Download Cements: Price war unlikely even though expansions loom

December 04, 2015
MORNING BRIEFING
Pakistan Cement Sector
Cements: Price war unlikely even
ƒ
Faizan Ahmed
though
expansions loom
w
[email protected]
+ 9221 111-574-111
KSE100 Index: Closing 32,565.14 ↑ (172.22)
ƒ
The bar of skepticism for the cement industry is always set high by
investors in the country due to multitude of reasons with alarm horns
being sounded every time there is any news regarding the industry.
ƒ
Our analysis suggests that the pendulum swings between the overrated
pessimism and irrational exuberance are imbalanced and past motives
which led manufacturers to a price war are not applicable under current
circumstances.
ƒ
Ext: 3103
Expected New Capacities - North
(mn tons)
FY18 FY19 FY20
With Pakistan set to see a period of high GDP growth post initiation of
CPEC in the next 5 years, we believe that the country is inching towards
a construction boom driven by strong housing and infrastructure
spending by the govt and households.
Bestw ay Cement*
0.00
0.00
0.00
Cherat Cement**
0.00
0.00
0.00
Chinese Cement Plant
0.00
0.00
3.00
Kohat Cement***
0.00
0.00
3.00
We expect this to translate into strong local dispatches ahead, whereas
share of exports in total dispatches is likely to fall to negligible levels.
Maple Leaf Cement****
0.00
0.00
3.00
Lucky Cement
0.00
2.30
0.00
Don’t let yourself be fooled by price war rumors
Total
0.00
2.30
9.00
The bar of skepticism for the cement industry is always set high by investors in the
country due to multitude of reasons with alarm horns being sounded every time
there is any news regarding the industry. Off late, rumors have been circulating in
the market pertaining to a possibility of another round of price war between the
manufacturers post COD of new capacities which are expected to come online by
the end of FY20F. Our base case forecasts assume 7yr CAGR of 7.5% in local
dispatches which will be sufficient to counteract the decline in export dispatches of
local manufacturers. Adding to our conviction are the current capital commitments
of local manufacturers (coal based power projects, capacity enhancements,
conglomerate type diversifications) which we believe will hinder cost leaders to
make an effort to wipe out smaller players by breaking pricing discipline and selling
their cement at lower prices.
Expected New Capacities - South
ƒ
(mn tons)
FY18 FY19 FY20
ACPL (Hub Chow ki, Lasbella)
0.00
1.30
0.00
Chinese Cement Plant
0.00
0.00
3.00
LUCK (Indus Highw ay, KHI)
0.00
0.00
0.00
DGKC (Hub Chow ki)
0.00
2.60
0.00
Total
0.00
3.90
3.00
Total Additions
0.00
6.20 12.00
Source: JS Research
* Hattar and Chakwal incl Mustehkam Cement
** Expansion coming online in FY17
Uptrending local dispatches, declining share of exports in total (mn tons)
*** Assumed keeping past history in view
60.0
**** Assumed but likelyhood remains low
50.0
40.0
30.0
20.0
10.0
Total Local Dispatches
FY23E
FY22E
FY21E
FY20E
FY19E
FY18E
FY17E
FY16E
FY15A
FY14A
FY13A
FY12A
FY11A
FY10A
FY09A
FY08A
FY07A
FY06A
FY05A
FY04A
FY03A
FY02A
FY01A
FY00A
-
Total Export Dispatches
Source: JS Research
Overrated pessimism?
Our analysis suggests that the pendulum swings between the overrated pessimism
and irrational exuberance in terms of cement sector stock prices are imbalanced
and past motives which led manufacturers to a price war are not applicable under
JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
Please refer to the important disclosures and disclaimer on the last page
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December 04, 2015
MORNING BRIEFING
current circumstances. We rule out possibility of a price war in the foreseeable
future as we believe that capacity utilization levels of the industry will continue to
improve till FY18F, drop in FY19F and FY20F with cumulative additions of
estimated 18.20mn tons (conservative estimates) and start rising again to reach
86% till the end of FY23F. With overall tilt shifting towards local dispatches (falling
exports assumed), we believe profitability of local cement players is bound to
increase as local retention prices remain higher than export retention prices.
Inching towards a construction boom
With Pakistan set to see a period of high GDP growth in the next 5 years, we
believe that the country is inching towards a construction boom driven by strong
housing and infrastructure spending by the govt and the households. Local
dispatches in the country have grown by a 23yrs (FY92-FY15) CAGR of 5.8%
against an average GDP growth rate of 4.3% during the same period. With our
conservative FY16-FY23 average GDP growth forecast of 4.5%, we eye 7yr CAGR
of 7.5% in local dispatches of the country and a negative 7yr CAGR of 9.7% in
export dispatches. Accordingly, our forecasts assume a conservative 7yr CAGR of
6% in total dispatches of the industry against historical 23yrs CAGR of 6.9%. We
believe that this is a very realistic scenario keeping in view the demand expected to
emanate from (1) CPEC, (2) private sector housing schemes and (3) general
replacement type construction activity due to benign inflationary outlook.
Still attractive after incorporating massive new capacities
Plugging growth forecasts into our model and incorporating cumulative capacity
additions of a massive 18.20mn tons til the end of FY20, we expect capacity
utilization to stand at 76% in FY20 and reach 86% by the end of FY23 even after
incorporating conservative GDP and dispatches growth forecasts.
Pakistan m arket statistics (Dec 03, 15)
KSE-100 Index
32,565.14
Previous KSE-100 Index
32,392.92
172.22
Change from last closing
0.53%
Change from last closing (%)
6,900.63
KSE Market Cap. (Rs. bn)
KSE Market Cap. (US$ bn)
65.38
Total Volume (Shares mn)
119.90
Traded Value (Rs. bn)
7.28
Traded Value (US$ mn)
68.93
19,109.41
KSE-30 Index
30.35
Change from last closing
Change from last closing (%)
0.16%
KSE Futures Volume (Shares mn)
23.92
2,166.87
KSE Futures Value (Rs. mn)
2.69%
KSE Futures Spread
Source: KSE
KSE valuations
2013A
2014A 2015A/E
P/E (x)
9.0
7.6
6.7
P/BV (x)
1.8
1.6
1.6
Div. Yield (%)
5%
6%
7%
11%
18%
14%
Earnings grow th
Source: JS Research
Capacity utilization has generally moved with GDP growth rate
150%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
100%
50%
GDP Growth % (RHS)
FY22E
FY20E
FY18E
FY16E
FY14A
FY12A
FY10A
FY08A
FY06A
FY04A
FY02A
FY00A
FY98A
FY96A
FY94A
FY92A
0%
Capacity Utilization
Source: JS Research
Also in Focus
Indus Motor increases prices of new models
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Rs15k-30k yesterday with immediate effect on new orders. The increase in prices
is in response to 1% higher duty imposed on import of CKDs in the mini-budget.
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December 04, 2015
MORNING BRIEFING
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