Searching for a new normal Underweight (Maintain) February 1, 2017 PT Mimi Halimin +62-21-515-1140 mimi.halimin@miraeasset.co.id The Indonesian cement industry booked yet another weak performance in 2016. In our view, lethargic cement consumption is the result of the property market s slowdown. The nation s cement consumption has failed to reach 5% growth since 2013 (when it grew 5.5% YoY). Weak cement demand growth in the three subsequent years (2014-16) represents a break with past patterns; historical data show that cement demand typically displayed high growth after periods of sluggishness (see Figures 1 and 2). We attribute this different growth pattern to different conditions in Indonesia s cement industry. Currently, the cement industry is struggling not only with slowing demand but also increased supply, given the rising number of cement players from nine in 2014 to 14 in 2016. Domestic installed capacity continues to rise due to additional production capacity from existing and new cement players (see Figure 12). With these challenges, cement producers are forced to find new markets, including through exports, to offset weak domestic demand. This is surprising, given that Indonesia s cement consumption per capita still lags behind that of regional peers such as Malaysia, Vietnam, and Thailand. Further obstacles facing the industry include potential government intervention and the rainy season. In our view, Indonesia s cement industry is in a transitional phase toward a new landscape with additional players joining the game, a growing export market, and accelerated growth of bulk cement on the back of increased infrastructure projects. All in all, we believe the industry is still in the process of reaching a new equilibrium. Five additional cement players within just two years The Indonesian Association (ASI) gained five new members in just two years, with the total number of cement companies rising to 14 in 2016 from nine in 2014 (see Table 1). Two members joined in 2015: Cemindo Gemilang, with its Semen Merah Putih brand, and Jui Shin Indonesia, with its Semen Garuda brand. Three more joined in 2016: Semen Jawa (SCG), Sinar Tambang Arthalestari (Semen Bima), and Conch Indonesia (CONCH). Although the new players did not change the standing of Indonesia s top three cement producers, they have put pressure on existing players due to additional supplies and competitive pricing pressure in the battle for market share. Another year of weak cement consumption in 2016 In line with the historical pattern (see Figure 3), national cement consumption for the month of December came in weaker than November, at only 5.5mn tonnes (-4.1% MoM). This represents only a slight increase of 0.9% from December of last year (see Table 2). Excluding new players (Semen Jawa, Sinar Tambang Arthalestari, and Conch Indonesia), December cement consumption fell 4.6% YoY (see Table 3). Cumulatively, FY16 national cement consumption grew 2.2% YoY to 61.8mn tonnes (see Table 2). However, excluding the new players, consumption fell 2.6% YoY (see Table 3). Updates on listed cement companies: Semen Indonesia (Persero) Tbk (SMGR) booked 2.2mn tonnes in domestic sales volume in December 2016 (-10.1% YoY; -5.4% MoM). Cumulatively in FY16, SMGR booked 25.7mn tonnes in domestic sales volume (-1.1% YoY). Indocement Tunggal Prakarsa Tbk (INTP) booked 1.4mn tonnes in domestic sales volume in December 2016 (+0.1% YoY; -4.9% MoM). Cumulatively in FY16, INTP booked 16.1mn tonnes in domestic sales volume (-4.0% YoY). Analysts who prepared this report are registered as research analysts in Indonesia but not in any other jurisdiction. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Holcim Indonesia Tbk (SMCB) booked 702,609 tonnes in domestic sales volume in December 2016 (-9.9% YoY; -2.8% MoM). Cumulatively in FY16, SMCB booked 7.7mn tonnes in domestic sales volume (-11.3% YoY). Lafarge Indonesia booked 180,174 tonnes in domestic sales volume in December 2016 (-2.2% YoY; +6.1% MoM). Cumulatively in FY16, Lafarge Indonesia booked 1.8mn tonnes in domestic sales volume (-3.8% YoY). Semen Baturaja (Persero) Tbk (SMBR) booked 163,151 tonnes in domestic sales volume in December 2016 (+27.8% YoY; -2.4% MoM). Cumulatively in FY16, SMBR booked 1.6mn tonnes in domestic sales volume (+6.1% YoY). Seeking new markets through exports Given weak domestic cement consumption, Indonesian cement producers have attempted to boost sales through export markets. As a result, clinker and cement export markets surged by c.59% YoY to 1.6mn tonnes in 2016. This may seem surprising, given that Indonesia s cement consumption per capita still lags behind that of regional peers such as Malaysia, Vietnam, and Thailand (see Figure 10). However, export