sectorupdate– 14 june2017 ciptadanasekuritas asia...

EQUITY RESEARCHCIPTADANA SEKURITAS ASIA

Please see analyst certification and other important disclosures at the back of this report 2

Sector Update – 14 June 2017

Neutral Cement SectorOversupply concerns remain a drag

Plenty of overcapacityIndonesia has already become the biggest cement producer in South East Asia with anannual installed production capacity of 90 mn tons, followed by Vietnam (78 mn tons),Japan (60 mn tons), and South Korea (55 mn tons). However, Indonesia's cement demandhas grown sluggishly due to the impact of the country's slowdown on the property sector.Data from Indonesia Cement Association (ASI) shows that domestic cement sales in May-17 reached 5.47 mn tons, up 7% from to the same period last year. This was mainly drivenby seasonality effect (cemend demand usually tends to pick up 2 months before Ied-Fitr),However, in 2016, there are 5 newcomers (Anhui Conch, Pan Asia, Siam Cement, CemindoGemilang and Jui Shin Indonesia) entering the market with total additional capacity of 9.3mn ton (+11.5% YoY), increasing the overall industry capacity to nearly 90 mn ton, whiledomestic demand only reached 63 mn tons (utilization rate of 70%). For FY17, total cementcapacity is expected to go up 106.3 mn tons (+18.1% YoY) in FY17 but demand is projectedto only reach 66.1 mn tons, which is equivalent to 64% of industry utilization rate (excesssupply of 40mn tons),

Cement prices may stay lowBased on our channel check, average selling prices (ASP) remained on a declining trend inMay-17, with the big 3 players’ average bag cement prices in Jakarta declining by 2.3%MoM in May-17. Cement industry is expected to have ASP decrease of around 2%-5%respectively in the next month. This was mainly due to after Idul-Fitr seasonality thatusually the trend is going down and increasing of bulk segment, which has a lower ASPthan bag cement. Furthermore, with 5 new comers entering the market, thus 3 big playersthat add more capacities may aggressively maintain or increase its market shares toutilize its plants by sacrificing their margin. All in all, we are in the view that cement pricesfor the medium term may stay low as a result of the tightening competition and shiftingfrom bag cement to bulk cement.

Infrastructure expansion to accelerate in 2H17 onwards...Infrastructure continues to be a top priority for the Government of Indonesia. Thegovernment remains fully committed to its infrastructure plans, despite the globaleconomic uncertainty. Our President is aiming for Indonesia to be at the 40th position inthe World Bank Ease of Doing Business Index in 2017 (up from 109th last year). We believethat despite the obstacles that the government of Indonesia might face while executing theprojects, our projection for 4.5% higher cement growth YoY this year is on the conservativeside. We foresee cement demand momentum will be started to pick up in 2H17 (driven byinfrastructure development) after a stunted growth in the first half of this year. Growthaccelaration in infrastructure development and slower property sales will push bulksegment further sales portion to 30% in FY17 from 23% last year.

Maintain Neutral stanceDespite of oversupply condition in the market, we believe market leader like SMGR andINTP could survive tough business landscape but with lower profitability. Some growthdrivers are supporting rising cement sales in Indonesia, most notably the government’senormous infrastructure agenda, such as the construction of 2,650 km of roads, 15 newairports, refurbishment of 24 ports, urban and national rail networks, 49 dams, and over500,000 new housing units. We maintain our HOLD rating for SMGR and INTP with TP ofRp.8,900 (-8% downside from current share price) and Rp16,000 (-10.3% downside) butwe have SELL rating on SMCB as our TP of Rp625 ( -19.3% downside). We see SMCB as theleast profitable cement maker in our coverage with gross margin of 20% vs peers of 32-42%.

