united fiber system limited - 联合早报网ir.zaobao.com.sg/ufs/news/ufs091106.pdf · (b) wood...

United Fiber System Limited

09 November 2006 of 47

An investment in UFS gives investor a forestry concession, a soon-to-start wood chip mill, a yet-to-build pulp mill, and construction business. We value these businesses at 74 cents per share. There is also a chance to own a functional pulp mill at a discount which would add 47 to each UFS share. BUY for a narrowing of discount to fair value and the CHANCE to own Kiani Kertas at a discount. Our price target is 44 cents should the Kiani Kertas deal fall through, and 72 cents if the deal is successfully concluded. Implicit in our price target is a 40% discount for excessive market speculation and unrealistic market expectation in the past. This legacy discount (or problem) may erode when the mills start operating and the purchase of Kiani Kertas is more definitive. We initiate coverage with a BUY recommendation and 12-month price target of 44 cents. (I) These are what you get

• Too much negative publicity and speculative press coverage have clouded investors’ perception. It’s time for a recap. Investment in UFS nets you the following:- Business Company DMG’s valuation

per UFS share DMG’s discount to fair valuation

Forestry concession PT HRB S$0.18 S$0.11 Wood chip mill PT MAL S$0.10 S$0.06 Pulp mill PT MBBM S$0.41 S$0.24 Construction Poh Lian S$0.05 S$0.03 Sum S$0.74 S$0.44

(A) Forest concession – PT HRB (Hutan Rindang Banua)

• This concession covers 268,585 hectares in South Kalimantan, Indonesia. Total area suitable for plantation is 130,000 hectares. Between 1994 and 1998, 76,000 hectares were planted with fast growing Acacia Mangium. This forest asset is valued at US$204m (or US 9.6 cents per share) at end 2005.

(B) Wood Chip Mill - PT MAL (Mangium Anugerah Lestari)

• This wood chip mill has an annual capacity for 700,000 tonnes bone-dry wood and is expected to start production in November 2006. Construction cost of US$45m is fully financed by loans from China National Machinery & Equipment Import and Export Corporation (US$18m) and Raiffeisen Zentralbank (US$21m). Output from the mill is worth US$80m – US$90m per annum. 80% of the output will be taken up by China National Machinery & Equipment Import and Export Corporation at prevailing market price.

(C) Pulp Mill – PT MBBM (Marga Buana Bumi Mulia)

• This proposed pulp mill has an annual capacity of 600,000 tonnes Bleached Hardwood Kraft Pulp. Construction is expected to start in 1Q07 with completion in 2009. Development cost of US$863m is 80% financed (US$690.4m) by the turnkey contractor, China National Machinery & Equipment Import and Export Corporation. The raw material, logged wood, will be supplied from United Fiber’s forest concession.

Initial Coverage

UNITED FIBER SYSTEM (UFS: S$0.225) BUY (Initial) Know what you get 09 November 2006

DMG & PARTNERS SECURITIES PTE LTD 20 Raffles Place #22-01 Ocean Towers Singapore 048620 RCB Reg. No. 198701140E



• Annual revenue is estimated at US$310m to US$330m. 90% of the output will be bought by CellMark at prevailing market price. CellMark has an option for the remaining 10%.

(D) Construction

• This legacy business is not to sneer at. Order book in the past 1 year has increased from S$150m to S$220m while projects are being completed. Poh Lian Construction is an A1 class contractor and can tender for public sector projects of unlimited value.

• Net profit margins have recovered from negative territory. Current range of 2% – 5% is

boosted by private sector projects which typically carry net profit margin of 5% – 10%. But interest and valuation will rise with the construction up-cycle, spurred by 2 Integrated Resorts, the Business and Financial Centre and three mega malls along Orchard Road.

(II) This is what you hope to get

• Since mid-2005, UFS has been eyeing to buy PT Kiani Kertas. The latter is an

operationally-ready Bleached Hardwood Kraft Pulp mill with an annual capacity of 525,000 tonnes in Mangkajang, Berau, East Kalimantan, Indonesia. This mill has a 126 MW cogeneration power plant, airstrip, deepwater harbour, water treatment plant, an effluent treatment plant and townsite for 800 workers. Commercial production began in November 1999 but was subsequently hampered by the lack of operation funds.

• In July 2005, UFS entered into an Operation Management Arrangement (OMA) to

manage Kiani Kertas mill. UFS will provide operating capital and take delivery of the produced pulp in lieu of payment. Production resumed in September on an ad hoc basis.

• In the meantime, UFS began preparatory work to acquire Kiani Kertas, including

appointment of financial adviser and arranger, lawyers, accountants and technical surveyors. An intermediary entered into preliminary agreement with the vendors of Kiani Kertas in December 2005.

• Bank Mandiri has started to push the vendor to close a deal as soon as possible as the

bank is under pressure to resolve its non-performing loans problems. Recent statements from UFS and Bank Mandiri, which is owed money by Kiani Kertas, suggest that an agreement is imminent. BUT nothing is heard from the vendor.

• Investors should note that there had been many false starts. UFS similarly implied that it

was closed to an agreement in June 2006 when it secured the pre-closing financing. Similarly, UFS announced in February 2006 details of its June 2005 agreement with the intermediary to buy Kiani Kertas. This was preceded in December 2005 by UFS’ announcement that its intermediary had entered into an exclusive sales and purchase agreement with Kiani Kertas’ shareholders.

• Investors must understand that this could be a case of cultural clashes. The UFS-Kiani

Kertas saga smacks of Indonesian wayang kulit – shadow dancing – where the innuendoes are as important, if not more important, than the story. Singapore investors have to appreciate Indonesian undertones, evident in the form of an Indonesian major shareholder, an Indonesian CEO, Indonesian forestry concession, pulp mill, wood chip mill, and now a potential acquisition of a big-scale Indonesian pulp mill, Kiani Kertas.

(III) This is what you stand to gain (or lose)

• We believe that investors are getting a 70% discount for the existing businesses of a

forestry concession, wood chip mill, a yet-to-build pulp mill and construction business.



Investors are given a FREE OPTION for the CHANCE to own Kiani Kertas at a discounted price. A successful purchase could boost UFS fair value by 47 cents per share.

• We initiate coverage of UFS with a BUY recommendation. Our fair valuation of existing

businesses is 74 cents per share. This will rise by 47 cents per share should UFS succeed in buying Kiani Kertas at its target price.

• We are applying a 40% discount to fair valuation for our target pricing. This translates to

S$0.44 without Kiani Kertas and S$0.72 with Kiani Kertas at UFS’ pricing. The implicit 40% discount is for excessive market speculation and unrealistic market expectation in the past. This legacy discount (or problem) may erode when the mills start operating and the purchase of Kiani Kertas is more definitive.

Year end Dec (S$m) 2003 2004 2005 2006F 2007F 2008F Revenue 156.0 92.4 94.5 149.1 566.3 573.8 Profit before tax (34.0) 6.6 5.2 12.9 15.3 70.2 Net (loss)/profit (34.9) 0.8 0.8 2.6 3.8 10.5 Loss per share / EPS (cents) (2.04) 0.04 0.04 0.12 0.18 0.49 EPS growth n.m. -102.1% -6.7% 200.6% 47.6% 176.0% PE at 22.5 cents (x) (11.0) 519.9 557.4 185.5 125.7 45.5

Lynette Tan (65) 6232 3890 [email protected]



Appendix 1: Key Stock Information

Issued Capital (m shares) : 2130.814m Market Capitalisation : S$479.43m @ 22.5 cents Major Shareholders : Tektronix Industries – 44.22%* Wisanggeni Lauw – 13.12%* Bloomberg Code : UFS SP Average daily volume (52 week) : 11.152m 52-week high / low : S$0.37 / S$0.195 * direct and deemed interests Price Chart of United Fiber System

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Appendix 2: Earnings forecast

Year end Dec (S$m) 2003 2004 2005 2006F 2007F 2008F Revenue 156.0 92.4 94.5 149.1 566.3 573.8 Cost of sales (145.2) (85.0) (82.0) (133.9) (298.0) (277.3) Gross profit 10.9 7.5 12.5 15.2 268.3 296.5 Selling and distribution (1.0) (0.3) (4.3) (5.2) (68.0) (57.4) Administrative (6.7) (5.2) (10.6) (7.5) (93.4) (68.9) Other operating expenses (8.6) (4.8) (3.5) (5.2) (39.6) (34.4) Other revenue 6.3 19.3 16.0 22.4 56.6 57.4 EBITDA 0.9 16.5 10.2 19.7 123.9 193.2 Depreciation and amortisation (9.1) (8.1) (0.5) (1.9) (2.9) (7.2) Operating profit/loss (8.2) 8.4 9.7 17.8 121.0 186.0 Finance costs (1.2) (1.8) (4.6) (4.9) (105.7) (115.8) Share of associates 0.0 (0.1) - - - - Exceptional items (24.6) 0.1 - - - - Profit before tax (34.0) 6.6 5.2 12.9 15.3 70.2 Tax expenses (1.0) (5.8) (4.4) (10.3) (11.5) (59.7) Minority interest 0.1 - (0.0) (0.0) (0.0) (0.0) Net (loss)/profit (34.9) 0.8 0.8 2.6 3.8 10.5

Loss per share / EPS (cents) (2.04) 0.04 0.04 0.12 0.18 0.49 PE at 22.5 cents (x) (11.02) 519.94 557.43 185.46 125.67 45.54

Margins Gross 7.0% 8.1% 13.2% 10.2% 47.4% 51.7% EBITDA 0.5% 17.8% 10.8% 13.2% 21.9% 33.7% Operating -5.3% 9.1% 10.3% 11.9% 21.4% 32.4% Net -22.4% 0.8% 0.8% 1.7% 0.7% 1.8%

Growth Revenue -4.9% -40.8% 2.3% 57.8% 279.8% 1.3% Gross profit -28.2% -31.3% 67.4% 22.1% 1661.1% 10.5% EBITDA -96.0% 1820.9% -38.2% 93.5% 528.7% 55.9% Operating profit -167.0% -202.5% 15.7% 83.3% 579.8% 53.7% Net profit 4805.5% -102.2% -1.2% 239.2% 47.6% 176.0% EPS 3228.8% -102.1% -6.7% 200.6% 47.6% 176.0%

Revenue by segment Construction & Property 151.9 92.1 69.0 115.6 97.2 41.9 Forestry and pulp - - 25.3 33.5 469.2 531.9 Others 4.1 0.3 0.2 - - -

Revenue growth by segment Construction & Property -7.4% -39.4% -25.0% 67.5% -16.0% -56.9% Forestry and pulp 0.0% 0.0% 100.0% 32.5% 1302.0% 13.4% Others n.m. -92.8% -25.9% -100.0% 0.0% 0.0%

Revenue by geography Singapore 145.7 92.1 69.2 115.6 97.2 41.9 Other Asia-Pacific 10.4 0.3 25.3 33.5 469.2 531.9

Revenue growth by geography Singapore -2.8% -36.8% -24.9% 67.2% -16.0% -56.9% Other Asia-Pacific -26.7% -97.4% n.m. 32.0% 1302.0% 13.4%



Appendix 3 : Balance Sheet

Year end Dec (S$m) 2003 2004 2005 2006F 2007F 2008F Forest assets 307.7 316.1 338.9 340.6 342.4 344.2 Goodwill 285.8 278.1 278.1 278.1 278.1 278.1 Fixed assets 20.5 18.5 23.9 29.9 42.0 64.8 Properties under development - - - - - - Investments 2.4 0.7 0.7 0.7 0.7 0.7 Other investments 0.7 0.5 0.4 0.4 0.4 0.4 Deferred tax assets - - 0.1 0.1 0.1 0.1 Advances to a partnership - - - - - - Non-current assets 617.0 613.9 642.1 649.9 663.7 688.3

Assets held for sale - - - - - - Properties under development 6.8 - - - - - Completed properties held for sale 14.5 7.3 3.3 2.6 - - Construction work-in-progress - - 1.1 1.1 1.1 1.1 Inventories - - 2.3 - - - Trade and other receivables 31.7 26.2 74.7 78.5 82.4 84.0 Cash at bank 3.0 11.9 14.4 16.9 19.7 52.2 Current assets 56.1 45.3 95.7 99.1 103.1 137.4

Construction progress bililngs 8.4 7.0 5.2 4.7 4.5 4.4 Trade and other payables 51.8 41.0 33.4 34.1 35.8 32.2 Hire purchase creditors 0.1 0.0 0.0 0.0 0.0 0.0 Provision for taxation 0.3 0.8 0.2 0.7 1.0 60.1 Amounts due to bankers 23.2 36.7 77.8 75.9 77.4 69.7 Current liabilities 83.8 85.5 116.7 115.4 118.8 166.4

Net current assets (27.7) (40.2) (20.9) (16.3) (15.6) (29.0)

Deferred taxation 79.7 82.0 88.0 79.8 90.7 91.2 Non-current payables 26.1 - - - - - Hire purchase creditors 0.0 0.0 0.1 0.1 0.1 0.1 Long term loans 18.3 3.8 5.4 5.1 4.9 5.0 Non-current liabilities 124.2 85.8 93.5 85.0 95.6 96.2

