Oct 13, 2017 11:49:42

Building Materials – Infrastructure Projects Boost Bulk Cement Sales Growth

9M17 domestic cement sales came in at 47m tonnes (+6.6% YoY), driven by  bulk cement sales. We believe the main sales growth driver was the rampup  in infrastructure projects. Cement sales are cyclically higher in 2H of the  year, and our ground checks indicate that cement makers slowed down the  rate of their price reductions in 3Q17. However, in the long term, we expect  competition in the cement industry to remain intense. National un-utilised  production capacity is likely to increase, as production capacity is growing  faster than demand. Maintain NEUTRAL on the sector.

Bulk cement sales growth improves. We believe the ramping-up of  infrastructure projects is likely the main sales growth driver for Indonesia’s  cement industry. 9M17 domestic cement sales increased to 47m tonnes  (+6.6% YoY). This was driven by bulk cement sales – which accounted for  c.25% of 9M17 domestic cement sales – which grew 13.6% YoY.  In Java, cement sales, which accounted for 57% of 9M17 domestic sales,  grew faster (+11.3% YoY) than that of ex-Java, which were flat (+1% YoY).  3Q17 domestic cement sales jumped to 18.4m tonnes (+29.5% QoQ,  +21.1% YoY). We opine that this significant sales increase was partly driven  by the longer working days in the absence of the Lebaran holiday in June.

Indocement’s market share is stable, while Semen Indonesia’s (SI)  slipped. We estimate that Indocement was able to maintan its 3Q17 market  share at 25.4% (2Q17: 25.5%). During the quarter, it widened the sales  coverage of its second-tier brand, Rajawali, which is now available in 30  cities in Jakarta, Banten, West Java and Central Java. Previously, Rajawali  cement was only available in a few cities in Banten and West Java.  SI’s 3Q17 market share dipped to 40.3% (2Q17: 41.1%), likely due to the  slow rate of its ASP reduction.

Slower ASP reduction. Cement sales are cyclically high in 2H of the year  – which leads to easing competition. Hence, cement makers slowed down  in reducing their selling prices. SI’s ASP reduction decelerated – its domestic  ex-factory ASP declined by just 1.2% QoQ in 3Q17 (2Q17: -2.4% QoQ) This  is in line with on-the-ground checks we conducted on retail selling prices, at  building materials stores in Jakarta, Bali and Makasar. Our latest ground  checks suggest that cement retail selling prices were flat MoM in September.

Expect competition to remain intense in 2018. Despite the slower price  reduction in 3Q17, competition in Indonesia’s cement industry likely to  remain intense over the long term. In 2018, national cement production  capacity is estimated to reach 113m tonnes (+9% YoY), while we estimate  national cement demand to increase to 70m tonnes (+7% YoY).  In our calculation, the national cement overcapacity is likely to increase to  43m tonnes in 2018F (vs 39m tonnes in 2017F), while un-utilised production  capacity may rise to 38% in 2018F (vs 37.1% in 2017F).

Maintain NEUTRAL. The announcement of higher monthly cement sales in 4Q17 may improve investor sentiment on the cement companies’ respective share prices. However, we expect competition to remain tough over the long term. Premised on this, we keep our NEUTRAL weighting on the cement sector. (Andrey Wijaya)