Exhibit 1: Cement stocks rating and valuation

Bberg Mkt.cap Last Target Upside PER EV/EBITDA ROE Yield

Ticker Rating (Rp tn) Price Price pot.(%) 2017F 2017F17F (%) 17F (%)

SMGR HOLD 57.0 9,675 8,900 (8.0) 14.2 8.3 11.9 3.5

INTP HOLD 64.8 17,850 16,000 (10.3) 14.4 8.5 14.7 4.2

SMCB SELL 5.8 765 625 (18.3) - 16.2 -2.8 -

Sector NEUTRAL 42.5 9.5 11.0 7.9 2.5

Sector Cement

Bloomberg Ticker JAKBIND

Share Price Performance

Last price 560.3

52w High/Low price 582/391

Mkt. Cap (Rpbn/USDmn) 415,890/31,153

3m 6m 12m

Absolute (%) 2.2 10.5 33.8

Relative to JCI (%) 0.6 8.4 21.7

Zabrina Raissa, CSA+62 21 2557 4800 ext. 735

[email protected]

http://www.ciptadana.com

-10%

-5%

0%

5%

10%

15%

20%

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100

200

300

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Aug-

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Oct

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Nov

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Dec

-16

Jan-

17Fe

b-17

JAKBIND 1yr Rel. to JCI (RHS)




Industry reviewPlenty of overcapacityIndonesia has already become the biggest cement producer in South East Asia with anannual installed production capacity of 90 mn tons, followed by Vietnam (78 mn tons), Japan(60 mn tons), and South Korea (55 mn tons). However, Indonesia's cement demand hasgrown sluggishly ever since 2013 due to the impact of the country's economic slowdown onthe property and infrastructure sectors. On a seasonality effect, ASI figures show thatdomestic cement sales in May-17 reach 5.47 mn tons, up 7% from to the same period lastyear. Consumption of cement jumped, especially in high-consumption areas such as WesternJava (+5.2% YoY), Overall Java (+11.7% YoY), Ex Java (+0.3% YoY). We see cemend demandtends to pick up 2 months before Ied-Fitr. However, in 2016, there are 5 newcomers (AnhuiConch, Pan Asia, Siam Cement, Cemindo Gemilang and Jui Shin Indonesia) entering themarket with total additional capacity of 9.3 mn ton (+11.5% YoY), increasing the overallindustry capacity to nearly 90 mn ton, but demand only reached 63 mn tons in FY16, left aproduction oversupply of 27 mn tons. Meanwhile, total cement capacity is expected to go upto 106.3 mn tons (+18.1% YoY) in FY17, but demand is projected to only reach 66.1 mn tons inFY17, leaving a production oversupply of 40.2 mn tons. All in all, assuming that the increasein cement consumption per year was only 5-7%, the industry still would sit on overcapacityuntil 2021. Yet, the risk of overcapacity is stark.

Exhibit 2. Indonesia Cement Industry 2017

Source : INTP

Exhibit 3. Oversupply market (in mn tons)

Source : INTP




Exhibit 4. Production Capacity in 2017

Source : SMGR, Association Cement Indonesia (ASI)

Exhibit 5. Industry domestic sales volume May-17

Source : Association Cement Indonesia (ASI)

Domestic Capacity (mt)

Semen Indonesia 35.5

Indocement Tunggal Prakasa 24.9

Holcim Indonesia 12.5

Semen Andalas 2.00

Semen Baturaja 3.8

Semen Bosowa 7.0

Semen Kupang 0.3

Semen Jui Shin 1.5

Semen Puger 0.3

Semen Merah Putih 7.5

Semen Anhui Conch 4.5

Siam Cement 1.8

Semen Pan Asia 1.9

Semen Serang (Haohan) 1.2

Semen Hippo (Sun Fook) 0.6

Semen Jakarta 1.0

Total 106.3

-

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Exhibit 6. Seasonality effect before Ied-Fitr


Cement prices may stay lowBased on our channel check, ASP of cement makers remained on a declining trend in May-17, with the big 3 players’ average bag cement prices in Jakarta declining by 2.3% MoM inMay-17. Cement industry is expected to have ASP decrease of around 2% and 5%respectively in the next month. This was mainly due to after Idul-Fitr seasonality that usuallythe trend is going down and increasing of bulk segment, which has a lower ASP than bagcement.

Furthermore, with 5 new comers entering the market, thus 3 big players that add morecapacities may aggressively maintain or increase its market shares to utilize its plants bysacrificing their margin. All in all, we are in the view that cement prices for the medium termmay still weak as a result of the tightening competition and shifting from bag cement to bulkcement. Additionally, we expect cement prices may stay low in 2017F, improving in 2018along with higher cement consumption. Noted that in 1Q17, cement prices to fall at 4.4% YoYto Rp942k/ton from Rp986k/ton in 1Q16.

