An LBSL / JKSB Research Publication

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1 BDT : 1, ,800 1,600 1,400 1,200 1, Heidelberg Cement Adjusted Price-Volume Graph 3-Jan-07 3-Mar-07 3-May-07 3-Jul-07 3-Sep-07 3-Nov-07 3-Jan-08 3-Mar-08 3-May-08 3-Jul-08 Volume Closing Price HEIDELBERG CEMENT BD (HEIDELBCEM) Ordinary Shares (mn) Free Float 12 mth High/Low (BDT) Market Capitalization(BDT mn) Average Daily Volume (Shares) Price Performance 180, , , , ,000 80,000 60,000 40,000 20,000 1 mth 6 mth 12 mth DSI -5.90% -3.28% 22.31% HEIDELBERGCEM -5.05% 12.56% 19.26% % 1695 / 962 7,335 23,955 Bangladesh Equities Corporate Update HEIDELBERGCEMENT BANGLADESH LTD Financial Revenue NPAT EPS EPS DPS EV/Sales EV / EBITDA P/E(x) P/BV Year (Dec) BDT' mn BDT' mn BDT' mn Growth % BDT (x) (x) , % , % , % E 6, % E 8,229 1, % E 9,957 1, % HeidelbergCement Bangladesh Limited (HCBL) is a direct subsidiary of HeidelbergCement Group in Germany with a 61% stake in the entity. HeidelbergCement Group started its operations in Bangladesh in 1998 by setting up a floating terminal in the port of Chittagong. The company consequently built a greenfield manufacturing plant Scancement International Ltd and acquired a controlling stake in the formerly state owned Chittagong Cement Clinker Grinding Co Limited (CCCGCL). The two entities were amalgamated in 2003 to form HCBL. HCBL currently operates two plants with a total annual capacity of 2 million tons of cement. The annual per capita consumption of cement in Bangladesh is around kg, with an installed capacity of 15 million tons per year and a cement demand of 8 million tons per year. Local producers account for as much as 60% of current cement production in the country while foreign manufacturers accounting for 40% of market share. A slowdown in the local construction sector seen over the last year has led to widening of the installed capacity to demand gap. However consumption of cement in Bangladesh has picked up in the last quarter with the prospect of elections later this year which should see the resumption of private sector projects as well as the roll out of government infrastructure development plans. We expect an annual growth of 8% for the sector over the next 3 years. An LBSL / JKSB Research Publication Farzana Hoque farzana@lbsbd.com LankaBangla Securities Ltd DSE Annex building (1st Floor) 9/E, Motijheel C/A, Dhaka-1000 Bangladesh Tel: , , Fax: lbsldhk@accesstel.net John Keells Stock Brokers (Pvt) Ltd Company No. PV , Glennie Street, Col. 2 Sri Lanka. Tel: /5, /7, Fax: jkstock@keells.com August 2008 Currently HCBL operates 2 plants, located in Chittagong (two units) and in the Kanchpur area of Narayangonj (two units). The company has increased the capacity of its Kanchpur plant by installing a second grinding unit with an annual capacity of 0.45 mn MT operational from Feb The company s sales revenue has grown at a CAGR of % over the last four years, with total sales volume growth at a CAGR of 8.06% in the same period. While growth in demand for the sector is expected at around 8% per year HCBL s production and sales for cement is forecast to grow 10% per year for next three years. Growth above industry average is expected due to the quality and consistency of its two cement brands, its brand image, an uninterrupted power supply from the captive power sources at both plants, as well as a secured supply of raw materials. A healthy growth in volumes and price should see the earnings increase by 19.51% in 2008 while earning growth is expected to increase to 35.57% and 31.32% for the years 2009 and 2010 on the back of lower finance costs and increase in non operating income. Earnings growth of 19.51% and 35.6% for 2008 and 2009 correspond to a P/E ratio of 9.88x and 7.28xrespectively. The counter currently trades at a steep discount to sector and market which is at present at multiples of 24.9x and 16.5x. Page 1of 6