Net assets 465.1 487.9 527.7 548.6 552.4 563.0

Share capital 171.1 181.1 194.7 213.1 213.1 213.1 Reserves 294.1 306.8 333.0 335.5 339.4 350.0 Shareholders' funds 465.1 487.9 527.7 548.6 552.4 563.0 Minority interest - - 0.0 0.0 0.0 0.0 Equity 465.1 487.9 527.7 548.6 552.4 563.0

Current ratio 0.7 0.5 0.8 0.9 0.9 0.8 Trade receivables turnover (days) 99.2 114.3 194.8 187.5 51.8 52.9 Trade payables turnover (days) 134.5 199.3 165.4 92.0 42.8 44.7

Gross borrowings 41.6 40.6 83.3 81.1 82.4 74.7 Gross gearing (x) 0.1 0.1 0.2 0.1 0.1 0.1 Net borrowings 38.6 28.7 69.0 64.2 62.7 22.5 Net gearing (x) 0.1 0.1 0.1 0.1 0.1 0.0

Return on asset (%) -4.7% 1.0% 0.7% 1.7% 2.0% 8.9% Return on equity (%) -7.2% 0.2% 0.2% 0.5% 0.7% 1.9% Return on capital employed (%) -1.5% 1.6% 1.7% 2.9% 19.1% 29.2%



Appendix 4 : Cash flow forecast

Year end Dec (S$m) 2003 2004 2005 2006F 2007F 2008F Profit / (Loss) before tax (34.0) 6.6 5.2 12.9 15.3 70.7 Adjustments for:- Deprn & amortisation 9.1 8.1 0.5 1.9 2.9 7.2 Exceptional items 24.6 (0.1) - - - - Gain from increase in fair value (3.0) (19.1) (15.5) - - - Gain from disposal of interest in JV (0.1) - - - - - Loss/(gain) on disposal of fixed assets 0.7 0.0 (0.1) - - - Interest expense 1.2 1.8 4.6 4.9 105.7 115.3 Interest income (0.0) (0.0) (0.3) (0.1) (0.1) (0.1) Impairment in value of assets 0.8 0.1 0.2 - - - Reversal of impairment (2.4) - - - - - Fixed assets written off 0.1 0.2 0.0 - - - Share of associates (0.0) 0.1 - - - - Net exchange differences (0.1) 0.3 (0.2) - - - Operating (loss)/profit before working capital changes (3.2) (1.9) (5.7) 19.6 123.8 193.1 Decrease in properties under development 44.1 - - - - - Decrease/(increase) in completed properties (11.8) 14.1 3.9 0.7 2.6 - Decrease/(increase) in construction WIP 10.3 (0.8) (2.3) (0.5) (0.1) (0.1) Decreae/(increase) in inventories 0.0 - (2.3) 2.3 - - (Increase)/decrease in trade and other receivables 0.2 6.9 (40.2) (3.7) (3.9) (1.6) Increase/(decrease) in trade and other payables (7.2) (8.1) 4.4 0.7 1.7 (3.6) Cash generated from/(used in) operations 32.5 10.1 (42.2) 19.0 124.1 187.7 Interest paid (1.4) (1.3) (3.4) (4.9) (105.7) (115.3) Income taxes paid (0.3) (0.0) (0.6) (0.2) (0.7) (1.0) Net cash generated from/(used in) operating 30.8 8.9 (46.2) 13.9 17.6 71.4

Acquisition of subsidiaries - - - - - - Addition in cost of forest asset (1.0) (0.9) (1.1) (1.2) (1.3) (1.3) Down payment for construction of wood chip mill - - (8.3) - - - Interest received 0.0 0.0 0.3 0.1 0.1 0.1 Proceeds from disposal of fixed assets 1.1 0.2 0.3 - - - Proceeds from disposal of assets 1.2 - - - - - Proceeds from disposal of subsidiaries & associates 3.0 0.5 - - - - Purchase of other investments (0.0) - - - - - Purchase of investment properties (2.0) - - - - - Purchase of fixed assets (0.4) (0.7) (1.9) (8.0) (15.0) (30.0) Net cash (used in)/generated from investing 1.9 (1.0) (10.8) (9.1) (16.1) (31.2)

(Repayments of)/proceeds from bank borrowings (36.8) 2.3 50.2 (2.2) 1.3 (7.6) Repayments of HP liabiilities (0.6) (0.1) (0.1) (0.0) (0.0) (0.0) Expenses incurred on issuance of ordinary shares - - (0.8) - - - Proceeds from issuance of shares - - 10.0 - - - Increase of pledge in fixed deposits - - (4.2) - - - Advances to a partnership (0.1) - - - - - Net cash used in financing (37.5) 2.3 55.2 (2.2) 1.3 (7.6)

Net increase/(decrease) in cash and cash equivalents (4.8) 10.1 (1.8) 2.6 2.7 32.6 Cash and cash equivalents at beginning of year 5.6 0.8 11.0 9.2 11.8 14.5 Cash and cash equivalents at end of year 0.8 11.0 9.2 11.8 14.5 47.1



Appendix 5 : Corporate Summary BUSINESS OF UFS

Overview UFS was originally a construction and property company that diversified into the forestry and pulp businesses in June 2002. Its operations are currently organised into two core business divisions: (i) the forestry and pulp division, and (ii) the construction and property division. UFS holds a forest concession right for an industrial timber estate of 268,585 hectares in South Kalimantan, Indonesia, through its wholly-owned Indonesian subsidiary PT HRB. The concession right entitles it to plant, maintain, process and market products extracted from the concession area for a period of 43 years, which runs from 27 February 1998 until 26 February 2041. UFS plans to manufacture pulp (which is the basic raw material needed to produce paper) through the operation of the MBBM Mill to be situated within its forest concession area. The MBBM Mill is being developed and will operate through PT MBBM, a wholly-owned Indonesian subsidiary. The MBBM Mill has a planned production capacity of 600,000 tons of BHKP per annum. For a total development cost of up to US$45 million, UFS has also begun the development and construction of a wood chip mill in South Kalimantan, which has a planned annual production capacity of 700,000 (bone dry) tons of wood chips. As part of its regional expansion plans, UFS proposes to acquire the entire issued and paid-up share capital of PT KK. PT KK owns and operates a modern BHKP pulp mill situated on a 3,400 hectare site located in Mangkajang, Berau District, East Kalimantan. The KK Mill and its supporting infrastructure and facilities are technologically competitive and have a design capacity of 525,000 tons of BHKP per annum. (I) UFS’ Competitive Strengths Forest concession right in Indonesia Subsidiary PT HRB, holds a forest concession right of 268,585 hectares situated in South Kalimantan, Indonesia, which entitles it to plant, maintain, process and market products extracted from the concession area up to 26 February 2041. Since 1995, UFS has planted approximately 76,000 hectares of its concession area with Acacia Mangium, a fast-growing leguminous species, which can be processed into market pulp of high quality for the production of tissue and printing and writing grade papers. The average maturity period for an Acacia Mangium tree is six to eight years. In addition, UFS has identified approximately 50,000 hectares available for planting within the concession area. The size of its plantation and ongoing investment in tree planting is expected to ensure a sustainable supply of wood raw material for MBBM Mill. However, in order to support the development of the local economy, UFS plans to buy at least 20 per cent. of the wood raw material from forest plantation owners in the vicinity. The constant and stable supply of raw material will help ensure that MBBM Mill remains at optimum utilisation. The forest asset had a book value of over US$204 million at end 2005, based upon a valuation report prepared by Pöyry, a reputable international third party consultant Advantageous position in relation to the supply of wood raw material Wood raw material costs make up the bulk of the cost of production of market pulp, accounting for approximately 60-70 per cent. of the total manufacturing costs. The remaining components comprise mainly of labour costs, chemicals for bleaching the pulp and energy costs. Variations in



the price of wood will therefore generally have the biggest impact on total manufacturing costs and profitability. However, as UFS plans to source a large proportion of its wood raw material from its own forest plantations, its exposure to changes in the price of wood should, to some extent, be mitigated. MBBM Mill and Wood Chip Mill sites are strategically located in South Kalimantan. As there are no other nearby mills, plantation owners in the vicinity are expected to sell their harvested trees to UFS’ mills than to sell them elsewhere. UFS will have a reliable source of raw material from the surrounding plantations. This strength is complemented by UFS plantation as an alternative source of wood, providing UFS with significant bargaining power. Proximity to fast growing Asian import market, in particular China According to Pöyry, the demand for BHKP is expected to grow by 8.1 per cent. per annum in China through 2015. However, China’s lack of wood fibre domestically means that it has to continue to rely on imported pulpwood and pulp to meet this demand. UFS mills will provide a gateway to Asian pulp and paper demand, with China being a major producer of paper and paperboard products and expected to remain a major net importer of pulpwood and pulp. UFS mills will enjoy cost advantages relative to North and South American producers through lower freight costs, due to their proximity to China and other Asian markets. UFS will have a cost advantage over competitors in many countries Indonesia is one of the world’s most cost-competitive countries for the production of pulp. Due to the lower cost of production in Indonesia, coupled with lower transport costs attributable to proximity to Asian markets such as China, Taiwan, Japan and Korea, UFS has a distinct advantage over its non-Indonesian competitors. Guaranteed revenue streams from offtake agreements In April 2001, PT MBBM entered into an exclusive offtake agreement with CellMark, under which CellMark agreed to offtake up to 90 per cent. of the annual BHKP production of the MBBM Mill. CellMark, headquartered in Sweden, sells pulp, paper, packaging paper and board, and recycled fibre in more than 90 countries. The offtake agreement is for a period of 10 years from the date of commencement of commercial production at MBBM Mill. UFS has a similar offtake agreement with CMEC in which CMEC will offtake 80 per cent. of the Wood Chip Mill’s annual production for up to three years after commencement of commercial production. These agreements will provide UFS with long-term guaranteed revenue streams, optimise inventory management and generate surplus cash flows after repayment of approximately US$690 million of supplier’s credit financing for the construction of the MBBM Mill and approximately US$39 million of financing for the construction of the Wood Chip Mill. Track record as a construction company UFS is a major construction company in Singapore. The construction division, Poh Lian Construction (PLC) has more than 30 years of experience in the construction industry and prides itself for its quality, reliability, safety as well as its environmental innovation in project management. PLC is a certified A1 contractor and is able to tender for public sector projects of unlimited value. Over the years, PLC has worked on numerous HDB Design and Build projects, institutional projects, factory projects, upgrading projects as well as prestigious private housing projects.



(II) UFS’ Strategy UFS aims to maintain its construction business and become a major player in the international pulp industry, with a focus on quality, cost efficiency, safety, sustainability and environmental responsibility. Vertically integrated business model UFS’ strategy in the forestry and pulp businesses is based on a close integration of all production stages from the tree seeds to the final BHKP product. This will allow UFS to optimise and control all factors in the production of BHKP, which may influence the quality and overall manufacturing cost of the pulp. In conjunction with the existing forest concession and reforestation programme, the construction of the MBBM Mill and the Wood Chip Mill and the KK Acquisition will complete its vertically integrated business model. In December 2002, PT MBBM entered into a turnkey contract with CMEC for the construction of the MBBM Mill, which is a 600,000 tons per annum BHKP pulp mill for up to US$863 million in South Kalimantan, Indonesia. BHKP, the sole product of the MBBM Mill, is the basic raw material used in the production of fine papers, tissue and other related products. BHKP is a commodity that is freely traded in the international market, and the pricing of BHKP is dictated by the supply and demand situation globally. Commercial operation of the MBBM Mill is expected in 2009. On 22 April 2003 and 24 December 2004, PT MAL entered into a turnkey contract with CMEC for the construction of the greenfield Wood Chip Mill in South Kalimantan, Indonesia, with an annual production capacity of 700,000 (bone dry) tons of wood chips. The total development cost of the mill is up to US$45 million. The wood chips will be sold to existing pulp mills as fibre raw material. Construction of the Wood Chip Mill is completed and production is expected to start in November 2006. UFS proposes to acquire the entire issued and paid-up share capital of PT KK. PT KK owns and operates a modern BHKP mill situated on a 3,400 hectare site located in Mangkajang, Berau District, East Kalimantan. The KK Mill is self-supporting in relation to energy and key chemicals, and has existing infrastructure required to support operations including a co-generation power plant, a deep-water harbour, a road network to the mill and facilities to accommodate its employees. The KK Mill and its supporting infrastructure and facilities are technologically competitive and have a design capacity of 525,000 tons of BHKP per annum. Forest plantation In order to ensure effective control over wood raw material supply and cost-efficiency in its forestry business operations, UFS has adopted the following strategies: • Continue to develop additional pulpwood plantations within its forest concession area. To date, a total of approximately 76,000 hectares have been planted and an additional approximately 50,000 hectares of suitable land have been identified for plantation. During 2005, UFS restarted its plantation programme, which was halted during the financial crisis in the late 1990s. During 2006 plantation period, UFS plans to plant some 10,000 hectares. Beginning in 2007, UFS plans to plant some 20,000 hectares per annum. • Continue active promotion of and participation in the People’s Forest Programme. Under this programme, UFS will assist the farmers in the following:

• identifying suitable land areas; • preparing and filing land applications; • sourcing necessary financing; • providing technical assistance in areas for land clearing, nursery development, planting and harvesting; and



• offtake of the harvested trees. • Acquire and/or form partnerships/strategic alliances to obtain additional concession areas for further plantation development proximate to UFS’ planned operations in East and South Kalimantan. • Increase R&D activities for the following purposes:

• Improvement in the wood yield per hectare of plantation: The R&D team will continue to perform tests to determine the optimal spacing for trees in order to achieve maximum wood harvest. Trees have been planted in rows at various intervals to optimise the diameter, volume, growth and height of the trees from the various sample plots. Pruning is performed on the Acacia Mangium trees in order to maximise the wood yield from the trees. • Improvement of immature Acacia Mangium trees’ resistance against diseases: Various degrees of disease have been simulated in various sample plots. The R&D team will continue to apply different dosages of various fungicides such as benlate, bavistin, alto, antracol and vitigran to the different sample plots. The plant within each sample group is then compared with trees grown under normal conditions to determine the effectiveness of fungicides as well as the resistance of the plants to the diseases. As mature trees are more resistant to disease, R&D efforts are focused mainly on the immature Acacia Mangium trees. • Development of seed stand: develop more high quality seeds and shorten the growth cycle of the plantation to five to six years compared to provenance planted now, which requires six to eight years to mature. • Improvement in the soil fertility after harvest: introduce a gentle harvesting method, which should reduce the logging impact, and leaves as much logging residue, mainly consisting of small branches and leaves as possible in the field. This will help each growth cycle to improve the soil fertility.