Exhibit 7. ASP of cement

Source : Association Cement Indonesia (ASI), Ciptadana estimates

Date Volume (k tons) MoM change (%)Apr-15 4,537May-15 4,834 7%

June-15 4,907 2%July-15 3,417 -30%

Apr-16 4,561May-16 5,134 13%

June-16 5,114 0%July-16 3,615 -29%

Ied-fitr month

800

830

860

890

920

950

980

2013 2014 2015 2016 2017F 2018F

Thousands




Infrastructure expansion to accelerate in 2H17onwards...Infrastructure continues to be a top priority for the Government of Indonesia. Thegovernment remains fully committed to its infrastructure plans, despite the global economicuncertainty. Our President is aiming for Indonesia to be at the 40th position in the World BankEase of Doing Business Index in 2017 (up from 109th last year).

Exhibit 8. Global cement demand outlook

Source : Heidelberg cement

We see an ample room for cement industry to grow from the government’s much heralded 1mn house programme, which it will boost bulk segment demand. Note that, infrastructurecontribution (shown as bulk sales) has increased from below 20% in 2012 to nearly 25% lastyear. Additionally, the government’s enormous infrastructure agenda also will support risingcement demand in Indonesia, such as the construction of 2,650 km of roads, 15 new airports,refurbishment of 24 sea ports, urban and national rail networks, 49 dams, and over 500,000new housing units.

Exhibit 9. Road development plan 2015-2019

Source : Ministry of public works and housing




Furthermore, President Joko Widodo seeks a new approach to achieve much-neededbreakthroughs to boost infrastructure development by increasing the government budgetsharply for infrastructure development. Given 11% YoY higher budget for infrastructure thisyear to Rp337 tn, this would result in higher cement demand.

Exhibit 10. Funds allocated to infrastructure spending in the government’s annual statebudgets

Source : Ministry of public works and housing

There is a significant need for infrastructure investment in roads, toll roads, ports, airportsrailways, water, and power plants. We estimate cement requirement for these project ofaround 15-20mt per annum. As such, we also believe that despite the obstacles that thegovernment of Indonesia might face while executing the projects, our projection for 4.5%higher cement growth YoY this year is on the conservative side.

Exhibit 11. Domestic market consumption FY16

Source : SMGR

According to government, Indonesia's per capita cement consumption now stands at 243 kg(per year). This number is still far below per capita cement consumption figures in regionalpeers. For example, in Malaysia per capita cement consumption stands at 751kg, while inThailand and Vietnam the figure is 443 kg and 661 kg, respectively. Of the total of 63 mn tonsof cement sold in Indonesia in FY16, about 50mn tons were used in the property sector(including the government's 1 mn Houses program). Going forward, we foresee bulk salescomposition will stand at 30% and bag sales at 70% in FY17.

Bag77%

Bulk23%

Bulk (±23%) it consist of :1) Ready mix

(infrastructure) ± 60%2) Fabricator ± 35%3) Projects (mortal &

render) ± 5%

Bag (±77%) it consist of :1) Housing (± 90%)2) Cement based

industry (± 10%)




Exhibit 12. Indonesia’s per capita cement consumption

Source : Indonesia Cement Association (ASI)

Exhibit 13. Cement sales by product type


Maintain NeutralDespite of oversupply condition in the market, we believe market leader like SMGR and INTPcould survive tough business landscape but with lower profitability. Some growth drivers aresupporting rising cement sales in Indonesia, most notably the government’s enormousinfrastructure agenda, such as the construction of 2,650 km of roads, 15 new airports,refurbishment of 24 ports, urban and national rail networks, 49 dams, and over 500,000 newhousing units. We maintain our HOLD rating for SMGR and INTP with TP of Rp.8,900 (-8%downside from current share price) and Rp16,000 (-10.3% downside) but we have SELLrating on SMCB as our TP of Rp625 ( -19.3% downside). We see SMCB as the least profitablecement maker in our coverage with gross margin of 20% vs peers of 32-42%.

On the other hand, we prefer SMGR over INTP, as its valuation looks attractive on itscheapest valuation, trading at an enterprise value/per ton (EV/ton) of around USD100-120.This is lower than the replacement cost of a cement plant at around USD150 per ton.

