DBS Cement

Recovery in the offing

• Mortgage rate decline will boost cement demand
• Infrastructure projects will increase demand
• Slowdown in expansion except SMGR
• Top pick: SMGR with TP: Rp6,100

Declining mortgage rate will boost demand for cement. Cement sales fell 8.1% y-o-y in 5M09, however, cement sales should start to recover in 2H09. As some banks have started to offer low rate mortgage and competition in mortgage lending is about to intensify, we believe it will boost property and cement sales. Mortgage lending is one of the easiest ways to boost lending by the banking sector on the back of simple credit screening and certainty of collateral value.

Infrastructure projects will increase demand. We have seen the positive impacts from the government’s stimulus infrastructure developments. As such, cement demand from these projects will add to that from property private projects. The upcoming infrastructure and toll road projects with estimated investment value of US$15bn should become the main driver for cement demand.

Slow down in expansion except SMGR. The recent financial turmoil, rising cost of funds and slowdown in demand have pushed some cement companies to scale down capex or delay expansion plans. INTP chose to delay construction of a new kiln plan. However, SMGR that has run at above 90% will continue with its expansion plan given its strong balance sheet and financial back up. As such, we believe that SMGR will be able to capitalize the fast growing demand in 2011 and maintain its leadership position. Also, the new Tonasa plant should benefit from strong growth in eastern part of Indonesia .

Upgrade TPs: We upgrade our earnings forecast on INTP by 38% in 2009 and 23% in 2010 while maintaining our forecast on SMGR. Both companies showed favourable 1Q09 results driven by improvement in efficiency. We also rollover our valuation from FY09 to FY10 and lower our risk free and ERP assumptions to 9.5% and 5%, respectively. As such, we raised TP of SMGR to Rp6,100 at US$165EV/ton and INTP to Rp8,900 at US$167EV/ton. SMGR is our top pick on the back of its competitive advantage as it has geographically diversified production facilities.