Semen Gresik (SMGR IJ; CP: IDR8,900; BUY) Target Price: IDR11,550 - BNP Paribas

Key issues
ƒ Despite pressure from rising energy costs, Semen Gresik margin in 2Q11 was relatively unchanged. The management attributed this to their cost efficiency programme for which they have been using more medium-low grade coal, alternative energy sources (ie rice husk and sugar cane). In 2010, Gresik still used high grade coal for 30% of its coal requirement, and now they only use medium to low grade coal.
ƒ Management believe margins will remain sustainable in the medium term despite the threat from new players. It will take time for new players to fully set up their operations in Indonesia, especially to build distribution networks and strong brands. Over the longer term, if the new players have established their networks, EBITDA margin could decline to 31-32% from the current 33-34%.
ƒ Management remains focused on profitability rather than market share, and ASP can go up higher in 2H to protect margin from rising energy costs. Management remains positive on the demand outlook and this year and is targeting 19.5m tonnes of cement sales.

Questions raised
ƒ Update on the new mills construction? The completion of the new mills is running on track. As at end June 2011, the plant in Tuban reached 89% completion while the Tonasa V plant was at 88%. The new mills are expected in operation next year and the management expect utilisation rates of up to 70% during the fist year production.
ƒ Why did cement prices only rise 2-3% this year? Some smaller cement companies want to get more market share by maintaining their price. Nonetheless, as margin started to be affected by rising energy cost, cement price would go up in 2H.

Current view
ƒ We remain positive on Semen Gresik, especially with its new capacity next year, which will allow them to regain some of the market share. Cost efficiency has been one of the main strategies from Gresik’s management to deliver profit growth given their limited excess capacity, and it has started to contribute this year. We also share the same view with management that new players will not affect their margin and market share in the near term as it will take sometimes to set up distribution network and strong brand. BUY with TP IDR11,550.