Indonesia Cement:Conch expansion continues;Tier 1Indo players taking a breather until 2020
Indonesia - an investment phase for Conch; ASPs to be under pressure till 2020
We visited Conch Indonesia's headquarters in Jakarta and its grinding stationin Merak, West Java in late September. Defying skeptics, Conch's first steps inoverseas expansion have been successful, as they continue to take market shareaway from Tier 2Indonesia cement players. As one of the lowest cost players inIndonesia, Conch has mirrored its China strategy to prioritize market share overASPs when it enters a new market. Therefore, cement ASPs in Indonesia willlikely be capped until Conch's goal of c.20% market share is achieved by 2020.However, given the c.20-30% correction in Indo cement ASPs since 2012, and lessroom for further cost cuts by Conch until 2020, ASPs would have likely troughedover the next 12-18months. Tier 1Indonesia cement stocks such as SMGRand INTP, which are on a similar cost structure as Conch, are less affected andhave been oversold in our opinion. We like Conch for its successful globalizationstrategy and Semen Indonesia as the proxy for infrastructure demand recovery.
Overseas expansion by Conch - 50mt by 2020and Indonesia to be 20-25mt
Conch began its expansion into Indonesia in 2011and rolled out an ambitious10-year capacity expansion plan to reach c.20% market share with 20-25mtcapacity, on the back of a G2G (Government to Government) invitation forChinese corporates to develop the cement market in Indonesia. The Indocement sector remains under-penetrated, at 242kg consumption per capitavs. world average 557kg/Vietnam 607kg/Thailand 447kg/Malaysia 715kg, andConch believes cement consumption could even be higher given the potentialof Indonesia. Since clinker lines' construction has been discouraged in the Javaislands, Conch has opted to build clinker lines mainly in South Kalimantan andSulawesi, where coal deposit is ample, and send clinker back to the Merakgrinding station to supply the greater Jakarta regions at the expense of additionaltransportation cost.
Conch already has 7.5mt of capacity in Indonesia as of 1H17, a further 2.2mt willbe added in North Sulawesi by end-2017and 4.4mt through the Barru projects inSouth Sulawesi in 2018/19. Conch's ultimate target is to supply the majority ofclinker needed in Merak from the South Sulawesi clinker production base alongthe coast by 2019/20, which should remove the logistic bottleneck of transportingclinker from the inland South Kalimantan to the port. Conch expects the cost todrop at least RMB30/t by then, which should boost the profitability of its Indo operations or allow Conch to lower prices further for market share gains. Besidesthe 20-25mt of expansion slated for Indonesia, Conch has further identified apipeline of 8.8mt capacity in Laos, 2.2mt each in Myanmar and Russia and 1.8mtin Cambodia. Myanmar is currently extremely profitable for Conch with GP/t ofRMB130/t.