Case 3 Cemex

Assignment Multinational Financial Management

Case 3

CEMEX ENTERS INDONESIA Lecturer: Erni Ekawati, Ph.D

By: GROUP 5 Ariefka Sari Dewi

12/341231/PEK/17320

Dwi Wahyu R.S

12/341246/PEK/17335

Hartatiek

12/341257/PEK/17346

Niken Andry

12/341279/PEK/17368

Rifqa

12/341295/PEK/17384

PROGRAM MAGISTER MANAJEMEN FAKULTAS EKONOMIKA DAN BISNIS UNIVERSITAS GADJAH MADA YOGYAKARTA 2013

A. FACTS Cementos Mexicanos (Cemex) is a multinational company that produces cement in Mexico. Cemex is the largest cement manufacturer in the Americas, and third largest in the world. Cemex began its international expansion in an effort to reduce its reliance on the Mexican market to capitalize on demand in many countries. Cemex competes in the global marketplace for both market share and capital. The international cement market, like markets in other commodities such as oil, is a dollar-based market. For this reason and for comparisons against its major competitors in both Germany and Switzerland, so Cemex considers the U.S. dollar its functional currency. Cemex wants to increase its market capitalization through global expansion and entering in Asia market. In the year 1998, Cemex was considering the construction a cement manufacturing facility on the Indonesian island of Sumatra. The project, Semen Indonesia, would be a wholly owned greenfield investment with a total installed capacity of 20 million metric tons per year (mmt/y). There were three driving reasons for this project: 1. Initiate a productive presence in Southeast Asia. 2. Favorable long-term prospects for Asian infrastructure development and growth. 3. Positive prospects for producing and exporting from Indonesia due to the depreciation of the Indonesian rupiah (Rp) in 1997. In analyzing feasibility of this project, Cemex make a road map of the complete multinational capital budgeting to enter in Indonesia market.

Figure 1: a Road Map of to the Construction of Semen Indonesia’s Capital Budget The basic principle is that, the parent company invests US$-denominated capital in FDI project, project capital budget evaluated, and then project cash flows are remitted to Cemex in order to make parent viewpoint capital budget. The first step to construct capital budget, Cemex was analyzing a set of pro forma financial statements for Semen Indonesia, all in Indonesian rupiah (Rp). The next step is to create two capital budgets like project viewpoint and parent viewpoint. The following analysis was conducted assuming that purchasing power parity (PPP) holds for the Rp/US$ exchange rate for analysis this project. The projected inflation rates for Indonesia was 30% per annum and 3% per annum for United States inflation.

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B. SITUATION ANALYSIS 1. Financial Assumption This project would be held in Indonesia so the calculation was in Indonesian Rupiah. Before the capital budgets (NPV and IRR) were calculated, financial assumptions must be made. Based on the case, the financial assumption will be explained below. a. Capital Investment Cemex had production capacity of 20 million metric ton per year (mmt/y) with cost of installed capacity $110/tonne. Cemex assumed exchange rate of Rp 10,000/US$ in the year 1 and would be change consistent with inflation rate. Therefore, cost of initial investment can be calculated by 20 million mmt/y*$110/tonne = $2.2 billion or Rp 22 trillion. The amount cost of plant and equipment were Rp 17,6 trillion and Cemex assumed an annual depreciation charge of Rp 1.76 million (10 years straight-line depreciation schedule). b. Foreign Exchange Rate This project was assuming that PPP holds for the Rp/US$ exchange rate. The spot rate in year 0 was Rp 10.000/US$. The projected inflation rates for Indonesia were 30% per annum and 3% per annum for United States. This table below shows that calculation of spot rate Indonesian Rupiah against U.S. Dollar Table 1: Spot Rate (Rp/US$) Project year

0

1 (1.3/1.03)* 10,000

2 ((1.3/1.03)^2)* 10,000

10,000

12,621

15,930

Calculation Spot rate (Rp/US$)

3 4 ((1.3/1.03)^3)* ((1.3/1.03)^4)* 10,000 10,000 20,106

5 ((1.3/1.03)^5)* 10,000

25,376

32,028

c. Financing Capital structure was used by project viewpoint consists of 50% equity and 50% debt. All equity form Cemex, 75% debt from Cemex, and 25% from a bank consortium arranged by the Indonesian government. When, capital structure was used by parent viewpoint consist of 60% equity and 40% debt. The loan is denominated in U.S. dollars and Indonesian Rupiah. In U.S. dollars, the loan has 10% of annual interest with maturity 5 years. In Indonesia Rupiah, the loan has 35% of annual interest with maturity 8 years. This capital structure makes the difference of weighted average cost of capital (WACC) between project viewpoint (used in Indonesian Rupiah) and parent viewpoint (used in U.S. Dollar). This is calculation of WACC from project and parent viewpoint: Table 2: Calculation of WACC from Parent Viewpoint Information Risk-free rate Credit spread Cost of debt Cost of debt, after-tax Debt proportion Cemex Beta Equity premium Cost of equity Equity proportion

Calculation

8%*(1 – 0.35)

(13% - 6%) (6% + 7%)*1.5

Result 6% 2% 8% 5.2% 40% 1.5 7% 16.5% 60%

WACC = (0.4)*(5.2%) + (0.6*16.5%) = 11.98% 2

Table 3: Calculation of WACC from Project Viewpoint Information Calculation Risk-free rate Credit Premium Cost of debt in Rupiah Cost of debt, after-tax 35%*(1 - 0.3) Cost of debt, after tax to be paid (24.5%*0.25) Cost of US$ debt Cost of US$ debt, after-tax 38.835%*(1 – 0.3) Cost of debt, after tax to be paid (27.184%*0.75) Total Cost of debt 6.125% + 20.388% Debt Proportion Cemex Indonesia of beta Equity premium (40% - 33%) Cost of equity (33% + 7%)*1 Equity Proportion WACC = (0.5*26.513%) + (0.5*40%) = 33.527%

