Cement Industry (OVERWEIGHT) Strong growth in Java - Danareksa

Another strong month
Given a boost by the better weather, domestic cement demand picked up further in March to reach 3.8mn tonnes, or up 11.3% yoy. On a mom basis, domestic demand grew by 14.9% mom, outpacing the expected impact coming from seasonality since February is a shorter month. Cumulatively, total domestic demand was up by 8.6% yoy to 10.6mn tonnes – or inline with our 8% demand growth estimate for FY11. Exports were very low as cement producers preferred to sell cement on the more lucrative domestic market. All in all, the supply demand conditions look tight as cement producers have not been firing up their old and inefficient plants.

Better contribution from Java
Over the last couple of years, Java has been underperforming the outer islands in terms of growth. We believe this is because the economies of the outer islands have been benefiting from the soaring commodity prices which, in turn, have led to improving purchasing power. Furthermore, it is also the case that the outer islands are starting from a much lower base. This means there is more room for potential growth. However, in the early part of this year, demand from Java (except East Java) was surprisingly higher than in other areas.

The strong demand in Java favors Indocement and Holcim
The strong demand growth in West and Central Java basically favors Indocement and Holcim. This is reflected in the domestic demand growth for Indocement of 8.4% to 3.2mn tonnes and for Holcim of 24.4% to 1.6mn tonnes in the year up to March. In contrast, Semen Gresik recorded only minor growth of 1.4% to 4.3mn tonnes, meaning that the company lost market share. The big gainer was ultimately Holcim.

Moderately higher pricing
Rising coal prices forced cement producers to nudge up their selling prices. By March 2011, ASP had reached Rp1.1mn per tonne at the retail end. This is 4.0% Ytd higher than last year’s ASP of Rp1.06mn per tonne. For the time being, the cement producers don’t have any immediate plans to hike prices further. The price increases at the beginning of the year should be sufficient to maintain margins. Note also that cement producers have been a beneficiary of the stronger rupiah since about 60% of the COGS are US dollar linked.

Indocement remains our preferred stock
Indocement is our top pick in the sector. We like the company since it has the largest idle capacity, strong support from its parent company for product innovation in addition to having the most efficient cement production operations. BUY with a Target Price of Rp18,700.