Cement Sector Update Faster February - Bahana Sekuritas

Volume: 3.3m tons, +8.5% m-m on an adjusted basis & +9.7% y-y
According to the Indonesian Cement Association, February’s domestic cement consumption rose 9.7% y-y but fell 7.0% m-m to 3.3m tons. However, on an adjusted basis (given just 18 working days, compared to January’s 21 days), February sales actually rose 8.5% m-m. On an aggregate basis, 2M11 total cement volume reached 6.8m tons, +7.1% y-y, in line with our estimate, accounting for 15.6% of our 2011 volume target of 43.7m tons, +7.2% y-y. Of February total volume, Java contributed approximately 54% or 1.8m tons (-11.5% m-m and +11.8% y-y) while the remaining 46% or 1.5m tons (-1.1% m-m and +7.3% y-y) stemmed from ex Java. East Java continued underperforming as February’s volume contracted 10.3% y-y while the best performing were Banten (+29.6% y-y), Jakarta (+28.6% y-y) and West Java (+20.7% y-y) on infrastructure development. Likewise, Sulawesi’s volume dipped 11.6% y-y. In contrast, Sumatra grew 15.3% y-y and accounted for 51.9% of ex Java cement demand.

Future growth to be buoyed by property and infrastructure projects
Going forward, we believe cement demand will be supported by buoyant property development and realization of infrastructure projects, expected to involve total spending of IDR50t. This would in turn produce substantial multiplier effect for growth in cement consumption. We note, however, that the reconstruction efforts in Japan post the earthquake would be limited on Indonesian cement companies due to high freight costs on exported cement.

Sector underperfomance on higher energy-related costs
The sector underperformed the market 5.1% ytd (exhibit 3) mainly on concerns of higher energy-related costs, particularly coal which accounted for over 40% of total production cost. We expect 2011 average coal price to reach USD120/ ton vis-à-vis USD93/ ton in 2010. While cement producers may pass on the energy cost increase onto the consumers to prevent margin compression, this move could raise the attention of the Commission for the Supervision of Business Competition (KPPU), which had been previously investigated cement companies on alleged cartel-like price control.

INTP benefited from Java’s demand; Less favorable growth for SMGR
INTP has continued to benefit from Java’s strong demand growth with February volume reaching 1.0m tons (-2.7% m-m and +13.1% y-y), causing higher market share of 32.0%, up from 31% a year ago and 30.6% a month earlier. This is inline with our expectation, accounting for 15.6% of 2011 volume growth of 13.6m tons (+8.0% y-y). On SMGR, domestic cement of 1.4mt (-7.5% m-m and +2.2% y-y) accounted for nearly 14.9% of our FY11 sales volume target of 18.8m tons (+6.7% y-y). This slightly eroded SMGR’s market share to 41.0% from 41.3% in January. SMGR’s under-performance mainly stemmed from its Tonasa facility as demand in Sulawesi weakened while Java and Sumatra facilities suffered from limited capacity. While we are NEUTRAL on the sector, both stocks offer upsides at current levels. BUY.