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xResearch

Active Member
Apr 9, 2017
1,537
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38
#21
Elixir Insight
08 August 2017

Pakistan Cement Sector


Taking a Non-Consensus View on Pricing
  • We have rationalized our assumptions on: i) industry demand growth which is now projected to clock in at a FY17-23 CAGR of 8.5%; ii) capacity addition timelines including a conservative incorporation of an additional capacity of 4.5mntpa in our terminal year; and iii) retail prices in South
  • We believe retail prices in South will witness some glitches as new entrant (DGKC) arrives in Mar-18. Resultantly, we are incorporating discount of PKR 25/bag (4%) in 4QFY18; while we are keeping retail prices stable at PKR 580/bag over FY19-20 – gradually diminishing pricing premium (over North).
  • Backed by upbeat utilization levels, cement players in North should be able to continue to pass cost pressures to end consumer.
  • Consequently we revise down our PT’s for Elixir Cement Universe by an average of 11%, where LUCK remained the least affected owing to its cost efficiencies and value derived from non-cement ventures. On the other hand, ACPL has witnessed the highest attrition in PT as the company has the most to lose in case of retail price weakness in South.
  • We remain Overweight on the sector with our liking tilted towards North based players - our preferred picks include PIOC, KOHC and MLCF with respective Jun-18 PT’s of PKR 193/share, PKR 316/share and PKR 151/share offering total returns of 62%, 54% and 37%.
Revisiting Industry Assumptions: FY17 has been a major roller coaster ride for Pakistan Cement Industry, where Elixir Cement Space depicted all time high margins of 43% during 1Q which later tapered off to 38% by 4Q; this was attributable to i) augmented coal prices and, ii) momentary price war in North despite all time high utilization levels. Furthermore, political uncertainty and slowdown in government projects has raised further concerns over domestic demand assumptions, which coupled with upcoming over supply situation has compelled us to revisit our investment case for Elixir Cement Universe.

We have thus rationalized our assumptions on:
  1. industry demand growth which is now projected to clock in at a FY17-23 (6 year) CAGR of 8.5% (vs earlier estimates of 9.2%);
  2. capacity addition timelines including a conservative incorporation of an additional capacity of 4.5mntpa in our terminal year;
  3. retail prices in South which are projected to decline by PKR 25/bag in 4QFY18, followed by a 2 years stagnation; and
  4. sea freight which has been increased by 40%YoY to USD 13/ton.
Resultantly, our Jun-18 PT’s for Elixir Cement Universe stand revised down by an average of 11% (range: 5-20%) where Lucky Cement (LUCK, revised PT: PKR 871/share) remained the least affected owing to its cost efficiencies and value derived from non-cement ventures. On the other hand, Attock Cement (ACPL) has witnessed the highest attrition in PT which now stands at PKR 315/share as the company has the most to lose in case of retail price weakness in South. We remain Overweight on the sector with our liking tilted towards pure-North plays, including Pioneer Cement (PIOC), Kohat Cement (KOHC) and Maple Leaf (MLCF) with respective Jun-18 PT’s of PKR 193/share, PKR 316/share and PKR 151/share offering total returns of 62%, 54% and 37%.

Capacity Additions Have Always been a Concern... Historically capacity expansion cycles have always pushed cement sector dynamics to a complete debacle, whether it be on account of significant revisions in market shares or increasing operating leverage in absence of cost efficient projects. In this regard, retail prices of cement bags declined substantially by 17% and 30% to PKR 242/bag and PKR 261/bag during FY06-07 and FY09-10 cycles, respectively. During the current expansionary wave, almost 12 cement manufacturers have already announced expansions of ~27.3mntpa (accounting for 60% of existing capacity) out of which ~19.6mntpa (52% of existing capacity) are slated to come online in North, while remaining 7.7mntpa (~89% existing capacity) in South.

This time around, however, we believe that capacity enhancement cycle will depict a mixed trend - North Region will be witnessing gradual supply additions owing to multiple factors including i) delays in financial close by Kohat Cement (KOHC) and Gharibwal Cement (GWLC) (accounting for 21% of announced additions), ii) stringent regulatory issues which are restricting D. G. Khan Cement (DGKC) and LUCK from finalizing their announced projects (worth 23% of total announced additions) and, iii) upcoming capacity additions to follow existing arrangement’s formula whereby a new expansion is only allocated partial market share in first year, as witnessed in the case Cherat Cement’s (CHCC) Line-II expansion which came online in 2HFY17.

