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1、GlobalResearch9 December 2019Indonesia CementUBSEvidenceLabinside:IndoInfraPart1No worriesoncementdemand-supplyoutlook?UBS Evidence Lab satellite imaging & demand model indicate higher utilisation WebelieveourEBITDAmarginimprovementthesisremainsintact,despitelower-than- expected volume growth in 201

2、9. We expect 5mt (5% of 2019 capacity) incremental domestic supply until 2022, as recent geospatial data indicates two cement plants in Java (Grobogan and Singa Merah) to come online. We expect domestic volume to recover to +2.3% YoY in 2020 (2019: -0.2% YoY) and +5% YoY in 2021, driven by improving

3、 credit cycle and stable inflation, which would translate to rising sector utilisationandhealthypricecompetition.WebelievethemarketispricinginanEBITDA margin 130bp below our estimate for 2020E, and we see more upside for Semen Indonesia.Limited supply pressure from ongoing new plant constructionCont

4、inuing our initial reports in August 2018 assessing plant construction through satellite imaging, we use data from UBS Evidence Labs geospatial team to monitor eightlocations(sixarenew).WenowexpecttotalIndonesiadomesticcapacitytoreach 105mtpaby2022(previously:102mtpa)afterincludingHongshi/Imascospla

5、ntinEast Java.However,wethinktwonewcementplantswouldhavelimiteddistributionscope given their locations and lack of port access. Meanwhile, given their lack of plant expansion,webelieveConchandSiamCementarefocusingonprofitabilityratherthan market share.Domestic cement demand could gradually improve f

6、rom Q220OurdemandforecastisbasedonaproprietaryIndonesiacementconsumptionmodel (autoregressive order: ARIMAX) with three input variables unchanged from the last iteration (Indonesia crude price, inflation and M2 money supply). Our base scenario indicates demand could recover in Q419, cool off in Q120

7、, then rise to 5% level by Q420. We attribute this to lower oil price assumption (high base in H119) and softer economicactivityin9M19(M2moneysupplyisatwo-quarterleadingindicator).Reiterate our preference for Semen IndonesiaWetrimourpricetargetsforSemenIndonesia(SMGR)andIndocement(INTP)by4-8% duetom

8、oreconservative2020volumeforecasts.ForINTP,our2020EEPSissimilarto consensus;however,forSMGRour2020EEPSis27%aboveconsensusaswebelieve market is undervaluing synergy with recently acquired Solusi Bangun Indonesia(SMCB).Figure 1: Valuations summaryBuilding MaterialsIndonesiaEquitiesBobSetiadiBuilding M

9、aterialsIndonesiaEquities HYPERLINK mailto:bob.setiadi +62-21-25547032Joshua Tanja, CFA HYPERLINK mailto:joshua.tanja +62-21-25547030CompanyPrice (Rp)RatingMarketcap(US$m)PE (x) 2020E EV/EBITDA (x) 2020E2021EEV/tonne 2020EFCF yield(%)2020EROE (%) 2020EPerformance1mYTDSemen Indonesia12,425Buy5,26017.

10、29.58.51224.412.7-1.88.04.6Indocement20,700Neutral5,43837.220.317.419 12.23.2Rating PT(Rp)EPS2019E(Rp)EPS2020E(Rp)EPS 2021E (Rp) Forecast changesOldNewOldNewOldNewOldNewOldNewSemen IndonesiaBuyBuy15,70015,000338340730721876853IndocementNeutralNeutral23,90022,000488444600552742662Above data as of 6 D

11、ecember 2019. Source: Reuters, UBS estimates HYPERLINK /investmentresearch /investmentresearchThisreporthasbeenpreparedbyPTUBSSekuritasIndonesia. ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURESBEGIN ONPAGE23. UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbe

12、aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Indonesia cementUBSResearchTHESISMAPMOSTFAVOUREDLEASTFAVOUREDSemenIndonesia(SMGR)PIVOTALQUESTIONSQ:

13、Is Indonesia an oversupplied cementmarket?Yes, with domestic utilisation at 69%. However, we expect slower supply growth of 5mt in FY19- 22E(1.6%CAGR),comparedto7.5mtinFY16-19.Theseconditionswouldbefavourableforhigher ASP, which combined with better cost input could allow the sectors EBITDA margin t

