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)
Cement, higher 4Q16 sales QoQ, as expected
Domestic cement sales increased to 17.3m tonnes in 4Q16 (+13.7% QoQ), inline with our expectation. On our calculation, Semen Indonesia’s domestic market shares fell to 40.7% in 4Q16 (from 42.4% in 3Q16), similarly Indocement also saw some compression on its market share, slightly declined to 25.5% (from 25.8%) in the same period.
SMCB inaugurates new terminal plant
On 11 November, Semen Holcim ($SMCB) inaugurated a cement terminal with a capacity of 1m tons pa (bags and bulk) in Rangai village, Southern Lampung. The facility cost USD26mn and will strengthen the presence of Holcim Indonesia brands to meet market needs, especially in Lampung and the surrounding areas. President of SMCB, Gary Schutz, stated that the terminal facilities are equipped with a shipping port and environmentally-friendly technologies.
Indonesia: Currency update: IDR depreciation: Don’t panic
Effects of a shallow FX market; Buying opportunities exist
Based on Bank Indonesia’s data, ytd the average daily turnover for the IDR spot market is only USD1.7bn, which is shallow by regional standards, reflecting just 0.5x of GDP (exhibit 1), one of the lowest among its regional peers. Even worse is the 1M NDF market, which only trades at USD0.7bn a day ytd. Unfortunately, the NDF sometimes can influence the spot market, particularly on pressure stemming from the recent Trump election. However, given such illiquidity, we advise investors to remain calm, particularly as we believe the fundamentals in Indonesia remain largely unchanged. We note that, through years of balance sheet repair since the 1998 Financial Crisis, the Indonesian stock market’s net gearing has improved from more than 150% back then to 27.3% in 9M16. Furthermore, we believe Indonesia is currently in a good position given that its 3Q16 CAD of 1.86% is the lowest since 1Q12. In fact, we think the current situation presents buying opportunities for investors as we expect the IDR to become stronger by year-end. It is worth pointing out that there should still be around USD10bn to come in from tax amnesty repatriation between now and the end of 2016.
Sensitivity analysis: 1% weaker IDR = 0.9% market EPS
Given recent IDR gyrations, we present our latest currency sensitivity analysis on the IDR/1USD, in an effort to aid investors in better gauging their investments in Indonesia. Our study, based on 87 non-financial stocks under our coverage (62% of total JCI market capitalization), shows that each 1% IDR depreciation could lower the EPS of our covered stocks by 0.9% overall (exhibit 5). That said, it is not a surprise that a recent 3% negative swing in the NDF market spooked investors, as it could translate into a 3.6% wipeout in 2017 market EPS growth.
Winners: Coal, Metals, Oil & Gas and Plantations
A stronger dollar should in general spell good news for sectors with dollar revenue such as Coal, Metals and Oil & Gas and Plantations (exhibit 5). By stock, our sensitivity analysis indicates that $SIMP, $WINS, $TBLA, $PTBA and $SGRO should be the major beneficiaries of IDR deprecation within our basket of stocks (exhibit 2).
Losers: Poultry, Property and Consumer Discretionary
Against a backdrop of a weaker IDR, sectors with large USD costs and borrowings should suffer: Poultry, Property and Consumer Discretionary (exhibit 5). Stock-wise, losers of a stronger dollar include heavily leveraged companies under our coverage: $SMCB, $LPKR and $MAPI (exhibit 3).
Safe havens: Mainly Construction and Telcos
For investors seeking shelter from currency volatility, we point to the Construction and Telco sectors (exhibit 10 & 24). In terms of stocks, $JSMR, $SCMA, $SIDO and $WSKT (exhibit 4) should have their earnings relatively least altered by FX swings.
Semen Indonesia: Likely Higher Sales In 2H
Semen Indonesia’s 2H16 sales are likely to increase, driven by:
1. Higher property sales on lower mortgage rates and relaxed LTV;
2. Seasonally high sales at year end, in line with the acceleration in infrastructure projects.
However, industry competition is likely to remain intense due to the overcapacity situation. Since we roll over valuation to FY17F’s cash flow, we lift our DCF-based TP to IDR10,300 (from IDR9,000, 3% upside), implying 12x FY17F P/E. Reiterate NEUTRAL.