Exhibit 14. EV/TON (USD)

Source : Company, Ciptadana research

19% 20% 21% 22% 23% 23%30%

81% 80% 79% 78% 77% 77%70%

2011 2012 2013 2014 2015 2016 2017

Bulk Bag

SMGR INTP2016 120 147

2017F 102 170

243 kg




Exhibit 15. SMGR Financial Highlights (Last price: Rp9,675 , HOLD, TP: Rp8,900)Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Revenue (Rpbn) 26,948 26,134 26,956 28,551 31,008

Operating profit (Rpbn) 5,946 5,227 4,597 5,482 5,368

Net profit (Rpbn) 4,521 4,522 3,635 4,288 4,215

EPS (Rp) 762.3 762.3 612.8 722.9 710.6

EPS growth (%) -18.7 0.0 -19.6 18.0 -1.7

EV/EBITDA (x) 7.1 7.5 8.3 6.3 6.1

PER (x) 11.4 11.4 14.2 12.1 12.3

PBV (x) 2.0 1.8 1.7 1.6 1.5

Dividend yield (%) 4.3 4.3 3.5 4.1 6.5

ROE (%) 17.1 15.6 11.9 13.2 12.6

Source : SMGR, Ciptadana Estimates

Exhibit 16. Share price performance

Source : SMGR

Exhibit 17. SMGR’s revenue breakdown as of 1Q17

Source : SMGR

7

9

11

13

Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17

Thousands

90%

5%

2% 3%

Cement Ready mix concrete Clinker Others




Exhibit 18. INTP’s Financial Highlights (Last price: Rp17,850 , HOLD, TP: Rp16,000)Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Revenue (Rpbn) 17,798 15,362 17,720 20,625 21,757

Operating profit (Rpbn) 5,057 3,645 4,030 4,877 5,335

Net profit (Rpbn) 4,357 3,871 3,677 4,512 5,073

EPS (Rp) 1,183.6 1,051.6 998.7 1,225.6 1,378.0

EPS growth (%) -17.7 -11.2 -5.0 22.7 12.4

EV/EBITDA (x) 9.7 12.4 10.9 9.0 8.0

PER (x) 15.2 17.1 18.0 14.6 13.0

PBV (x) 2.8 2.5 2.4 2.2 2.1

Dividend yield (%) 7.5 3.5 3.3 5.5 6.1

ROE (%) 18.3 14.8 13.3 15.1 16.2

Source : INTP, Ciptadana Estimates


Source : INTP

Exhibit 20. INTP’s revenue breakdown as of 1Q17

Source : INTP

10

15

20

25


Thousands

89%

11%

Cement Ready mix concrete




Exhibit 21. SMCB’s Financial Highlights (Last price: Rp765, SELL, TP: Rp625)Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Revenue (Rpbn) 9,239 9,458 9,458 10,327 10,843

Operating profit (Rpbn) 324 276 276 1,474 1,335

Net profit (Rpbn) 199 -285 -224 730 679

EPS (Rp) 26.0 -37.1 -29.3 95.2 88.6

EPS growth (%) -67.8 n/m n/m n/m -7.0

EV/EBITDA (x) 14.3 13.5 16.2 6.1 6.3

PER (x) 30.2 -21.1 -26.8 8.2 8.9

PBV (x) 0.7 0.7 0.8 0.7 0.7

Dividend yield (%) 3.9 1.4 -2.4 -1.9 6.1

ROE (%) 2.4 -3.5 -2.8 8.3 7.4

Source : SMCB, Ciptadana Estimates


Source : SMCB

Exhibit 23. SMCB’s revenue breakdown as of 1Q17

Source : SMCB

6

8

10

12

14


Hundreds

85%

12%

3%

Cement Ready mix concrete Other




EQUITY RESEARCH

HEAD OF RESEARCH ANALYST ANALYSTArief Budiman Syaiful Adrian Zabrina Raissa, CSAStrategy, Automotive, Heavy Equipment,Construction

Banking, Consumer, Cigarette Poultry, Cement, Toll Road, AviationConstruction, Shipping T +62 21 2557 4800 ext 919 T +62 21 2557 4800 ext 735T +62 21 2557 4800 ext 819 E [email protected] E [email protected] [email protected]

ANALYST ANALYST ANALYSTKurniawan Sudjatmiko Nichelle Ongko Edward LowisCoal, Metal Mining, Oil & Gas and Services Media, Retail, Others Consumer, PlantationsT +62 21 2557 4800 ext 739 T +62 21 2557 4800 ext 740 T +62 21 2557 4800 ext 760E [email protected] E [email protected] E [email protected]