14、o rise to24% by 2022E (2019E: 19%), in our view.Q:Willdomesticcementsalesvolumecontinuetoaccelerate? HYPERLINK l _bookmark1 more Yes,butatamoregradualtempo.BasedonourIndonesiacementconsumptionmodel,weexpect domesticcementvolumegrowthtoimproveto2.3%YoYin2020E(2019E: -0.2%YoY),startingin Q220. We thin

15、k this could further improve to 5.0% YoY in 2021E with better economic activity and oil price as well as stable inflation. HYPERLINK l _bookmark2 moreUBSVIEWWe have a positive view on Indonesias cement sector. In 2019-22E, we expect 5mt (+5%) of incrementalsupplyincrease,comparedto8.5mt(+12%)ofincre

16、mentaldemandincrease.Webelievethis would lift sector utilisation to 74% in 2022E (2019E: 69%) and drive cement ASP upwards. Ultimately,weexpectsectorEBITDAmargintoimproveby540bpin2019-22E.WehaveaBuyrating on Semen Indonesia and a Neutral rating onIndocement.EVIDENCELeveragingdatafromtheUBSEvidenceLa

17、bDataScienceteam,wedeterminedthreevariableswith the greatest predictive power for domestic cement demand growth: 1) consumer price index; 2) oilprice; and 3) M2 money supply. We fed historical data and UBS forecast variables into anARIMAX model, which on a four-quarter moving average basis indicates

18、 that Indonesia domestic cement demand will bottom in Q220E then gradually improve to 5% YoY in Q421E. Using satellite imaging data from UBS Evidence Labs geospatial team, we monitor eight cement plant locations from new and established cement companies. We noticed construction going on at four loca

19、tions but expect onlytwoplants(GroboganandSingaMerah:totalling5mtpa)tobeusedforthedomesticmarket.WHATSPRICEDIN?SMGR and INTP management expect industry volume to grow 2-4% YoY in 2020, and we believe market expects similar numbers. We estimate the sector as currently priced implies 2020 EBITDAmargin

20、 of 21.5%, 190bp below our forecast, indicating market expects oversupply to continue to pressure ASP and EBITDA margin growth potential. HYPERLINK l _bookmark3 more CapacityincreasetoslowinthenextthreeyearsDomestic demand to gradually improve fromQ220E16%14%12%3-year CAGR10%3-year CAGR8%6%4%2%0%-2%

21、-4%01-0404-0707-1010-1313.9%12.5%5.7%12.5%5.7%6.1% 6.0%4.4%3.8%4.0%2.2%0.2%5.7%-1.9%2.6%1.6%16-19E19-22E100.090.080.070.060.050.040.030.0 15%(US$/tonne)10%(US$/tonne)5%0%Q406 Q307 Q208 Q109 Q409 Q310 Q211 Q112 Q412 Q313 Q214 Q115 Q415 Q316 Q217 Q118 Q418 Q319 Q220 Q121 Q421-5%Q406 Q307 Q208 Q109 Q40

22、9 Q310 Q211 Q112 Q412 Q313 Q214 Q115 Q415 Q316 Q217 Q118 Q418 Q319 Q220 Q121 Q421CAGRCAGRCAGRCAGRCAGRCAGRCAGRASP(RHS)CapacityDemandBase Downside UpsideSource: Indonesia Cement Association, Company data, UBSestimatesSource: Thomson Reuters, CEIC, UBS Evidence Lab Data ScienceteamIndonesiaCementUBS Re

23、searchPIVOTALQUESTIONS HYPERLINK l _bookmark0 return Q: Is Indonesia an oversupplied cement market?UBS VIEWYes, with domestic utilisation at 69%. However, we expect slower supply growth of 5mt in FY19-22E (1.6% CAGR), compared to 7.5mt in FY16-19. These conditions would be favourable for higher ASP,

