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Cement - Industry Update

CEMENT – INDUSTRY UPDATE
SALES VOLUME MAY BE WEAKER THIS YEAR
In 4Q19, it is noticeable that industry recovery took place following the presidential election period, as, by the end of FY19, the strong 4Q19 result brought industry cement sales volume to 70.1 million tons vs. 69.5 million tons in FY18. In the following three months however, the 1Q20 result saw a halt in the recovery due to more rainy days; but we should cautiously monitor the 2Q20 result, as the impact of coronavirus outbreak may start kicking in this quarter, according to INTP. We see that contractors and property developers may be forced to delay their projects, thus resulting in possible lower use of cement.
 
Also, two new players, INTP said, namely HongShi and Semen Grobogan may enter the market this year which, coupled with possible weaker demand this year, could lower the industry utilization ratio. As a result, given fiercer competitions, cement players - especially smaller ones - may be forced to cut their ASPs this year.
 
DO THE INTEREST RATE CUTS HAVE ANY EFFECT?
In total, there have been six interest rate cuts since June 2019, which were intended to boost the economy. We see that there was indeed a strong surge in both bag and bulk sales in the 2H19, but it could be underpinned by the conclusion of presidential election as well. Still, the lower interest rate was not enough to boost cement sales, as the bag sales had a three-consecutive-month year-on-year contraction this year, suggesting that the appetite for properties is lower. Thus, in our view, the Government’s accommodative policy may not be enough to spur the appetite, especially in this quarter, as the impact of the pandemic outbreak may outweigh the more favorable lending terms.
 
BUT MARGIN COULD REMAIN SOLID
We think that INTP and SMGR could benefit from softer coal price this year, given the weaker global demand. China’s domestic producers have reportedly been told to halt productions, but it remains to be seen whether they will comply to the restrictions. As coal remains the major component for cement production, it is safe to assume that weaker coal price would, at least, support the eroding margin caused by the possible ASP cuts.
 
OUR VIEW
Our estimate for both INTP and SMGR’s sales volume to grow by a flattish +1.5% (Y/Y) and decline by -4.0% (Y/Y), respectively, as we see the last two-month domestic sales trend favored INTP, which recorded a decline -2.0% (Y/Y) and -7.2% (Y/Y), compared with SMGR’s -3.9% (Y/Y) and -9.5% (Y/Y) in February and March 2020, respectively.
 
Also, our estimates for INTP and SMGR’s ASP stood at flattish +1.0% (Y/Y) and +0.5% (Y/Y), respectively; but it is important to note that the possibility of ASP contraction remains present, given the upcoming tighter competitions this year. We expect INTP and SMGR to record revenues of Rp16.3T (+2.4% Y/Y) and Rp39.3T (-2.5% Y/Y), respectively, while net profits stood at Rp2T (+10.2% Y/Y) and Rp2.3T (-4.4% Y/Y), as the latter may still be squeezed by mounting financing costs stemming from SBI acquisition loans. Please note that our assumptions are subject to change following the upcoming 1Q20 result release.

 

Thu April 23Th, 2020

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