2 PROFILE HCBL is subsidiary of HeidelbergCement Group in Germany with a 61% stake in the entity. HeidelbergCement Group with interests in cement, ready-mixed concrete, aggregates and related activities is one of the leading producers of building materials worldwide with manufacturing bases in over 50 countries. In 1998, HeidelbergCement Group started its operations in Bangladesh by setting up a floating terminal in the port of Chittagong and distributing the cement to the key markets of Dhaka and Chittagong. Subsequently it built a greenfield manufacturing plant Scancement International Ltd and acquired a controlling stake in the formerly state owned Chittagong Cement Clinker Grinding Co Limited (CCCGCL). In 2003, the two companies were amalgamated and the company s name was changed to HCBL. HCBL currently operates two plants with a total annual capacity of 2 million tons of cement, offering multiple blended cement options like Ordinary Portland Cement (OPC), Portland Composite Cement (PCC) through its two cement brands Scan and Ruby Cement. CEMENT INDUSTRY IN BANGLADESH The annual per capita consumption of cement in Bangladesh is around kg, which is one of the lowest in the world with its neighbor India having a per capital cement consumption estimated at 150 kg. The dominant type of cement used in the country is Ordinary Portland Cement (OPC), with a 95% to 5% mix of clinker and gypsum. Clinker, is primarily imported from countries like India, Thailand, Malaysia, Philippines, Indonesia and China and is therefore susceptible to rising global raw material costs. The country lacks cement plants that are integrated with clinker production and as a result is forced to import clinker for its entire cement production. Lafarge Cement is currently the only integrated cement producer in Bangladesh with a clinker production capacity of 1.2 mn MT that is sourced via a cross border conveyer belt originating from the Indian State Meghalaya. The country has an installed capacity of 15 million tons per year and a cement demand of 8 million tons per year, with a wide gap in capacity and demand fueling severe competition in the market. This has resulted in an increase in consolidation in the sector among local producers. Local producers account for as much as 60% of current cement production in the country while foreign manufacturers like HCBL, Lafarge, Cemex and Holcim accounting for 40% of market share. Holcim currently has a market share of 8% with three plants with a collective installed capacity of 1.3 mn MT. HCBL has a market share of 13% with an installed capacity of 2.0 mn MT. Lafarge Cement in full operation from this year has a reported installed capacity of 1.5 mn MT. Among the local manufacturers Shah Cement, Fresh Crown, Seven Circle, Royal and Aramit are the main players, many of whom lost market share initially but subsequently enhanced their supply chain management and their marketing and distribution capability in order to remain competitive. Shah Cement was the market leader in 2007 with a market share of 22% A slowdown in the local construction sector seen over the last year as a result of political uncertainty, the recent anti-corruption drives as well as a downturn in large government infrastructure projects has led to widening of the installed capacity to demand gap. The sector has also been affected Page 2 of 6

3 by the rising cost of construction raw materials over the last 18mths which saw growth in the construction sector slow down from 8.3% in 2006 to 7.0% in 2007, and is expected to have slowed down further to 6.2% for the fiscal year ended in June Consumption of cement in Bangladesh has however seen an increase in the last quarter and is expected to increase further in coming years with elections now likely by the end of the year which should see an increase in private sector lead projects being resumed along with the roll out of government infrastructure development plans next year. We expect a volume growth rate of around 8% per year for the sector over the next few years. PRODUCTION AND CAPACITY EXPANSION HCBL has a current installed capacity of 2.0 mn MT per year. It operates 2 plants which are certified according to the global environmental management system standards ISO-14001, located in Chittagong (two units) and in the Kanchpur area of Narayangonj (two units). The company has increased the capacity of its Kanchpur plant by installing a second grinding unit of 0.45 mn MT per year that was commissioned in February The added capacity allows HCBL to supply cement all year round even during months of peak demand. HCBL has strived to increase its market share and position while maintaining price leadership. Currently its two cement brands Scan and Ruby cement collectively hold a 13% market share. In 2007, the company achieved a 1% volume growth over FY06 while the overall cement sector experienced a negative growth of 2.4% during this year, as the anti-corruption drive and political uncertainty had an adverse impact on the domestic