On the other hand, Southern region is expected to witness sizeable enhancement in capacity; growing by 1.8x to 16mntpa by FY20E, coupled with application of relatively different formula compared to North – this, in our view, may lead to significant concerns on cement pricing in South. While possible limited-time disruptions in marketing arrangement in South cannot be rule out, we have not incorporated price war scenario in our base case owing to multiple factors (discussed later).

Domestic Demand Outlook Remains Robust: Despite FY17 concluding at lower than expected domestic demand, we highlight that excluding June anomaly (where domestic demand for the month receded by 19.6%YoY), local demand posted a strong growth of 10.8% during 11MFY17. During June, demand was lackluster owing to Eid/Ramadan holidays as well as an artificial reduction in supply created by local manufacturers in order to rationalize prices. Thus for FY17, as a whole, demand registered a growth of 8%YoY (vs 3 year avg. of 10.2%) taking 6 year CAGR to 8.4% for FY11-17A.

While Offtake numbers for July have already picked up by 55%YoY and 18%MoM (owing to low base effect), however there are concerns on possible slowdown on government projects owing to political uncertainty. We opine that local demand will still be on the stronger side on the back of Election year spending, infrastructure activity and ongoing construction boom by the private sector. We thus expect country’s cement demand to grow at 6 year CAGR of 8.5% (Local/ Exports +9.7/-5%) translating into comfortable utilization levels of ~80% in the medium term.

Utilization levels in North to Remain Upbeat… We believe that North is expected to lead on demand which is likely to accrete at 6 year CAGR of 8.6% (Local/ Exports: +9.8/-5%), maintaining utilization levels at over 80% in the medium term. The prime reason behind healthy growth in domestic demand emanates from i) construction of major Dams (Karot and Suki Kinari which have already begun), ii) higher allocation of Special Economic Zones (SEZ’s) in KPK and Punjab region, and iii) supporting population dynamics. On the contrary, export market will continue to take a hit owing to introduction of cheaper Iranian cement in Afghanistan which is currently the largest export market for North.

….But South Remains a Concern: Owing to a smaller domestic demand base of 6.5mntpa, along with falling exports for the region (FY17: -25%YoY to 1.51mntpa), we believe that upcoming capacity expansions will cut utilization levels in South to just over 60% by FY20 (66% in FY19). Thus strong domestic demand (emanating from high rise housing projects in Karachi and gradual industrialization / housing demand in Gwadar) may not be enough to ensure high conviction on price stability and complete pass-through of cost pressures in the medium term.

Retail Prices Will Find New Course: After reaching price consensus in FY11, following a price war in FY09-10, the industry has since been able to pass on every major cost pressure (FED, Import Duty, Coal Prices etc) to end consumers, where average retail prices during FY10-17 grew at 7 year CAGR of 10% (+45%YoY from FY10 to FY11 post achievement of price consensus). Region wise price distribution suggests that South has sold its cement bags at an average premium of 5% over FY12-17.

We believe concerns regarding dilution of pricing power owing to materialization of substantial capacity addition is unwarranted, where we highlight Northern Region to remain at a sweet spot owing to expected upbeat utilization levels of ~80% with local share accounting for 94% of total sales. To recall, during FY12-FY15 utilizations levels in North hovered around 68-75% wherein the same period retail prices increased by an average of 5% pa. As a result, we expect retail prices in North to grow at 5 year CAGR of 2.5% from PKR 565/bag to PKR 624/bag (by FY23), passing major cost pressures to the consumers.

On the other hand, we believe prices in South will witness some glitches as new entrant (DGKC) arrives in Mar-18 with additional capacity of 2.8mntpa. Resultantly, we are incorporating discount of PKR 25/bag (4%) in 4QFY18; while we are keeping retail prices stable at PKR 580/bag over FY19-20 – gradually diminishing pricing premium (over North) and restricting dumping of cement from North to South.