markets contributed only 2.5% to total cement consumption (see Figure 9). Bulk cement growth to improve thanks to infrastructure projects sales in Indonesia are generally dominated by bag cement, the type used for housing and residential purposes, with a c.75% contribution. On the other hand, bulk cement, used for readymix and pre-cast for infrastructure projects, contributes c.25% of total domestic cement consumption in the country. However, given the sluggish property market and increasing activities in the infrastructure sector, bulk cement has booked higher growth than bag cement. In 2016, bulk cement grew 5.6% YoY, compared to only 1.1% YoY for bag cement. In light of the more promising outlook for infrastructure projects compared to developers, we expect bulk cement growth to further improve in 2017. Lower cement price in Papua: Another government intervention? In order to achieve equitable welfare across Indonesia, President Joko Widodo is aiming to bring the current price of cement in Papua down to the same level as in Java through a one cement price program. Currently, due to a lack of transportation facilities, the cement price in Papua is reported to be as high as IDR800,000/sack to IDR2.5mn/sack, vastly higher than in Java, where the price is only around IDR70,000/sack. This potential price intervention reminds us of the intervention in 2015, when the government ordered state-owned cement companies to reduce their retail selling prices by IDR3,000/sack. Due to this, listed cement companies share performances weakened significantly. However, unlike the previous intervention, we believe the potential lowering of the cement price in Papua would not have a significant impact on listed cement companies performance, as East Indonesia (Maluku and Papua) contributes less than 3% of total domestic cement consumption. Oversupply gap to widen in 2017 producers installed capacity is forecast to reach around 100mn tonnes/year in 2017. According to information presented by INTP, domestic supply is forecast to grow c.16% to 104.4mn tonnes in 2017 from c.89.9mn tonnes in 2016. Thus, the oversupply gap will widen if growth in demand does not keep pace with supply growth (see Figure 12). We predict that cement demand growth will not catch up with supply growth in the near term. In 1Q17, especially, we expect the rainy season to impede cement consumption growth. In our view, unfavorable weather is likely to hamper the cement distribution process and progress in infrastructure projects. 2
We maintain our Underweight call on the cement sector Overall, we maintain our Underweight call on the cement sector. We have seen no positive signs that cement demand will pick up sufficiently to catch up with supply growth in the near term. We believe the Indonesian cement industry is in the process of searching for a new normal at which the oversupply gap can be reduced. Potential risks to our call include a better-than-expected property sector recovery, a higher-than-expected demand recovery in the coming months, and favorable government interventions. 3
Figure 1. Historical domestic cement demand growth Figure 2. Weak domestic cement demand growth (YoY, %) 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 5% level 4.0% 2.0% 0.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (%) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% (mn tons) 70 18% 58 60 60 62 55 60 48 50 41 15% 40 30 6% 20 6% 3% 2.2% 1% 10 0 2010 2011 2012 2013 2014 2015 2016 volume (RHS) growth (LHS) Source: Company data, Mirae Asset Sekuritas Research Indonesia Figure 3. Monthly total domestic cement consumption Figure 4. 12M16 domestic cement consumption 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 5.21 4.45 4.77 4.56 2016 2015 2014 5.13 5.11 3.00 January March May July September November 3.61 5.97 5.63 Dec 16: +0.9% YoY; -4.1% MoM 6.06 5.74 5.50 62.0 61.5 61.0 60.5 60.0 59.5 59.0 58.5 58.0 57.5 57.0 60.44 12M15 60.44 Total Excl. new players 61.76 58.89 12M16 Figure 5. INTP s domestic cement sales volume Figure 6. INTP s cumulative domestic cement sales volume 1.8 1.6 1.5 1.4 1.2 1.3 1.2 1.2 1.0 0.8 1.4 1.3 0.9 1.6 Dec 16: +0.1% YoY; -4.9% MoM 1.4 1.5 1.5 1.4 17.00 16.80 16.60 16.40 16.78-4.0% 0.6 16.20 16.12 0.4 0.2 0.0 16.00 15.80 15.60 12M15 12M16 4
