Investment Highlights

• We maintain UNDERWEIGHT for the building material sector. Locally, the sector continues to be weighed down by weak demand (the discrepancy between the news flow on the revival of mega projects, and in reality, the absence of sizeable new public infrastructure projects up for bidding), excess supply (particularly, steel from a new foreign-owned plant in Kuantan) and policy risks (for instance, the government recently shot down a plan by the producers to raise cement prices). On the global front, China plans to raise steel production in 2020 despite slowing domestic demand. For aluminium, the steady consumption growth in China in 2020 will be more than met by the production growth.

• We project an average steel bar price of RM2,000/tonne in 2020F (revised down from RM2,100/tonne we assumed previously). Industry experts forecast steel surplus in China to rise to 196mil tonnes in 2020F (+13% from 174mil tonnes estimated in 2019) as production is projected to grow by 1–2% (on hope of increased spending in infrastructure projects in China) while consumption is projected to contract by 1.4% (as in reality, investments are slowing amidst the US-China trade war) (Exhibit 2). China’s steel surplus normally ends up as exports to the rest of the world. The oversupply situation could ease (but would not go away completely) in 2021F as China’s steel surplus is projected to reduce to 115mil tones on the back of a 10% drop in production (as the authorities intensify their efforts to eliminate obsolete and highly-polluting capacity from the system on environmental concerns) and a further 2% decline in consumption. China is the world’s largest producer and consumer of steel, making up about 55% of the global market.

• We project an average cement price in Peninsular Malaysia of RM195/tonne in 2020F (revised up from RM190/tonne we assumed previously). We expect a very gradual rise in cement prices (so that it is more palatable to various stakeholders, particularly, the government and the construction sector) as the supply tightens. With one less player in the sector following the takeover of Lafarge Malaysia by YTL Cement in 2019 (Exhibit 3), we believe the fight for market share will ease, paving the way for players to shut down underutilised plants to optimise operations. In terms of cement consumption in Peninsular Malaysia, we project a 3% decline to 14.6mil tonnes in 2020 (from 15mil tonnes estimated in 2019) on subdued public infrastructure construction activities as the government tightens its belt, coupled with the still challenging property market. Typically, during a property boom, the property sector consumes about two thirds of total cement production, while the balance one third goes to the construction sector.

• We project an average aluminium price US$1,850/tonne in 2020F (relatively unchanged from US$1,870/tonne we previously assumed, and as compared with an average of about US$1,900/tonne over the last three years) to reflect the uncertain global economic outlook against a backdrop of the lingering US-China trade tension that hurts demand and hence prices of commodities in general. Aluminium consumption in China is growing, backed by the substitution of steel with aluminium in the production of motor vehicles and aircraft. Industry experts project aluminium consumption in China to rise by 7.8% to 38.7mil tonnes in 2020 which will be more than met by production projected to expand by 8–9% to 38.9– 39.2mil tonnes. Similarly, China is the largest producer and consumer of aluminium in the world with a 58% share of global market share (Exhibit 4).

• We may upgrade our UNDERWEIGHT call on the sector to NEUTRAL/OVERWEIGHT if the government decides to pumpprime the economy with public projects in the event of external shocks such as an unexpected slump in the global economy.

• We do not have any top pick for the sector.

Source: AmInvest Research - 10 Dec 2019