We opine that a prolonged price war in South is unlikely on the back of i) relatively more maturity in south players, where LUCK despite being the largest player is willing to accept new capacity/entrant; ii) lower financial leverage; and iii) relevant groups’ preference (DGKC and LUCK) to mark cement operations as “Cash Cows” to expand ventures in other industries (retail, automobiles, hotels, dairy).
 

xResearch

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Apr 9, 2017
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#22
AKD Daily
08 August 2017

Pakistan Cement: Jul'17 Dispatches Review


As per provisional data released by APCMA, total cement dispatches were up 45.0%YoY/26.3%MoM during Jul'17, led by significant increase in domestic dispatches to 2.91mn tons (+55.6%YoY/24.5%MoM) and nominal recovery in export dispatches to 0.476mn tons (+2.3%YoY/38.4%MoM). This significant jump in total dispatches was also a factor of low base in the corresponding periods owing to Ramadan and monsoon season. While recent slowdown in demand (9.4%YoY in Apr'17-Jul'17 vs. 13%YoY in Apr'16-Jul'16) has much to do with seasonal factor, we believe demand to start picking pace again going forward, based on: 1) increasing construction activity on higher PSDP spending in 2HCY17 particularly in the backdrop of election year and 2) impressive growth in private sector credit related to construction activity (+36.8%YoY in Jun'17). With the cement sector correcting -18%CYTD, we feel current price levels offer attractive entry points especially when fundamentals remain strong (AKD Universe 5yr earnings CAGR of 16%). Maintaining an Overweight stance on the sector, our top picks include LUCK (TP: PkR1,180/sh, upside: 63%), MLCF (TP: PkR169/sh, upside: 49%) and FCCL (TP: PkR56/sh, upside: 37%).

Domestic Dispatches growth turned positive again: As per recent APCMA provisional data, domestic cement dispatches recorded a significant increase in Jul'17 to stand at 2.91mn tons (up 55.6%YoY/24.5%MoM). Local dispatches growth came into the positive zone again post extended Ramadan season. This significant jump in total dispatches was also a factor of low base in previous corresponding periods due to Ramadan and monsoon season.

Export slump seems to be exhausting at lower level: Export dispatches growth came into the green zone (+2.3%YoY) for the first time after Sept'16. While exports largely remain on lower side, the export slump seems to be exhausting now at this level. Sequentially, we saw exports increasing by 38.4%MoM to 0.476mn tons against 0.344mn tons in Jun'17. Going forward, we expect exports to remain flattish due to rising fuel prices/other input costs and import/anti-dumping duties making it more difficult for cement exporters in Pakistan to compete against indigenous cement players.

Investment Perspective: Backed by expansion led volumetric growth, continued focus of GoP on infrastructure (37%YoY higher PSDP allocation to PkR2.1tn in FY18B), impressive growth in private sector credit related to construction activity (+36.8%YoY in Jun'17), expected decline in energy costs from anticipated correction in coal prices and addition of energy diversification projects, we believe Cement sector remains fundamentally sound. Correcting -18%CYTD, we feel current price levels offer attractive entry points where we maintain an Overweight stance on the sector. Our top picks include LUCK (TP: PkR1,180/sh, upside: 63%), MLCF (TP: PkR169/sh, upside: 49%) and FCCL (TP: PkR56/sh, upside: 37%).
 

xResearch

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Apr 9, 2017
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#23
11 August 2017

Cement growth with reservations

The cement sector closed off FY17 with the highest ever dispatches in the sector’s history—clocking at 40 million tons and running at 86 percent of the capacity. Falling exports, however, cast a dark shadow on expected overall growth going forward. Despite those reservations, the sector kicks off FY18 with a 56 percent growth in local dispatches; and a 2 percent growth in exports. The turnaround—though it is too soon to call it that—comes from a 40 percent increase in exports to Afghanistan in July 2017 against this month last year.

http://www.brecorder.com/2017/08/11/364504/cement-growth-with-reservations/
 

xResearch

Active Member
Apr 9, 2017
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#24
Aba Ali Habib Research
21 September 2017


Cement Sector: Flash Note
Proliferating coal prices to put cement player’s earnings at stake.