Result 33% 2% 35% 24.5% 6.125% 38.835% 27.184% 20.388% 26.513% 50% 1 7% 40% 50%

d. Revenues Cemex assumes that the 20 mmt/y facility is expected to operate at only 40% capacity (producing, 8 million metric tonnes). Sales price of cement was $58/tonne and would remain constant over the life project. Capacity is expected to be 50% in year 2 and 60% from year 3 on. e. Costs Costs of this project consist of manufacturing cost, production costs, and loading costs. Manufacturing costs (labor, materials, power, etc.) were estimated at Rp 115,000 per tonne for 1999 and increasing in accordance with inflation rate of 30% per year. Production costs are estimated Rp 20,000 per tonne for 1999 and increasing in accordance with inflation rate of 30% per year. 2. Project Viewpoint Capital Budget Evaluation of a project from local viewpoint serves some useful purposes, but it should be subordinated to be evaluated from the parent’s viewpoint. In evaluating a foreign project’s performance relative to the potential of a competing project in the same host country, we must pay attention to the project’s local return. Almost any project should at least be able to earn cash return equal to the yield available on host government bonds (with the same maturity as project’s economic life). For project viewpoint, net cash flow or free cash flow is calculated by summing EBITDA, recalculated taxes, and changes in net working capital. Capital budgeting is estimated by using EBITDA, not EBT, which contains both depreciation and interest expense. Furthermore, taxes are recalculated on the basis of EBITDA. The firm’s cost of capital used in discounting also includes the deductibility of debt interest in its calculation. The initial investment of Rp 22 trillion is the total capital invested to support these earnings. Although receivables average 50 to 55 days sales outstanding (DSO) and inventories 65 to 70 DSO, payable and trade credit are also relative long at 114 DSO in the Indonesian cement industry. Semen Indonesia expects to add approximately 15 net DSO to its investment with sales growth. The terminal value (TV) of project represents the continuing value of the cement manufacturing facility in the years 5, last year of detailed pro forma financial analysis. 3

TV calculated as perpetual net operating cash flow after year 5. TV from Semen Indonesia can be estimated by using form below.

Terminal Value 

NOCF5 (1  g) 6,547,059  (1  0)   RP19,686,258 k WACC  g 0.33257  0

The result of the capital budget from the project viewpoint indicate a negative present value (NPV) of Rp 9,443,460 million or about Rp 9,4 trillion and internal rate of return (IRR) of only 15.4% less than cost of capital about 33.257%. According to this calculation, the project is not acceptable. Tabel 4: Capital Budget: Cemex Indonesia (millions RP) Project Year Spot Rate (Rp/$) EBITDA Recalculated taxes (@30%) Net Operating cash flow

Year 0 10,000

Additions to NWC Initial Investment Terminal Value

(22,000,000)

Free Cash Flow (FCF)

(22,000,000)

NPV @ 33.257% IRR

($9,443,460) 15.4%

Year 1 12,621 2,979,029

Year 2 15,930 4,499,067

Year 3 20,106 6,504,982

Year 4 25,376 7,813,589

Year 5 32,028 9,352,941

(893,709)

(1,349,720)

(1,951,495)

(2,344,077)

(2,805,882)

2,085,320

3,149,347

4,553,487

5,469,512

6,547,059

(240,670)

(139,028)

(436,049)

(289,776)

(625,314) 19,686,258

1,844,650

3,010,319

4,117,438

5,179,736

25,608,003

3. Parent Viewpoint Capital Budgeting All incremental earnings to Cemex from the prospective investment project in Indonesia are important in parent viewpoint. For Cemex, investment must be analyzed in terms of US dollar cash inflows and outflows associated with the investment over the life of project, after-tax, discounted at its appropriate cost of capital. Parent viewpoint capital budget can be estimated in two ways. First, isolate individual cash flows, adjusted for any withholding taxes imposed by the Indonesia government and converted to US dollars. In the case of Semen Indonesia, dividends will be charged a 15% withholding tax, 10% on interest payments, and 5% license fees. Mexico does not repatriated earnings since they have already been taxed in Indonesia. After isolate individual cash flows the second step is to calculate the actual parent viewpoint capital budget, combines these US dollar after-tax cash flows with initial investment to determine the net present value of proposed Semen Indonesia subsidiary eyes of Cemex. A specific peculiarity of this parent viewpoint capital budget is that only the capital invested into the project by Cemex itself, $1,925 million, is included the initial investment, $1,100 million in equity and $825 million loan. The Indonesia debt of Rp 2.75 billion ($275 million) is not included in the Cemex parent viewpoint capital budget.

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Table 5: Semen Indonesia’s Remittance and Capital Budget: Parent Viewpoint (millions of Rp and US$) Project Year Spot Rate (Rp/$)

Year 0 10,000

Dividend Remittance Dividends paid (RP) Withholding tax @ 15% Net dividend remitted (RP) Net dividend remitted ($) License Fees Remittance Fees remitted Withholding tax @ 5% Net dividend remitted (RP) Net license fees remitted ($) Debt Service Remittance Promised interest paid ($) Withholding tax @ 10% Net interest remitted ($) Principal payments remitted ($)

Year 1 12,621

Year 2 15,930

Year 3 20,106

Year 4 25,376

Year 5 32,028

0 0 0 0

0 0 0 0

560,423 (84,063) 476,360 24

555,757 (83,364) 472,393 19

651,450 (97,717) 553,732 17

117,126 (5,856) 111,270 8.8

184,787 (9,239) 175,547 11.0

279,871 (13,994) 265,877 13.2

353,235 (17,662) 335,573 13.2

445,831 (22,292) 423,539 13.2

82.5 (8.25) 74.3

69.0 (6.90) 62.1

54.1 (5.41) 48.7

37.8 (3.78) 34.0

19.8 (1.98) 17.8

135.1

148.6

163.5

179.9

197.8

0.0 8.8 209.4 218.2

0.0 11.0 210.7 221.8

23.7 13.2 212.2 249.1

18.6 13.2 213.9 245.7

17.3 13.2 215.7 246.2

Capital Budget: Parent Viewpoint (US$ million) Dividends License fees Debt service Total Initial Investment Terminal Value Free Cash Flow (FCF) NPV @ 17.98% IRR

