Cement Sector NEUTRAL. Magnificent March. Equity Research. Sector Update BCAS Vignette Cement Sector

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1 Equity Research Cement Sector NEUTRAL (unchanged) Sector Update BCAS Vignette Cement Sector Magnificent March Facts: Mar-17 cement sales record 5-year high Domestic demand surged to +10.5% MoM, +3.6% YoY. The Indonesian Cement Industry recorded its highest monthly volume in 5 years, at 5.0mn tons (+10.5% MoM, +3.6% YoY), which led to 1Q17 volume coming in at 14.7mn tons (-14.8% QoQ, +0.4% YoY), accounting for 22.9% of our 2017 forecast (64.5mn tons). Simultaneously, cement players proceeded to enlarge their export market as total volume escalated to 150k tons (+32.5% MoM, +34.8% YoY). Interesting to note that bag cement sales (+10.2% MoM, +1.9% YoY) started to pick up post 5 consecutive months of sluggish performance, indicating a potential recovery in the property segment. Meanwhile, bulk cement sales (+11.6% MoM, +9.3% YoY) remain solid, given infrastructure development in 2017F. Java maintains its dominance. On a regional breakdown, Java remains the growth engine of Mar-17 domestic sales, which stood at 2.8mn tons (+11.9% MoM, +7.7% YoY), boosted by robust sales in East Java (+20.6% YoY) and Central Java (+14.3% YoY) which offset slack demand in Jakarta (-3.3% YoY) and West Java (-0.4% YoY). On the other hand, the Outer Java recorded a slight sales contraction at 2.2mn tons (-1.3% YoY) with Sulawesi (-8.8% YoY) and Kalimantan (-7.3% YoY) as the underperformers (Exhibit 2). Competition remains challenging. Fierce Mar-17 competition remains the overhanging issue for the Tier-1 players as SMGR (Mar/Feb-17: 41.4%/42.2%) and SMCB (Mar/Feb-17: 14.6%/15.8%), saw a loss in market share, albeit with a slight improvement for INTP (Mar/Feb-17: 25.8%/25.0%). Against this, Semen Conch and Semen Bima managed to acquire a higher market share of around 110bps and 40bps, respectively, revealing continued pressure on ASP up to 1Q17 (Exhibit 5). Outlook: Expect higher sales volume in 2Q17 We think that domestic cement consumption will continue to rise in 2Q17, mainly driven by infra-related projects which will enter peak development towards 2H17 (ASEAN games 2018), coupled with stabilizing political tension (post gubernatorial election) and improving weather. Although we saw a slight improvement in property development, we remain in doubt over its sustainability, at least until 2H17. On a more positive note, cement producers should benefit from a more stable trend of energy prices on QoQ basis, which would ease up margin pressure (Exhibit 6-7). Recommendation: Maintain NEUTRAL, top picks on SMGR We reiterate our NEUTRAL call to the sector with SMGR as our top pick. Upside risk to our call includes faster-than-expected recovery in the property sector, while downside risk lies with the concern of continued ASP deterioration. Exhibit 1. March cement sales movement, ('000 tons) 5,100 5,000 4,900 4,800 4,914 4,849 5,021 12M PRICE PEFORMANCE 32,000 30,000 28,000 26, April 2017 Nyoman Widita Prabawa nyoman.prabawa@bcasekuritas.co.id Source: Bloomberg, BCA Sekuritas MARKET DATA ext , Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 YTD 1M 3M 12M Absolute 5.6% 4.2% 13.8% -6.8% JCI return 5.3% 0.7% 5.9% 15.6% Relative 0.3% 3.5% 7.9% -22.4% Source: Bloomberg STOCK COVERAGE Ticker Rating BCAS Cement (LHS) CP TP P/E (x) P/B (x) (IDR) (IDR) 2017F 2017F INTP BUY 16,650 19, SMBR SELL 3, SMGR BUY 8,800 11, Sector Neutral Source: BCA Sekuritas (%) Rel. to JCI Performance (RHS) 4,700 4,671 4,600 4,500 4,531 4,400 4,300 4, March cement sales volume Source: Company, BCA Sekuritas estimate

2 Exhibit 2. Monthly volume breakdown Indonesia Cement Industry Domestic 4,849 4,544 5, ,676 14, Java 2,608 2,512 2, ,967 8, Banten (5.1) - Jakarta (3.3) 1,213 1,132 (6.6) - West Java (0.4) 2,111 2,085 (1.2) - Central Java ,660 1, Yogyakarta East Java ,003 2, Outer Java 2,240 2,032 2, (1.3) 6,708 6,470 (3.5) - Sumatra 1, , ,175 3,067 (3.4) - Kalimantan (7.3) 1, (9.9) - Sulawesi (8.8) 1,293 1,200 (7.2) - Nusa Tenggara East Indonesia Export Grand total 4,960 4,657 5, ,887 15, % Bag volume % Bulk volume Average domestic daily volumes (8.8) (8.8) Semen Indonesia (SMGR IJ) Domestic 1,963 1,919 2, ,929 6, Gresik 1,009 1,051 1, ,122 3, Padang (4.0) 1,490 1,364 (8.4) - Tonasa (9.4) 1,318 1,281 (2.8) Export Grand total 1,979 1,988 2, ,985 6, Domestic Export Grand total % Bag volume % Bulk volume Indocement Tunggal Prakarsa (INTP IJ) Domestic 1,295 1,136 1, ,942 3,777 (4.2) Export na (100.0) (78.7) Grand total 1,319 1,147 1, (1.7) 3,991 3,788 (5.1) Domestic Export Grand total % Bag volume % Bulk volume Semen Baturaja (SMBR IJ) Domestic Export n.a. n.a. 0 0 n.a. Grand total Domestic Export Grand total % Bag volume % Bulk volume Source: Companies, Indonesia cement association 2