construction sector. The company s sales revenue has grown at a CAGR of % over the last four years, with total sales volume growth at a CAGR of 8.06% in the same period. While growth in demand for the sector is expected at around 8% per year HCBL s production and sales for cement is forecast to grow 10% per year for next three years to 1.12 million metric tons in 2008 and 1.23 million metric tons in The higher growth rate in production and sales of the company compared to the industry is expected to take place due to the quality and consistency of its products (Scan and Ruby Cement), its brand image, and also due its capability of year round supply of cement to the market. In addition the company has the advantage of sourcing uninterrupted power by virtue of having captive power generation installations at its facilities in Chittagong. The company also enjoys a reliable supply source of clinker from Indocement in Indonesia, a subsidiary of its parent company. RAW MATERIALS AND COST STRUCTURE Bangladesh is dependent on imports for a bulk of its supply of clinker, with no clinker deposit in the country. A large portion of clinker of about mn MT are imported from Thailand, Indonesia Malaysia, Philippines, India and China each year. This is imported by both local and foreign manufacturers, with many foreign manufacturers sourcing clinker from their respective group related entities in the region. The country does have 1.2 mn MT of installed capacity for clinker production that Lafarge sources from the Indian State of Meghalaya via a cross border arrangement. The industry has recently faced higher prices for raw materials due to higher freight cost caused by the fuel price hike in the international market. All Page 3 of 6

4 of this has significantly affected the operating environment of cement manufacturers with the high cost adversely affecting the construction sector. The company has a current gross margin of 22% and is expected to retain margins between 20% - 22% over the next couple of years. Clinker accounts for as much as 56% of the company s cost structure which the company imports under a purchase agreement from Indocement in Indonesia, a HeidelbergCement Group company. While the company benefits marginally from superior cost advantages as a result of the agreement, the company is ensured of reliable supply of clinker. Other raw materials including Gypsum, Iron Slag and Limestone are purchased and world market prices from countries in the region. With the cement sector importing almost all raw material requirements, a rise in global prices is expected to be passed on to the consumer protecting margins. HCBL s competitor Lafarge Cement does have an advantage in having its own source of clinker although its facility is located near the rural north-east Indian border. HCBL has domestic distribution advantages by having its plants located near high cement consumption regions of Dhaka and Chittagong. The company has been operating a 5.8MW gas based power generator since 2003 which has helped it reduce power costs while negating any reliance on the highly unreliable national grid. The company s other facility in Kanchpur has also gained access to an uninterrupted source of power following a joint venture with Meghna Energy Limited with the plant located in the premises. FINANCIAL PERFORMANCE A 10% growth rate in sales should volume and an estimated 10% annual increase in price is expected to contribute toward healthy earnings growth of 19.51% in Declining finance costs as well as high other operating income stemming from increased cash reserves is expected to result in earnings growth of 35.57% and 31.32% for the years 2009 and As of December 2007, the company held BDT million in net debt, which includes the current portion of long term loan and short term loan from Meghna Energy Limited (MEL) for working capital requirements. A bulk of this is expected to be retired during EBITDA margins are expected to remain in a range from 20% -23% for the next three years as a result of its stable revenue and cost structures, while ROE is expected to be maintained at 19.86% and 20.60% for the years 2008 and 2009 respectively. A substantial increase in world raw material prices significantly above the annual 10% expected increase, which would be passed onto consumers may result in slower volume growth going forward. In addition we have assumed continuity of the current depreciation policy. However the company has applied for accelerated depreciation on its recently commissioned plant in Kanchpur. If approval is granted, as per the relevant schedule earnings expectations would decline to BDT 522mn and BDT 975mn respectively in 2008 and 2009 although pick up from 2010 onwards on a lower depreciation charge. Page 4 of 6