(1,925) 614.66 (1,925) (925.62) -1.84%

218.2

221.8

249.1

245.7

860.8

In order to evaluate the project’s cash flows that are returned to the parent company, Cemex must discount these at the corporate cost of capital. If Cemex were undertaking an investment of the same relative degree of risk of the firm itself, a simple discount rate of 11.98% might me adequate. Cemex, however, requires new investment to yield an additional 6% over the cost of capital for international projects. The discount rate for Semen Indonesia’s cash flows repatriated to Cemex will therefore be discounted at 11.98% + 6%, or 17.98%. From the parent viewpoint capital budgeting, it is indicated a negative NPV of US$925.6 million with IRR -1.84%. Based on this result yhis investment is unacceptable from the parent’s viewpoint. Multinational firm should invest only if they can earn a risk-adjusted return greater than locally based competitors can earn on the same project. If they are unable to earn superior returns on foreign projects, their stockholders would be better off buying shares in local firms, where possible, and letting those companies carry out the local projects. 5

Most firms appear to evaluate foreign projects from both parent and project NPV and the overall effect on consolidated earning of the firm. For foreign projects, must adjust for agency cost and foreign exchange rate risks and costs. B. KEY ISSUES Cemex was using traditional capital budgeting for considering expansion in Indonesia. From traditional capital budgeting, Cemex got negative NPV and IRR that is less than WACC, not only from project viewpoint but also from parent viewpoint. These calculations meant the investment should be rejected. Is there any wrong assumption that Cemex use? Cemex was considering expansion to Indonesia yet Cemex did not consider the additional risk or sensitivity analysis from both project viewpoint and parent viewpoint. From project viewpoint, sensitivity analysis could be measured from foreign exchange risk and other sensitivity variable such as the capacity utilization rate. Furthermore, from parent viewpoint, the additional risk can be measured in at least two ways, adjusting the discount rates or adjusting the cash flows. What will happen if Cemex considers these additional risks? C. ALTERNATIVE SOLUTIONS 1. Changing in Foreign Exchange Rate Cemex should consider additional risks for both project viewpoint and parent viewpoint. Cemex should consider whether if the rate of rupiah was depreciated or appreciated. We try to make some estimation based on this consideration, rupiah depreciate and appreciate. a. Rupiah depreciate When the rate of rupiah depreciation were greater than US dollar at the PPP it would make the assumed cash flows to Cemex worth less in dollars and the cheaper rupiah made Semen Indonesia more competitive. It will happen caused by cash flow of Semen Indonesia both cash inflows (export to Taiwan) and outflows (imported components from parent company) are denominated in foreign currencies. Rupiah depreciation would make higher inflation, so we would like to forecast the capital budget with Indonesia inflation rate 40% (>30%). And the result is capital budget have the negative NPV of Rp -6,435,034 and IRR of 24.5%, compared to 36.06%. This result shows that the project should be rejected. b. Rupiah appreciate Rupiah appreciates because of the decreasing of inflation rate. For this estimation, we assume that inflation Indonesia decrease 10% or become 20%, inflation America stays the same or 3%, WACC for project is 30.45% and 17.98% for parent. Based on these assumptions, we try to estimate NPV and IRR for both project viewpoint and parent view point. For project viewpoint, we got a negative NPV of Rp 12,126,108 million and IRR 6.1% that is less than WACC. And for parent viewpoint, we got a negative NPV of $921.83 million with a negative IRR 1.65%. Based on this estimation, we can assume that this investment should be rejected. c. Real Option We can find the NPV and IRR based on the financial assumptions. When the NPV value is negative, for example $-614.710 it mean that the project must be rejected. In this 6

session, we use several assumptions, whether we got changes on inflation rate or at capacity amount. When the inflation rate is assumed very high than 30% like 40%. The NPV value is ($6,435,034). So that when inflation rate higher to 40% and capacity volume of sales increased became 12,000 on year 1, then 14,000 on year 2, then 16,000 in year 3-5, the NPV value is still negative ($-614.710). And if inflation rate is still on 30% but we changes on the capacity as telling above, it shown at exhibit 4 and we can see that NPV value is ($4,650,934). It is better than cash flow without changes on capacity but it still got negative value and the project has to reject.

Inflation rate 40%

NPV= Rp -6,435,034

p=33,3%

Inflation rate 30% Project

NPV= Rp -9,443,460

p=33,3%

Inflation rate 20% NPV= Rp -12,126,108 p=33,3% Total NPV = (0,333 x Rp -6,435,034) + (0,333 x Rp -9,443,460) + (0,333 x Rp 12,126,108) = Rp -9,325,532 Figure 2: Real Option for Changing in Foreign Exchange Rate Actually we don’t know exactly the probability so we assume that the probability is about 33.3% each inflation rate (we divided into 40%, 30% and 20% without change on capacity). Based on those analyses, the total NPV is Rp -9,325,532. When the inflation rate going higher or lower, but NPV value is still negative. From these analyses we can conclude that the project still must be rejected because the NPV is still negative. 2. Changing in Capacity Furthermore, we try to estimate NPV and IRR for project and parent by increasing the capacity utilization rate. We assume that capacity for year 1 is 50%, year 2 is 60%, year 3 is 70%, year 4 is 80%, and year 5 is 90%. We use the same inflation rate from the case, 30%. Based on this assumption, we got the results of the capital budget from the project viewpoint indicate a negative NPV of Rp -4,677,058 million and an IRR of only 25.4%, compared to the 33.257 % cost of capital. Even we optimist with the condition is different, which means that the production capacity is higher than that so NPV will be positive. But this project’s NPV is still negative and would not acceptable. Then we use probability 50% on each condition (project of 30% inflation rate and project of 30% inflation rate plus change in capacity), the total NPV is Rp –7,060,259. The project still must be rejected. 7

Pesimist NPV= Rp -9,443,460 p=50%

Project

Optimist

NPV= Rp -4,677,058

p=50% Total NPV = (0.5 x Rp -9,443,460) +(0.5 x Rp -4,677,058)

