Semen Gresik (SMGR) All about expansion

Targeting Vietnam

The management of Semen Gresik has stated its intention of investing in Vietnam - a move which reflects the company's desire to grow inorganically if there are any opportunities. The acquisition would create additional capacity instantly and boost Semen Gresik's cash flows. Vietnam's close proximity to North Sumatra provides good access to Indonesia and to the northern part of Sumatra especially. Nonetheless, the acquisition price remains an important factor. As to the acquisition target, Semen Gresik has yet to disclose any names. It is also too early to determine the potential impact of any such acquisition on Semen Gresik's operations.

Tuban IV in operation

Tuban IV has been running trail operations for the last two months. Although delayed for about 4 months, the project is still within budget. The current production level of the new plant is 3,000 tonnes per day, translating into a utilization rate of 30%. Going forward, the plant's utilization rate will gradually be increased over the next 2-3 months. With the additional capacity coming from Tuban IV, the Tuban facility should have production capacity of 10mn tonnes p.a., thereby increasing the total production capacity to 22.0mn tonnes p.a.

Further expansion plans

The management of Semen Gresik plans to submit new expansion plans to its shareholders at the upcoming AGM. This will allow the company to attain shareholders' approval sooner rather than later. The initial plan is to build two new cement plants in Java and Sumatra. Although the timeline is to add new capacity in 2015-16, construction of new plants could take 36-48 months, meaning the new capacity is ready only in 2018-19. When the new capacity is ready, the current plant should be running at full capacity. Notably, all this expansion is on top of the inorganic growth. In simple terms, if the cement market grows by 6% p.a. - a reasonable assumption - then the cement industry will need to add capacity of 3.0mn tonnes every year - or basically one plant each year. Besides Semen Gresik, the other players in the industry also have plans to raise capacity. Although this is encouraging, the cement companies must be careful in adding capacity at the right time, so as to avoid a sudden oversupply condition.

BUY recommended

In our view, Semen Gresik remains committed to its grand strategy of maintaining market share of 40-45% in the domestic market. To ensure that it meets this goal, the company is actively seeking opportunities to grow - either organically or by making acquisitions. In this way, Semen Gresik hopes to maintain its dominant position in the domestic market. The Vietnam acquisition could help it achieve this target. BUY maintained with a Target Price of Rp13,850.