24、 which combined with better cost input could allow the sectors EBITDA margin to rise to 24% by 2022E (2019E: 19%), in our view.EVIDENCEDuring its Q219 earnings call, SMGR management said it is not planning to make further acquisitions or construct new cement plants post the SMGR- HolcimIndonesiadeal

25、.UsingsatelliteimaginggatheredbyUBSEvidenceLabs geospatial team, we monitor eight cement plant locations from new and established cement companies. We observe construction going on in four locations but believe only two cement plants (Grobogan and Puger: 5mtpa) are applicable for domesticcapacity.WH

26、ATS PRICED IN?Market expects less supply pressure but is cautious on potential capacity additions from new cement companies. We calculate that the sector is implying2020EBITDAmarginof21.5%atcurrentprices,or190bpbelowour forecast,indicatingthemarketexpectstheoversupplyconditiontocontinueto pressure A

27、SP and EBITDA marginrecovery.Is the supply situation worth revisiting?Despite relatively low utilisation (2019E: 70%) and limited success breaking into the national market, new companies have recently shown renewed interest in enteringIndonesiascementmarket.Weattributethistoanimprovingcompetitive la

28、ndscapeaftertheHolcimIndonesiaacquisitionandacloseddomesticmarketdue to a cement import ban. Moreover, established companies (eg, Panasia, Conch, SiamCement,MerahPutih)havealsopreparedlandbankforasecondproduction line. Thus we believe it is important to revisit the supply situation in Indonesias cem

29、ent market.We list 10 projects that could potentially come online by 2022:AftertheSMCBacquisition,AnhuiConchisthethirdlargestcementproducer with 6.7mtpa capacity. It has completed the first phase of construction in Bolaang,NorthSulawesiandispreparingasecondproductionline.Company alsoplanstodevelopgr

30、eenfieldcementplantsinSouthSulawesi.Three other cement companies (Semen Merah Putih, Siam Jawa, Semen Bima) havepreparedlandbankforsecondproductionlinesatestablishedplants.GreenfieldcementplantsarebeingbuiltintwolocationsinJava:1)Grobogan inCentralJava;and2)Hongshi/ImascoinEastJava.WeconsideredGrobo

31、gan in our previous model but notHongshi/Imasco.SMGR has cleared landbank for new plant construction in Pidie (Aceh) and Kupang (Nusa Tenggara). However, since acquiring Holcim Indonesia (SMCB), management says it is not planning for majorcapex.Figure 2: Indonesia cement expansion plans (2020-22E)Ad

32、ditionalNoCompanyBrandLocationTypeProbabilitycapacityComments(mtpa)1Anhui ConchSemen Conch Bolaang, NorthExtensionLowN/ACompletedfirstphaseinQ119.Nonewsonplantexpansionfor Sulawesi2nd linesecond productionline.2Anhui ConchSemenConchBarru,SouthGreenfieldMediumN/AFacingpermitissuesandresistancefromloc

33、als.Sulawesi3Cemindo Semen Merah Bayah, Banten PutihExtensionHigh32nd lineStartedconstructionofsecondlineinApril2018withSinomaas themaincontractor.IndocementinitsQ218conferencecallstated thatitaimedfortheexportmarket(Africa).5LintangSaptaSemen LestariBanyumas, CentralExtensionLow2nd linePreviousowne

34、r(Panasia)sold51%staketominoritypartnerin Nov-18 at US$118 EV/tonne. Company has prepared landbank for a second production line.Hongshi/7ImascoSemen Singa MerahPuger,Java6GajahTunggalSemenGroboganGrobogan, Central GreenfieldHigh2ConstructionbeganinJanuary2018.ThecompanyinJune2019 saidtheprojectwas50

35、%complete.Hongshi6GajahTunggalSemenGroboganGrobogan, Central GreenfieldHigh2ConstructionbeganinJanuary2018.ThecompanyinJune2019 saidtheprojectwas50%complete.irrigation system near the cement plants.88SemeruSemen KalimantanKutai, East KalimantanGreenfieldHighN/AOperational since end-2018, but only gr