Environmental and social responsibility UFS will manage its forest assets and industries in compliance with Indonesian, and to the extent possible, international environmental standards. As a forestry and pulp company, UFS’ long-term survival depends upon the sustainability of its wood resources and forest operations, as well as industrial activities, development of the local economy and social environment. Construction and Property Division UFS will seek opportunities in high-end condominium construction, where margins tend to be higher, and HDB work. UFS has no current plans to acquire land bank for further development projects. (III) UFS’ History The company was incorporated in December 1995 as Poh Lian Holdings, a private limited investment holding company. In conjunction with its initial public offering, the company was converted into a public limited company in May 1997 and changed its name to Poh Lian Holdings Limited and was listed on the main board of the SGX-ST. In April 2002, shareholders approved a plan to diversify into the forestry and pulp businesses. Pursuant to this plan, the company acquired the entire issued and paid-up share capital of Anrof Singapore Ltd which, through one of its subsidiaries, held a forest concession right in South Kalimantan, Indonesia. Through this acquisition, the company also acquired a licence to build and operate a pulp mill in South Kalimantan, Indonesia with an annual production capacity of 600,000 tons of pulp. In 2002, the company name was changed to United Fiber System Ltd to reflect its new core businesses of forestry and pulp production. (IV) Principal Products and Services UFS operations are organised into the following two core business areas:



• forestry and pulp division; and • construction and property division. Forestry and Pulp Division Forestry Business UFS holds a forest concession right for an industrial timber estate of 268,585 hectares in South Kalimantan, Indonesia, through wholly-owned Indonesian subsidiary PT HRB. The concession entitles UFS to plant, maintain, process and market products extracted from the concession area for a period of 43 years, which runs from 27 February 1998 until 26 February 2041. The map below shows the locations of the concession area and the sites of Wood Chip Mill and proposed MBBM Mill.

Within the concession area, UFS has planted approximately 76,000 hectares of Acacia Mangium, a fast-growing leguminous species, which can be processed into market pulp of excellent quality for the production of tissue and printing and writing grade papers. The average maturity period for Acacia Mangium is six to eight years. UFS has established a reforestation programme for its plantations that involves planting of Acacia Mangium on available grassland, bush and scrub land. A total of 120,000 to 130,000 hectares of the forest concession area are suitable for forest plantations, including 76,000 hectares that have already been planted. As part of reforestation programme, UFS has mapped out plans identifying the areas to be planted annually to ensure that there are sufficient mature trees available for harvesting annually to serve as raw material for the planned MBBM Mill. The reforestation programme will provide a sustainable source of wood raw material for the MBBM Mill. The forestry assets are valued annually by Pöyry, a reputable international engineering and consulting group specialising in forestry-based industries. UFS forest asset had a fair value (less estimated point-of-sale costs) of approximately US$204 million. In 2005, the forestry and pulp division contributed positive results of S$15.3 million (US$9.2 million) on gain arising from increase in fair value less point-of-sales costs of forest asset.



UFS Pulp Business UFS plans to manufacture pulp through the operation of a BHKP mill in South Kalimantan, Indonesia. The MBBM Mill will be located in Satui, near a plantation site in Kintap within UFS forest concession area. The MBBM Mill is being developed and will operate through PT MBBM, a wholly-owned Indonesian subsidiary, established in year 2000 specifically for this purpose. The MBBM Mill has a planned production capacity of 600,000 tons per annum. UFS has decided to build the MBBM Mill in this location as it is a suitable mill site with access to process water (the Satui River) and a recipient for the used (and cleaned) process water (the sea). Also, it is close to source of wood (UFS’ forest plantation) and villages with experienced labour. These factors should ensure that business operations are cost-efficient. UFS is in the process of acquiring the land on which the MBBM Mill will be situated, covering a total gross area of 340 hectares within its concession area. After acquiring the land, UFS will need to apply for permission to convert the site into industrial use, prior to beginning construction of the MBBM Mill. The proposed built-up area of the MBBM Mill and adjoining supporting facilities is approximately 200 hectares. The remaining 140 hectares will be used for a possible future expansion of the MBBM Mill. In addition to the production line and a co-generation power plant, the MBBM Mill project comprises an adjoining chemical plant, a water and wastewater treatment plant, a township and related infrastructure to be developed. The MBBM Mill will also have its own jetty to allow for the import and export of goods. Funding the development of the MBBM Mill project will include the development of these adjoining facilities. The entire project cost is estimated at approximately US$1.03 billion (excluding working capital, interest during construction, and infrastructure taxes and duties). It is expected to be financed by a combination of debt and equity. Instead of funding the entire development of the project, UFS is seeking third parties to undertake the development of the adjoining facilities, whilst it focus on the development of the MBBM Mill (pulp mill production line and co-generation power plant). The MBBM Mill and the adjoining chemical plant will share the same water and wastewater treatment plant, resulting in more efficient use of chemicals and power. The breakdown of the estimated development cost of US$1.03 billion for the MBBM Mill and the adjoining supporting facilities is as follows:

Items Estimated

cost

(US$ in million)

Pulp mill production line and co-generation power plant ..................................... 863 Chemical plant........................................................................................................... 85 Water and wastewater treatment plant.................................................................... 65 Township and related infrastructure........................................................................ 13 1,026 Pulp Offtake Arrangements In April 2001, PT MBBM entered into an offtake agreement with CellMark (“CellMark Offtake Agreement”). CellMark has agreed to offtake up to 90 per cent. of the projected annual pulp production of the MBBM Mill for a period of 10 years from the date of commencement of commercial production. Under the CellMark Offtake Agreement, the quality of the pulp is required to comply with internationally accepted environmental standards.



The price for the pulp, under the terms of the Cellmark Offtake Agreement, will be the current prevailing market price for Acacia Mangium pulp in US dollars or such other price as agreed by the parties. Pulp Mill Turnkey Contract In December 2002, PT MBBM entered into a turnkey contract with CMEC (the “Turnkey Contract”) for the construction of the MBBM Mill with an annual capacity of 600,000 (Air Dry) tons per annum in South Kalimantan, Indonesia, for a consideration of up to US$863 million. CMEC is an industrial foreign trade corporation engaged mainly as a contractor of international engineering projects and in the import and export of machinery and electrical products business. CMEC has a track record of international projects that includes thermal power stations in Malaysia and Bangladesh and cement plants in Vietnam and Pakistan. Under the terms of the Turnkey Contract, CMEC will build and deliver the MBBM Mill to UFS on a turnkey basis. CMEC is responsible for the MBBM Mill’s design and the supply and installation of equipment for the MBBM Mill production line and co-generation power plant, as well as for procuring spare parts and materials, and for providing training, commissioning and technical support for the commercial operation of the MBBM Mill for one year. UFS target to have the MBBM Mill commence operations in 2009. Under the Turnkey Contract, CMEC is responsible for financing 80 per cent. of the development costs and PT MBBM is responsible for the remaining 20 per cent., which is payable on a progressive basis during the construction of the MBBM Mill. The supplier’s credit provided by CMEC bears interest at 6 per cent. per annum compounded semi-annually.. The repayment period for the principal amount and the compounded interest of the supplier credit is seven years, payable semi-annually in arrear 36 months after commencement of construction. The Turnkey Contract shall take effect upon fulfilment of all conditions precedent by the relevant stakeholders. The security package for the supplier’s credit includes (i) naming CMEC as the first beneficiary under an insurance policy for national political risk; (ii) a repayment guarantee by UFS; (iii) a first lien over the MBBM Mill in favour of CMEC; and (iv) paying part of the receivables from the sale of the pulp produced by the MBBM Mill into an account jointly managed by PT MBBM and CMEC. The following significant progress under the Turnkey Contract has been made: • CMEC has executed a purchase contract with a value of more than US$250 million for the main process machinery with Andritz OY, one of the world’s leading suppliers to the pulp and paper industry; • CMEC has obtained in-principle approval from the relevant authorities for the supplier credit; • CMEC has sought internal approval by the Ministry of Finance and the State Council of the People’s Republic of China, in support of its supplier credit. Also, final approvals from the State Council of the People’s Republic of China and relevant authorities are in the process of being finalised; and • CMEC has also confirmed that China Export & Credit Insurance Corporation (“Sinosure”), in conjunction with international insurance underwriters, has agreed to provide the coverage of related insurances for the MBBM Mill project. Feasibility and Environmental Studies Feasibility studies on the MBBM Mill project were undertaken by Pöyry in 1996 and updates on the study were undertaken in December 1999 and November 2003. It was concluded that the MBBM Mill was feasible in view of market potentials in Asia-Pacific, in particular China, the availability of low-cost wood raw material from UFS forest plantation and UFS’ competitive cost structure. An environment study was also undertaken in February 1996 and updated in March



2003 by AF Industrins Processkonsult AB, Stockholm, Sweden, to evaluate, among other things, the environmental acceptability of the project, the conformity of the proposed pulp mill process concept with international standards and the compliance of pulp mill effluent discharge and atmospheric emissions with existing national standards and regulations and international guidelines (such as those of the World Bank). The MBBM Mill project plans to meet the World Bank’s Environmental Guidelines that relate to effluents and air emissions from pulp mills. Construction of the MBBM Mill will commence once final approval for CMEC’s supplier credit has been obtained from the State Council of the People’s Republic of China and relevant authorities. UFS expects the MBBM Mill to commence operations in 2009. The MBBM Mill will source its wood raw material, Acacia Mangium, from UFS forest plantation and neighbouring third party forest plantations outside its concession area. Economics of the Pulp Business The sole product of the MBBM Mill is BHKP, which is the basic fibre raw material needed to produce mainly printing and writing grade papers and tissue products. BHKP is a commodity that is freely traded in the international market, and the pricing of BHKP is dictated by supply and demand. Since 1999, BHKP has traded at an average price of US$518 per ton, up to a high of US$703 and a low of US$392. In March 2006, BHKP (Acacia Mangium) traded at US$530 to US$555 per tons in the Asian market. The following chart illustrates the price trends for Acacia pulp from Indonesia since 2003:

Wood raw material cost will make up the bulk of the cost of production, accounting for 60 to 70 per cent of total costs. The remaining components comprise mainly labour costs, chemicals for bleaching the pulp and energy costs. The cost of wood raw material is generally the most volatile of the cost components. UFS intends to source most of the raw material internally, from the forest plantation owned by subsidiary PT HRB. The forest plantation is expected to provide the MBBM Mill with a sustainable supply of raw material, which should help ensure that the MBBM Mill remains at optimum utilisation. In line with market practice, whilst UFS has not undertaken any insurance on its forest asset, UFS has ensured that the firebreaks and other fire-fighting measures are in place to contain any outbreak of fire and are able to respond to any fire on or near its forest plantation in order to

Acacia (Indonesia) Price Trend

300

350

400

450

500

550

600

1 2 3 4 5 6 7 8 9 10 11 12

Month

Price (US$/tonne)