Figure 7. SMGR s domestic cement sales volume Figure 8. SMGR s cumulative domestic cement sales volume 3.0 2.5 2.2 2.0 1.5 1.0 0.5 1.8 2.0 2.0 2.1 2.2 1.5 2.5 2.4 Dec 16: -10.1% YoY; -5.4% MoM 2.5 2.3 2.2 26.00 25.95 25.90 25.85 25.80 25.75 25.70 25.65 25.60 26.0-1.1% 25.7 0.0 25.55 25.50 12M15 12M16 Figure 9. Domestic vs. export as % of total consumption 3% Figure 10. consumption per capita (kg/capita) 1,800 1,693 1,600 1,400 1,200 Domestic Export 1,000 800 600 717 610 586 97% 400 200 0 235 234 201 China Malaysia Vietnam Thailand Indonesia Philippine India Source: Company data, Mirae Asset Sekuritas Research Indonesia Figure 11. Market share Figure 12. Estimated oversupply gap (%) 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 2016 2015 120.0 100.0 80.0 60.0 Domestic supply Domestic demand Oversupply gap 20.0% 15.0% 10.0% 40.0 20.0 5.0% 0.0 0.0% SMGR INTP SMCB SMBR Others Source: Company data, Mirae Asset Sekuritas Research Indonesia 5
Table 1. Members of the Indonesian Association Source: ASI, Company data, Mirae Asset Sekuritas Research Indonesia Table 2. Total domestic cement consumption (in tonnes) 2015 2016 YoY (%) January*) 4,861,928 5,213,678 7.2% February*) 4,306,667 4,450,959 3.4% March*) 4,670,868 4,766,629 2.1% April 4,537,237 4,561,357 0.5% May 4,834,265 5,133,863 6.2% June 4,907,721 5,113,614 4.2% July 3,416,934 3,614,581 5.8% August 5,371,732 5,971,303 11.2% September 5,675,641 5,633,478-0.7% October 6,348,447 6,062,829-4.5% November 6,061,206 5,737,245-5.3% December 5,452,209 5,503,160 0.9% Total 60,444,855 61,762,697 2.2% Source: Indonesia Association, Mirae Asset Sekuritas Research Indonesia Note: There were 11 cement companies within ASI in 2015, and 14 in 2016 *) Conch Indonesia data is not available 6
Table 3. Total domestic cement consumption (excluding the three new members in 2016, in tonnes) 2015 2016 YoY (%) January 4,861,928 5,048,898 3.8% February 4,306,667 4,317,019 0.2% March 4,670,868 4,646,542-0.5% April 4,537,237 4,341,286-4.3% May 4,834,265 4,886,847 1.1% June 4,907,721 4,858,268-1.0% July 3,416,934 3,431,827 0.4% August 5,371,732 5,646,297 5.1% September 5,675,641 5,328,250-6.1% October 6,348,447 5,747,298-9.5% November 6,061,206 5,434,395-10.3% December 5,452,209 5,199,062-4.6% Total 60,444,855 58,885,990-2.6% Source: Indonesia Association, Mirae Asset Sekuritas Research Indonesia Note: We exclude Semen Jawa, Sinar Tambang Arthalestari, and Conch Indonesia 7
APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, PT, and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Indonesian jurisdiction and are subject to Indonesian securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of PT, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or PT Mirae Asset Sekuritas Indonesia except as otherwise stated herein. Disclaimers This report is published by PT ( Mirae ), a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Mirae makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Bahasa Indonesia. If this report is an English translation of a report prepared in the Indonesian language, the original Indonesian language report may have been made available to investors in advance of this report. Mirae, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae. Mirae, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 8
Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Mirae Asset Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Mirae Asset Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae and its affiliates to any registration or licensing requirement within such jurisdiction. International Network PT. Mirae Asset Securities Co. Ltd. (Seoul) Mirae Asset Securities (Hong Kong) Ltd. Equity Tower 50th Floor Jl.Jend Sudirman, SCBD Lot 9 Jakarta 12190 Head Office 14, Eunhaeng-ro, Yeongdeungpo-gu Seoul 150-973 Korea Suites 2005-2012 Two International Finance Centre 8 Finance Street, Central Hong Kong Tel: 62-21-515-1140 Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Mirae Asset Securities (America) Inc. Mirae Asset Securities (Europe) Ltd. Mirae Asset Securities (Singapore) Pte. Ltd. 320 Park Avenue, 31st Floor. New York, NY 10022 41st Floor, Tower 42 25 Old Broad Street Six Battery Road #11-01 Singapore, 049909 United States London EC2N 1HQ United Kingdom Tel: 1-212-407-1000 Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tokyo Representative Office Beijing Representative Office Shanghai Representative Office 7F, Yusen Building, 2-3-2 Marunouchi, Chiyoda-ku Tokyo 100-0005 Japan 2401A, 24th Floor. East Tower Twin Tower, B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 China Room 38T31, 38F SWFC 100 Century Avenue, Pudong New Area, Shanghai, 200120 China Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699 Tel: 86-21-5013-6392 Ho Chi Minh Representative Office Suites 901B. Centec Tower 72-74 Nguyen Thi Minh Khai St, Ward 6 District 3, HCMC Mirae Asset Investment Advisory (Beijing) Co., Ltd 2401B,24th Floor. East Tower Twin Tower, B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 China Mirae Asset Securities (Mongolia) LLC #406, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 14240 Mongolia Tel: 84-8-3910-6000 Tel: 86-10-6567-9699 Tel: 976-7011-0807 9