36、inding mills by importing raw materials from other regions.9SemenSemen IndonesiaKupang,EastGreenfieldLowN/ANusaTenggaraAftertheacquisitionofHolcimIndonesia,SemenIndonesiasLandbankLandbankforasecondproductionlinehasbeenprepared,but management said it has no capex plans for its Indonesiabusiness.N/ALo

37、wExtension 2nd lineSukabumi, West Java4SiamCementSemen Jawa10Semen IndonesiaSemenPadangPidie,AcehGreenfieldLowN/Amanagement said it has no plans to open a new cement plant inthe near future.UBSviewontotaladditionalcapacityin2020-22E5.0We include #6 and #7 for additional capacity for domestic market;

38、 we exclude Cemindo Gemilang capacity.TotalIndonesiacapacityattheendof2022105.7Source: Company data, Bisnis Indonesia, UBS estimatesResults from UBS Evidence Lab satellite imagingUsingdatafromtheUBSEvidenceLabgeospatialteam,wemonitoreightcement plants that we believe are currently under construction

39、 or have a probability to startconstruction.Wesetbenchmarksthatgreenfieldplantconstructioncantake up to 30 months and brownfield expansion can take 24months.Since our previous study in December 2018 (see report), we have removed six locations as: 1) construction completed with no further landbank fo

40、r expansion (Conch: Banten and South Kalimantan; Bosowa: Maros); 2) no construction progressinthepastthreeyears(Ultratech:Wonosari);3)managementdecisionto halt new plant construction (Semen Indonesia: Aceh andKupang).Below is the result of recent data from UBS Evidence Labs geospatial team:Figure 3:

41、 Summary of key geospatial data from UBS Evidence LabSiteSite12345678North SulawesiSouth SulawesiBayah West JavaSukabumiBanyumasEast JavaCentral JavaNorth SulawesiSouth SulawesiBayah West JavaSukabumiBanyumasEast JavaCentral JavaKalimantanDate 112-Oct-1918-Oct-1925-Oct-192-Aug-192-Aug-1916-Oct-1927-

42、Oct-1921-Oct-19Date 225-Oct-196-Nov-19Conch, BarruMerah Putih,SiamCement,Panasia,Imasco, PugerGrobogan,Semeru, EastOneOnelineWhatdowesee?integratedcement factoryCleared landTwo-line integratedcement One-line integratedcement One-line integratedcement PartlycompletedPartly completedintegrated cement

43、integratedcementfactoryfactoryGrindingmillwithnokilnFacilities seenNo quarryFacilities seenNo quarry2.97.5No quarryDistancetoquarryNext to (km)on line 1on line 1on line 1ort/sea30.5Next to port36284280.2Space availableforSpace availableforline 2?YesNMYesYesYesNoNoNo1NM11111under0constructionHow many

44、 silos?1NM2111underconstruction1 underconstruction1# ofcementmills1NM1111under1under1constructionconstruction# ofcementsilos1NM4464under4under2constructionconstructionPowerplantonsite?NoNMYesNoNoNoNoNoRaw material storage#offlying-saucer0buildingsNM1111under00construction# oflonghangars1NM2331under1

45、under0constructionconstructionSource: UBS Evidence LabSemen Conch: no evidence of progress on capacity expansion. Conch completed the first phase of Bolaang plant (North Sulawesi) in Q119. The plant is located right beside a limestone quarry and 3km from the port. Satellite imaging from October 2019

46、 showed no new construction on the secondproductionline.Meanwhile,wesawnoconstructionprogressinBarru plant(SouthSulawesi)asofOctober2019,althoughthecompanyhascleared the landbank for plant construction. According to the media, the company is having difficulty securing the construction permit due to

47、resistance from locals.Figure4:AnhuiConchprojectinBarru,SouthSulawesiFigure5:AnhuiConchprojectinBarru,SouthSulawesiSource: UBSEvidenceLabSource: UBS EvidenceLabFigure6:AnhuiConchplantinBolaang,NorthSulawesiFigure7:AnhuiConchplantinBolaang,NorthSulawesiSource: UBSEvidenceLabSource: UBS EvidenceLabSem

48、en Merah Putih: the only new player developing a second productionline.Basedonourchannelcheck,SemenMerahPutihcouldonly produce less than 50% of clinker ratio due to limitation on its kiln capacity. Thiscouldpotentiallyexplainwhythecompanydecidedtodevelopasecond production line despite a low utilisat