¨ Higher property sales. After the 7-day repo rate was cut by 25bps in June, we expect the benchmark rate to decline to 5.25% by end-2016 and further reduce to 4.5% in 2017. This lower rate should trigger the lowering of banks and financing companies’ mortgage rates. In addition, loan-to-value (LTV) regulations have been relaxed by 5-15% for non-subsidised housing or apartments. Banks can also now allow homeowners to purchase a second property that is under construction with mortgage loans as well. Previously, such mortgages were only allowed after the construction process was completed. We believe the lower benchmark rates and more relaxed LTV policies should make properties more affordable and, hence, boost property sales. This, in turn, ought to increase Semen Indonesia’s sales.
¨ High 2H16 sales cycles. Based on our calculations, 2H16 cement sales volumes will account for 53% of full-year sales on average. This will be driven by the increase in infrastructure projects. The Government has plans to accelerate infrastructure and public transportation developments both within and out of Jakarta’s central business district (CBD). This includes the development of mass rapid transit (MRT) and light rail transit (LRT) networks. Outside Jakarta, state-owned construction firms have been tasked with accelerating the construction of toll roads, airports and seaports. These should create further demand on cement.
¨ However, competition is likely to remain intense. Based on our ground checks at building materials stores in Jakarta, we see continued pricing pressures for cement firms. The Indonesian Cement Association also stated the current cement supply remains high. Semen Indonesia is in a better position than its peers in dealing with current competition. In our calculation, its ASP fell a mere 2% YTD while Indocement Tunggal Prakarsa’s (Indocement) (INTP) ASP declined 4% YTD. However, the former’s domestic market share was marginally lower at 41.5% in 7M16 (7M15: 41.9%), while Indocement’s fell to 26.4% (from 27.9%) during the same period.
¨ Reiterate NEUTRAL, with a higher TP. Since we roll over valuation to FY17F cash flow, we lift our DCF-based TP to IDR10,300, implying 12x FY17F P/E. Key upside risks to our call are higher-than expected infrastructure projects from better government spending and elevated property sales driven by lower benchmark rates. The main downside risk is a national overcapacity situation that pressures selling prices. (Andrey Wijaya)
Semen Indonesia: Likely Higher Sales In 2H
Semen Indonesia’s 2H16 sales are likely to increase, driven by:
1. Higher property sales on lower mortgage rates and relaxed LTV;
2. Seasonally high sales at year end, in line with the acceleration in infrastructure projects.
However, industry competition is likely to remain intense due to the overcapacity situation. Since we roll over valuation to FY17F’s cash flow, we lift our DCF-based TP to IDR10,300 (from IDR9,000, 3% upside), implying 12x FY17F P/E. Reiterate NEUTRAL.
¨ Higher property sales. After the 7-day repo rate was cut by 25bps in June, we expect the benchmark rate to decline to 5.25% by end-2016 and further reduce to 4.5% in 2017. This lower rate should trigger the lowering of banks and financing companies’ mortgage rates. In addition, loan-to-value (LTV) regulations have been relaxed by 5-15% for non-subsidised housing or apartments. Banks can also now allow homeowners to purchase a second property that is under construction with mortgage loans as well. Previously, such mortgages were only allowed after the construction process was completed. We believe the lower benchmark rates and more relaxed LTV policies should make properties more affordable and, hence, boost property sales. This, in turn, ought to increase Semen Indonesia’s sales.
¨ High 2H16 sales cycles. Based on our calculations, 2H16 cement sales volumes will account for 53% of full-year sales on average. This will be driven by the increase in infrastructure projects. The Government has plans to accelerate infrastructure and public transportation developments both within and out of Jakarta’s central business district (CBD). This includes the development of mass rapid transit (MRT) and light rail transit (LRT) networks. Outside Jakarta, state-owned construction firms have been tasked with accelerating the construction of toll roads, airports and seaports. These should create further demand on cement.
¨ However, competition is likely to remain intense. Based on our ground checks at building materials stores in Jakarta, we see continued pricing pressures for cement firms. The Indonesian Cement Association also stated the current cement supply remains high. Semen Indonesia is in a better position than its peers in dealing with current competition. In our calculation, its ASP fell a mere 2% YTD while Indocement Tunggal Prakarsa’s (Indocement) (INTP) ASP declined 4% YTD. However, the former’s domestic market share was marginally lower at 41.5% in 7M16 (7M15: 41.9%), while Indocement’s fell to 26.4% (from 27.9%) during the same period.
¨ Reiterate NEUTRAL, with a higher TP. Since we roll over valuation to FY17F cash flow, we lift our DCF-based TP to IDR10,300, implying 12x FY17F P/E. Key upside risks to our call are higher-than expected infrastructure projects from better government spending and elevated property sales driven by lower benchmark rates. The main downside risk is a national overcapacity situation that pressures selling prices. (Andrey Wijaya)
