RHB Indonesia Morning Cuppa - 19 August 2016 - (Building Materials, Wika Beton)

Good morning,

Building Materials: Cement Price Likely To Continue Declining

Based on our ground checks at building materials stores in Jakarta, we see continued pricing pressures for cement companies. The Indonesian Cement Association revealed that current cement supply remains high, with August selling prices dropping MoM, whilst domestic cement sales volumes declined 29% MoM in July due to cyclicality. We maintain NEUTRAL on the sector. Main upside risk to our call is a possible moratorium on new cement plant investments although we see this as going against the Government’s aim of lowering cement selling prices.

¨ Our ground checks at building materials stores in August revealed:

i. New cement makers – Semen Merah Putih and Siam Cement Group (SCG) (SCC TB, NR) – are expanding their target markets and distribution outlets;

ii. Cement companies continued to cut selling prices – especially for cement in 40kg bag packages. Prices for 50kg bag packages remain relatively stable.

¨ Lower selling prices are in line with our expectations since we believe that the increase in national supply will outpace demand growth. The Indonesia Cement Association (ASI) revealed that current cement supply is abundant. It expects national cement production overcapacity to increase to 30m tonnes in 2017 (from 28m tonnes in 2016) with utilisation rates of 65-70% (below our current estimates). Given the excess capacity, cement producers are expected to continue cutting selling prices to boost sales and maintain market share.

¨ Lower July cement sales, as expected. According to ASI, July domestic cement sales declined by 29% MoM (to 3,615k tonnes), while export sales jumped 37% MoM (to 203k tonnes). Lower domestic sales in July reflected seasonal factors (Lebaran) whilst higher export sales, which generate lower EBIT margins, suggest that the national overcapacity is still in place.

¨ 7M16 domestic sales increased 3% YoY. PT Semen Indonesia Persero Tbk’s (SI) (SMGR IJ, NEUTRAL, TP: IDR9,000) domestic market share was marginally lower, at 41.5% in 7M16 (from 41.9% in 7M15), while Indocement’s (INTP IJ, NEUTRAL, TP: IDR17,900) fell to 26.4% (from 27.9%). SI continued to cut its domestic average selling price (ASP) to IDR792,000/tonne (-0.8% MoM) in July. YTD, its selling price has declined by 6%.

¨ Moratorium on new plant investment? The Minister of Industry, Airlangga Hartanto, recently stated that the ministry will propose a modification to the Negative Investment List (DNI) to limit foreign investments in cement plants. The moratorium is to be implemented over the next five years to limit the production of cement in Java Island, which currently contributes 56% of total cement production. However, we see the above moratorium as contradicting President Jokowi’s aim in reducing cement selling prices and lower construction costs. Notably, in early 2015, the Government requested SI to lower its selling prices, which in turn impacted selling prices across the industry.

¨ Top pick is SI. If the above new cement investment moratorium is implemented, SI's Rembang plant will likely be the latest new greenfield cement plant to come on-stream in Java. SI is constructing a new cement plant in Central Java, which is already 95% completed. The company said that it has obtained a legal permit for the new plant. We reiterate our NEUTRAL stance on the Indonesian cement sector with SI as our top pick. (Andrey Wijaya)

Link to report: Cement Price Likely To Continue Declining

Link to Daily report: Indonesia Morning Cuppa - 190816

Result Reviews:

Wijaya Karya Beton (WTON IJ, NEUTRAL, TP: IDR860), 1H16’s results

♦ Wika Beton booked IDR109.4bn(+104.3%YoY) net profit in 1H16, in-line with our estimates (45% of our NPAT FY16F), but below consensus estimates with only 37% to consensus FY16F estimates. In 5-year historical average, Wika Beton booked 45% of its FY’s net profit in 1H16.

♦ Its revenue reached IDR1.5trn (+70.4%YoY), 43%/41% to our/consensus estimates, mainly supported by IDR1.9trn new contracts in 1H16. Railway Sleeper product also generated much higher revenue compare to 1H15. Purchase order from Balai Teknik Perkeretaapian (Train) contributed 11.7% of revenue, from previously nothing in 1H15.

♦ Wika Beton’s gross margin improved to 13.2% from only 12.4% in 1Q16, thanks to higher product margin such as railway sleeper and improve utilization rate

♦ On quarterly basis, Wika Beton saw its 2Q16 revenue up by 7.3% QoQ; 69.5% YoY, with net profit reached IDR59.1bn (+17.7%QoQ; 61.9%YoY).

We will roll over our valuation to FY17F and update our recommendation ASAP. (Dony Gunawan)

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