DBS Indonesia Industry Focus Cement Sector

Down but not out

There is a high possibility that cement sales may fall in 2009. However, we think it should recover next year driven by both recovery of the economy in general and the stimulus package launched by the government. In the long term, we foresee a strong growth for cement demand driven by huge market potential in Indonesia. Also competition should be healthy during the down time. However, coal purchase price adjustment could put pressure on FY09 gross profit margin. We reinstate our coverage on INTP with Buy call and TP: Rp6,800; and maintain our Buy call on SMGR with TP:Rp4,850

Sluggish sales. We foresee a 5% decline in cement sales in 2009 on the back of the macroeconomic environment, plunge in commodity prices as well as high base of cement sales in 2008. However, we believe that cement demand will start to recover next year and surpass 2008’s sales in 2011. We forecast cement sales to grow 6% in FY10-11.

Healthy competition for now. With the expected weak demand in 2009, we do not foresee a price war between cement producers, and they will manage to maintain market share. However, if 2006 slowdown is a guide, cement producers will start a price war upon signs of a recovery in cement demand.

Margin contraction. Despite the decline in coal price from its peak mid last year, coal price contracts between cement producers and coal miners were still low at
US$35-45/ton. As such, the current coal price has doubled compared to last year’s contract price, resulting in higher energy cost as coal accounts for 25% of the
total production cost

Down but not out. Long-term demand for cement should remain strong in Indonesia. We believe demand for cement will grow at a fast pace in the long-term as indicated by lag of infrastructure in the country shown by the current ratio of length of toll road to the population. At the same time, the expected low interest rate environment should bode well for the property development.

Top pick: INTP. We upgraded the cement sector to Positive as we believe demand will remain strong in the long-term. INTP is our top pick on the back of its strong and consistent performance and healthy balance sheet.