= Rp -7,060,259

Figure 3: Real Option for Changing in Capacity 3. Real Market Condition From inflation rate data on the appendix, we are assuming that the Indonesian inflation rate is expected to normalize. Therefore, we are using inflation rate decrease in 30% every year. Based on IMF data, Indonesian inflation rate in 1998 was 77.54% and we are assuming that it is expected to normalize, so it will decrease into 54.28% then 37.99% in year 2000. While the inflation rate of United States is expected 2%/year with Indonesian Rupiah exchange rate Rp 10,375 against U.S dollar. Therefore, changing in the inflation rate will affect in Indonesian Rupiah exchange rate against U.S dollars. Cemex allocated production capacity was 20,000 mmt/y, but it would not maximizing the production capacity. It only used 40% from maximum capacity in year 1. Cemex can use 50% from maximum production capacity in year 1 and it capacity will increase 10%/year. Thus, Cemex production capacity is 60% in year 2, 70% in year 3, 80% in year 4, and 90% in year 5. We are assuming that Cemex has increased in export sales because one of Cemex purpose to build plant in Indonesia was global expansion especially in Southeast Asia market. We believe that the plant can operate at optimum capacity. Then we used the same additional expenses include license fees, general administrative expenses and depreciation as the case assumed. We also build this parent view point capital budget. Dividends are not distributed in the first and second year but it will distribute at a 50% rate in the year 3-5. Dividends will be charged a 15% withholding tax, 10% interest payments and 5% license fees. This is illustrated in the Appendix 5 which shows all incremental earnings to Cemex from the prospective investment project. Based on World Bank data, the components of cost of capital will be changed in accordance with market condition. The components of cost of capital will describe in the appendix. We found that the new WACC or WACC adjusted is 16.26% from parent viewpoint and 46.87% from project viewpoint. The new WACC or WACC adjusted and exchange rate will affect in free cash flow (FCF) and capital budgets (NPV and IRR) for Cemex. Based on our calculation, we found that NPV is Rp -3,983,785 million and IRR is 37.7% form project viewpoint. This negative NPV indicates that Cemex should reject this project. An IRR calculation is less that cost of capital 45.29%, so this project is not acceptable (reject) from project viewpoint. While NPV and IRR from parent viewpoint also rejected because of NPV has negative value and IRR less than cost of capital. 8

Therefore, using the real inflation rate and cost of capital data, this project is not acceptable. Cemex should not build plant and equipment in Indonesia. D. RECOMMENDATION From all of our estimate with sensitivity analysis, this project should be rejected. We adjusts increase and decrease in inflation rate, the project should not acceptable. We also adjusts the sales volume into 50%-90%, but still the NPV is negative and IRR still less than WACC. And we adjust the NPV and IRR by using real market condition, the result stays the same, NPV still negative and IRR still less than WACC. This investment could not applied in Indonesia and also the timing of investment was not in good condition because Indonesia was suffering crisis during 1997-1998. If Cemex really want to make a greenfield investment in Indonesia, there are several recommendations that we can give for Cemex: 1. Cemex should use optimist assumption for calculating capital budgeting, both project viewpoint and parent viewpoint. 2. Cemex should use Rupiah for the all debt. Cemex use US dollar as functional currency, so the all revenue will be in US Dollar. At that time Rupiah was depreciated, Cemex will get more Rupiahs if Cemex converted US Dollar to Rupiah. 3. In 1998, Indonesia faced economic crisis, but the crisis will not last forever. Cemex should make assumption that crisis and hyperinflations are expected to normalize.

E. BIBLIOGRAPHY Saphiro, Alan C. (2010). Multinational Financial Management 9th Edition. John Wiley & Sons, Inc. http://www.bps.go.id/aboutus.php?inflasi=1 http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weorept.aspx?sy=1997&ey=2 003&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=85&pr1.y=8&c=536%2C111& s=PPPEX%2CPCPI%2CPCPIPCH%2CPCPIE%2CPCPIEPCH&grp=0&a= http://data.worldbank.org/indicator/FR.INR.RINR?page=3

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Appendix Exhibit 1: Semen Indonesia Debt Service Schedule Project Year Spot Rate (Rp/$)

Year 0 10,000

Year 1 12,621

Year 2 15,930

Year 3 20,106

Year 4 25,376

Year 5 32,028

Indonesian Loan @ 35% for 8 years (million Rp) Loan Principal 2,750,000 Interest Payment Principal Payment Total Payment

2,654,061 (962,500) (95,939) (1,058,439)

2,524,543 (928,921) (129,518) (1,058,439)

2,349,694 (883,590) (174,849) (1,058,439)

2,113,648 (822,393) (236,046) (1,058,439)

1,794,985 (739,777) (318,662) (1,058,439)

Cemex Loan @ 10% for 5 years (million US$) Loan Principal 825 Interest Payment Principal Payment Total Payment

689.9 (82.5) (135.1) (217.6)

541.2 (69.0) (148.6) (217.6)

377.7 (54.1) (163.5) (217.6)

197.8 (37.8) (179.9) (217.6)

0.0 (19.8) (197.8) (217.6)

Cemex loan converted to Rp (million Rp) Scheduled @ Rp10,000/$ Interest Payment Principal Payment Total Payment

(825,000) (1,351,329) (2,176,329)

(689,867) (1,486,462) (2,176,329)

(541,221) (1,635,108) (2,176,329)

(377,710) (1,798,619) (2,176,329)

(197,848) (1,978,481) (2,176,329)

Actual (@ current spot rate) Interest Payment Principal Payment Total Payment

(1,041,262) (1,705,561) (2,746,823)

(1,098,949) (2,367,915) (3,466,864)

(1,088,160) (3,287,494) (4,375,654)

(958,480) (4,564,190) (5,522,670)

(633,669) (6,336,691) (6,970,360)

(2,746,823)

(3,466,864)

(4,375,654)

(5,522,670)

(6,970,360)

(409,082)

(546,940)

(580,770)

(435,821)

(881,453)

(1,652,385)

(2,765,571)

(4,358,210)

(1,290,535)

(2,199,325)

(3,346,341)

(4,794,031)

