CLSA Anti-monopoly rules no cartel in cement sector by analyst Sarina Lesmina

· KPPU (Anti Trust Commission)' verdict yesterday said that they can't find clue of cartel in cement companies in Indonesia. Specific statement was "Based on price parallelism, excessive price and production and marketing fixing and excessive profit, the commission's panel did not find enough reason to say there is cartel".

· However, Benny Pasaribu, the Head of Panel advised to dismiss Indonesia Cement Association and for the government to take over the function of the association, saying that production realization data of each of the eight cement companies can be found in the cement association, hence providing the cement companies the opportunity to do concerted action.

· KPPU also advised government to set a ceiling price for cement to protect consumers.

Comment:
· KPPU' non-cartel findings were as expected. The case had been under KPPU's investigation for over a year. The hearing yesterday did not conclude whether government will take action on KPPU's proposal to dismiss the Cement Association and for government to set a ceiling price for cement.

· Maintain BUY on our top picks: Indocement and Holcim. Both offer the best operational and financial leverage to earnings upside

· Indocement is now trading at 15x PE11, and 14x PE12, offering 11% upside to our TP of Rp19,000/sh. Indocement is generating US$27 net profit on every tonne of cement it sells into the local market. Moreover, the company is able to add 6.3m tonnes of additional cement on existing capacity alone. Assuming constant margins (unlikely as operational leverage will lower costs), INTP could add US$175m extra to earnings, 45% of our forecast profit this year.

· Holcim is now trading at 12.5x PE11 and 10.3x PE12, offering 29% upside to our TP of Rp3,000/sh. Holcim Indonesia currently generates only US$13 per tonne in profit, much less than peers. This reflects high COGS, low operating leverage plus debt servicing costs. We forecast the company will be net cash by 2011, reducing interest costs, while the company can add 3.9m tonnes to output. Even assuming constant margins, full capacity would imply a 42% boost to our 2010 earnings projection. A US$5 per tonne increase in net shareholder returns would lift that percentage gain to a healthy 58% increase.