Indonesia cement: February 2016: Cooling down
- Domestic volumes +3.4% y-y on February leap year: The addition of Semen Bima (owned by Sinar Tambang Artha Lestari) into the Indonesia Cement Association (ASI) calculation has brought Feb-16 domestic cement volumes to 4.5mnt (+3.4% y-y, -14.6% m-m). This translated into 2M16 volumes of 9.7mnt (+5.4% y-y) or 15.4% of our total full-year 2016 volumes assumption (2M15: 15.3%). However, if we exclude Semen Bima and Semen Jawa (another new addition in 2016), 2M16 volumes only grew by 2.2% y-y during a relatively wet season and the February leap year. The bag vs. bulk cement proportion in Feb-16 was stable, with bulk cement contributing 22.7% of total sales (Jan-16: 22.4%).
- Outer Java sales growth greatly outpaces Java growth: Due to the sales drop in Banten (-12.9% y-y) and Yogyakarta (-11.9% y-y), Java’s Feb-16 sales dropped to 2.4mnt (-0.7% y-y, -19.3% m-m). This was despite the addition of the two new players with plants located in Java (Semen Bima - Banyumas, Central Java; and Semen Jawa – Cikarang, West Java). On the other hand, Outer Java showed solid growth, with Feb-16 sales of 2.1mnt (+8.4% y-y, -8.6% m-m) due to high demand in Sulawesi (417k, +33.5% y-y) and Sumatra (1mnt, +17.1% y-y).
shows solid growth: In Feb-16, $SMGR
booked soft sales of 1.8mnt (-5.8% y-y) which we believe was attributed to increased competition in Java, which led to a 12.3% y-y sales decline. This also affected $INTP
, although the company fared slightly better by recording Feb-16 volumes of 1.2mnt (-2.4% y-y) on solid growth in Outer Java. Meanwhile, the aggressive marketing strategy by $SMCB
, especially in Sumatra, resulted in solid Feb-16 sales of 630kt (+14.6% y-y). Combined with soon-to-be-acquired Semen Andalas, $SMCB
had a 17.4% Indonesia market share ($SMGR
: 40.7%; $INTP
: 26.6%) in Feb-16. Lastly, $SMBR
recorded flattish Feb-16 sales of 101kt (+0.4% y-y).
Outlook: Lower prices required to penetrate new areas
Facing tougher challenges in Java, large cement companies such as $INTP
have turned to Outer Java areas in search for greater volume growth, even though most of their plants are located in Java. Based on our market survey, most consumers and distributors are still loyal to locally produced cement due to their familiarity to the brand and product availability. As a result, we believe that new entrants into the market would be required to offer more attractive prices, which, combined with higher transportation costs, would diminish the impact of margin savings from lower energy and oil prices.
Recommendation: Reiterate UNDERWEIGHT and TPs
At this stage, we await news of increased demand due to property development to offset the wide oversupply gap prior to making changes to our UNDERWEIGHT sector rating. Company-wise, we downgrade SMBR to REDUCE from Hold on the recent surge in its share price, while retaining our call on the other stocks ($SMGR
– HOLD, $INTP
– REDUCE). Risks to our call are increasing ASPs on a turnaround in the property market and a stronger-than-expected IDR.