49、ion rate (47% in 2018). However, given the Bayah plants location (southern West Java) and proximity to a port, we could see the company exporting its product to other countries rather than trying to enter the competitive Western Javamarket.Satelliteimagingshowsthecompanyhascompletedclinkerstorageand

50、has partlycompletedpreheaterfacility.Wethusexpectthesecondproductionline tobeoperationalbyend-2020.However,wehavedecidednottoincludethis in Indonesia domestic capacity as we assume the company to dedicate the second production line to the export market.Figure8:SemenMerahPutih(CemindoGemilang)plant i

51、n Bayah, WestJavaFigure9:SemenMerahPutih(CemindoGemilang)plant in Bayah, WestJavaSource: UBSEvidenceLabSource: UBS EvidenceLabOntheotherhand,weseenoprogressinconstructionoftheSemenJawa(Siam Cement)plantinSukabumi(WestJava)sinceourlastreport.Thesituationissimilar inSemenBimasplantinBanyumas(CentralJa

52、va).Bothcementplantsarelocated inland 25 km from the nearest port, creating a cost barrier to exporting cement tootherislands/countries.Thus,webelievebothcompaniesarewaitingforbetter cement demand in West Java before making further investment in their second production lines.Figure10:SemenJawa(SiamC

53、ement)plantin Sukabumi, WestJavaFigure11:SemenJawa(SiamCement)plantin Sukabumi, WestJavaSource: UBSEvidenceLabSource: UBS EvidenceLabFigure12:SemenBimaplantinBanyumas,CentralJavaFigure13:SemenBimaplantinBanyumas,CentralJavaSource: UBSEvidenceLabSource: UBS EvidenceLabConstruction of two new integrat

54、ed greenfield cement plants is progressing. Semen Grobogans cement plant has begun to take shapewith the completion of raw mill and preheater facility as well as cement silos. Constructionprogressisonscheduletomeetourexpectationofoperationin Q121.However,wedonotthinkthatSemenGroboganhasenoughlandban

55、k to develop a second production line, which should limit its ability to compete against tier-1 cement companies, in ourview.Figure14:SemenGroboganplantinGrobogan,Central JavaFigure15:SemenGroboganplantinGrobogan,Central JavaSource: UBSEvidenceLabSource: UBS EvidenceLabSemen Snga erahanother greenfe

56、ld ement pantis bng dveopd by aconsortiumofHongshiCement(unlistedcementcompanyfromChina)and Imasco. It is located in Puger, a city in southwestern East Java (SMGR and SMCBs plants are located in northern East Java). Despite being only 3.8km fromaport,weseelimitedaccessandnoconstructionofaconveyorbel

57、t,and thusassumeSemenSingaMerahwillfocusprimarilyonservingtheregional market.Thecompanyguidesplantcapacityof8,000tonperday(c.3mtpa),whichwe previously excluded from our forecast due to lack of progress. However, we believe the construction schedule is behind Semen Grobogan and do not expect the ceme

58、nt plant to be operational untilend-2021.Figure16:SemenImascoplantinPuger,EastJavaFigure17:SemenImascoplantinPuger,EastJavaSource: UBSEvidenceLabSource: UBS EvidenceLabLastly, we believe Semen Semeru in East Kalimantan is only serving as a grinding mill plant and is not a fully integrated cement pla

59、nt. We think this is due to the lack of a nearby quarry and the absence of a cement kiln. Local mediaquotedcompanymanagement(seelink-inBahasaIndonesia)assaying thattheplanthasbeeninoperationsinceend-2018andthatitisobtainingits clinker from South Kalimantan and SouthSulawesi.Figure18:SemenSemeruplant

60、inKutai,East KalimantanFigure19:SemenSemeruplantinKutai,East KalimantanSource: UBSEvidenceLabSource: UBS EvidenceLabImpact to our forecastsWe have added capacity from Semen Singa Merah (Hongshi/Imasco) into our calculations and now expect 5mt additional industry capacity in the next three years (1.6