20032004

20052006



contain any outbreak of fire. UFS plants trees in plots with surrounding firebreaks to prevent spread of fire should there be an outbreak. Pulp Mill Process Flow The pulp mill process is a fully integrated production facility. The logs will be delivered to the MBBM Mill site. The logs will be debarked, chipped and the chips screened in the woodhandling area. The wood chips will be conveyed to the fibre line area where they will be fed to a digester where pulp is produced. Thereafter the pulp is screened and bleached before it is pumped to the pulp drying and baling areas where it will be dried, cut, baled and prepared for shipment. Water for the MBBM Mill will be supplied from a pump station at the nearby Satui River. The water will be treated prior to use as process and potable water. The chemicals required will be salt as a feedstock to the bleaching chemical preparation plant and make-up saltcake and limestone for chemicals lost in the pulping process. In the recovery area, used chemicals from the fibre line will be reprocessed. A recovery boiler will be used to burn organic material extracted from the wood in the digester when pulp is produced.. High-pressure steam will be produced from this process. The steam will be utilised in the power plant, together with steam produced in a power boiler, to produce electricity. The power boiler will be fuelled by tree bark and waste wood from the woodhandling area. Wood Chip Mill UFS has completed construction of a wood chip mill in South Kalimantan, which has a planned annual production capacity of 700,000 (bone dry) tons of wood chips, for a total development cost of up to US$45 million consisting of a construction cost of US$39 million and other development costs of US$6 million. The raw material, which is 100 per cent. plantation wood, will be provided by neighbouring third party plantations. Indonesian subsidiary PT MAL was established for manufacturing of wood chips. In 2004, PT MAL entered into a turnkey contract with CMEC to construct the Wood Chip Mill for a cost of up to US$39 million. Under the terms of the contract, CMEC’s obligations include designing, supplying and procuring all equipment and material, spare parts, transportation, civil work, installation, training, commissioning and technical support for commercial operation of the Wood Chip Mill for one year. UFS has procured financing from CMEC and Raiffeisen Zentralbank Osterreich (“RZB”) for the construction of the Wood Chip Mill. A facility agreement for US$21 million was signed with RZB and UFS will receive US$18 million in supplier credit from CMEC. The repayment period for the US$39 million principal amount of the facility agreement and the supplier credit is three years, starting after completion of the construction of the Wood Chip Mill. UFS is expected to finance other development costs of up to US$6 million from internal funds. PT MAL acquired the land required for the construction of the Wood Chip Mill. Pre-construction work, including a land survey and basic and detailed engineering were completed. The main machinery contract was awarded to Andritz OY of Finland by CMEC. Construction of the Wood Chip Mill began in the second quarter of 2005 and was completed by 3Q06. Wood Chip Offtake Arrangement On 4 March 2005, wholly-owned subsidiary Pacificwood, entered into an agreement (“Wood Chip Offtake Agreement”) with CMEC. Under the terms of the Wood Chip Offtake Agreement, CMEC agreed to purchase 80 per cent. of the annual production of wood chips for up to three years after commencement of commercial production. In each three-month period, Pacificwood must sell and deliver to CMEC at least 105,000 tons of wood chips having the aggregate value of



US$10.2 million in the first year, and, in subsequent years, at least 122,500 tons of wood chips per annum having the aggregate value of US$11.7 million. No penalty is payable by Pacificwood if it fails to deliver the required amount. During the term of the Wood Chip Offtake Agreement, Pacificwood must give CMEC the first right to purchase the remaining 10 per cent. of the annual production of PT MAL. Competition The international markets for pulp are highly competitive, involving a large number of producers located throughout the world, many of which have greater resources than UFS. UFS’ production level will be small by comparison to overall world market pulp production, and the prices UFS will be able to obtain for its pulp will depend on prevailing world prices and other factors. UFS will have competitors in many areas of its business operations and markets. Many factors will influence its competitive position including cost, price, product quality and service. Key competitors will be those who are based in Southeast Asia and produce similar type of market pulp (from Acacia Mangium or eucalyptus trees). UFS believes that its main competitors in Southeast Asia are as follows: • APRIL, Sumatra, Indonesia, whose annual market pulp production capacity is 1.8 million tons; • PT Tanjung Enim Lestari, Sumatra, Indonesia, whose annual market pulp production capacity is 450,000 tons; and • Phoenix Pulp and Paper Public Company Ltd, Thailand, whose annual market pulp production capacity is 200,000 tons. Social Environment UFS cooperates closely with the Indonesian Government and with the local communities, and recognises its responsibility to support the development of the local economy and the social environment. The establishment of the MBBM Mill, the Wood Chip Mill and the reforestation programme will have a number of positive environmental and socio-economic impacts: Employment Opportunities Employment opportunities will be created for local people as skilled and unskilled workers in the operation and maintenance of the mills and adjoining facilities. • During the peak MBBM Mill construction period, up to 10,000 skilled and unskilled workers will be employed; • Upon completion, the MBBM Mill and adjoining supporting facilities will employ up to 1,000 people; • About 5,000 people will be involved in the logistics of the forestry operation, i.e. harvesting and transportation of the wood logs to the MBBM Mill; • Local contractors under the supervision of PT HRB will perform the harvesting and transport of the logs; • Planting of seedlings will provide silviculture jobs for over 4,000 people; and • Thousands of others will be employed by various service and supporting industries during the construction period and later by the small and medium-sized enterprises around the MBBM Mill. Improved Welfare Welfare of the surrounding communities will be improved through: • participation in the People Forest Programme; • improvements in communications through the upgrading of roads and telephone networks; • the upgrading of general educational, recreational and health services; and



• the establishment of government offices, shopping facilities and other amenities. Local Procurement The local content during the construction period will be significant. The construction company will procure various locally manufactured industrial products and locally available raw materials such as cement, steel and other building material. In addition, locally available services, including engineering, civil work, steel construction and transport, will be procured. Small and Medium Industrial Estate Utilising the electrical power and other utilities provided by the MBBM Mill, there will be opportunities for the establishment of up to 200 small and medium-sized scale enterprises. These enterprises may consist of light and medium-weight industries such as woodworking, food processing, garment, handicraft, assembly, metal, building and similar types of industries. Fully established, these enterprises alone could present job opportunities for up to 20,000 people. In addition, supporting services to cater for daily needs, including restaurants, workshops, small food markets and barbershops, are likely to be established. Agriculture In view of the significant increase in population expected to be brought about by the project, food supply will need to be established. Cash-crop plantations and daily farms will be set up by the local populace to provide vegetables, meat and poultry for the surrounding communities. Subsequently, these facilities may evolve into producing raw material for the food-processing industries to be established in the industrial area. The local fishing communities will be encouraged to develop and establish processing plants for the daily catch from the sea. Town Site Development A town site will be established at the commencement of the project to accommodate some 50,000 employees with families. Normal infrastructure facilities including water, power, communication, schooling, medical and shopping will be supplied. With the establishment of service and supporting industries, the population in the area is likely to increase substantially and the town site may well grow into a full-fledged township. Shops, schools, sports facilities and other service facilities are likely to be established. Both local and foreign investors will be invited to develop the town site together with the other facilities mentioned above. Environment Sustainable development is a vital component of competitiveness and a necessary condition for the progress and existence of UFS’ business. To achieve sustainable growth, all projects incorporate environmental considerations from the earliest stages. The use of plantation wood, clean processes and an efficient wastewater treatment plant are among the industry’s contribution to environmental protection and are what allows the industry to operate in a sustainable fashion. Fast-growing forest plantations are particularly helpful in protecting the environment as they produce, using relatively little land area, very large volumes of wood that are able to satisfy local



and global demands for this resource without recourse to irreplaceable native forest. Using plantation wood allows society’s needs to be met, and allows the use of native forest to be limited to conservation and recreation. The production of pulpwood in high-productivity areas through plantations allows native forests to be conserved and not exploited. As part of an improvement to the existing environmental management system, UFS has commited to maintaining and not replacing the native forest with plantations. This commitment is formal, and as such, may be externally audited. UFS has identified, registered and formally separated the native forest from its plantations, and classified it according to use as protection or conservation. In both cases, native forest cannot be replaced by plantations of other species. Conservation forest may be used for limited harvesting of trees and other products to support the livelihood of the local people. UFS is committed to protect areas with high biodiversity value within its concession. It will continue to only establish plantations of Acacia Mangium forests on non-productive, degraded mineral soil covered by grassland, bush or scrub land. This is in line with the policy of the Indonesian Government to rehabilitate degraded land. UFS forest plantations will supply the MBBM Mill with wood on a sustainable basis. Its forest activities will comply with the forest policy of the World Bank and be developed so that they can be certified by a recognised international forest certification body. The MBBM Mill will be built with modern and environmentally friendly technology. The MBBM Mill and the Wood Chip Mill will be built and operated in full compliance with the stringent environmental regulations of the World Bank and the Government of Indonesia. UFS also plan to implement the ISO 14000 Environmental Management System. The process machinery and designs will be supplied by reputable manufacturers from Finland, Austria and Canada. By inviting reputable and environmentally responsible global corporations to participate in the project, UFS believes that the environmental impact of the MBBM Mill and the Wood Chip Mill will be minimised. Regulatory Environment UFS is subjected to a number of acts and regulations concerning environmental management and protection in relation to the forestry sector and the pulp and paper industry in Indonesia. Environmental Regulation Environmental protection in Indonesia is subject to various laws, regulations and decrees. A company whose business and/or action plan can significantly affect the environment requires a general environmental licence. Certain business/activities of a company require an Environmental Impact Analysis (Analisa Mengenai Dampak Lingkungan, or “AMDAL”). A company must obtain and maintain an AMDAL document, which consists of an environmental impact assessment (Analisa Dampak Lingkungan, or “ANDAL”) report, an environmental management plan (Rencana Pengelolaan Lingkungan, or “RKL”) and an environmental monitoring plan (Rencana Pemantauan Lingkungan, or “RPL”). The decision on the environmental impact analysis of a business and/or activity (“AMDAL Approval”) shall become invalid upon the occurrence of the following events: • the business and/or activity plan is not implemented within three years as of the issuance of AMDAL Approval; • the location of the business and/or activities has moved/changed; • the design and/or process and/or capacity and/or raw materials and/or auxiliary materials has changed; or • a principal environmental change has occurred prior to or at the time of the implementation of the business and/or activity as the result of a natural event or other causes.



A company whose business activities deal with specific environment-related matters, such as industrial hazardous toxic waste, requires a specific environmental licence. A company must comply with certain regulations regarding management of hazardous and toxic waste materials. Furthermore, every business and/or activities that dispose wastewater to the water or water resources is required to obtain a licence from the relevant regent/major. The regulation prohibits (i) every business and/or activities to dispose wastewater containing radioactive material to the water or water resources; and (ii) regent/major to grant a wastewater disposal licence that violates the water-quality standard and cause water pollution. Pursuant to the Environmental Law of 1997, remedial and preventative measures, as well as sanctions, may also be imposed to remedy or prevent pollution caused by business operations that are in violation of various laws, regulations and decrees related to the environment, such as the imposition of substantial criminal penalties and fines and the cancellation of approvals previously granted. Certain violations may also be subject to a sanction in the form of the revocation of a licence for the operation of a business and/or activity. The head of a region may file a proposal for the revocation of a licence for the operation of a business and/or activity to an authorised official. In addition, the Environmental Law regulates monetary compensation that must be granted, either based on an out-of-court settlement or lawsuit under court proceedings. Furthermore, the responsible party for the undertaking and/or activity of a business which significantly affects the environment, uses hazardous and toxic materials, and/or produces hazardous toxic waste, shall be strictly liable for the related losses and pay direct and immediate compensation when environment pollution and/or damages occurs. The responsible party for the undertaking and/or activity can be exempted from the obligation to pay compensation as mentioned above if such party can prove that the pollution and/or damage to the environment are caused by one of the following reasons: • the occurrence of a natural disaster or a war; • the occurrence of a force majeure; or • the activity of a third party causing the occurrence of a pollution and/or damage to the environment. In addition, there are a great number of laws and regulations as well as presidential, ministerial and director general decrees relevant for the forestry operations, including the logging concession for industrial crops and the required AMDAL study. The present State Ministry for Environment compiles national environmental policies and coordinates the implementation of these policies. The implementation of the policies is executed by the technical department of the Ministry and by Indonesian regional governments. In 1990, BAPEDAL (Indonesian Agency for Environmental Impact Management) was created and was given a mandate to, among other things, monitor and control activities that have important environmental impacts, improve public participation in environmental impact control and develop a reference laboratory. BAPEDAL also has a primary role in the implementation of several strategic programmes, such as The Clean River Programme, The Blue Sky Programme, Protection of Marine and Coastal Waters and The Cleaner Production Programme. Based on Presidential Decree No. 2 of 2002 (“PD 2/2002’) concerning the Position, Task, Function, Authority, Organization Composition and Work Structure of the State Minister, the task, function and authority of BAPEDAL is transferred to the State Ministry for Environment (Kementerian). The State Ministry for Environment is the Indonesian Government institution responsible for implementing the governmental duties in coordinating the environmental management and environmental impact control. KNLH reports



directly to the Indonesian President and coordinates its activities with various Indonesian Government entities, including the Ministry of Forestry, the Ministry of Industry and the Indonesian Investment Co-ordinating Board. Construction and Property Division The construction and property division achieved revenue of S$92.1 million (US$54.4 million) and operating profit of S$1.2 million (US$0.7 million) in the financial year ended 31 December 2004 and revenue of S$69 million (US$41.5 million) and operating loss of S$0.01 million (US$0.006 million) in the financial year ended 31 December 2005. Despite profits generated from the construction business, the loss of S$0.01 million (US$0.006 million) in the financial year ended 31 December 2005 was a result of poor performance of the property development business, which has been affected by the slowdown in the property market in the past few years. Construction Business PLC was established in 1975. HDB was established by the Singapore government to provide quality and affordable housing. In line with HDB’s objectives, PLC started out mainly undertaking major building construction projects in Singapore, particularly with HDB. Contracts by HDB are usually awarded by an open tender system to companies with a consistent track record for quality, timely completion and the lowest pricing. PLC is a certified A1 contractor and is able to tender for public sector projects of unlimited value. There are about 40 A1 contractors in Singapore. PLC is also the first contractor to achieve the integrated ISO certification by Building and Construction Authority (“BCA”) in 2001 (ISO 9001:2000, ISO 14001:1996 and OHSAS 18001:1991). PLC places great emphasis on quality, performance, safety and environmental management systems on site. PLC has also been awarded various private housing projects. Details of the major projects since 1997 are set out in the tables below. PLC had an order book of approximately S$202 million (US$121 million) in February 2006. PLC has won many accolades for its performance. In 2004, PLC was given the Construction Excellence Merit Award for outstanding performance in the East Meadows Condominium project awarded by the BCA. In 2005, PLC won the Best Buildable Design Award (Merit) for Nuovo Executive Condominium awarded by BCA, Safety Performance Award (Silver) for Punggol East Contract 31 (“PEC31”) awarded by Ministry of Manpower and Environment Innovation Project Idea (Merit) for its wastewater treatment system in PEC31 awarded by Singapore Contractors Association Limited. The following table sets out current major building projects: List of Current Major Building Projects

