Mortgage and Cement - CLSA

Pretty obvious that we are going to see some selling pressures in the market today, following poor US numbers and Eurozone contagion fears. Perhaps a day for looking at more encouraging trends at home.

Over the past 5 years, mortgage rates at Bank Tabungan (BBTN IJ) have fallen by over 40%. It is important to note that this is BEFORE the country reaches investment grade.

BBTN – Average Mortgage Rate

In the mortgage business, BBTN is a giant, especially in the low cost housing. The bank controls 27% mortgage market share.

In term of penetration, Indonesian mortgages to GDP are only 2.2%. With single digit average rates likely on the horizon + GDP approaching $1tn by 2014 + mortgages growing at nearly 40% per annum, we could see the mortgage market nearly triple by 2014 to $40bn, and rise to 4% of GDP. The upside is massive.

This is great news for cement producers. Our cement analyst Di Shui estimates approximately 3/4 of Indonesia's demand for cement is driven by housing projects, growing at ~11% YTD. Population growth, rapid urbanization, household formation, and rising GDP per capita will only further fuel the nation's housing demand.

At 175kg/capita consumption in 2010, Indo's cement penetration still ranks lowest amongst regional peers, at 1/3 of Thailand's and 1/4 of Malaysia. This foretells of enormous upside.

A stimulatory credit environment will surely help finance this building boom.

Indonesia is ASEAN's largest cement market, with 40.8m tons of cement consumed in FY10. 90% of this market is controlled by 3 producers, well poised and well capitalized to capture sector growth.

The latest May cement sales numbers suggests that domestic sales continue to gather momentum as we head into the dry(er) season. Domestic sales of 4.146m for the month was 9.1% higher MoM, 19.5% higher YoY. Please see attached for the details.

We are overweight the cement sector. Buy INTP IJ, SMCB IJ. O-PF SMGR IJ.