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Senin, 15 Agustus 2011

Cement - all starts aligned for rerating, top pick INTP - CLSA

You want to buy one of the best proxies to domestic consumption (property, infrastructure, mortgage/GDP penetration) but don’t want to pay record high prices? Look no further, cement play is by far the most compelling bet.

Indocement, Gresik and Holcim is trading at 25%, 15% and 24% off their 2010 highs. Investors have been worried about 1) margin compression from higher input cost 2) less pricing discipline after Rajawali sold out of the stake in Gresik 3) KPPU investigation on price fixing 4) competition from smaller cement players 5) Foreign players coming into the landscape

These overhangs are all behind us now and fundamentals are showing a clear turn around.

1) Costs are coming down (50% of COG are energy related
2) both Indocement and Gressik raising prices for the first time this year
3) KPPU investigation was inconclusive
4) Di Shui’s report last week showed most of the small players have no strong presence in Java and are already running at full capacity.
5) Lastly factoring any material impact from foreign player is way too premature as that would take at least 4-5 years to build anything meaningful.

It is also interesting to note that domestic consumption has been a key growth driver to this economy. Even when the world fell off the cliff in late 08, Indonesia’s cement consumption was only down 5% YoY in 1Q09 (no govt stimulus here) and at the same time operating margins improved YoY.

Our cement guru Di Shui has been banging on the table to buy the cement plays. All stars are aligned for a re-rating in the sector. Annualizing 7M11 sales (conservative as 1H is seasonally weak) implies the sector is on track to grow by 13% to 46m tons in FY11, adding an incremental 5.3m tons of consumption YoY

Di Shui’s cement report “Java’s cement king” last month pointed out Java saw 18.7% growth in 1H11 vs. 1H10 compared to 14.8% average for Indonesia. Greater Jakarta is particularly strong, registering 27.7% growth. This is a complete contrast to 2006-2010, places like Kalimantan and Sulawesi registered CAGR of 14.8% and 12.1% respectively.

The regions are still growing nicely but based on channel checks and cement numbers, its just that growth in Java is accelerating rapidly. We believe that rising demand in Java has been largely driven by property development and the retail housing segment (with incremental gains in public spending) and FDI investments in manufacturing.

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