Sector Update Construction & Materials Another Expansion; Price War Drama Again? The second largest cement manufacturer in South (ACPL) announced to enhance the pro‐
duction capacity from 1.74mn tons to 2.90mn tons. The announcement has once again fueled the risk of price war as CHCC and DGKC are already in course of setting up new plants which are expected to come online by FY17 and FY18 respectively. We believe that these new capacities of ~5mn tons does not pose a significant threat to pricing arrange‐
ment as additional capacities will be consumed by the growing cement demand. Higher Domestic Demand to Support Pricing Arrangement Local dispatches grew by 8.15% Y/Y to a record high of 28.26mn tons in FY15. Higher de‐
velopment expenditure along with improved private sector consumption led this growth. Going forward, we believe that if nominal increment in PSDP expenditure and major pro‐
jects including CPEC (China Pakistan Economic Corridor) materializes the resultant de‐
mand will reach 34mn tons by FY19. Furthermore, exports are already depressed and we do not expect any significant jump in numbers. Industry capacity by the end of FY19 will settle at ~49mn and as per our projection of volumetric growth, the utilization level will be at 82%, hence, reducing the possibility of price war. Luck’s Reaction? Recall that shortly after the CHCC capacity expansion announcement in mid of 2013, the largest cement manufacturer (LUCK) resigned from APCMA over pricing issues. However, after agreement on certain terms and conditions predominantly restriction on expansion till March’14, the differences were resolved between the manufacturers. Lucky enjoys a predominant position in cement industry with COGS/ton being the lowest at PKR 3,878 against the industry average of PKR 4,467. Moreover, higher share of exports in total product mix also gives an advantage over its competitors. Therefore, Lucky ce‐
ment will be least affected if any cut in price takes place. On the other hand, company utilization level has already crossed 82% and within couple of years it may reach 100%. Despite many projects already in the pipeline, debt free bal‐
ance sheet and strong operating cash flows can smoothly bear the cost of a new plant in Pakistan. Conclusion Aug 17, 2015 Sector COGS/ton LUCK KOHC MLCF PIOC DGKC FCCL ACPL CHCC Average Source: HMFS Research PKR/ton 3,878 4,374 4,400 4,479 4,480 4,648 4,675 4,804 4,467 Expected Capacity Share ‐ FY19 Capacity (mn tons) BWCL 7.90 LUCK 7.75 DGKC 6.82 FCCL 3.43 MLCF 3.37 ACPL 2.90 KOHC 2.68 CHCC 2.30 PIOC 2.03 Source: HMFS Research Share 16.2% 15.8% 13.9% 7.0% 6.9% 5.9% 5.5% 4.7% 4.2% Kumail Chevelwalla AC [email protected] KSE 100 Index Vs Const & Materials Sector 80%
We see no risk of price war if Lucky remains silent on the current expansion cycle while either of the two responses will give rise to speculations concerning breakdown of price discipline. 60%
40%
20%
European 300 1HFY18 ACPL 1.10 European* 120 1HFY18 *Assumption Source: HMFS Research KSE‐100
Aug‐15
2.60 Jun‐15
DGKC ‐20%
May‐15
1HFY17 Mar‐15
120 Feb‐15
Chinese Dec‐14
1.30 Nov‐14
CHCC 0%
Sep‐14
Expansion Size (mn tons) Technology Investment (USD mn) Expected Time for Completion Aug‐14
List of Expansion Projects Cement Sector
Source: HMFS Research Note: Please refer to the last page for Analyst Certification and other important disclosures. HABIBMETRO Financial Services Company Update Analyst Certificate The research analyst denoted AC on the cover of the report on with the name of analyst who has written the report. The analysis and views express in this report exclusively reflect his/her personal views about the subject, company or security. Furthermore his/her compensation was, is or will not be directly related to the recommendation or views articulated in this report. The infor‐
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