Year 4 25,376 16,000 58 1,471,813

Year 5 32,028 18,000 58 1,857,627

Cash flow in RP on Cemex Loan (million RP) Total Actual Cash Flow 8,250,000 IRR of cash flow: 39%

Foreign Exchange Losses on Cemex Loan (million RP) Forex Loss on Interest: (216,262) Forex Loss on Principal: (354,232) Total Forex Loss on Debt: (570,494)

Exhibit 2: Semen Indonesia Pro Forma Income Statement Project Year Spot Rate (Rp/$) Sales Volume Sales Price ($) Sales Price (RP)

Year 0 10,000

Year 1 12,621 10,000 58 732,039

Year 2 15,930 12,000 58 923,933

Year 3 20,106 14,000 58 1,166,128

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Total Revenue ('000)

7,320,388

11,087,190

16,325,798

23,549,001

33,437,295

(1,150,000) (200,000) (252,427) (1,262,136) (2,864,563)

(1,794,000) (312,000) (393,786) (1,968,932) (4,468,718)

(2,720,900) (473,200) (597,243) (2,986,214) (6,777,556)

(4,042,480) (703,040) (887,332) (4,436,660) (10,069,512)

(5,912,127) (1,028,196) (1,297,723) (6,488,616) (14,726,662)

Gross Profit

4,455,825

6,618,472

9,548,241

13,479,489

18,710,633

License Fees General & Admin Expenses EBITDA

(146,408)

(221,744)

(326,516)

(470,980)

(668,746)

(585,631) 3,723,786

(997,847) 5,398,881

(1,632,580) 7,589,146

(2,590,390) 10,418,119

(4,012,475) 14,029,412

(1,760,000) 1,963,786

(1,760,000) 3,638,881

(1,760,000) 5,829,146

(1,760,000) 8,658,119

(1,760,000) 12,269,412

Interest on Cemex Debt Forex Losses on Debt Interest on Local Debt EBT

(825,000) (570,494) (962,500) (394,208)

(689,867) (1,290,535) (928,921) 729,557

(541,221) (2,199,325) (883,590) 2,205,010

(377,710) (3,346,341) (822,393) 4,111,675

(197,848) (4,794,031) (739,777) 6,537,756

Income taxes (30%) Net Income (RP) Net Income ($ million)

0 (394,208) (31)

0 729,557 46

0 2,205,010 110

1,995,610 2,116,064 83

1,961,327 4,576,429 143

Cash costs ('000) Additional production costs ('000) Loading costs ('000) Shipping costs ('000) Total

Depreciation & Amortization EBIT

Exhibit 3: Rupiah Depreciates Project Year Spot Rate (Rp/$) Sales Volume Sales Price ($) Sales Price (RP) Total Revenue ('000)

Year 1 13.592 8.000 58 788.350 6.306.796

Year 2 18.475 10.000 58 1.071.543 10.715.430

Year 3 25.111 12.000 58 1.456.466 17.477.595

Year 4 34.132 12.000 58 1.979.663 23.755.954

Year 5 46.393 12.000 58 2.690.804 32.289.647

(920.000)

(1.610.000)

(2.704.800)

(3.786.720)

(5.301.408)

(160.000) (217.476) (1.087.379) (2.384.854)

(280.000) (380.583) (1.902.913) (4.173.495)

(470.400) (639.379) (3.196.893) (7.011.472)

(658.560) (895.130) (4.475.650) (9.816.061)

(921.984) (1.253.182) (6.265.911) (13.742.485)

Gross Profit

3.921.942

6.541.935

10.466.123

13.939.894

18.547.162

License Fees General & Admin Expenses EBITDA

(126.136)

(214.309)

(349.552)

(475.119)

(645.793)

(504.544) 3.291.262

(964.389) 5.363.238

(1.747.760) 8.368.812

(2.613.155) 10.851.620

(3.874.758) 14.026.611

(1.760.000) 1.531.262

(1.760.000) 3.603.238

(1.760.000) 6.608.812

(1.760.000) 9.091.620

(1.760.000) 12.266.611

Cash costs ('000) Additional production costs ('000) Loading costs ('000) Shipping costs ('000) Total

Depreciation & Amortization EBIT

Year 0 10.000

11

Interest on Cemex Debt Forex Losses on Debt Interest on Local Debt EBT

(825.000) (781.788) (962.500) (1.038.026)

(689.867) (1.844.413) (928.921) 140.037

(541.221) (3.288.757) (883.590) 1.895.244

(377.710) (5.251.943) (822.393) 2.639.573

(197.848) (7.920.352) (739.777) 3.408.635

Income taxes (30%) Net Income (RP) Net Income ($ million)

0 (1.038.026) (76)

42.011 98.026 5

299.176 1.596.067 64

1.091.048 1.548.525 45

1.022.590 2.386.044 51

Year 1 13.592 3.291.262

Year 2 18.475 5.363.238

Year 3 25.111 8.368.812

Year 4 34.132 10.851.620

Year 5 46.393 14.026.611

(987.379)

(1.608.971)

(2.510.644)

(3.255.486)

(4.207.983)

2.303.883

3.754.266

5.858.168

7.596.134

9.818.628

(240.670)

(139.028)

(436.049)

(289.776)

(625.314)

Capital Budget: Cemex Indonesia (million RP) Project Year Spot Rate (Rp/$) EBITDA Recalculated taxes (@30%) Net Operating cashflow

Year 0 10.000

Additions to NWC Initial Investment Terminal Value

(22.000.000)

Free Cash Flow (FCF)

(22.000.000)

NPV @ 36,06% IRR

27.228.531 2.063.213

3.615.238

5.422.119

7.306.358

36.421.845

(Rp6.435.034) 24,5%

Semen Indonesia’s Remittance and Capital Budget: Parent Viewpoint (million RP & million US$) Project Year Spot Rate (Rp/$) Dividend Remittance Dividends paid (RP) Withholding tax @ 15% Net dividend remitted (RP) Net dividend remitted ($) License Fees Remittance Fees remitted Withholding tax @ 5% Net dividend remitted (RP) Net license fees remitted ($) Debt Service Remittance Promised interest paid ($) Withholding tax @ 10% Net interest remitted ($) Principal payments remitted ($)

