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Kamis, 21 Juli 2011

Cement sector: Homefield Advantage - CLSA

Di Shui has done some channel checks and came away convinced that market concerns over rising competition is premature. We have long known that barrier to entry is significant - branding, distribution, land acquisition, and access to raw materials.

But what’s interesting is that even bulk cement is a branded commodity and it is very difficult for cement distributors to switch from one brand to another back and forth. Plus, construction lead time is 2-3 years, assuming one can clear the land (a big IF, especially in Java).

Key points from her report:

1H11 demand growth of 14.8% YoY was largely driven by property development.
Government spending is rising, especially in West and Central Java.
The private sector accounts for 60-70% of total demand with the remaining 30-40% attributed to public spending.
Semen Gresik and Semen Bosowa (the 1st and 4th respective largest domestic producers) have started to import clinker. Both are facing high utilization rates ahead of new capacity coming on stream in 2012.
There have been headlines that several large foreign cement producers plan to expand into Indonesia; we tally US$4bn for 24.5 tons of new capacity. Market concerns over rising competition may be premature. Limited to no foreign capacity likely before 2015.
Despite domestic supply constraints in 2011, market opportunity for foreign producers is limited. Even bulk cement is a branded commodity in Indonesia.
Distribution is another key barrier to entry. Distributers are unlikely to take on new producers, as old producers may retaliate by cutting off supply in the future.
Other barriers include land acquisition and access to raw materials.
We remain overweight Indonesian cement producers. BUY Holcim (SMCB IJ), O-PF Indocement (INTP IJ) and Semen Gresik (SMGR IJ).

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