5 VALUATIONS Expected earnings growth of 19.51% and 35.6% for 2008 and 2009 correspond to a P/E ratio of 9.88x and 7.28x for 08E and 09E respectively. The counter currently trades at a steep discount of 60.3% to sector and a 40.12% discount to market. Ratio Analysis E 2009E 2010E Sales Growth % 16.44% 36.93% 12.33% 20.99% 21.00% 21.00% EBITDA Margin % 11.61% 18.44% 20.43% 20.83% 21.55% 22.24% Earnings Growth % % 19.11% 19.51% 35.51% 31.28% ROE % 4.74% 22.48% 21.76% 21.48% 23.28% 24.01% ROCE % 3.83% 20.77% 20.61% 20.56% 22.45% 23.24% EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x) Income Statement E 2009E 2010E For the year ended 31st December BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn Sales 3,139 3,655 5,004 5,621 6,801 8,229 9,957 Cost of Good (2,778) (3,129) (4,033) (4,411) (5,398) (6,488) (7,798) Gross Profit ,210 1,403 1,741 2,160 Other Operating income Warehousing,distribution and selling expenses (95) (96) (71) (100) (119) (127) (133) Administrative expenses (204) (207) (190) (218) (251) (291) (338) Operating Profit ,133 1,489 1,940 Other Non-operating Income Financial Expenses (128) (143) (108) (74) (59) (33) (28) Contribution to WPPF (1) (8) (32) (45) (51) (69) (91) Profit before Income Tax (56) ,025 1,388 1,823 Income Tax Expenses (11) 1 (68) (209) (282) (382) (501) Profit for the year (67) ,007 1,321 Page 5 of 6

6 Balance Sheet E 2009E 2010E As at 31st December BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn Non-Current assets Porperty Plant and equipmnet 2,971 2,876 2,712 2,602 2,664 2,390 2,129 Capital Work in Progress Intangible Assets Preliminary and pre-operational expenses Total Non-Current assets 2,995 2,884 2,721 2,951 2,669 2,395 2,133 Current Assets Inventories ,195 Trade and other receivables Current Account with Meghna Energy Ltd Advance, Deposites and prepayments Advance income tax paid Cash and bank balance ,706 2,839 4,623 Total Current Assets 1,138 1,435 1,417 2,202 3,337 4,801 6,998 Total Assets 4,134 4,319 4,138 5,153 6,005 7,196 9,131 EQUITY Sharesholders' equity Share capital Capital reserves Revenue reserves and surplus: General reserve Dividend equalization fund Retained earnings ,154 1,663 2,264 3,129 4,310 Total Sharesholders' equity 1,699 1,839 2,321 2,857 3,458 4,324 5,504 Liabilites Non-current liabilities Long term loan suppliers' credit-bloked Quasi equity loan ADP loan Deferred liability-gratuity Defered tax liability Total Non-current liabilities Currant liabilities Bank overdraft trade and other payables ,054 1,348 1,632 1,810 2,191 Long term loan (current portion Short term loan 968 1, Provisions for other liabilities and charges ,099 Provision for tax liability Unclaimed dividend Total Currant liabilities 1,890 2,045 1,626 2,137 2,393 2,712 3,444 Total Liabilities 2,435 2,480 1,817 2,296 2,547 2,872 3,627 Total Equity and liabilities 4,134 4,319 4,138 5,153 6,005 7,196 9,131 CashFlow Statement E 2009E 2010E As at 31st December BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn BDT' mn A. Operating Activities Net cash flow from operating activities ,009 1,128 1,256 1,486 2,041 B. Investing Activities Purchase of software - (0) (0) (4) Purchase of fixed assets (20) (87) (24) (423) (10) (12) (15) Sales of fixed assets Net cash used in investing activities (2) (86) (19) (418) (10) (12) (15) C.Finacing Activities Dividend paid (0) (0) (38) (83) (141) (141) (141) Short term loan (repayment)/received (559) 187 (200) (200) (100) loan inflow Long term loan repayment (252) (111) (322) (53) (50) - - Net cash used in financing activities (75) (52) (919) 50 (391) (341) (241) D. Net cash (dec.)/inc. during the year 85 (36) ,133 1,784 E. Operating Balance (29) ,706 2,839 Closing Balance ,706 2,839 4,623 Page 5 of 5 This document is published by LankaBangla Securities Ltd and John Keells Stock Brokers (Pvt) Ltd for the exclusive use of their clients. All information has been compiled from available documentation and LBSL's and JKSB s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this document, neither LBSL or JKSB nor its employees can accept responsibility for any decisions made by investors based on information herein.