Year 0 10.000

Year 1 12.621

Year 2 15.930

Year 3 20.106

Year 4 25.376

Year 5 32.028

0 0 0 0

0 0 0 0

798.034 (119.705) 678.329 34

774.263 (116.139) 658.123 26

1.193.022 (178.953) 1.014.069 32

126.136 (6.307) 119.829 9,5

214.309 (10.715) 203.593 12,8

349.552 (17.478) 332.074 16,5

475.119 (23.756) 451.363 17,8

645.793 (32.290) 613.503 19,2

82,5 (8,25) 74,3 135,1

69,0 (6,90) 62,1 148,6

54,1 (5,41) 48,7 163,5

37,8 (3,78) 34,0 179,9

19,8 (1,98) 17,8 197,8

Capital Budget: Parent Viewpoint (US$ million) 12

Dividends License fees Debt service Total

0,0 9,5 209,4 218,9

Initial Investment Terminal Value

0,0 12,8 210,7 223,5

33,7 16,5 212,2 262,5

25,9 17,8 213,9 257,6

31,7 19,2 215,7 266,5

(1.925) 586,91 (1.925) (912,79) -2%

Free Cash Flow (FCF) NPV @ 17.98% IRR

218,9

223,5

262,5

257,6

853,4

Exhibit 4: Rupiah Appreciates Cost of Capital: Cemex Indonesia Risk-free rate Credit Premium Cost of debt in Rupiah Cost of debt, after-tax Cost of US$ debt Cost of US$ debt, after-tax % debt

33% 2% 35% 24.50% 28% 19.71% 50%

Cemex Indonesia Equity premium Cost of equity % equity

1 7% 40% 50%

WACC

30.4533%

Capital Budget: Cemex Indonesia (million RP) Project Year Spot Rate (Rp/$) EBITDA Recalculated taxes @30% Net Operating cash flow

Year 0 10,000

Additions to NWC Initial Investment Terminal Value

(22,000,000)

Free Cash Flow (FCF)

(22,000,000)

NPV @30.4533% IRR

Year 1 11,650 2,666,796

Year 2 13,573 3,708,909

Year 3 15,814 4,936,898

Year 4 18,424 5,457,526

Year 5 21,464 6,009,723

(800,039)

(1,112,673)

(1,481,070)

(1,637,258)

(1,802,917)

1,866,757

2,596,237

3,455,829

3,820,268

4,206,806

(240,670)

(139,028)

(436,049)

(289,776)

(625,314) 13,813,958

1,626,087

2,457,209

3,019,780

3,530,492

17,395,450

($12,126,108) 6.1%

Capital Budget: Cemex Indonesia (million RP & million US$) Project Year Spot Rate (Rp/$) Dividend Remittance Dividends paid (RP) Withholding tax @ 15% Net dividend remitted (RP) Net dividend remitted ($) License Fees Remittance Fees remitted Withholding tax @ 5%

Year 0 10,000

Year 1 12,621

Year 2 15,930

Year 3 20,106

Year 4 25,376

Year 5 32,028

0 0 0 0

0 0 0 0

798,034 (119,705) 678,329 34

774,263 (116,139) 658,123 26

1,193,022 (178,953) 1,014,069 32

126,136 (6,307)

214,309 (10,715)

349,552 (17,478)

475,119 (23,756)

645,793 (32,290) 13

Net dividend remitted (RP) Net license fees remitted ($) Debt Service Remittance Promised interest paid ($) Withholding tax @ 10% Net interest remitted ($) Principal payments remitted ($)

119,829 9.5

203,593 12.8

332,074 16.5

451,363 17.8

613,503 19.2

82.5 (8.25) 74.3 135.1

69.0 (6.90) 62.1 148.6

54.1 (5.41) 48.7 163.5

37.8 (3.78) 34.0 179.9

19.8 (1.98) 17.8 197.8

0.0 9.5 209.4 218.9

0.0 12.8 210.7 223.5

33.7 16.5 212.2 262.5

25.9 17.8 213.9 257.6

31.7 19.2 215.7 266.5

Capital Budget: Parent Viewpoint (US$ million) Dividends License fees Debt service Total Initial Investment Terminal Value

(1,925) 586.91 (1,925) (912.79) -2%

Free Cash Flow (FCF) NPV @ 17.98% IRR

218.9

223.5

262.5

257.6

853.4

Exhibit 5: Changing in Capacity Semen Indonesia Pro Forma Income Statement Project Year Spot Rate (Rp/$) Sales Volume Sales Price ($) Sales Price (RP) Total Revenue ('000)

Year 0 10,000

Year 1 12,621 10,000 58 732,039 7,320,388

Year 2 15,930 12,000 58 923,933 11,087,190

Year 3 20,106 14,000 58 1,166,128 16,325,798

Year 4 25,376 16,000 58 1,471,813 23,549,001

Year 5 32,028 18,000 58 1,857,627 33,437,295

(1,150,000) (200,000) (252,427) (1,262,136) (2,864,563)

(1,794,000) (312,000) (393,786) (1,968,932) (4,468,718)

(2,720,900) (473,200) (597,243) (2,986,214) (6,777,556)

(4,042,480) (703,040) (887,332) (4,436,660) (10,069,512)

(5,912,127) (1,028,196) (1,297,723) (6,488,616) (14,726,662)

Gross Profit

4,455,825

6,618,472

9,548,241

13,479,489

18,710,633

License Fees General & Admin Expenses EBITDA

(146,408)

(221,744)

(326,516)

(470,980)

(668,746)

(585,631) 3,723,786

(997,847) 5,398,881

(1,632,580) 7,589,146

(2,590,390) 10,418,119

(4,012,475) 14,029,412

(1,760,000) 1,963,786

(1,760,000) 3,638,881

(1,760,000) 5,829,146

(1,760,000) 8,658,119

(1,760,000) 12,269,412

(825,000) (570,494) (962,500)

(689,867) (1,290,535) (928,921)

(541,221) (2,199,325) (883,590)

(377,710) (3,346,341) (822,393)