Description of Project Details of Project Estimated Year ofCompletion

Estimated Value of Contracts

(S$ Million) (US$ Million) IKEA Warehouse RetailBuilding ...............................

Piling and maincontracts work for theerection of a 4-storeywarehouse retailbuilding at the corner ofTampines Expresswayand Tampines Ave 10

2006 39.1 23.5

Punggol East.......................

Building including PilingWorks 582 dwelling

2006 87.7 52.7



List of Current Major Building Projects

Description of Project Details of Project Estimated Year ofCompletion

Estimated Value of Contracts

(S$ Million) (US$ Million) units with basementcarpark

The Tresor Condominium..

92 units with basementcarpark at DuchessAvenue/Duchess Road

2007 22.2 13.4

Cosmopolitan Condominium .....................

228 units withbasement carpark atKim Seng/River ValleyRoad

2007 62.4 37.5

Urbana Condominium........

126 units with basementcarpark at River ValleyRoad

2007 33.3 20.0

HDB Bedok Upgrading ......

11 HDB blocks atBedok South Avenue 1

2008 41.5 25.0

Buckley 18 Condominium.

49 units with attic,basement carpark atBuckley Road

2008 25.6 16.4

Newton One Condominium…………………

91 units with 2basement carparks atNewton Road

2009 47.4 30.4

The following table sets out major building projects since 1997: List of Completed Major Building Projects

Description of Project Details of Project Year ofCompletion

Total Revenue Recognised

(S$ Million) (US$ Million) Hillview Regency Condominium .....................

572 apartment units –Design & Build(Structural) at BukitBatok East Avenue 2

2005

74.5

44.8

Nuovo Executive Condominium .....................

297 apartment units –Design & Build(Structural and M&E) atAng Mo Kio Avenue 6/9

2004

49.9

30.0

Amaranda Gardens Condominium .....................

189 apartment unitswith basement carparkat Serangoon Avenue 3

2004

31.0

18.6

The Alessandrea.................

Design and Build 19-storey apartment (total105 units) withbasement andswimming pool

2003

22.8

13.7



List of Completed Major Building Projects

Description of Project Details of Project Year ofCompletion

Total Revenue Recognised

(S$ Million) (US$ Million)

Sengkang Neighbourhood4............................................

Design and Build HDB715 apartment units

2003

61.7

37.1

East Meadows Condominium .....................

482 apartment units atTanah Merah

2001

71.0

42.7

Columbarium Complex......

3-storey with basementcarpark at ChineseCemetery Path 2/ChoaChua Kang Road

2001

22.0

13.2

Bukit Panjang Neighbourhood 1 ...............

Design and Build HDB848 apartment units

2000

80.5

48.4

Bedok Industrial Park E .....

One block of 6-storeyfood factory withlorry/car park lots andcanteen

2000

29.0

17.4

Yishun Neighbourhood 1...

288 HDB dwelling units

2000

36.6

22.0

Sengkang Neighbourhood1............................................

711 HDB dwelling units(Design Plus)

1999

100.0

60.1

Regentville Condominium .

580 apartments at YioChu KangRoad/Hougang Street92

1999

97.3

58.5

Ayer Rajah Crescent……………………......

JTC Factories cumMulti-Storey Carparks

1999

36.3

21.8

Yio Chu Kang Road............

Seasons ParkCondominium

1997

68.8

41.4

Tuas Reclaimed Land ........

46 units of Standardand Terrace Factories,substations, TelecomMDF building, sewersroads and drains

1997

96.3

57.9

Tampines .............................

Institute of TechnicalEducation

1997

29.4

17.7



Appendix 6 : Parameters used in DMG’s Valuation (I) Forestry Concession, Wood Chip Mill, Pulp Mills (II) Construction

Discount rate for future earnings 12%

Forestry yield 175 – 250 m3 / hectare

Log price US$25 / m3

Wood chip price US$110 / tonne

Pulp price US$570 / tonne

Net profit margin 6%

Market PE for contractors 8x



Appendix 7 : Indonesian Pulp and Paper Industry (from “Industry Evolution in Developing Countries: the Indonesian Pulp and Paper Industry” by Michiel Van Dijk Indonesian Pulp and Paper Industry The pulp and paper industry is one of the oldest manufacturing sectors in Indonesia, originating in 1923 when the first mill was started on Java Island. With an average growth rate of 20% per annum, the pulp and paper industry was one of the fastest growing industries since the New Order. In the 1990s, it experienced a spectacular period of catch-up from a backward industry, comprising a few small mills, to an industrial giant and world-class player. (I) Industry Characteristics The industry comprised two sub-sectors which are strongly connected. In the pulp sector, the raw material, mainly wood is transformed into pulp. In the paper-making part, the pulp is transformed into paper, basically done by one piece of equipment, the paper machine. Pulp and paper making can be either vertically integrated into one mill or be separated into two mills. The pulp and paper industry is a supplier dominated industry. In this class of industries, new technology is mainly introduced by suppliers of machinery; process innovation is relatively much more important than product innovation. The pulp and paper industry ranks among the most scale and capital intensive in manufacturing. In the US, the average annual investment is US$16,000 per employee, four times the average of US$4,000. The construction of a single state-of-the-art pulp mill can cost up to US$1b and the largest paper machines cost over US$300m. The drive for capital and scale intensive production is due to price-based competition in the pulp and paper market. Paper is a standardised commodity product. Companies compete on price instead of quality, although reliability of supply and brand also play a role for some paper grades. The demand for pulp and paper is positively correlated with the level of GDP. The industry is environmentally sensitive. To guarantee a constant supply of raw material, sustainable forest management is required. The pulp and paper industry is ranked among the top five in terms of the quantity of toxic materials generated per unit of output and average pollution abatement costs. In the past 20 years, the pulp and paper industry started to shift from industrialized to developing countries, particularly Brazil, Chile and Indonesia. These countries have a natural competitive advantage in the production of pulp and paper because of their abundant natural resources. The rotation time of pulpwood is 7 to 10 years in countries with a tropical climate, compared to 40 years in the Scandinavian countries. Consequently, raw material costs are lowered in the developing countries. (II) Historical Development Before the Asia financial crisis, the pulp and paper industry was Indonesia’s 10th largest industrial sector in terms of value-added. The industry underwent rapid growth of 20% per annum in the 1990s, becoming an important international player. (A) First Paper Mills: 1923-1974 In 1923, the first Indonesian paper mill, N.V. Papier Fabriek Padalarang, was established on Java, by the Dutch paper producer, N.V, Paper Fabriek Nijmegen. The mill was built to produce printing and writing paper from rice straw, catering to the needs of Dutch colonial government. In 1939, the same Dutch firm, which owned the mill in Padalarang, established a second mill in



Letjes, East Java, with a capacity of 3,000 tons per year (tpy) After independence, the Indonesian government adopted a policy of state led industrialization to build a strong national industry, including pulp and paper. In 1958, Padalarang and Letjes were nationalized and renamed, PN Kertas Padalarang and PN Kertas Letjes, respectively. They catered to the demand for writing paper and books from the Ministry of Culture and Education. The government increased the local supply of paper through the construction of 5 more mills between end 1950s and early 1970s.

Four of the mills were located in Java, the main domestic market. Rice straw and bamboo were the dominant raw materials. Except for the Siantar and Matapura mill, use of pulpwood as input was limited. Installed capacity amounted to 47,500 tpy but due to lack of spare parts and shortages of raw material, actual production was only 18,000 tons, reflecting a utilization rate of 40%. The Indonesian pulp and paper industry in the early 1970s was uncompetitive, with no export potential. All firms were small by international standards. (B) Import Substitution Led Growth: 1974-1984 Between 1974 and 1984, pulp and paper industry went through a phase of rapid development. The number of mills increased from 7 to 33 mills and installed paper capacity grew from 67,000 to 606,000 tpy. The industry also diversified as the first board and tissue paper producers entered the market. All new mills were privately owned. The predominant factor behind the rapid expansion was the introduction of high tariff protection, stimulating the investment in new, mainly non-integrated mills. Tariffs were levied on all grades of paper up to 60% but not on pulp. The World Bank estimated that the effective protection, taking into account prices of inputs, was on average 90% ranging from very high numbers for smaller mills, making their contribution to domestic value-added negative, to 60% for larger mills. Subsidised energy prices also contributed to high effective protections rates. About 50% of the plants were only profitable because of tariff protection. Another factor encouraging the pulp and paper industry to expand was the rapid growth in demand for paper products, caused by economic growth in Indonesia. Paper demand is highly correlated to economic growth. (C) Backward Integration, Large Scale Production and Exports: 1984-1997



In the second half of the 1980s, the industry started to integrate backward into the production of pulp. The pioneering company was Indah Kiat, which set up the first large non-integrated pulp mill in Riau, Sumatra, with a capacity of 100,000 tpy in 1984. The mill was started with the intention to supply the paper mills within the Indah Kiat group, which were dependent on expensive imports. In 1989, the first large non-integrated pulp mill, PT Inti Indorayon Utama, started production with a capacity of 180,000 tpy. In the next few years, pulp capacity was boosted by the expansion of existing mills and the start-up of several world-class pulp mills. With capacity of 750,000 tpy the pulp mill of Riau Andalan Pulp and Paper (RAPP) was then the single largest pulp line in the world. The initial expansion of pulp capacity was accompanied by a second wave of paper capacity growth. Production of paper increased from 402 to 4821 thousand tpy over the period 1984-1987. In 1987, Indonesia became a net exporter of paper, while it still had to import almost 50% of its pulp demand. Much of the paper were exported to the newly industrializing countries, which lack the necessary raw material to produce their own paper. Between 1984 and 1997, the production of pulp increased more than 17 fold from 178 to 3,058 thousand tpy. As a result of this rapid expansion, Indonesia became a net exporter of pulp in 1995. In 1996, Indonesia ranked 7th and 16th on the list of the world’s largest exporter of pulp and paper respectively. The main reason for the enormous expansion of the pulp and paper industry over this period was the determination of the Indonesian government to establish a world-class pulp and paper industry. This involved the construction or expansion of 56 pulp and paper mills, and conversion of 10% of Indonesia’s land mass into forestry plantations. Underlying this Master Plan were three factors. First, a world class pulp and paper industry was a replacement for the declining oil industry as a source of foreign exchange. Second, upward integration from a wood-based to a wood processing industry was a natural progression in Indonesia’s resource – based industrialization. Third, a large pulp and paper industry was a partial solution to Indonesia’s deforestation problem, caused by forest depletion which affected 5-7m hectares of forested area. Government concessions were given for commercial plantations to grow pulp and paper wood on degraded or unprofitable logged over land. (D) Financial Crisis and Debts: 1997 to Present Indonesia’s economic crisis put an end to the expansion of the pulp and paper industry. Large pulp and paper mills were heavily indebted to finance their capacity expansion. With depreciation of the Indonesian Rupiah, the dollar denominated debts forced many pulp and paper companies to delay or cancel their expansion plans. The crisis affected large and small mills differently. For large firms, production cost declined 40% from US$210 to US$125 per ton because raw material, energy and labour costs were denominated in Rupiah. For small non-integrated mills which have to import their raw material in US dollar, production costs actually increased. While large mills could sell their products overseas in US dollars, small mills were selling their products domestically in Rupiah. While big firms were tottering under their debts, small firms were devastated by their cost structures. (III) Industry Structure The pulp and paper market comprises several sub-markets or segments of homogenous products. The latter are weakly related in terms of demand and supply. For all segments, the number of plants has stabilised or even decreased after a period of initial growth, but there is no sign of shakeout. Exit has been relatively low for all sub-markets. (A) Printing and Writing Paper (i) Import Substitution: 1974 – 1984



