Indopremier CEMENT INDUSTRY

Cement demand is expected to recover in 2H09, on the back of infrastructure project. The sign of domestic demand recovery has been seen since March 2009 which grew by 1% MoM, followed in April 09 enhanced by 6.8% MoM and in May 09 elevated by 7.1% MoM. As such, we upgraded cement sector rating to OVERWEIGHT from NEUTRAL with SMGR as our Top Pick which is backed by strong balance sheet and net cash position, as well as lower in earning multiple compared to the industry.

Domestic and export sales in May raised by 7.1% MoM and 64.1% MoM
In May 2009, Indonesia cement sales continued to rise either for domestic or export. According to Indonesia Cement Association (ICA), domestic sales grew by 7.1% MoM in May 2009 attained to 3.05 million tones, higher than April 2009 sales. Java was still the driver of May sales which surged by 8.6% MoM reaching 1.69 million tones. Meanwhile, Sulawesi region was the best performer in this period (+18.3% MoM) and became the driver of 5.2% MoM outside Java growth which attained to 1.36 million tones. Export sales in the same period escalated by 64.1% MoM reaching to 502k tones, significantly higher than April Sales (+7.7% MoM). On the other hand, the year to date sales still fell by 11.3% YoY. The 5M09 cement sales contracted by 8.1% YoY for domestic sales and 23.6% YoY for export sales which became to 14.12 million tones and 1.52 million tones, respectively.

SMGR still controlled domestic market share
In term of market share, SMGR still dominated domestic cement industry in 5M09 by 45.8% market share which improved by 160 bps compared to 44.2% market share in the same period last year. Second place was taken by INTP with 29.6% market share which has tumbled by 313 bps compared to the same period last year while SMCB only posted 12.8% market share. INTP and SMCB market share were expropriated by SMGR and others cement player (mainly by Semen Bosowa Maros).

Cartel investigation due to higher cement price
The negative issue in June 2009 for Indonesia cement sector was cartel allegation to SMGR, INTP and SMCB. Cement price in Indonesia is relatively higher compared to other countries. We noted that average cement price increased by 22% YoY and 5% MoM in April 2009, ranging between Rp 55,821 – Rp 57,427 per sack. Currently, The Supervisory Commission of Business Competition (KPPU) is still investigating the alleged cartel in this sector. INTP and SMCB management claimed that such cartel does not exist, since high cement price was due to high fuel cost. Hence, cement price would unlikely to step down this year due to soaring commodities price, in our opinion. Most of the fuel costs, such as coal are based on one year contract.

Assumption changing and upgraded to OVERWEIGHT with SMGR as our top pick
Considering the current market situation, we have evaluated our basic assumption of Risk free rate and Market risk premium in our DCF model became 10.5% and 5.5% from previous 11.8% and 5.45%, respectively. Therefore, our WACC assumption for SMGR, INTP and SMCB are 13.29%, 13.84% and 14.69%, respectively, thus we obtained new target price for our cement valuation universe. We maintain BUY recommendation for SMGR with new TP at Rp 6,730 reflecting 42% upside. Meanwhile, we upgraded BUY recommendation for INTP (TP Rp 8,110) and SMCB (TP Rp 1,230) from HOLD recommendation. Finally, we also upgraded cement sector rating to OVERWEIGHT from NEUTRAL on the back of better cement demand in 2H09 with catalyst of infrastructure project. For this sector, SMGR is still our Top Pick which is backed by its strong balance sheet and net cash position, as well as lower in earning multiple compared to the industry. Downside risk for cement sector are an indefinite delay in infrastructure project such as due to prolong rainy season and festive season, rising energy price and higher raw materials price.