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Rabu, 08 Juni 2011

CEMENT SECTOR: Long-term Competition threat as early 2014 - reit Overweight - Credit Suisse

I think Long-Term Competition threat could cap the sector valuation from premium to market in-line valuation (16x PER market target at end-2011F). Ella is currently forecasting cement demand based on organic growth with majority driven by retail/property-related demand (c80%), please note Pre-Asian crisis Infrastructure-related demand was as high as 60% compared to c20% now. At Rp9,650- SMGR is trading at 14.9x 2011F PER (in-line with CS Indonesia Universe 14.4x) and implied 14% upside to TP Rp11,000 (implied 17.0x 2011F PER), given its new capacity coming in 2012F-2013F, we reiterate Buy SMGR as top-pick in the sector on both valuation and mid-term growth prospect! We have seen the premium valuation capped for our 2nd preferred stock INTP, despite being best managed and lowest cost producer, @Rp17,200 is trading at 17.4x 2011F PER (20% premium to CS Indonesia Universe) and par to TP Rp17,400 (implied 17.6x 2011F PER), therefore Hold INTP.

· Ella Nusantoro (Daily attached): Indonesia cement industry operates in a natural oligopolistic market, with a high barrier to entry. This is due to cement mostly being sold in bags (80%) rather than in bulk (20%). However, the industry is attractive for new entrants given ASP is at US$89/t with gross margin at 47.6%, in addition to the availability of coal domestically which accounts for 30% of total cost and is the main source for energy. While current demand of 6% CAGR for 2011-13E seems limited, thus the upside will come from the implementation of GoI infrastructure projects.
· However, threat from new entrants will cloud the industry by as early as 2014. Our estimates are that by 2013, the industry capacity will rise at an 8% CAGR for 2011-13E to 62.4m tpa, and assuming a 6% CAGR for 2011-13E on domestic cement demand growth (exclude government infra project) and 3 mn tonnes exported, by 2013, the industry will have 11mn tonnes excess capacity (or 17% of capacity). Assuming domestic demand growth doubles starting in 2013 with the implementation of government infrastructure projects, Indonesia will face a shortage in cement in 2014, similar to situation in 1994-97, where cement has to be imported. On that scenario, it makes sense for new entrants to want to set foothold in Indonesia and the existing cement companies to expand capacity. Our estimate figures for 62.4 mtpa capacity by 2013 excluded the plan for Holcim Indonesia ’s 1.7 mtpa in Tuban, new entrants Semen Grobogan’s 2 mtpa in Central Java and Siam Cement’s 1.7 mtpa in West Java . It is estimated to take around three years for construction to be complete, thus assuming that it starts today, the combined 5 mtpa will likely be completed by 2014.
· Meanwhile, the existing cement companies will continue to enjoy the current margins with an ability to pass on the rise in input costs. We maintain our OVERWEIGHT rating on the sector, with Semen Gresik as our top pick in the sector, due to valuation.

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