The Indonesian government aimed to build a strong pulp and paper industry comprising large scale, integrated pulp and paper mills which were able to compete internationally. However, the policy did not achieve the expected results. Although private investment was boosted and the number of printing and writing mills increased from 5 to 15 between 1974 and 1985, the type of development which has taken place was largely based on imported pulp rather than indigenous fibres. The industry comprised small mills which were not internationally competitive, was primarily on Java, and had concentrated on the production of only a few grades, leaving many essential grades, which could be produced economically in Indonesia, to be imported. Only two mills were integrated and three mills reached international standards of production. Other plants had low productivity due to technical and marketing problems, lack of working capital, fibre losses, too much water consumption, and high energy consumption. Data on paper machines installed gives a good picture of the relative size of the Indonesian plants in comparison with international best practice. According to historical data, 51 paper machines were in operation during 1974-1984. Paper machines installed by the public companies in the 1960s and 1970s were of similar type as the paper machines installed by the Dutch colonial government in 1923, 1931 and 1940. The newly installed machines were outdated, as they dwarfed in comparison with international best practice. All the paper machines were either second hand or cheap, low quality machines from Taiwan and Korea. There were three reasons for the growth of non-integrated small mills instead of the economically beneficial large scale plants. First, the tariff structure with zero import duty on pulp and 30 -60% tariff on paper, gave more incentive to produce paper than pulp. Second, local entrepreneurs had difficulties raising capital for large integrated mills. Third, investment risks in Indonesia encouraged the establishment of financially less risky small mills. (ii) Dual Market Structure and Dominant Firms: From 1984 onwards After 1984, the printing and writing paper market expanded rapidly. But growth was unequal, resulting in a dual market structure. By 2000, about 5 very large mills were dominating the market with a capacity of above 100,000 tpy. There is a only one firm with capacity of 68,000 tpy, and a large competitive fringe of 14 smaller mills with a capacity of 24,000 tpy and less. This dual market structure is caused by the behaviour of one dominant market player, Asian Pulp and Paper (APP), owned by the Sinar Mas Group. The four largest mills accounted for 67% of Indonesia’s production in 1980, rising to 90% in 2000. Three out of the four largest mills, Tjiwi Kimia, Pindo Deli and Indah Kiat (Riau), and two smaller mills are owned by APP and together account for almost 90% of total production. In 2000, Riau Andalan Pulp and Paper (RAPP) installed its first paper machine with a capacity of 325,000 tpy. A series of aggressive expansions and takeovers led to APP being the prime producer in the printing and writing market. Average production of APP mills increased from 3000 tpy to 460,000 tpy, while the output per mill of its competitors stayed the same. In the 1990s, APP installed seven out of the nine largest paper mills in Indonesia. Two of them ranked amongst the world’s top 12 largest printing and writing paper machines, and were installed between 1996 and 2000. Only RAPP, the second largest pulp mill in Indonesia, and part of a large business conglomerate, has installed a paper mill of similar quality and capacity. All other firms are operating with obsolete technology far from the technology frontier. The aggressive expansion of APP absorbed any increase in demand, which made it difficult for new companies to enter the market. Entry barriers are extremely high because APP continuously installed best-practice technology and could, use low cost pulp through its access to large quantities of natural forests. In an industry where a product is highly standardized, economies of scale prevail and competition is on costs, all profitable entry was completely eroded. Since 1985, only three new mills entered the market and only one exited. All entrants were established producers, Two are relatively small tissue and board mill, which started in 1989 and 1991; the third was RAPP.



The expansion of APP was characterized by a leading pulp and paper consultant as unprecedented by a single entity in the history of the paper industry. APP has been the central force shaping the structure of the printing and writing paper market after 1984. It also expanded capacity in other segments of the paper and pulp industry, and is currently the largest producer in the board, tissue and pulp markets. This expansion is due to APP’s access to cheap raw materials and subsidized financing. Many small firms survived next to giants, APP and APRIL. There are three plausible reasons. First, some small mills cater to niche markets, such as specialty papers. Obsolete small paper mills can be profitably used to produce small quantity of specialty paper in short production runs. On the other hand, large scale modern paper mills are only profitable if they are running 24 hours a day. Second, the large mills run by APP and RAPP are catering to the export market leaving space in the domestic market for smaller competitors. The APP mills exported 70% of their output between 1998 and 2000. Third, isolated markets and market failures provide market for the smaller paper mills. (B) Pulp

There are currently 6 major pulp mills in Indonesia, of which five are large scale state-of-the-art pulp plants owned by 4 Indonesian conglomerates. APP owns two of them. APRIL owns another two. The 6 pulp mills are :- - Indah Kiat (Sumatra) - APP - Riau Andalan Pulp & Paper(Sumatra) - APRIL - Lontar Papyrus (Sumatra) - APP - Tanjung Enim Lestari (Sumatra) - Barito/Marubeni - Indorayon (Sumatra) - APRIL - Kiani Kertas (Kalimantan) - Prabowo Subianto The main factor behind the establishment of the pulp industry has been access to natural wood resources and subsidised finance. To stimulate development of a large scale modern pulp and paper industry, the Indonesian government offered capital subsidies, including the approval to use natural forest in the wood rich areas of Sumatra and Kalimantan as raw materials. (Cost of harvesting 1m3 of mixed tropical hardwood –natural forest are only US$17, while they are US$26 for plantation pulpwood. In contrast, plantation wood costs in Scandinavia are between US$41 and 46/m3). Peculiarities within the Indonesian financial system allow big companies to access financial resources with an advantage. Entry in the pulp market has therefore been limited to large conglomerates which enjoyed certain benefits not available to other companies. Consequently, APP and APRIL have used this advantage to integrate backwards into the production of pulp. (IV) Board Similar to printing and writing paper, the number of board mills increased rapidly because of high protection rates during the period of import substitution. The board mills were relatively small and were therefore not able to compete internationally. Expansion of the board market was driven by growth in the manufacturing sector and the economy. After 1984, the number of plants gradually increased till 1994 when it stabilised around 36. The board industry also shows signs of a dual market structure, with several small mills and a few large plants. Capacities range from 250 tpy for the smallest producer to more than a million tpy. With around 40% market share, APP is again the dominant market player. The board market is not as distorted as the pulp, and printing and writing paper, because the economic incentives for constructing large mills have been limited. Indonesia does not have a particular comparative advantage in the production of board because the raw material is waste paper instead of wood. The recovery rate of waste paper is low and more than 50% has to be imported. (C) Newsprint and Tissue Paper



The share of newsprint and tissue is only 7% and 3% in 2000 of Indonesia pulp and paper industry. Both are niche markets. Most newsprint and tissue are consumed in Jakarta and other big Indonesian cities. The newsprint market is highly concentrated. Only 5 mills supplies the entire market as only 1% of newsprint is imported, while 65% of output is exported in 2000. Entry barriers are high because the paper mills are large and expensive. APP is not active in the newsprint market. The number of tissue paper mills has increased substantially in the 1990s, up to 13 in 1999, stimulated by increased demand. Tissue machines are smaller and cheaper than other paper mills. Entry barriers are comparatively lower. Competition is not intense. In 1991, APP started to produce tissue paper and controlled almost 60% of the market in 2000.



Appendix 8: Background And Trends In Pulp And Paper Industry (from JaaKo Pöyry Consulting) Overview of Global Market Pulp Markets Total global consumption of virgin wood pulp was 180 million tons in 2005. Market pulps make up about 30 per cent., or 54 million tons, of this total. The remainder of the wood pulp produced is used for paper production at integrated pulp and paper mills. Kraft pulps account for close to 90 per cent. of total market pulp. Over 40 million tons of BHKP and bleached softwood kraft pulp (“BSKP”) was traded as market pulp in 2005 (See Figure 1.1). Figure 1.1 - Total Virgin Wood Pulp and Market Pulp Consumption 2005(1) Note: (1) “UKP” means unbleached kraft pulp, “SC” means supercalendar and “MC” means medium consistency. In 2005, almost 39 per cent. of global BHKP, or 8.8 million tons, was consumed in Asia. China, Korea and Japan are the main consumers in Asia-Pacific, accounting for 72 per cent. of total BHKP consumption in Asia (see Figure 1.2). Figure 1.2 - BHKP Consumption 2005 by Region and by Asia-Pacific Country BHKP consumption has been increasing dramatically in the Asia-Pacific since the early 1990s (see Figure 1.3). With the exception of Japan, which has been facing a stagnant economy,

Europe38%

Asia41%

Latin America

4%North

America15%

Others2%

22.1 million tons

Others4%

India2%

Taiwan8%

Korea21%Japan

14%

China37%

Australia2%

Indonesia12%

8.8 million tons

Total virgin woodpulp consumption

180 million tonsTotal market pulp consumption

54 million tons

BHKP

BSKPUKP

MC & SC

Sulfite

BHKP

BSKP

UKPMC & SC

Sulfite



demand from other Asian countries have been growing steadily apart from the sharp, but temporary, decline during the 1997 Asian economic crisis. Figure 1.3 - Historical Growth of BHKP Consumption in Asia-Pacific Historically, the main exporters supplying the BHKP demand from the Asia-Pacific have been Indonesia, Brazil, Canada and the United States (see Figure 1.4). Figure 1.4 - Major Trade Flows of BHKP into Asia-Pacific and Oceania2

Note: (1) The numbers in figure 1.4 are in “millions of metric tons”.

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Demand Prospects Drivers Demand for BHKP is mainly driven by its consumption in woodfree printing and writing papers (making up, on average, about 40 per cent. of the total fibre raw materials) and tissue paper (making up, on average, about 20 per cent. of the furnish). As most of the printing, writing paper and tissue paper mills in the Asia-Pacific are non-integrated, this helps increase the consumption of BHKP and offers opportunities for exporters to make long-term supply contracts with these producers. The main drivers for the demand for BHKP in paper furnish or ingredients include, among others, increasing paper quality requirements, changing mill and process requirements, improving pulp quality and increasing use of pigments and fillers. More specific drivers are illustrated in Figure 1.5. Figure 1.5 - Drivers for BHKP Demand

Lower price of BHKP vs BSKP for non-integrated buyer

Increasing supply of BHKP from low cost plantation resources

More modern paper machines requiring less BSKP for strength

Improving quality of BHKP from optimisedsingle species plantations

Growth in pr/wrand tissue paper consumption and production

Increase in paper production in inherently fibre poor countries, requiring non-integrated production

Move to lower basis weight papers requires more BSKP for strength and mechanical pulp for opacity

Faster paper machine speeds requiring more BSKP for strength

Increasing use of fillers and coating pigments requiring more BSKP for strength

Positive Factors

Negative Factors




























Positive Factors

Negative Factors

Overall, BHKP is expected to maintain its share in various paper products due to the ongoing development and modernisation in paper machines. Printing and writing paper consumption is also growing strongly, boosted by modern office automation, particularly laser printers. Despite threats from electronic media, printing and writing paper consumption continues to grow strongly. The demand for woodfree printing and writing papers and tissue papers is forecast to be highest among the various paper and paperboard grades (see Figure 1.6).



Figure 1.6 - Forecast Global Demand Growth of Paper and Paperboard Demand Growth Demand for BHKP is projected to continue to grow from 22 million tons per annum in 2005 to just over 30 million tons per annum in 2015. The growth of BHKP consumption is gradually shifting from North America and Western Europe to Asia. Asia became the single largest consuming region of BHKP in the late 1990s (see Figure 1.7). The main reasons for fast-growing demand in Asian markets, with the exception of Japan, include: • rapid growth in paper and paperboard demand requiring continuous additions of capacity; • fast, modern and large new paper machines being introduced to the region requiring good-quality fibre; • shortage of local wood fibre supply, particularly in China and North Asia; and • closures of non-wood pulp mills, particularly in China.

