18 February 2009
Indonesia Cement Sector
Silver lining in every cloud
Rachman Koeswanto
PT Deutsche Bank Verdhana
Indonesia
Research Analyst
(62) 21 318 9524
rachman.koeswanto@db.com
Still upbeat on cement sector outlook
Cement demand should remain weak in the coming months; however, we expect
a recovery towards the end of 2009F, supported by lower rates, abating inflation
and a stable rupiah. In our opinion, these conducive macro conditions should
revive residential property development, which contributes >80% of domestic
cement demand. Overall, we forecast flat domestic cement demand growth in
2009F, before rising by 5% YoY in 2010F and 10% YoY in 2011F.
Deutsche Bank AG/Hong Kong
This research has been prepared in association with PT Deutsche Bank Verdhana Indonesia. The opinions contained in this report
are those of PT Deutsche Bank Verdhana Indonesia.
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LOCATED IN APPENDIX 1.
Industry Update
Top picks
Semen Gresik (SMGR.JK),IDR3,525.00 Buy
Companies featured
Indocement (INTP.JK),IDR4,275.00 Buy
2007A 2008E 2009E
P/E (x) 23.4 10.5 12.1
EV/EBITDA (x) 11.2 5.4 6.1
Price/book (x) 4.36 1.90 1.68
Holcim Indonesia (SMCB.JK),IDR560.00 Buy
2007A 2008E 2009E
P/E (x) 44.1 62.5 19.0
EV/EBITDA (x) 11.8 5.9 6.6
Price/book (x) 5.94 1.86 1.67
Semen Gresik (SMGR.JK),IDR3,525.00 Buy
2007A 2008E 2009E
P/E (x) 15.8 8.7 9.8
EV/EBITDA (x) 8.9 4.6 5.8
Price/book (x) 5.01 2.57 2.30
Sufficient cement capacity
20%
40%
60%
80%
100%
120%
140%
1994
1996
1998
2000
2002
2004
2006
2008
2010F
2012F
2014F
-30%
-20%
-10%
0%
10%
20%
30%
Utilization Demand YoY (RHS)
Industry capacity:
58.9mn in 2012F
Domestic cement demand trend
-20%
-10%
0%
10%
20%
30%
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Indonesia Java Outer Islands
2008: Indonesia +11%; Java
+8%; Outer Islands +16%
Global Markets Research Company
Full-scale price war is unlikely, in our view
The cement demand slowdown could erode the current healthy, competitive
environment. However, we do not expect this to spiral into another price
competition as the top three cement producers are committed to follow a nonpricing
strategy to preserve their earnings. Furthermore, we believe they will
remain rational in a bid to justify and/or finance their capacity expansion and
increase their financial independency from their owners.
Industry cement capacity is no longer a concern
In contrast with our earlier concerns, we believe the risk of cement capacity
constraints in Indonesia is quite muted amid the demand slowdown. Based on our
estimates, domestic cement demand growth in 2009-11F could be satisfied by
using the excess capacity, directing the export sales to the domestic market,
and/or a de-bottlenecking program. Meanwhile, we believe the domestic cement
demand after 2011F could be met by the completion of new cement plants.
Semen Gresik is our top pick in the sector
We rate Semen Gresik, Indocement and Holcim Indonesia as Buys, with Semen
Gresik our top pick in the sector. Under conditions mentioned above, we expect
Semen Gresik to deliver superior earnings and operational performances
compared with its peers. There is still upside earnings potential if synergy
improves further. Finally, the stock offers attractive valuation, trading at 11% and
20-29% discounts to its regional average PER and replacement cost, respectively.

Table of Contents
Investment thesis .............................................................................. 3
Outlook ....................................................................................................................................3
Valuation ..................................................................................................................................3
Risks ........................................................................................................................................3
Semen Gresik is our favorite ............................................................ 4
Semen Gresik (Buy; TP: Rp4,375) .............................................................................................5
Indocement (Buy; TP: Rp8,125) ................................................................................................5
Holcim Indonesia (Buy; TP: Rp875)...........................................................................................6
No capacity concerns ........................................................................ 8
Indonesia’s annual capacity: +1.5mn tons to 48.1mn tons in 2008 ..........................................8
Industry utilization rate reached 89% in 2008 ...........................................................................9
New cement capacity: +10.8mn tons until 2012F ..................................................................10
Cement demand slowdown ........................................................... 12
Weaker residential property demand outlook in the near term...............................................12
Higher government spending .................................................................................................14
Slow progress in toll road development .................................................................................14
Full-scale price war is unlikely ....................................................... 17
Semen Gresik.........................................................................................................................17
Indocement............................................................................................................................20
Holcim Indonesia ....................................................................................................................22
Financial discussions....................................................................... 24
Weaker earnings and profitability outlook in 2009F ................................................................25
Sound balance sheets.............................................................................................................27
Earnings sensitivity .................................................................................................................29
2008 sector review .......................................................................... 30
Stronger-than-expected cement demand in 2008...................................................................31
Indocement posted the strongest domestic sales growth .....................................................32
Greater pricing flexibility .........................................................................................................33
Export sales ............................................................................................................................33
Risks.................................................................................................. 35
Banks’ limited financing availability .........................................................................................35
Indefinite delay in infrastructure development........................................................................35
Rising energy prices................................................................................................................35