Highlights

• For steel subsector:

• Despite the government’s relentless efforts in curbing the influx of cheap imported steel products into Malaysia, performance of the domestic steel players remained weak in 2014.

• Moving into 2015, Malaysia Iron and Steel Federation (MISIF) projects apparent steel consumption in Malaysia to grow moderately by 3-4%, underpinned by sustained construction and infrastructure spending.

• Despite the decent consumption growth, we are holding the less -than-bullish view on the local steel producers’ fortunes, on the back of: (1) Persistent overcapacity issue in the region and muted global economic growth; and (2) Falling raw material prices, this will continue to weigh on steel product prices and restocking sentiment. For cement sub-sector

• We believe the weak results registered will continued into 1Q15, due to several factors including: (1) Rainy seasons in 4Q14 and festive holidays in 1Q15; (2) The absence of lumpy cement demand from property development projects; and (3) Potentially, continued intense price competition among the cement players

• Despite the expected weak near-term performance, we are still expecting a better longer term outlook (i.e. beyond 1Q15), due to: (1) The implementation of various large scale infrastructure projects; and (2) Lower coal and diesel prices. Catalysts Steel sub-segment

• More effective measures introduced by the Chinese authority to curb steel capacity.

• A potential effective trade action by the government on steel dumping activities Cement sub-segment

• Timely implementation of ETP projects; and

• Sustainable demand from property development projects.

Risks

• Overcapacity in China remains over the longer term;
• Increas e in raw materials which will reduce margins.

Rating

NEUTRAL Steel sub-segment

Negatives

• Overcapacity results in volatile earnings.

Positives

• Potential trade action on steel dumping activitiesCement sub-segment

Positives

• Positive demand outlook.

Negatives

• Pricey valuation.

Sector View

We are maintaining our NEUTRAL stance on the Building Materials sector with a SELL on Ann Joo, TP: RM1.00; HOLD on CSC Steel, TP: RM1.06; and BUY on Lafarge, TP:RM10.72

Source: Hong Leong Investment Bank Research - 14 Jan 2015