Deutsche Construction Materials Alert - Potential new Chinese cement producer

Hangzhou Cement (HC) relocates its factory to Indonesia
HC, which is partnering with PT Banten Global Development (Regional State Owned), has expressed its plan to invest US$700mn in developing a 2mn tons p.a. cement plant at Banten (Lebak Regency) in Western part of Java. The final decision is still subject to the feasibility study on the raw material reserves and infrastructure availability, which is scheduled for completion in November.

Unlikely to change the competitive landscape outlook
We have been hearing many interested investors in the past years, however, thus far, there is no investment realization in the sector. We attribute this condition to challenges in raw materials reserves, red tapes and local community. For example, even major existing cement company like Semen Gresik has postponed its Greenfield project due to difficulty in procuring necessary landbanks. Based on our channel checks, the main raw materials reserves, limestone and clay, in Banten are not large enough to support a major cement plant (beyond 2.5mn tons p.a.) for a long period of more than 20 years.
Moreover, assuming it manages to complete its cement plant, we still expect this cement company to have a difficult time marketing the cement product. Approximately 80-85% of cement sales is in bag meaning retail market, which is quite brand oriented as the retail customers have a perceived quality attached to certain cement brand such as Indocement and Semen Gresik. Additionally, new players need to develop their own marketing and distribution networks, which are quite expensive.

Reiterate Indocement as our top pick in the sector with TP of Rp21,250
Indocement is a main beneficiary of the buoyant demand, delivering strong earnings growth (+33% p.a. EBITDA growth in 2010-12F) due to ample capacity and a superior business model.