Cement Strong sales and resilient margin - Kim Eng

􀂃 First‐quarter results for all cement producers under our coverage were in line with our expectations. Though margins were not as low as feared, the stubbornly high coal prices could see the producers succumbing to cost pressures. Consumers, despite their strong purchasing power, are unlikely to be willing to accept a price hike of more than 7%, which is what the cement producers must do if they wish to maintain margins at 2010 level.
􀂃 Domestic cement sales grew by 17% y/y last month to 3.73m tonnes. Holcim continued to lead the pack with volume growth of 25% y/y. Indocement and Semen Gresik Group (SGG) saw sales volume growth of 19% and 15%, respectively.
􀂃 Domestic sales volume increased by 11% y/y in 4M11 compared to a year ago. We maintain our FY11F growth assumption at 7% y/y in anticipation of a similar pattern to last year, where the strong start in the beginning of the year was negated by a weak second half. In FY10, sales volume surged by 16% y/y in the first four months but ended the year only 6% y/y higher.
􀂃 A new competitor has appeared on the scene. Siam Cement Group (SCG), Thailand’s largest cement maker with a production capacity of 24mtpa, has signed CSPA to acquire a 70.4% stake in Kokoh Inti Arebama (KOIN IJ). The latter is a building material distributor that has a nationwide distribution network covering 22 cities in Indonesia, as well as 19 building material stores in Java.
􀂃 In our view, SCG can leverage on its highly competitive pricing to penetrate the Indonesian market. Its ASP in 1Q11 was Bt1,900/tonne, or about Rp538,000/tonne, which was around 40‐50% cheaper than what Indonesian consumers were paying. Moreover, its production capacity can still support volume expansion, as utilisation rate is still at 75%. This translates to about 5‐6m tonnes of idle capacity.
􀂃 Whether SCG will pose a threat remains to be seen, as there are obstacles it needs to overcome. For one, it lacks silos and packing plants in Indonesia, which are crucial for efficient distribution to retail customers. The psychological barrier, too, is high given that Indonesian customers tend to be loyal to their chosen brand.