RISK MANAGEMENT

In conducting business activities, the Company exposed several business risks such as competition, availability of raw materials and financial liquidity which is able to be controlled by the Company and a number of risks that can not be controlled by the Company such as force majeure, foreign exchange rate against Rupiah, government policies such as monetary policy as well as non-monetary policy and condition of domestic and global economy

Even though the Covid-19 pandemic in 2020 has brought Indonesia to the brink of an economic recession, risk management for business risks that can be controlled by the Company still shows its effectiveness, whereas in 2020 the Company had no difficulty in obtaining raw materials, had no liquidity problems and was able to open new markets to replace markets that have collapsed due to the decreasing in purchasing power. Therefore, the Company succeeded to prevent a drastic decreasing in net sales due to the economic recession, succeeded to increase comprehensive income for the year and also financed its capital expenditure by using its internal cash flow

BUSINESS RISK

1. Competition

   In year 2020, there were 89 paper and pulp mills in Indonesia with the total installed capacity of paper industry amounted to 17.9 million MT per year, with average utilization level in 2020 reached 75% per year. During the Covid-19 pandemic, the demand for paper products in domestic drastically decreased due to its impact that weakened public purchasing power, therefore the level of competition to compete for a smaller market got tighter.

   Based on this installed capacity of paper industry, the Company only represented 1.4%. However, by relying on the flexibility of the Company’s paper machines and positioning as niche player, in 2020, the Company managed to hold back the fast decreasing in net sales and its production realization therefore it reached its utilization rate to 79%.

2. Raw Materials

   The huge area of the development of industrial forest for pulp in Indonesia is still sufficient to fulfill the needs of wood as raw material of pulp production. Meanwhile Indonesia’s tropical climate allow to harvest pulp feedstock crops 3 - 4 times faster than in the cold climate countries therefore it can guarantee the sufficient supply of pulp in domestic. While for raw material of waste paper, APKI’s data showed that approximately 60% to 70% of total national paper production is allocated to fulfill domestic market demands, therefore the remains of waste paper are available much enough and can be re-used by paper industry.

   On the other hand, during 2020, the supply of imported recycled paper, that supported about 50% of the raw material needs of paper mills, experienced a significant decreasing due to the Covid-19 pandemic that took place globally and the strict government regulations regarding imported waste paper. Likewise, the supply of imported pulp has decreased due to the strict quarantine regulations that were implemented during the pandemic.

   Supported by the waste paper recovery rate in Indonesia that exceeded 70% and fully operated three De-inking Pulp machines, the Company continuously develops the portion of waste paper consumption on constant increasing in order to minimize the risk of raw materials shortage, especially pulp material.

3. The Company’s Liquidity

   In 2020, due to the economic recession, credit growth of national banking experienced contraction of 2.41%, worse than the achievement of credit growth in 2019 which reached 6.08%. Even though the banking’s capital adequacy ratio at the end of year 2020 was in a safe position of 23.78%, however the intermediation ratio (Loan to Deposit Ratio / LDR) decreased by 10.8% compared to LDR in 2019 to become 82.8% while the Non-Performing Loan (NPL) ratio reached 3.06% or increased compared to NPL in 2019 which was 2.53%. These indicators showed that national banking have faced difficulties in boosting credit growth in year 2020.

   The depreciation of Rupiah currency, high interest rates and stagnation in the banking intermediation function may lead to the risk of lack of liquidity for the Company, mainly to cover financing needed in relation with the additional working capital to support the increasing in production from investment of new paper machine. Hence, with the supports from reference bank with more than 30 years partnership and performing tight cash management, the Company has ability to perform self-financing for the needs of its working capital, and furthermore in year 2020 the Company was able to finance its capital expenditure by using internal cash flows approximately of Rp 297.9 billion.

4. Substantial Difference of Foreign Exchange Rates

   Due to the Company is still having bank loans for working capital and long-term debts in USD, the risk of USD exchange rate could not be avoided The working capital loan was still needed by Company because the Company was still importing raw materials and indirect materials by 14,9% and 2,4%, respectively from its total purchase quantity of raw materials and indirect materials in 2020. Therefore, Rupiah volatility against USD would create a quite high business risks for the Company. To minimize those risks, the Company consistently implements commercial hedging strategy which attempts to obtain export proceed in USD equal with the Company’s import needs every year and also efforts to reduce the portion of import purchase and substituting them by local content.