Cement Industry (OVERWEIGHT) Momentum maintained - Danareksa

Strong momentum maintained with a shift toward Java
In the first four months of the year, domestic demand was strong with volume growth of 10.7% yoy to 14.3mn tonnes. On a monthly basis, cement demand was relatively stable. Yet there has been a change in the demand growth trend with a clear shift back to Java, the country’s most populous island where large upgrades to infrastructure and housing need to be made. Actually, we made the point last year that demand should shift back to Java, and this is exactly what is happening at the present time.

Looking closer at Java’s brisk volume growth of 14.2% yoy, the highest growth was seen in DKI Jakarta, followed by Banten and then West Java. These are, notably, the home markets for Indocement, which, therefore, stands to significantly benefit from this situation, especially in light of Semen Gresik’s limited excess capacity. Similarly, Holcim should be another beneficiary.

Holcim gaining market share
Holcim’s more aggressive marketing efforts have paid off, as reflected in its higher market share of 15.2% in 4M11, up from 13.6% previously. Holcim has enjoyed particularly strong market share gains in Java and Sumatra. Meanwhile, Indocement has pretty much maintained its market share at 30.9%, while Semen Gresik lost market share due to capacity constraints.

Despite the strong demand prices fell a bit
Rather surprisingly, prices dipped by 2% mom to Rp1,076,000 per tonne in Apr11 despite the strong domestic demand. Usually in a business environment where demand is strong, cement producers tend to raise prices (especially if energy costs are on the up too). In our view, however, pricing may have been too high due to logistical reasons. At the current level, we feel that the pricing level is still right. After all, if domestic pricing is too high, it might invite competition in the form of imports.

Indocement still favored
Looking at the ongoing shift in demand toward Java, Indocement and Holcim are the cement producers which stand to benefit. Of these two companies, we like Indocement more since it is still running well below its full utilization rate – that is around 75%. As for Holcim and Semen Gresik, they will be occupied by efforts to expand capacity. Semen Gresik might be more interesting since its new capacity should be completed early next year. BUY on Indocement with a Target Price of Rp18,700.