Average 2.2%/a

Cartonboards

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Coatedmechanical

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mechanical

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Figure 1.7 - Demand for BHKP by Region 1970-2015 The demand for BHKP is expected to grow by 8.1 per cent. per year in China until 2015 and by 3.5 per cent. per year in the rest of Asia-Pacific excluding Japan. Underpinned mainly by the strong growth in China, the demand for BHKP in Asia-Pacific is forecast to increase from 8.7 million tons per annum in 2005 to 14.7 million tons per annum in 2015 (See Figure 1.8). Japan was the main consumer of BHKP in the early 1990s but, due to its maturing paper industry, the consumption of BHKP is expected to be stagnant in Japan. Consumption of BHKP in other Asian countries is expected to grow steadily, but significantly slower than China. Figure 1.8 - Demand for BHKP by Country in Asia-Pacific 1970-2015

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Supply World BHKP capacity totalled 23 million tons per annum by the end of 2005. The largest producers of BHKP are based in Brazil and Indonesia, followed by Spain and North America. The 15 largest producers account for more than 60 per cent. of the world’s total BHKP capacity. Aracruz Celulose S.A., the largest producer of BHKP, has a 13 per cent. share of the world’s total BHKP production. Figure 1.9 - Current Top Producers (by Group) of BHKP A number of significant BHKP pulp mill projects are planned to come on line between now and beyond 2010 (see Table 1.1). Most of these are expected to have a capacity above 500,000 tons per annum onward. The new projects include greenfield mills and new lines built on existing mill sites. Table 1.1 - List of Global New Major Projects of BHKP DECIDED BHKP PROJECTS Capacity Change

1000 t/aRegion Country Company (by Group) Mill Site Market Qtr/Year Description

Recent Capacity ChangesNorth America Canada AV Nackawic Inc. Nackawic 260 2006 restartLatin America Brazil Aracruz Celulose S.A. Guaiba, Porto Alegre 30 2006 capacity expansionLatin America Brazil Votorantim Celulose e Papel S.A. Jacarei 100 2006 capacity expansion

Completed Market Pulp Capacity Changes 2006 3902006North America Canada Bowater Thunder Bay -40 Q2/2006 decreaseLatin America Chile Arauco Nueva Aldea, Bio-Bio 425 Q2/2006 new millLatin America Chile Empresas CMPC S.A Santa Fe, Nacimiento, Bio-Bio 780 Q3/2006 new lineLatin America Brazil Cenibra Belo Oriente 200 Q4/2006 capacity expansion

Decided Market Pulp Capacity Changes 2006 1365

2007Latin America Brazil Veracel Celulose S.A.(Aracruz & Stora Enso) Eunápolis 100 Q1/2007 Raise in EfficiencyLatin America Brazil Suzano Bahia Sul Papel e Celulose S.A. Mucuri 1000 Q3/2007 new lineLatin America Uruguay Botnia.S.A. Fray Bentos 1000 Q3/2007 new mill


2008Latin America Uruguay Celulosas de M'Bopicua M'Bopicuá,Fray Bentos 500 Q1/2008 new mill


TOTAL DECIDED CAPACITY 3965

0 500 1000 1500 2000 2500 3000 3500

Aracruz*

APRIL

Stora Enso*

Votorantim

ENCE

Cenibra

Domtar

Marubeni

International Paper

APP

Nippon Paper

Ilim Pulp

Portucel Soporcel

Arauco

Mitsubishi Corp

Capacity 1000 t/a

* Include capacity of Veracel distributed

(50%) Aracruz (50%) Stora Enso



PLANNED BHKP PROJECTS Capacity Change1000 t/a

Region Country Company (by Group) Mill Site Market Qtr/Year Description

2006Scandinavia Sweden Stora Enso Pulp AB Skutskär 10 2006.. capacity expansionWestern Europe Spain Grupo Empresarial ENCE, S.A. Pontevedra 20 2006.. capacity expansionLatin America Brazil Suzano Bahia Sul Papel e Celulose S.A. Suzano(Mill B) 35 2006.. capacity expansion

Planned Market Pulp Capacity Changes 2006 65

2007North America Canada AV Nackawic Inc. Nackawic -160 Q1/2007 Conversion Latin America Brazil Aracruz Celulose S.A. Aracruz 250 Q1/2007 capacity expansion


2008Eastern Europe Bulgaria Svilosa S.A. Svishtov 50 2008.. capacity expansionOceania Australia Gunns Limited Bell Bay 820 Q4/2008 new mill


2010-China China Chen Ming Zhangjiang Guangdong 700 2009-10 new millRest of Asia Malaysia Tatau Pulp Manufacturer Tatau, Sarawak 750 2009-10 new millChina China APRIL Shangdong 750 2010 - new lineRest of Asia Indonesia United Fibre Systems Satui Pulp, South Kalimantan 600 2010 - new millWestern Europe Belgium Burgo Ardennes S.A. Virton -220 2010- change in integrationLatin America Brazil International Paper Ltda. Tres Lagoas 500 2010- new millLatin America Brazil Aracruz Celulose S.A. ..(..) 900 2010- new millLatin America Brazil Veracel Celulose S.A.(Aracruz & Stora Enso) Eunápolis 900 2010- new lineLatin America Brazil Cenibra - Celulose Nipo-Brasileira S.A. Belo Oriente 900 2010- new lineLatin America Brazil Ripasa S.A. Celulose e Papel Limeira(Ripasa I) 60 2010- capacity expansionLatin America Brazil Votorantim Celulose e Papel S.A. .., Rio Grande do Sul 1000 2015 new millRest of Asia Thailand Siam Cement Group Khon Kaen 250 2015 - new lineRest of Asia Vietnam Vinapimex Phong Chau Town 250 2015 - new line

Planned Market Pulp Capacity Changes 2010- 7340

TOTAL PLANNED CAPACITY 8365 As a result of the projects set out in Table 1.1 above, some new major companies are set to enter the list of top producers of BHKP. Aracruz and APRIL will still retain their top positions, whereas new players including Cenibra, Suzano Bahia, Metsa Botnia S.A., and Empresas CMPC S.A. will move up the rankings list due to their aggressive capacity expansions (see Figure 1.10). Figure 1.10 - Top BHKP Producers including New Decided and Planned Projects Demand/Supply Balance BHKP demand in Asia-Pacific has been growing steadily to approximately 8.8 million tons in 2005. With installed market capacity of approximately 5.2 million tons in the region, current net import into Asia was approximately 3.6 million tons in 2005.

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Aracruz*

APRIL

Votorantim

Cenibra

Stora Enso*

ENCE

Suzano Bahia

Botnia.S.A.

International Paper

Empresas CMPC S.A

Arauco

Gunns Ltd.

Tatau Pulp Manufacturer

Chen Ming Zhanjiang

Domtar

Capacity 1000 t/a

* Include capacity of Veracel distributed

(50%) Aracruz (50%) Stora Enso

current capacitydecided capacityplanned capacity



Asia is expected to continue to be a net importer of BHKP with the region’s demand forecasted to cross the 14 million tons mark by 2015. Comparatively, planned capacity for the region amounts to 4 million tons, requiring a net import requirement of 5 million tons in 2015. Figure 1.11 - Asia-Pacific Demand/Supply of BHKP 2000-2015 The balance above includes the projected BHKP demand, current production capacity and planned projects. The major planned projects are summarised below: 2008: 820,000 tons from Gunns Limited 2009 and beyond: 600,000 tons of market pulp from UFS. 700,000 tons of market pulp from Zhanjiang mill. This project, which has been approved by the Chinese government, is now undertaken by Chenming Paper. The agreement with the Chinese government was signed in late 2005. 750,000-800,000 tons of market pulp tons from APRIL’s 1 million tons per annum mill in China. Part of the pulp will be used by the company’s own new printing paper machine. 750,000 tons of market pulp from Tatau Pulp. A feasibility study for the project has been conducted and machine suppliers have initiated discussions with the firm. Another 500,000 tons per annum of BHKP capacity has been planned in Asia. Though this capacity has been announced, it is not confirmed as yet. These projects include Siam Cement Group’s plan to expand Phoenix Pulp’s capacity by 250,000-ton and Vinapimex’s plan to install a new 250,000 tons line at its Bai Bang mill. China accounts for over 60 per cent. of the region’s projected demand increase until 2015 or nearly 4 millions tons of pulp per annum. The two major projects that are being planned are not expected to significantly reduce the growing need for imports. China is expected to continue to import BHKP, both from existing and new suppliers in the future. At least part of the gap between supply and demand in the region is expected to be supplied by new capacity in South America.

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Pulp Qualities and Price Trends In general, eucalyptus pulp can be considered the best proven hardwood pulp for papermaking. A variety of BHKP is used in papermaking. BHKP is mainly used in coated and uncoated printing and writing papers. For these end uses, buyers are seeking good printing properties (good formation, high opacity, etc.) with acceptable strength. Strength properties are particularly important for producers of uncoated woodfree who do not use softwood in their furnish and for those who use hardwood pulp in multi-ply cartonboards. The main hardwoods, including eucalyptus, birch, mixed tropical hardwoods and acacia, have different characteristics. There are also fairly large differences amongst eucalyptus species. There are differences not only in strength and printing properties, but also in yield and in the way the pulp should be treated to enhance desired characteristics. The number and size of fibres, the shape of the fibres and the thickness of the fibre wall are examples of differences in pulp characteristics. Birch pulp is the strongest hardwood pulp grade, but its opacity and formation are not as good as that of eucalyptus pulp. Acacia has the highest number of fibres per gram and the collapsibility of the fibres helps to give the paper a good smooth surface. Acacia pulp, however, has a much lower strength, light-scattering ability and bulk than eucalyptus. Figure 1.12 - Quality Competitiveness of BHKP Pulps for Printing Paper Production

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Pulps bleached without the use of chlorine gas have gained popularity in Europe for environmental reasons. In Asia, however, these environmental concerns are less important and very little pulp is actually marketed as Elemental Chlorine Free (“ECF”) or Totally Chlorine Free (“TCF”) in Asia. There is no market preference for TCF pulp and no price premium can be achieved with this grade. Prices tend to show some variation between markets. Prices in China and Taiwan are at the lower end, while Korean and Japanese net prices are typically US$5-10 per ton higher on average.



Prices in Australia would be about US$15 per ton higher, partly reflecting the higher freight costs for overseas suppliers to deliver pulp to this market. Market pulp generally has no import duty, being an important basic raw material for papermaking and in short supply in most Asian countries. The only significant exceptions in the Asian region are Thailand, with a 10 per cent. duty and India with a 5 per cent. duty. The world market pulp prices have been declining in real terms over the past 20 to 30 years. The key drivers behind this price development include the following: • adequate fibre resources and greater availability of lower-cost fast-growing plantations, reducing cost of the main raw material for pulp production; • improvements in technology, allowing material saving and improved operating efficiencies, which result in lower cost of production; • increase in the economic scale of mills resulting in a larger capacity over which to spread the mill’s fixed costs and investment costs; • pulp mills becoming more energy-efficient and self-sufficient in energy generation reducing the costs of production; and • the general strength of the US dollar during the late 1990s and early 2000. The US dollar is the main currency in which market pulp is sold. Nominal pulp price rose rapidly during the 1970s and 1980s due to the high inflation rate during that time. The oil crises triggered the peaks in the mid-1970s and early 1980s. From the late 1980s, world economic growth and increase in paper consumption kept the prices high until the early 1990s. There used to be a significant difference in price between market BSKP and BHKP, but the gap has been smaller in recent years mainly due to furnish changes in paper products. This supports overall hardwood demand. Another driver for the increase in BHKP price in US dollar terms is that much of the hardwood pulp sold in Europe is quoted in Euros, which has increased significantly against the US dollar in recent years. The key factors that are expected to impact on future trend prices include economic growth, pulp and paper demand, industry cost structure and technology development. It is likely that the real price decline will continue but at a reduced rate, based on continuing but slower increases in pulp mill size and lower potential for cost reduction. Figure 1.13 - Price Forecast for BHKP to South east Asia 1970-2008

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Appendix 9 : Some Information on PT Kiani Kertas Overview PT KK is in the business of pulp manufacturing and owns and operates the KK Mill situated on a 3,400 hectares site located in Mangkajang, Berau District, East Kalimantan, Indonesia. The KK Mill has a designed production capacity of 525,000 tons of BHKP per annum. However, the KK Mill has never achieved full operation due to, among other things, a lack of operating working capital and the need for capital expenditures. The owners of PT KK are currently in default in respect of obligations to their creditors. According to the Sandwell Report, the KK Mill has operated only about half of the time since commercial production commenced. To achieve a production rate of 525,000 tons of BHKP per annum, an initial funding injection of approximately US$30 million will be needed to support additional maintenance, repairs and capital improvements. On 25 July 2005, UFS entered into an OMA with PT KK, whereby UFS manages the operations of the KK Mill, provide technical and financial support and inject working capital funding to PT KK, in return for market pulp produced at the mill. Whilst some of Indonesia’s other pulp mills may have a lower cost of production, more than 60 per cent. of the world’s BHKP capacity has higher cash costs than those of the KK Mill. The KK Mill has a competitive advantage compared to North and South American producers due to relatively lower costs and its proximity to growing markets such as China. History PT KK was established on 4 April 1991 and obtained its status as a limited liability company from the Minister of Justice (now the Minister of Law and Human Rights) on 10 July 1992. The objectives of PT KK are to engage in wood material processing, agriculture and trade. PT KK was previously owned by the Kalimanis Group, which is owned by Mr Mohamad “Bob” Hasan. PT KK was surrendered to the Indonesian Bank Restructuring Agency (“IBRA”) after Mr Hasan defaulted on bank loans after the Asian financial crisis in 1997/1998. In 2004, IBRA sold the controlling stake in PT KK to Fayola. The outstanding loans of PT KK were sold by IBRA to PT Nusantara Energi (which was represented by PT Anugra Nusantara Asset Management (“ANAM”)) and to the Bank (Indonesia’s largest state owned bank). Subsequently, the loans of PT KK to ANAM were assigned to a British Virgin Islands company, Langass. Furthermore, the loans of Langass and the Bank were restructured into a loan from the Bank, in the form of an investment credit facility with the principal amount of US$201.1 million and into a debt due to Langass in the form of mandatory convertible bonds in the amount of US$128.9 million (“MCB I”), both maturing in 2007. The KK Mill The KK Mill was built between 1994 and 1997 by a consortium of HA Simons, Canada, Beloit Corporation, United States and Ahlstrom Machinery Corporation, Finland, and is located in Mangkajang, Berau District, East Kalimantan, Indonesia. Test production began in April 1997 and the first shipment of pulp to the market was in October 1997. The KK Mill also includes a recausticising plant and a lime kiln, a power and recovery plant, a chemical plant, stores, water supply and treatment, wastewater treatment, offices, a laboratory and training facilities. Principal Products



