Cement Sector Outlook

Demand spurred by better property growth

Property demand recovery is on the way with six largest property companies is now aiming for 11% YoY growth for 2016 marketing sales after 6.5% decline in 2014, which marked as the first negative figure since 2006. We foresee demand to recover at quicker pace in 2016 with domestic cement consumption to grow by 8% YoY at 65.2 mn tons.

Lower coal price and stronger rupiah to improve gross margin

With approximately 40% of production cost is USD-linked while almost the entire revenue coming in IDR, cement players is positively impacted if the IDR strengthens.We may see margin improvement by 0.5 – 1.5 percentage for gross profit margin if rupiah stabilize below Rp 13,800 /USD. Meanwhile, coal price forward contract dwindled into all-time low level since 2009, hovering at (USD 53 – 55 / ton).

Java as fighting arena

Java remains a key focus (56% of total sales), asdowndraft in commodity price has translated slowing development in outer Java. SMGR is expected to maintain market share amidst tightening competition landscape from new small entrants, which most of them SMGR has the biggest market share in Java (approx. 40%), with approx. 50% of its sales in Java. SMGR hopes its future plant in Rembang, Central Java can increase its arm length in Java to defend market share in East Java and Central Java.

Demand is structurally strong

We still bullish on cement sector as we like the sector’s recovery stories, both on demand and margin outlook in 2016. Despite we expect new players will create more challenging competition in 2016. Despite we expect new players will create more challenging competition in 2016, we still confident that demand will remain structurally strong given the new government’s infrastructure development initiatives, huge backlog on national housing sector and low cement consumption per capita.

Good export outlook amid global oversupply

Considering domestic excess supply, SMGR exports its product to Singapore, Maldives, Bangladesh, Myanmar, etc. During 9M15, SMGR has exported 391k ton while its sales volume may double up  in two years given it was still a low base, coupled with weak  IDR that help export revenue. We deem over-supply also happens in ASEAN countries. This means pushing sales abroad is feasible but not easy.

Survival of the fittest

Our worst-case scenario assumes lower demand and fierce competition with lower ASP, leading to survival of the fittest contest. We expect major efficiency should apply, from cutting fixed costs to reducing overtime. Despite the efficiency debacles, our average EBIT margin in 2016 is still  higher compared to regional average.