Sector update:
Building Materials (Neutral),
Cement Price Likely To Continue Declining
Building Materials (Neutral),
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.
Best regards,
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
