Kim Eng Cement sector Robust as expected

What’s  New  
ƒ Cement consumption in June 2010 reached 3.40m tons, according to the Indonesia Cement Association. Though flat on a yearly basis, the figure marked a 3.8% m/m increase from 3.27m tons in May 2010. 
ƒ In 1H10, domestic cement consumption grew by 11.5% y/y to 19.60m tons. The robust growth is not unexpected, considering the low base  in 2009 and the prevailing  favourable  macro ‐economic  conditions. 
ƒ The  government  and  business  owners  have  agreed  to  cap  electricity tariff  increase  at  18%. This  will  translate  to  a  2 ‐3% rise  in  production cost. We  understand  that  the  cement  producers  can  pass  on  the  cost increase  to  consumers. 

Our  View  
ƒ Holcim  Indonesia  is  the  best  performer  to ‐date  with  19.0% y/y  volume growth, followed  by  Indocement  with  17.4% y/y  growth. Semen  Gresik Group  (SGG), however, only  posted  marginal  growth  of  4.0% y/y. 
ƒ SGG’s  sub ‐par  performance  could  be  attributed  to  the  major  overhaul in  Semen  Tonasa  early  this  year, which  caused  sales  to  drop  4.0% y/y in 1H10. But  Semen  Padang  and  Semen  Gresik  still  managed  to  grow by  1.7% and  9.1% y/y, respectively. 
ƒ We  expect  cement  consumption  to  moderate  in  2H10, as  construction activities  are  likely  to  slide  in  view  of  the  La  Nina  phenomenon, which  
brings  with  it  higher  rainfall. Hence, we  leave  our  volume  growth forecast  unchanged  at  7.5% for  2010. Retail  consumption  will  remain robust, but  surpassing  the  spectacular  performance  in  2H09  would  be a  tall  order, in  our  view. 
ƒ The  electricity  tariff  increase  should  pose  little  challenge  to  the  players in  terms  of  profitability, as  they  have  strong  pricing  power. If  the  cap remains  at  18% as  promised  by  the  government, production  cost  will rise  by  just  2 ‐3%. We  believe  the  cost  increase  can  be  easily  passed on to  consumers  without  any  significant  impact  on  demand. 

Action  & Recommendation  
ƒ We  maintain  our  overweight  recommendation  on  the  cement  sector as  we  expect  the  current  favourable  macro ‐economic  conditions  to last. Our  top  pick  in  the  sector  is  Semen  Gresik  which, at  12.2x  2011F PER, is  trading  at  a  15% and  22% discount  to  its  smaller  peers, Indocement and Holcim, respectively.