RHB Indonesia Morning Cuppa - 19 October 2016- (Building Materials, Oil&Gas)

Good morning,

Building Materials: Sales To Pick Up Despite Intensified Competition

We expect domestic cement sales to pick up, driven by:

1. Accelerated government infrastructure projects;

2. Higher property sales, driven by lower mortgage rates andthe relaxation of the LTV threshold.

Still, competition is likely to remain intense, triggered by the overcapacity situation. The potential delay in the opening of a new Rembang plant may only slightly impact the competitive landscape. Meanwhile, 3Q16 cement sales indicate that new players’ market shares are still rising. We remain NEUTRAL on the sector, with Semen Indonesia as our Top Pick.

¨ Better sales ahead. We expectcement sales to pick up, driven by:

i. The ramping up of government infrastructure projects, which intensifies at the end of year (a cyclical factor). In addition, abundant revenue from the tax amnesty providesmore funds for government spending;

ii. An increase in property sales on the back of lower mortgage rates and the relaxation of the loan-to-value (LTV) threshold;

iii. Rising prices of commodities such as coal and CPO – the mainincome sources of people outside Java – should boost consumer spending.

These factors should lead to increased cement sales. We expect the sector’s cement sales volume to grow by 6% and 7% YoY in FY16F-17F respectively.

¨ Competition likely to remain intense. Despite better sales ahead, we expect the increase in supply to be faster than the growth in demand. Hence, the delay in the commencement of Semen Indonesia’s(SMGR IJ, NEUTRAL, TP: IDR10,300) new Rembang plant should not change the competitive landscape. We further anticipate the utilisation rate (in terms of production) to decline to 70% and 69% in FY16 and FY17 respectively (from 75% in FY15).

¨ Given the overcapacity in production, we note that Indonesia’s cement producers continue to reducetheir selling prices to boost sales volume and maintain market share. We estimate that the combined new cement players’ market share increased to 9.8% in 3Q16 (2Q16: 9.5%, 1Q16: 8.3%).

¨ In-line 3Q16 sales. Domestic cement sales rose 2.8% QoQ (to 15.2m tonnes), while MoM, base domestic cement sales declined by 5.7% MoM (to 5.6m tonnes). This was driven by trucking/logistics activities being temporarily banned for four days, by the Government, during the Eid al-Adha holiday.

¨ Semen Indonesia gained market share, which slightly improved to 42.4% in 3Q16 (2Q16: 42.2%). The market share of its closest peer, Indocement (INTP IJ, NEUTRAL, TP: IDR17,900), slipped to 25.8% in 3Q16 (2Q16: 25.9%). Semen Indonesia cut its ASP by 2% QoQ to IDR790,000/tonne in 3Q16. Indocement has not reported its ASP, although we think the trend will be in line with that of Semen Indonesia.

¨ Reiterate NEUTRAL.We expect competition in the domestic cement industry to intensify. Our Top Pick is Semen Indonesia since the company is the biggest beneficiary of the recovery in cement sales growth across the country. It has a dominant market share both inand ex-Java. (Andrey Wijaya)

Link to report: Sales To Pick Up Despite Intensified Competition

Link to Daily report: Indonesia Morning Cuppa - 191016

Sector Update:

Update on Indonesia natural gas price cut

Apart from cutting gas price from upstream, ESDM is looking to regulate the distribution margins of gas distributor as part of the government’s bigger scheme to lower Indonesia industrial gas price to USD6.0/mmbtu. ESDM is looking to set a ceiling for distribution charge based the following formula:

Distribution tariff/mmbtu = Capex + Opex + Tax + required IRR on pipeline investment (average 12%)

We have called PGAS on the above matter, company mentioned the above is not firm and still being studied and discussed amongst gov officials. They are not willing to provide any guidance to calculate the above, citing that PGAS’s current distribution spread of USD2.5-3.0/mmbtu is already the min required rate of return to maintain the rate of its pipeline expansion, while ESDM is also trying to avoid dampening the gas pipeline investment of Indonesia, and risks of investing in distribution network in the country is higher than its more developed peers. Higher risk is mainly to build distribution network first while waiting for gas field development that might take a long time to materialize due to the country’s large underinvestment in marginal oil and gas fields.

The risk of intervention is apparent and a few brokers have downgraded PGAS IJ to sell. Having said, looking at next year, macro looks favorable, recovery of economy and higher oil prices (volume recovery, no more impairment and low E&P production costs of USD25/bbl).

Sentiment is driving the share price (PE multiple) while valuation remains to be undemanding, currently trading at 10x-9.0x FY16-17F PER, maintain Buy call and estimate, pending for more clarification. (Norman Choong CFA)

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