Highlights

• Development expenditure maintained. During the budget review speech yesterday, the Government maintained its development expenditure for 2015. Such move is positive to the building material sector, as sustained development expenditure will support consumption (and hence, prices) of building material products.

• Cement – a better proxy for the sector. Between the steel and cement sub-sectors, we are keeping to our view that the cement sub-sector will be a larger beneficiary from the implementation of construction and infrastructure projects, as its fortunes are more localised vis-à-vis the steel sub-sector (which on the other hand, is more susceptible to several external factors including raw material price fluctuation and pricing pressure from regional players). 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;
• Increase 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

• Maintain NEUTRAL stance on the sector.
• For exposure, our top pick is Lafarge (BUY; TP: RM10.72). We continue to like Lafarge for its: (1) Bright longer term demand prospects (arising from the implementation of various large-scale infrastructure and construction projects); (2) Strong balance sheet (with net cash of 51.1 sen/share as at 30 Sep 2014); and (3) Generous dividend payout history (with average payout ratio of 86.2% over the past 3 years translating to a net dividend yield of 3.5-4%).

Source: Hong Leong Investment Bank Research - 21 Jan 2015