(197,848) (4,794,031) (739,777)

Cash costs ('000) Additional production costs ('000) Loading costs ('000) Shipping costs ('000) Total

Depreciation & Amortization EBIT Interest on Cemex Debt Forex Losses on Debt Interest on Local Debt

14

EBT

(394,208)

729,557

2,205,010

4,111,675

6,537,756

Income taxes (30%) Net Income (RP) Net Income ($ million)

0 (394,208)

0 729,557

0 2,205,010

1,995,610 2,116,064

1,961,327 4,576,429

(31)

46

110

83

143

Year 1 12,621 3,723,786

Year 2 15,930 5,398,881

Year 3 20,106 7,589,146

Year 4 25,376 10,418,119

Year 5 32,028 14,029,412

(1,117,136)

(1,619,664)

(2,276,744)

(3,125,436)

(4,208,824)

2,606,650

3,779,217

5,312,402

7,292,683

9,820,588

(240,670)

(139,028)

(436,049)

(289,776)

(625,314)

Capital Budget: Cemex Indonesia (million RP) Project Year Spot Rate (Rp/$) EBITDA Recalculated taxes (@30%) Net Operating cash flow Additions to NWC Initial Investment Terminal Value

Year 0 10,000

(22,000,000) 29,529,388

Free Cash Flow (FCF)

(22,000,000)

NPV @ 33.257% IRR

($4,677,058) 25.4%

2,365,980

3,640,189

4,876,353

7,002,907

38,724,662

Capital Budget: Cemex Indonesia (million RP & million US$) Project Year Spot Rate (Rp/$)

Year 0 10,000

Dividend Remittance Dividends paid (RP) Withholding tax @ 15% Net dividend remitted (RP) Net dividend remitted ($) License Fees Remittance Fees remitted Withholding tax @ 5% Net dividend remitted (RP) Net license fees remitted ($) Debt Service Remittance Promised interest paid ($) Withholding tax @ 10% Net interest remitted ($) Principal payments remitted ($)

Year 1 12,621

Year 2 15,930

Year 3 20,106

Year 4 25,376

Year 5 32,028

0 0

0 0

1,102,505 (165,376)

1,058,032 (158,705)

2,288,215 (343,232)

0 0

0 0

937,129 47

899,327 35

1,944,982 61

146,408 (7,320)

221,744 (11,087)

326,516 (16,326)

470,980 (23,549)

668,746 (33,437)

139,087

210,657

310,190

447,431

635,309

11.0

13.2

15.4

17.6

19.8

82.5 (8.25) 74.3

69.0 (6.90) 62.1

54.1 (5.41) 48.7

37.8 (3.78) 34.0

19.8 (1.98) 17.8

135.1

148.6

163.5

179.9

197.8

Capital Budget: Parent Viewpoint (US$ million) 15

Dividends License fees Debt service Total

0.0 11.0 209.4 220.4

Initial Investment Terminal Value Free Cash Flow (FCF) NPV @ 17.98% IRR

0.0 13.2 210.7 224.0

46.6 15.4 212.2 274.3

35.4 17.6 213.9 266.9

60.7 19.8 215.7 296.2

(1,925) 921.98 (1,925) (739.57) 3.54%

220.4

224.0

274.3

266.9

1,218.2

Exhibit 5: Real Market Condition Indonesian Inflation Rate Year

0

1

2

3

4

5

Changing

598,54%

-30,00%

-30,00%

-30,00%

-30,00%

-30,00%

Inflation Rate

77,54%

54,28%

37,99%

26,60%

18,62%

13,03%

Calculation of WACC from Parent Viewpoint Calculation

Information Risk-free rate Credit spread Cost of debt Cost of debt, after-tax Debt proportion Cemex Beta Equity premium Cost of equity Equity proportion

11.5%*(1 – 0.35)

(9.5% + 8.41%)*1.5

Result 9.5% 2% 11.5% 7.48% 40% 1.5 8.41% 22.12% 60%

WACC = (0.4)*(7.48%) + (0.6*22.12%) = 16.26%

Calculation of WACC from Parent Viewpoint Information Calculation Risk-free rate Credit Premium Cost of debt in Rupiah Cost of debt, after-tax 50.28%*(1 - 0.3) Cost of debt, after tax to be paid (35.2%*0.25) Cost of US$ debt Cost of US$ debt, after-tax 50.49%*(1 – 0.3) Cost of debt, after tax to be paid (35.34%*0.75) Total Cost of debt 9.79% + 26.51% Debt Proportion Cemex Indonesia of beta Equity premium (58.44% - 48.28%) Cost of equity (10.16% + 48.28%)*1 Equity Proportion WACC = (0.5*35.31%) + (0.5*58.44%) = 46.87%

Result 48.28% 2% 50.28% 35.2% 8.79% 50.49% 35.34% 26.518% 35.31% 50% 1 10.16% 58.44% 50%

Semen Indonesia’s Debt Service Schedules and Foreign Exchange Losses (millions of Rp and US$) Project Year

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5 16

Spot Rate (Rp/$)

10,375

15,692

21,230

26,349

30,642

33,956

Indonesian Loan @ 35% for 8 years (million Rp) Loan Principal 2,750,000 Interest Payment Principal Payment Total Payment

2,654,061 (962,500) (95,939) (1,058,439)

2,524,543 (928,921) (129,518) (1,058,439)

2,349,694 (883,590) (174,849) (1,058,439)

2,113,648 (822,393) (236,046) (1,058,439)

1,794,985 (739,777) (318,662) (1,058,439)

Cemex Loan @ 10% for 5 years (million US$) Loan Principal 825 Interest Payment Principal Payment Total Payment

689,9 (82,5) (135,1) (217,6)

541,2 (69,0) (148,6) (217,6)

377,7 (54,1) (163,5) (217,6)

197,8 (37,8) (179,9) (217,6)

0,0 (19,8) (197,8) (217,6)

Cemex loan converted to Rp (million Rp) Scheduled @ Rp10,000/$ Interest Payment Principal Payment Total Payment

(825,000) (1,351,329) (2,176,329)

(689,867) (1,486,462) (2,176,329)

