Indo cement sector, high barriers to entry - CLSA

Determined Di Shui is still a bull on Indo cement companies. Rising competition is the main issue here. We believe that market concerns are premature. We remain overweight Indonesian cement producers.

Barriers to entry are high. Key points:

Land acquisition. Very difficult and time consuming, especially in main market Java. Lengthy negotiation with no certainty of outcome.
Access to Raw Materials. Limestone quarries are scarce. License from Ministry of Mining is required.
Distribution. Cement is bulky and costly to distribute. Our channel checks, interestingly, also suggest that large cement distributors are captive to existing producers and wary of switching allegiance.
Branding. Cement is a branded commodity. Especially true at retail/bag level, which accounts for 82% of domestic consumption. Even for bulk cement, brand is super important.
2-3 year construction period. And our channel check suggests no new player has broken ground to date.
No M&A opportunities. Lack of acquisition target for new players who want to expedite the process.
WORST CASE SCENARIO

Di Shui also worked on worst case scenario. Under our bear case scenario, we assume all new players starting in early 2012. Sector utilization rates remain attractively high at 80% through 2014 (assuming reasonable 8% domestic demand CAGR from 2011-15).

The risk of overcapacity is LOW, in our view. And disproportionately reliant on Chinese cement producer Anhui Conch’s ability to deliver on an ambitious expansion plan, i.e. 17mn tons new capacity, which represents 70% of total new capacity pledged by foreign producers. Under this scenario, capacity utilization will drop to 65%.

IF (a big IF) Anhui succeeds, distribution constraints suggest enhanced competition could be localized, with Semen Gresik (SMGR IJ) most impacted given dominance in East Indonesian markets.