Cement Industry Update: Semen Indonesia in a Good Position

However, despite higher cement sales, Indonesian securities brokerage firm Ciptadana Securities expects that the profit margin of all cement producers active in Indonesia will drop by between 30 and 40 basis points due to increased competition and rising production capacity in Indonesia's cement industry.

Recently, the Indonesian Cement Association (ASI) said it sees 16 million tons being added to Indonesia's total installed cement production capacity in the years 2015-2016 due to the construction of seven new cement plants by various cement companies. The country's total installed cement production capacity stood at 77 million tons at the start of 2015. Most of domestic cement capacity is located on the island of Java, Indonesia's most populous island and also the islands where cement demand is highest.

Ciptadana Securities believes that shares of Semen Indonesia, the country's largest cement producer (with a market share of around 43 percent), are the best picks. The broker set a target price for Semen Indonesia's shares at IDR 12,650 (with a P/E ratio of 12 times). At 12:10 pm local Jakarta time on Monday (18/01) shares of Semen Indonesia were down 1.42 percent to IDR 10,450.

One of the reasons why Semen Indonesia is estimated to be in a good position to benefit most from rising domestic cement sales is that the company's cement factories are spread across a wide geographical area in Indonesia (Sumatra, Java, Sulawesi, Kupang and Papua). As the Indonesian government targets to enhance infrastructure development across the archipelago, those cement producers that have plants in both western and eastern parts of Indonesia are in a good position to tap this potential.

Another Indonesian broker, Trimegah Securities puts the price target of Semen Indonesia's shares at IDR 12,500 (with a P/E ratio at 15.4 times).

Indonesia's Top Three Cement Producers:

Company	Target Price	P/E Ratio (x)	Market Share
Semen Indonesia	12,650	11.8	43%
Indocement Tunggal Prakarsa	19,000	12.8	28%
Holcim Indonesia	900	30.9	14%

^{Source: Ciptadana Securities}

Stock Performance Semen Indonesia (SMGR), Indocement (INTP) and Holcim Indonesia (SMCB):*

^{* normalized stocks, 1 January 2015 = 100}

Semen Indonesia plans to expand its annual production capacity by 13 million tons over the next five years.

Based on the latest data from ASI, Indonesia's cement sales totaled 61 million tons in 2015, up 1.8 percent from sales in 2014. Over the past two years the country's cement sales had been weak due to sluggish economic growth and particularly the slowdown in the country's property sector. Meanwhile, infrastructure development remained sluggish until the second half of 2015 when government spending on infrastructure finally started to increase. Whereas ASI expects Indonesia's cement sales to rise 4-6 percent (y/y) to 64 million tons in 2016, Ciptadana Securities sees a 9.8 percent (y/y) growth in domestic cement sales to 66.4 million tons this year.

Indonesian Cement Sales 2008-2016:

Year	Cement Sales	YoY Growth
2016¹	64 million	+5.0%
2015	61 million	+1.8%
2014	60 million	+3.3%
2013	58 million	+5.6%
2012	55 million	+14.6%
2011	48 million	+20.0%
2010	40 million	+4.2%
2009	38.4 million	+1.1%
2008	38 million	-

^{¹ ASI forecast
Source: Indonesian Cement Association (ASI)}

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