JP Morgan - Indonesia Hard Hat; August 2010 - still waiting for a more robust price increase

Domestic cement demand grew by 9.4% y/y for 8M10. Domestic cement demand went up to 27mn tonne for 8M10, up by 9.4% y/y. The growth in domestic cement demand is seen in almost all regions, with the exception of Sulawesi . Cement demand in August is only up by 1.4% y/y, which we attribute due to earlier fasting season which started in early August this year versus late August last year. We view there is a risk that September volume might be also weak due to seasonality.

INTP and SMGR 8M10 sales volume is in line with expectations. INTP sales volume of 8.4mn tonnes is up by 13.8% y/y, in line with our expectations. 8M10 sales volume is 64% of our full year expectations. We expect the company to deliver around 10% volume growth for Sep-Dec 2010. SMGR sales volume of 11.6mn tonnes is up by 3% y/y, in line with our expectations. 8M10 sales volume makes up 64% of our full year expectations. We expect SMGR to deliver around 12% volume growth for Sep-Dec 2010.

Inorganic growth for SMGR? In the month of September, the State-Owned-Minister indicate two options for Semen Baturaja , a state owned cement company, which currently has 1.3mn tonnes of capacity. The
first option is merging with Semen Gresik Group and the second option is to conduct an IPO. We think that any decision on whether Semen Baturaja would be incorporated to SMGR is not in the hand of SMGR and whether or not the acquisition is favorable would depend on the specifics of the merger.

Maintain OW on SMGR and INTP. We maintain our OW on SMGR with June-11 target price of Rp10,700 (DCF-based, WACC: 14.5%) and
OW on INTP with June-11 target price of Rp19,300 (DCF-based, WACC: 14.0%). We prefer SMGR over INTP due to re-rating potential. If infrastructure projects exceed expectations in FY11, we think INTP would be the one who benefits as its utilization is currently at 75% versus SMGR’s utilization of 93%. Key risk for cement sector is
whether the price could be increased in Oct 2010, as price has not been increased post the favorable decision by the KPPU in mid-August. Key risk for SMGR is delay on capacity expansion and key risk for INTP is weaker-than-expected export growth and pricing.