(541,221) (1,635,108) (2,176,329)

(377,710) (1,798,619) (2,176,329)

(197,848) (1,978,481) (2,176,329)

Actual (@ current spot rate) Interest Payment Principal Payment Total Payment

(1,294,619) (2,120,553) (3,415,172)

(1,464,577) (3,155,736) (4,620,313)

(1,426,066) (4,308,356) (5,734,422)

(1,157,364) (5,511,256) (6,668,619)

(671,806) (6,718,058) (7,389,864)

(3,415,172)

(4,620,313)

(5,734,422)

(6,668,619)

(7,389,864)

Cash flow in RP on Cemex Loan (million RP) Total Actual Cash 8,250,000 Flow IRR of cash flow: 50% Foreign Exchange Losses on Cemex Loan (million RP) Forex Loss on Interest: Forex Loss on Principal: Total Forex Loss on Debt:

(469,619) (769,224)

(774,710) (1,669,274)

(884,845) (2,673,248)

(779,654) (3,712,637)

(473,958) (4,739,577)

(1,238,843)

(2,443,984)

(3,558,093)

(4,492,290)

(5,213,535)

Semen Indonesia Pro Forma Income Statement Project Year Spot Rate (Rp/$) Sales Volume Sales Price ($) Sales Price (RP) Total Revenue ('000)

Year 0 10,375

Cash costs ('000) Additional production costs ('000) Loading costs ('000) Shipping costs ('000)

Year 1 15,693 10,000 58 910,176 9,101,764

Year 2 21,230 12,000 58 1,231,326 14,775,910

Year 3 26,350 14,000 58 1,528,293 21,396,098

Year 4 30,643 16,000 58 1,777,314 28,437,032

Year 5 33,957 18,000 58 1,969,508 35,451,151

(1,150,000) (200,000) (313,854)

(1,752,600) (304,800) (524,800)

(2,012,500) (350,000) (782,728)

(2,244,800) (390,400) (1,071,514)

(2,463,300) (428,400) (1,375,882)

(1,569,270)

(2,623,998)

(3,913,641)

(5,357,571)

(6,879,411) 17

Total

(3,233,124)

(5,206,197)

(7,058,870)

(9,064,285)

(11,146,993)

Gross Profit

5,868,640

9,569,713

14,337,228

19,372,747

24,304,158

License Fees General & Admin Expenses EBITDA

(182,035)

(295,518)

(427,922)

(568,741)

(709,023)

(728,141) 4,958,464

(1,329,832) 7,944,363

(2,139,610) 11,769,696

(3,128,074) 15,675,932

(4,254,138) 19,340,997

Depreciation & Amortization EBIT

(1,760,000) 3,198,464

(1,760,000) 6,184,363

(1,760,000) 10,009,696

(1,760,000) 13,915,932

(1,760,000) 17,580,997

Interest on Cemex Debt Forex Losses on Debt Interest on Local Debt EBT

(825,000) (1,238,918) (962,500) 172,046

(689,867) (2,443,965) (928,921) 2,121,610

(541,221) (3,558,271) (883,590) 5,026,614

(377,710) (4,492,673) (822,393) 8,223,156

(197,848) (5,213,841) (739,777) 11,429,531

Income taxes (30%) Net Income (RP) Net Income ($ million)

51,614 120,432 8

636,483 1,485,127 70

2,196,081 2,830,533 107

4,663,028 3,560,128 116

3,428,859 8,000,672 236

Capital Budget: Cemex Indonesia (million RP & million US$) Project Viewpoint Project Year Spot Rate (Rp/$) EBITDA Recalculated taxes (@30%) Net Operating cashflow

Year 0 10,375

Additions to NWC Initial Investment Terminal Value

(22,000,000)

Free Cash Flow (FCF)

(22,000,000)

NPV @ 45,29% IRR

Year 1 15,693 4,958,464

Year 2 21,230 7,944,363

Year 3 26,350 11,769,696

Year 4 30,643 15,675,932

Year 5 33,957 19,340,997

(1,487,539) 3,470,925

(2,383,309) 5,561,054

(3,530,909) 8,238,787

(4,702,780) 10,973,153

(5,802,299) 13,538,698

(240,670)

(139,028)

(436,049)

(289,776)

(625,314) 40,709,318

3,230,255

5,422,026

7,802,738

10,683,377

53,622,702

(Rp3,983,785) 37.7%

Capital Budget from Parent Viewpoint Project Year Spot Rate (Rp/$) Dividend Remittance Dividends paid (RP) Withholding tax @ 15% Net dividend remitted (RP) Net dividend remitted ($) License Fees Remittance Fees remitted Withholding tax @ 5% Net dividend remitted (RP) Net license fees remitted ($)

Year 0 10,000

Year 1 12,621

Year 2 15,930

Year 3 20,106

Year 4 25,376

Year 5 32,028

0 0 0 0

0 0 0 0

1,415,267 (212,290) 1,202,977 60

1,780,064 (267,010) 1,513,055 60

4,000,336 (600,050) 3,400,286 106

182,035 (9,102) 172,934 13,7

295,518 (14,776) 280,742 17,6

427,922 (21,396) 406,526 20,2

568,741 (28,437) 540,304 21,3

709,023 (35,451) 673,572 21,0 18

Debt Service Remittance Promised interest paid ($) Withholding tax @ 10% Net interest remitted ($) Principal payments remitted ($)

82,5 (8,25) 74,3

69,0 (6,90) 62,1

54,1 (5,41) 48,7

37,8 (3,78) 34,0

19,8 (1,98) 17,8

135,1

148,6

163,5

179,9

197,8

0,0 13.7 209.4 223.1

0.0 17.6 210.7 228.4

59,8 20.2 212.2 292.3

59.6 21.3 213.9 294.8

106.2 21.0 215.7 342.9

Capital Budget: Parent Viewpoint (US$ million) Dividends License fees Debt service Total Initial Investment Terminal Value Free Cash Flow (FCF) NPV @ 22.26% IRR

(1,925) 614,70 (1,925) (947,35) 0.97%

223.1

228.4

292.3

294.8

957.6

19