3 Exhibit 3. Domestic capacity and volumes, F (mn tons) Oversupply remains the key issue for the sector; however, we see this constricting, along with expansion of cement consumption in 2017F- 2018F F 2018F Installed capacity Domestic demand Source: Indonesia cement association, BCA Sekuritas estimate Exhibit 4. Domestic market share breakdown, M17 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6.1% 2.1% 9.4% 17.7% 17.3% 30.4% 27.8% 2.5% 14.8% 13.5% 15.2% 2.6% 2.2% 2.4% 15.2% 17.0% 15.3% 26.0% 26.9% 25.6% 43.7% 43.0% 41.4% 40.4% 41.5% M16 3M17 Source: Indonesia cement association SMGR INTP SMCB SMBR Other players Exhibit 5. Market share movement, 3M16 3M17 Company Name Products Mar-16 Feb-17 Mar-17 3M16 3M17 PT Semen Indonesia Tier-1 players Semen Indonesia 40.5% 42.2% 41.4% 40.4% 41.5% PT Indocement Tunggal Prakarsa Semen Tiga Roda 26.7% 25.0% 25.8% 26.9% 25.6% PT Holcim Indonesia Semen Holcim 16.5% 15.8% 14.6% 17.0% 15.3% Tier-2 players PT Semen Bosowa Indonesia Semen Bosowa 5.2% 4.5% 4.3% 4.9% 4.5% PT Cemindo Gemilang Semen Merah Putih 2.8% 3.4% 3.3% 2.4% 3.2% PT Semen Baturaja Semen Baturaja 2.3% 2.3% 2.4% 2.2% 2.4% PT Conch South Kalimantan Cement Semen Conch 1.7% 2.0% 3.1% 1.7% 2.4% PT Jui Shin Indonesia Semen Garuda 1.5% 1.4% 1.5% 1.4% 1.5% PT Siam Cement Group Semen Jawa 1.6% 1.9% 1.8% 1.7% 1.8% PT Sinar Tambang Arthalestari Semen Bima 0.9% 1.1% 1.5% 1.1% 1.5% PT Semen Kupang Semen Kupang 0.4% 0.4% 0.2% 0.3% 0.3% Source: Companies, Indonesia cement association SMGR managed to increase their market share to 41.5% in 3M17 while Tier-2 players continue to absorb market share from INTP and SMCB 3

4 Exhibit 6. Coal price movements HBA vs. Newcastle, (USD/ton) We expect a degree of coal price appreciation in 2017, which implies higher energy costs on a YoY basis Indonesia coal reference price (HBA) Newcastel coal reference price Source: The Ministry of ESDM, Bloomberg Exhibit 7. Indonesia electricity tariff, (IDR/kwh) 1,250 1,191 along with a stiffer electricity tariff 1,150 1,059 1, Source: PLN Electricity tarif (PLN) 1-4/TT Average Exhibit 8. Indonesia cement industry key data, F F 2018F Installed capacity* ('000 tons) 67,100 70,500 79,900 96, , ,100 Domestic volume ('000 tons) 58,024 59,909 60,420 62,008 64,488 69,647 Growth (%) Export volume ('000 tons) ,015 1,582 1,924 2,117 Total volume ('000 tons) 58,599 60,175 61,436 63,589 66,412 71,763 Utilization rate (%) Average Selling Price (IDR/ton) 948, , , , , ,872 Source: Companies, Indonesia cement association, BCAS estimate, *exclude Thang Long 4

5 Teguh Hartanto Director of Equity, ext: 129 RESEARCH DIVISION Darmawan Halim Arga Samudro Jennifer Frederika Yapply Head of Research, ext: 168 FI Analyst, ext: 181 Equity Analyst, ext: 179 Strategy, Automotive, Heavy Equipment FI Strategies & Macroeconomist Cigarettes, Consumer, Health Care Aditya Eka Prakasa Johanes Prasetia Michael Ramba Equity Analyst, ext: 182 Equity Analyst, ext: 185 Equity Analyst, ext: 184 Telco, Coal, Metal Mining Retail, Poultry Construction, Property Residential Nyoman Widita Prabawa Achmad Yaki Yamani Yuni Pratiwi Equity Analyst, ext: 180 Technical Analyst, ext: 186 Research Assistant, ext: 183 Cement, Plantation, Oil & Gas Technical Analyst EQUITY CAPITAL MARKET DIVISION Ermawati Agustina Erman Head of Institutional Sales, ext: 159 Amru Fernando Haslienda Santoso Jodikin Arief Iskandar Equity Capital Market, ext: 137 Sales Trader, ext: 164 Institutional Dealer, ext: 136 DISCLAIMER By receiving this research report ("Report"), you confirm that: (i) you have previously requested PT BCA Sekuritas to deliver this Report to you and you are legally entitled to receive the Report in accordance with Indonesian prevailing laws and regulations, and (ii) you have fully read, understood and agreed to be bound by and comply with the terms of this Report as set out below. 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