  • Recent upsurge in coal prices has thrown a major threats for cement players as coal cost (Fuel expense) contribute ~32-40% in overall COGS. (It takes about 200kg of coal to produce 1 ton of cement). During 1QFY18 coal prices has witnessed a rise of ~20% YoY from FY17 average of USD 77.4/ton to USD 84.3/ton (this augmentation in coal prices is more than our expected growth of 5% in FY18). This recent rally in coal prices is due to increase in china’s appetency for imported coal. China being world’s top coal importer bought 25.27mn tons of coal in August, up by 30% MoM from July’s 19.46mn tons. Additionally, for 8MCY17, coal imports of china inched up by 14.2% YoY compared to SPLY. On the flip side, disruption in coal supply by major exporters Australia and Indonesia could also be major driver for recent hike in coal prices. Australia exported 249.9mn tons of coal in the 8MCY17, down by ~4% YoY from 260.1mn tons in SPLY. Similarly, Indonesia’s exports slipped by 5.17% YoY to 218 million. According to Reuter’s sources; “This drop of a combined 22.1mn tons from the world’s top exporters may have more to do with the increase in prices than the strength of Chinese demand, even though the prevailing market narrative gives China a starring role in coal’s rally”.
  • We believe this recent ascend in Coal prices will put hefty pressure on earnings of cement players. To recall, since Jan-2017 cement sector scrips has lost ~30% in their stock values mainly due to i) decline in per bag prices in anticipation of oversupply scenario ii) increase in FED on cements from PKR 1 to 1.25 per kg and iii) continuous surge in coal prices.
  • In the 1QFY18 north cement prices has been contracted by 4.0% from PKR 559/bag to 530-538/bag. Whereas in south cement prices fell by PKR 20-25/bag to PKR 550-560 per bag.
  • We have performed the sensitivity analysis in order to gauge the impact of rising coal prices on cement company’s FY18 earnings. For every 10%/20% increase in coal prices from our base assumption average earnings of our cement universe would be dented by the PKR ~0.75/1.9 per share.
  • Most sensitive scrip (in terms of change in coal prices) in our cement universe is ACPL, which is likely to see the shrinkage in bottom-line by ~6%/20% for every 10%/20% increase in coal prices during FY18, followed by THCCL and DGKC with ~fall of 6%/12% and 5%/11%, respectively.
cement-aug17.JPG
 

xResearch

Active Member
Apr 9, 2017
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#25
Aba Ali Habib Research
02 October 2017

Pakistan Cement Sector: Cement industry utilization drops to 74.2% during sept’17.
  • During sept’17 cement dispatches portrayed a sharp plunge of 23%/5% MoM/YoY to 2,902k tons (local -25% MoM & export -9% MoM), decline in offtake could be attributed to 1) halt in construction activities at the start of month amid heavy rainfall and 2) higher offtake in base month (August). North/south volumetric sales clocked in at 2,418/484K ton, down by 20%/34% MoM. Utilization level drop to 74% against last month utilization level of 97%.
  • Among companies ACPL portrayed a highest decline of 28% MoM to 140K tons from 195K tons during Aug-17, followed by FCCL (-27% MoM), KOHC (-25% MoM), LUCK (-24% MoM) and PIOC (-23% MoM).
  • However, during 1QFY18 cement dispatches witnessed a positive growth of 12% YoY, where total industry offtake reached to 10,050K tons, local (8,792k, +18% YoY) and Export (1,258k, -19% YoY). Among companies CHCC, FCCL and DGKC portrayed a growth of 121%/15%/13% YoY.
  • On market share front, BWCL appeared as leader with market share of 19% followed by LUCK (16%), DGKC (11%), MLCF (8%) and FCCL (7%).
cement-sep17a.JPG cement-sep17b.JPG
 
Apr 11, 2017
131
1
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#26
The cement exports from the country registered a jump of around 28 % during Oct 2019 to 7,98000 tons against 6,16000 tons of the same period of 2018.

Cement exports rise by 16.48pc in four months of July-Oct

However, cement industry experts said that the growth in cement export was particularly seen from the Southern region which rose by 48.75 % from 0.352 million tons in Oct 2018 to 0.591 million tons in Oct 2019. While exports from North region grew nominally from 0.264 million tons in Oct last year to 0.265 million tons in Oct 2019.
According to the data of All Pakistan Cement Manufacturers Association, the cement exports increased by 16.48 % in the period of July-Oct 2019 to 2.81 million tons from 2.41 million tons during the same period last year. The export from North during the first four months of this fiscal were 0.95 million tons that was 5.64 % less than 1.01 million tons during the same period last year. However, in view of total loss of Indian market, the decline is not that sharp.