ANALYST ANALYST JUNIOR ECONOMISTNiko Margaronis Yasmin Soulisa Imanuel ReinaldoTelecommunication, Tower Property, Healthcare T +62 21 2557 4800 ext 820T +62 21 2557 4800 ext 734 T +62 21 2557 4800 ext 799 E [email protected] [email protected] E [email protected]

TECHNICAL ANALYST RESEARCH ASSISTANTTrevor Gasman SumarniT +62 21 2557 4800 ext 934 T +62 21 2557 4800 ext 920E [email protected] E [email protected]

EQUITY SALESCo HEAD OF INSTITUTIONAL SALES Co HEAD OF INSTITUTIONAL SALESDadang Mulyana The Fei MingPlaza ASIA Office Park unit 2 Plaza ASIA Office Park unit 2Jl. Jend. Sudirman Kav. 59 Jl. Jend. Sudirman Kav. 59Jakarta - 12190 Jakarta - 12190T +62 21 2557 4800 ext 838 T +62 21 2557 4800 ext 807F +62 21 2557 4900 F +62 21 2557 4900E [email protected] E [email protected]

SURABAYAJAKARTA - MANGGA DUA JAKARTA - PURI KENCANA Imelda SoetiknoGavin Ishak Chandra Herotionjaya Intiland Tower SurabayaKomplek Harco Mangga Dua Perkantoran Puri Niaga III Ground Floor Suite 5 & 6Rukan Blok C No.10 Jl. Puri Kencana Blok M8 No.2E Jl. Panglima Sudirman 101-103Jl. Mangga Dua Raya Kembangan Surabaya - 60271Jakarta - 10730 Jakarta - 11610 T +62 31 534 3938T +62 21 600 2850 T +62 21 5830 3450 F +62 31 534 3886F +62 21 612 1049 F +62 21 5830 3449 E [email protected] [email protected] E [email protected]

SEMARANGLusiana PermatasariGedung Menara Suara Merdeka6th Floor Unit-02Jl. Pandanaran No.30Semarang - 50134T +62 24 7692 8777F +62 24 7692 8778E [email protected]


EQUITY RESEARCHSector Update – 14 June 2017

CIPTADANA SEKURITAS ASIA

Analyst Certification

Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her personal views about thecompanies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are notand will not be influenced by any part or all of his or her compensation.

Disclaimer

This report does not constitute an offer to buy or sell any security/instrument, invitation to offer or recommendation to enter into anytransaction. Nor are we acting in any other capacity as a fiduciary to you. When making and investment decision, you should determine,without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume theserisks) as well as the legal, tax and accounting characterizations and consequences of any such transaction. In this regard, by accepting thisreport, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice,(b) there may be legal, tax or accounting risks associated with any transaction, (c) you should receive (and rely on) separate and qualifiedlegal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accountingadvice (and any risks associated with any transaction and our disclaimer as to these matters.

The information contained in this report is based on material we believe to be reliable; however, we do not represent that it is accurate,current, complete, or error free. Assumptions, estimates and opinions contained in this report constitute our judgment as of the date of thedocument and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions andthere can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. PTCIPTADANA SECURITIES AND ITS AFFILIATES SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OROTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANYRELIANCE ON THIS REPORT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF.

Analyst Certi ficationDisclaimer: This document is not intended to be an offer, or a solicitation of an offer, to buy or sell relevant securities (i.e. securitiesmentioned herein or of the same issuer and options, warrants or rights to or interest in any such securities). The information and opinionscontained in this document have been compiled from or arrived at in good faith from sources believed to be reliable. No representation orwarranty, expressed or implied, is made by PT CIPTADANA SECURITIES or any other member of the Ciptadana Capital, including any othermember of the Ciptadana Group of Companies from whom this document may be received, as to the accuracy or completeness of theinformation contained herein. All opinions and estimates in this report constitute our judgment as of this date and there can be noassurance that future results or events will be consistent with any such opinions, forecasts or estimates. The information in this documentis subject to change without notice; its accuracy is not guaranteed; and it may be incomplete or condensed.

sectorupdate– 14 june2017 ciptadanasekuritas asia...

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