The sole product of the KK Mill is BHKP, which is the basic fibre raw material needed to produce paper of certain qualities. For the years ended December 2003 and 2004 and the nine months ended September 2005, PT KK sold approximately 94,000 tons, 156,000 tons and 76,000 tons, respectively of BHKP, of which approximately 5,000 tons, 2,000 tons and 0 tons, respectively were domestic sales. Raw Materials The principal raw materials used in the production of BHKP are wood, chemicals, energy and water. Wood The KK Mill was designed to produce quality BHKP primarily from mixed Indonesian hardwood (“MIH”) and local Acacia Mangium from PT Tanjung Redeb Hutani (“TRH”). However, the KK Mill encountered operational difficulties using MIH and also the TRH plantations were not fully developed. Consequently, the KK Mill operated using purchased acacia logs and imported eucalyptus wood chips. The KK Mill now sources its wood raw material, Acacia Mangium and Gmelina, from third party forest plantations located, among other places, in East and South Kalimantan, Indonesia and in Sabah, Malaysia. TRH was established in 1994, as a jointly owned company along with PT KK owners, with the objective of establishing plantations to supply pulpwood to the KK Mill. TRH manages a concession area of about 180,000 hectares, of which approximately 100,000 hectares are plantable land. It is estimated that viable plantations presently cover about 26,000 hectares. It is further estimated that potential wood supply from external sources would be 24 million tons per annum. Chemicals The KK Mill’s chemical preparation plant produces bleaching chemicals consisting of sodium hydroxide, chlorine dioxide, oxygen and sulphur dioxide. The plant consists of (i) an integrated chlorine dioxide plant; (ii) a chlor-alkali plant; (iii) a sulphur dioxide plant; and (iv) an air separation unit. The raw materials used for production of these bleaching chemicals are primarily salt and sulphur. Energy The KK Mill has its own power-generation plant. High-pressure steam from a recovery boiler and a power boiler is used to generate the total electrical demand for the mill, services and the KK Mill town site, in two 63.3 MW double-extraction, condensing turbine generators. The KK Mill also has six diesel generators as emergency power back-up, but only two generators are currently in working order. Water The KK Mill has access to a low-lift pumping station on the Suaran River, which supplies raw water to the water treatment plant. The treated and filtered water produced is stored in clearwells. Production Capacity The KK Mill has a designed production capacity of 525,000 tons of BHKP per annum. The KK Mill has not been in continuous operation primarily due to lack of working capital and the need for capital expenditures. Features of the KK Mill



The KK Mill is elemental chlorine free, has achieved ISO 9000 Certification and follows air and wastewater standards equivalent to those of North American mills. The KK Mill site is self-supporting in relation to energy and key chemicals and has existing infrastructure required to support operations including (i) a co-generation power plant; (ii) a deep-water harbour; (iii) a road network to the mill; and (iv) facilities to accommodate its employees. There is also a purpose-built town, with housing, recreational facilities, a medical centre and schools for employees of the KK Mill and their families. The KK Mill also includes an airport and several jetties for both outgoing pulp and incoming materials, such as wood and fuel oil. According to the Sandwell Report, the KK Mill and its supporting infrastructure and facilities are technologically competitive. In particular, the KK Mill is designed to utilise available technology in order to minimise the impact on the atmosphere and prevent contamination of the waterbodies around the facility. This technology includes a low-odour recovery boiler, power boiler and lime kiln. Each of these has precipitators to reduce particulate that is discharged into the atmosphere. The pulping technology used for the KK Mill uses an extended cooking sequence that includes oxygen delignification and the recovery of process chemicals. The bleaching sequence also employs technology in which no elemental chlorine is used. Except for the pulp machine and the chemical plant, the KK Mill equipment is operated from a multi-station digital control system located in a central control room adjacent to the main offices and central laboratory. The pulp machine and the chemical plant are operated in local control rooms. Process Departments The KK Mill’s main process departments and areas include (i) pulpwood receiving and storage; (ii) wood preparation; (iii) wood chip storage; (vi) pulping; (vii) bleaching; and (viii) drying and finishing. The KK Mill’s support departments include (i) recausticising and lime kiln; (ii) power and recovery; (iii) bleaching chemical plant; (iv) stores; (v) maintenance shops; (vi) central control building with mill-wide control systems; (vii) water supply and treatment; (viii) effluent treatment; (ix) offices and laboratory; and (x) training facilities. The town site with recreational facilities is located about three kilometres from the KK Mill. Pulp Agency Arrangements Pulp sales from the KK Mill are handled by a Swedish company, Ekman AB (“Ekman”), which sells the entire amount of pulp produced under the terms of a marketing agreement. In order to ensure uninterrupted reliable and professionally handled pulp sales, UFS intends to continue such arrangements after the KK Acquisition, either with Ekman or with a competing agent. Environment The operation of the KK Mill is subject to several environmental laws, regulations and standards. In particular, the KK Mill is required to obtain a general environmental licence (required mainly by companies whose business or action plan may potentially have a significant impact on the environment) and a specific environmental licence (required by companies conducting its operations in sectors which have been designated as environment-related business sectors by law.



Regulations The KK Mill has to comply with regulations relating to obtaining of operational licences, business licences and investment licences. Furthermore, PT KK also needs to observe all the laws and regulations applicable to its business activities.



Appendix 10: Some Information on UFS’ proposed acquisition of PT Kiani Kertas UFS proposed to acquire the entire issued and paid-up share capital and the entire issued and outstanding unconverted mandatory convertible bonds of PT KK. PT KK owns and operates a modern BHKP mill situated on a 3,400 hectare site located in Mangkajang, Berau District, East Kalimantan. The KK Mill is self-supporting in relation to energy and key chemicals; and has existing infrastructure required to support operations including a co-generation power plant, a deep-water harbour, a road network to the KK Mill and facilities to accommodate its employees. Based on a technical due diligence study prepared by Sandwell Engineering Inc. dated 17 October 2005 (the “Sandwell Report”) commissioned by UFS in respect of the KK Mill, the KK Mill and its supporting infrastructure and facilities are technologically competitive and have a design capacity of 525,000 tons of BHKP pulp per annum. On 25 July 2005, UFS entered into the OMA in relation to the KK Mill whereby UFS manages the operation of the KK Mill, provides technical and financial support and injects working capital funding to PT KK, in return for market pulp produced at the mill, which UFS sell through a subsidiary. After a period of preparation, which began in August 2005, when UFS procured the delivery of raw materials to the KK Mill, production at the KK Mill was resumed on 28 September 2005. By end 2005, UFS had expended approximately US$20 million in the form of purchase advances to PT KK, net of the sale proceeds received from the sale of pulp delivered by PT KK. The production capacity from 27 September 2005 to 11 October 2005 was 12,565 tons, while from 9 December 2005 to 28 December 2005, a total of 22,204 tons was produced. The highest single day production was 1,398 tons. On 29 June 2005, UFS entered into a letter of intent (the “Letter of Intent”) with Kingsclere in respect of a share purchase agreement dated 1 December 2005 it has entered into with Fayola Investment Limited (“Fayola”) and Langass Offshore Inc. (“Langass”, and together with Fayola, the “Vendors”) for the acquisition of the Shares in PT KK. Pursuant to the Letter of Intent, Kingsclere proposed to sell to UFS a majority stake of not less than 51 per cent. of the issued and paid-up shares of PT KK for a price to be determined, after the conclusion of due diligence investigations in relation to PT KK. The understanding expressed in the Letter of Intent was subject to and conditional upon, among others (i) the completion of the due diligence investigations of PT KK and the results of the investigations being satisfactory to UFS; (ii) the necessary board and (where applicable) shareholders’ approvals being obtained; (iii) the necessary approvals, licences and permits being obtained from the relevant authorities; and (iv) the preparation, successful negotiation and execution of a formal sale and purchase agreement between UFS and Kingsclere in relation to the acquisition of PT KK. On 20 February 2006, UFS entered into an agreement with Kingsclere (the “Rights Acquisition Agreement”) to acquire (by way of novation) Kingsclere’s rights and obligations for the purchase of the entire issued and paid-up share capital and the entire issued and outstanding unconverted mandatory convertible bonds of PT KK (the “Sale Shares and Bonds”) under the following agreements: Novation is a term used in contract law and business law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. A novation must be agreed upon by all original parties to the original agreement. Furthermore, a contract transferred by the novation process transfers all rights and obligations from the original owner to the new owner. (i) a share purchase agreement (“SPA”) dated 5 December 2005 under which Kingsclere agreed to purchase all of the issued and paid-up share capital (and all rights, titles, interests and benefits pertaining thereto) of PT KK;



(ii) a debt instrument sale agreement (“DISA”) dated 5 December 2005 under which Kingsclere agreed to purchase all of the mandatory convertible bonds issued (pursuant to a restructuring of liabilities) by PT KK on 27 December 2004 and which mature on 26 December 2007; and (iii) an agreement dated 5 December 2005 between Kingsclere and the Vendors to regulate certain rights and obligations of the respective parties under and in relation to the SPA and the DISA, (collectively known as the “Sale Agreements”). Pursuant to the Rights Acquisition Agreement, the novation has been effected in the manner contemplated in the respective Sale Agreements. UFS assumed the rights and obligations of the purchaser in the Sale Agreements in substitution for Kingsclere. Accordingly, UFS agreed to purchase the Sale Shares and Bonds in accordance with the terms of the Sale Agreements. UFS’ obligation to complete the KK Acquisition is conditional upon, among other things, the following: • legal, accounting, financial and regulatory due diligence of PT KK and its business and UFS is to notify the Vendors that the results of such due diligence are (in UFS absolute discretion) satisfactory; • the passing of all necessary resolutions by UFS shareholders in an extraordinary general meeting to approve the acquisition of PT KK and the terms of the transactions contemplated under or incidental to the relevant Sale Agreement in accordance with the Listing Manual of the SGX-ST; • approval being given by the SGX-ST (if required) in relation to UFS issue of the acquisition mandatory convertible bonds (the “Acquisition MCB”), the issue of the Acquisition MCB shares upon conversion of the Acquisition MCB, the listing of the Acquisition MCB shares and UFS issue of promissory notes; • UFS obtained copies of all relevant and required approvals of the shareholders of each of the Vendors, approving the terms of the Sale Agreements and certain debt restructuring documents to be entered into by PT KK and the transactions contemplated therein; • UFS received documents evidencing the relevant regulatory approvals in Indonesia with respect to the Sale Shares and Bonds and the increase of share capital resulting from the conversion of the US$240 million Zero Coupon Convertible Bonds (“MCB II”) owned by Langass together with documents evidencing termination of certain loan agreements and the fulfilment of any other requirements in relation thereto to UFS reasonable satisfaction; • the granting of all required consents, approvals, environmental permits, authorisations or clearances required by the Vendors, PT KK and UFS from any governmental authority in Indonesia, any supranational agency or authority, any creditor of PT KK or any other person which, in UFS opinion (in UFS absolute discretion), are necessary or desirable for the completion of the acquisition, the debt restructuring of PT KK and/or the continued operation of the business of PT KK after the completion date; • the Vendors are to have obtained the tax clearances on tax liabilities from the relevant tax authorities covering all taxes with respect to PT KK’s tax matters for the financial years ended 31 December 2002, 2003, 2004 and 2005; and • UFS to have received, with respect to the loan agreements entered into between PT KK and certain lenders, whose rights, interests and claims were transferred (directly or indirectly) to the Indonesian Bank Restructuring Agency (“IBRA”), all documentation evidencing the validity and effectiveness of such transfers to UFS reasonable satisfaction.



Research Disclaimer This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report. DMG & Partners Securities Pte Ltd is a participant in the SGX-MAS Research Incentive Scheme and receives a compensation of S$5,000 per stock per annum covered under the Scheme. DMG & Partners Securities Pte Ltd is a joint venture between OSK Securities Berhad (a subsidiary of OSK Holdings Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited.

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