Experts said that exports from the Southern region almost matched the domestic consumption as the region exported 1.85 million tons of cement during July-Oct 2019 period. They said that the growth in cement exports from South was 32.5 %, as it grew from 1.397 million tons in corresponding period last year.

Data shows that in the first four months of this fiscal, cement manufacturers dispatched 16.117 million tons of cement, 4.53% higher than 15.419 million tons dispatches during the same period last year.

https://nation.com.pk/17-Nov-2019/cement-exports-rise-by-16-48pc-in-four-months-of-july-oct
 
Apr 11, 2017
131
1
18
#27
AKD Daily

Pakistan Cement:FO generation is back in the game

· Domestic FO prices are falling in-line with global trends as IMO2020 imparts its magic, capping the allowed limit of sulfur in shipping fuels to 0.5% against previous limit of 3.5%, resulting in expected decline in global demand to 1.55mnbpd against 2.86mnbpd in CY19.
· This decline is causing a shift in power generation preferences where FO based power generation now stands cheaper than the grid while closely competing with natural gas. We opine, a continued decline in FO prices can allow power generation on FO to be cheaper than natural gas.
· For cement manufacturers, Punjab-based players can turn out to be significant beneficiaries in the current scenario, where increasing RLNG prices forced them to prefer the grid. We estimate DGKC to save PkR8/bag on production at Kalar Kahar while MLCF and FCCL are expected to save PkR3/bag.
· Among other potential beneficiaries, we highlight LUCK’s Pezu’s plant and DGKC’s South palnt with the former expected to face gas shortages in winter while for latter, decreasing FO prices can result in FO based power generation being cheaper than KE tariff.
· In this backdrop, we believe players like LUCK, MLCF and DGKC will continue to enjoy an advantage over others after already selling well above their capacity based shares in 1QFY20, capitalizing on low cost of production in an environment of price competition where decline in FO prices can provide further impetus to these players.

AKD Research
 

xResearch

Active Member
Apr 9, 2017
1,537
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#28
The cement exports from the country are likely to post impressive growth of 45% annually led by exports from the southern region in November 2019, reporting a jump of 58% to 0.5 million tons, mainly owing to huge clinker sales to Bangladesh amounting to 155,000 tons. However, exports volumes during 5MFY20 are expected to record 22% annual growth to 3.6 million tons as compared to the same period of last year. As per cement industry’s provisional statistics, Maple Leaf Cement (MLCF) and Cherat Cement Limited (CHCC) are expected to post a massive jump in total sales by 84% YoY and 70% YoY to 480,000 tons and 302,000 tons, respectively. —INP

https://pakobserver.net/cement-exports-to-post45pc-growth/
 
Apr 11, 2017
131
1
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#29
Pakistan Equity| Cements| Sector Research
Top line Securities


Cements incur losses in 3QFY20
Lower retention prices dragged down margins


AEC6A828-C806-41A6-8B87-F87C5F50D2AE.jpeg 7CAE7229-79FE-4146-A37C-7D209BE12616.jpeg 4D936D37-9AE3-419A-A7B8-C40C5FAAB963.jpeg
 
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xResearch

Active Member
Apr 9, 2017
1,537
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38
#30
Coal and crude prices beneficial for cement industry, says DG Khan Cement

Two of DG Khan Cement’s senior management, Raza Mansha, CEO, and Farid Noor Ali Fazal, director, commented that falling coal and crude prices in international markets would reduce the cost of cement production in Pakistan, according to the company’s 9MFY20 report. They also anticipate a rise in cement demand on the back of government big hydroelectric dam projects.
According to the report, coal prices will remain low and may ease pressure on cost. Oil prices have hit rock bottom and are expected to remain on the low in near term during the time of the pandemic. This could provide some relief on the monetary side. Alongside, the healthy fall in interest rates, the cement industry should receive some breathing space.

Cement demand
DG Khan Cement expects a rise in cement demand, as soon as the groundbreaking of the special economic zones take place, later this year and the government commits to the plan regarding its development. Flagship projects Diamer-Bhasha Dam and Mohmand Dam are yet to reach the construction phase. These factors could offset the negative pressure of COVID-19 on industry.

https://thecement.pk/2020/05/02/coa...cial-for-cement-industry-says-dg-khan-cement/