The cement industry is largely dependent on the construction industry. As a result, the cement industry will benefit when the Malaysian government announces the "11th Malaysia Plan" in the second quarter of 2015, which includes large-scale key projects such as Metro Line 2, Light Rail Line 3, Independence Heritage Tower and Sungai Pasi-Ulu-Klang Elevated Expressway.
However, the concern now is the weak ringgit and low oil prices and their impact on the government's development expenditure. In addition, the real estate market is expected to maintain moderate development due to tight fiscal policies on mortgage lending and the imposition of a 6% product and service tax on construction materials such as cement.
Although the cement industry is a strong cycle industry, an industry insider said that the cement industry participants are a contest of sales.
& emsp; & emsp; "If you don't have sales, you can't get into the industry, and then you can't get out easily".
"The continued infrastructure investment of the 11th Malaysia Plan will give the construction industry a good prospect, but the question is how long it will take to implement these projects," he said. At the same time, he added, other risks in the industry include rising energy prices, especially coal and electricity, and fierce competition among enterprises.
With this in mind, he further believes that the outlook for the industry will be resilient.
The slide in oil prices could be a damper on the cement industry, and capital spending could be reduced.
He pointed out that the decline in government revenue could be partly offset by the elimination of subsidies. With the decline in the price of building materials (such as steel) and the active stabilization of cement enterprises under the pressure of overcapacity, construction enterprises have locked in lower building materials costs before the GST.
In the second quarter of last year, most of the top cement companies in the country raised their prices by 7-9%, led by Holcim (M) Sdn Bhd, followed by Lafarge Malaysia Bhd, Tasek Corp Bhd and Hume Cement Sdn Bhd. Looking back at the industry, we can see that many companies are quite conservative about their prices and expansion plans.
Grace Okuda, president of the Cement and Concrete Association, said the cement industry was generally optimistic this year due to the government's continued infrastructure projects. "Our analysis shows that the industry has sufficient capacity to meet the additional cement demand.".
& emsp; & emsp; "However, our expectations for 2016 and beyond are uncertain, but if the project is executed as planned, the demand for cement will continue to grow," Okuda said. However, he declined to comment on pricing and the overall impact of the GST on the industry.
In the second quarter of last year, cement companies raised prices in a challenging and competitive context, and many companies increased their production capacity, which industry insiders said would lead to oversupply.
According to a report by StarBizWeek magazine on August 9 last year, Lafarge's cement production capacity was 12.95 million tons, followed by YTL Cement with 5.95 million tons, CIMA with 3.4 million tons and Tasek Corp with 2.3 million tons. Hume Cemnet and Holcim Malaysia have a capacity of 2 million tonnes each.
The latest report from the Investment Banking Department of Bank of Malaysia shows that the average sales price of cement in Malaysia is fiercely competitive due to the impact of CIMA's new production capacity last year and YTL's production capacity to be put into operation in the second quarter of this year.
Research house expects the cement industry to grow by about 5% this year and 8% to 9% in 2014.
The expansion of Lafarge Malaysia's cement plant is rumoured to be continuing, with Lafarge increasing its capacity by 5% by the end of the year. Lafarge Malaysia is the exclusive concrete supplier for Rapid (Refinery and Petrochemicals Integrated Development Program) and other Petronas related projects in the Pengerang region, with a five-year project value of more than MYR 254 million.
If Lafarge's earnings in 2014 were partly affected by production problems, which led to low sales and high repair/maintenance costs, it is expected that its earnings will improve this year due to the resumption of production, the investment banking department of Bank of Malaysia said.
& emsp; & emsp; "We lowered our FY15 EPS forecast by 11%, based primarily on the assumption of a market share decline of 1% to 38% (taking into account new capacity from YTL)," they said. In addition, its earnings per share forecast for fiscal year 2016 and 2017 has not changed.
However, Research house still expects the merger between Lafarge and Holcim to be completed in June this year, and they say the Malaysia merger will follow, directly boosting earnings by 5%. The enlarged group, which can benefit from Johor's strong sales network in the long term, maintained the Lafarge Malaysia hold rating and the original target price of 9.3 ringgit.
In addition, MIDF Research maintained its "Lafarge Malaysia" neutral "rating, noting that Lafarge Malaysia Cement's earnings in 2014 were below their and market expectations.
Lafarge's EBITDA margin and profit margin after tax, amortization and minority interests narrowed to 18.4% and 9.3%, respectively.
In addition to fierce competition, Lafarge's performance in the fourth quarter of last year declined mainly due to increased operating costs caused by rising electricity, fuel and plant maintenance costs.
They believe that Malaysia's overcapacity will continue (the current total capacity is 29.8 million tons), which will affect the average selling price of cement and Lafarge's profitability.
In addition, although Tasek Corp's revenue in fiscal year 2014 increased by 13.7% to 656 million ringgit and its profit attributable to shareholders increased by 11.9% to 105 million ringgit, it said in its annual report that it remained cautiously optimistic about the outlook for this year. In the past year, the company's EPS rose from 77.29 gross to 86.46 gross, which it attributed to strong domestic demand in the first half of the year, high sales revenue and good pricing. However, in the second half of 2014, despite the increase in net income, the profit was lower than in 2013 due to fierce price competition.
Overall, the domestic cement market is expected to be healthy this year, but it is questionable whether companies can sustain long-term profit growth if they continue to face fierce price competition, overcapacity, rising coal prices and other tax risks.
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