the company’s healthy and sound balance sheet, we view that TB Bukit Asam will not meet any difficulties preparing financing as this project will be financed by a combination of internal and external financing. In addition, Bukit Asam Transpacific Railway has started preliminary discussions with several Chinese banks that are willing to disburse loans for the project.

• The next phase for the new railway project is the development of the final layout and design, which will be followed by land clearing activities that is scheduled to begin in the next three months.

• Overall, we believe that this update looks positive for TB Bukit Asam and with its current valuation of 2010F PER of 13.0x and EV/EBITDA of 11.1x, we maintain our buy recommendation on TB Bukit Asam.