Cement Sector: 1Q18 volume remains solid

Facts: 1Q18 sales remain solid while Mar-18 volume is tepid

· 1Q18 volume grew by +3.8% YoY. Indonesia Cement Association (ASI) has recorded an increase of 5.2mn tons (+8.3% MoM, +3.8% YoY) in Mar-18 domestic cement consumption, the product of forgiving weather in key domestic regions. This resulted to 1Q18 volumes of 15.7mn tons (-17.6% QoQ, +6.7% YoY), representing ~22.1% of our FY18 estimate (1Q17: 22.2%). Additionally, bulk cement continues to spike (+15.7%) vs. rather flattish growth within the bag sales front.

· Infra-centric areas were outperformers in 1Q18. In line with Mar-18 sales growth engine (bulk>bag), we consistently saw acceleration of cement consumption towards infrastructure development areas, namely, Central Java (+14.2% YoY) along with Sumatra (+9.0% YoY) and Kalimantan (+7.8% YoY). Hence, it justified the robust sales improvement noted in those areas in 1Q18, outpacing tepid improvements in property recovery, mostly within Western Java.

· SMGR improved its presence; INTP market shares remain strong. Reinforced by a healthy appetite for bulk cement, SMGR managed to improve its Mar-18 market share, along with INTP, given their exposure to power plant development in Batang and parts of LRT projects. Meanwhile, S. Conch and S. Bosowa were outperformers within Tier-2 players, in contrast to SMBR, which recorded a solid run contributed from the operation of Baturaja II Plant.

Outlook: Anticipating potential impact on higher ASP in 2Q18

Given fewer working days in 2Q18 (Lebaran festivities & Holiday period), we expect softer QoQ sales volume realization for domestic cement producers. Most importantly, during 2Q18 we expect to see an impact on market leaders’ (SMGR & INTP) decisions to jack up the ASP of domestic bag cement (+IDR1-2,000/sack), tracking the rise of coal and fuel prices. Although this would theoretically run the risk of market share contraction, we think the impact will be minimal, particularly as Tier-2 player profitability faces similar constraints.

Recommendation: Maintain NEUTRAL – top pick on INTP

At this stage, we reiterate our NEUTRAL stance with INTP (IDR21,000) as our top pick, given its solid exposure towards recovery within the bag sales segment, along with maintaining its strong infra-development presence. Upside / downside risk to our stance: Lower coal price / soft cement demand.