This new factory in Mojokerto, with a designed total production capacity of 8 million square meters of ceramic tiles per year, will manufacture wall tiles (the Digi Uno brand). When this IDR $300 billion plant is fully operational, the company's total production capacity will expand by 17 percent. Arwana Citramulia already operates two plants in Tangerang and Serpong in Banten, a plant in Gresik (East Java) and a plant in Ogan Ilir (South Sumatra).

Another positive factor is that production costs will be cut due to government support. In a bid to support domestic industries, the government will lower energy prices for labor-intensive industries as part of its third economic stimulus package unveiled on 7 October 2015. Gas is the largest cost component in the ceramic production process, accounting for nearly 35 percent of total production costs. Arwana Citramulia stated that for each USD $1 per british thermal unit (mmbtu) decline in gas price, the company's total production costs fall by 3.4 percent. Moreover, the company can take advantage of another incentive given by the government. There is a 30 percent discount on electricity tariffs for companies that use electricity between 11 pm and 8 am.

The expected improvement in next year's corporate earnings of Arwana Citramulia come after a weak performance in 2015. This year, the economic slowdown, high inflation and falling commodity prices curbed people's purchasing power, resulting in lower sales. Moreover, the property market (which accounts for a large portion of ceramic tiles demand) has experienced a slowdown. Furthermore, higher energy prices and wages caused higher operational costs this year.

Future Projection Arwana Citramulia's Financial Highlights:

      2013     2014    2015F    2016F    2017F
Net Sales  1,147.6  1,609.6  1,329.0  1,840.0  2,202.0
Net Income    235.2    259.3     83.0    208.0    270.0
P/E Ratio (x)     12,8     11,7     37,7     14,7     11,2
P/BV (x)     3,95     3,33     3,31     2,75     2,31

in billion IDR rupiah unless otherwise stated
¹ in IDR rupiah
Source: RHB OSK Securities

As the economic slowdown of Indonesia is estimated to have reached its bottom (GDP growth accelerated slightly to 4.73 percent in Q3-2015), ceramic tiles sales in the second half of the year have improved. In October 2015, sales rose 4.7 percent to 3.8 million square meters from the preceding month. It is also positive that, despite recently having raised selling prices of its flagship ceramic products by 1.5 percent, the company's sales have not slowed.

Earlier this year, Arwana Citramulia announced it plans to spend IDR 1.25 trillion (approx. USD $91 million) to expand production capacity to 84.4 million square meters of ceramic tiles per year by 2020.

Stock Quote Arwana Citramulia (ARNA):