Jan 10, 2014

CEMENT IN FOCUS SECOND DEVELOPMENT BOOM IN THE GULF

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Synopsis:
Another development boom in the middle-east is expected as we see Dubai being selected to host the World Expo in 2020 along with increased overall liquidity in other oil rich Gulf countries. It is reasonable to assume that heightened construction activities will outstretch local production capacity which will in turn allow for imports to meet increased demand. Countries in the Gulf have substantial capacities of production; however, as the entire region is expected to be going through development, imports appear likely. Pakistani cement firms producing high standards of cement products will be in a position to benefit from increased construction in the Gulf, an overall rise in exports is expected.

Dubai selected to host World Expo 2020:

A poll conducted to select the host for the World Expo 2020 was held at the 154 BIE General Assembly in Paris. Out of a total of 165 votes by country representatives, Dubai emerged as the favorite by majority, receiving 116 votes against peers to win the World Expo 2020 bid. Projects that have already been announced and under construction will now be hastened so that completion is assured before the city gets ready to host the event. Numerous additional projects including the Expo venue will likely be planned to better expedite Dubais position on the global economic stage. Besides the innovative Dubai Expo 2020 venue, the city will be planning several additional mega-projects like the Business Bay Canal and various other developments taking place on Sheikh Mohammad bin Zayed Road. Other preparations will also be made to accommodate the influx of international visitors which will require construction activities in hotel expansion and overall upgrading of airport infrastructure.
GCC Public Capital Expenditure (2004-12) (USD in Bn)
118 112 56 50 0 22 32 35 68 85 92
th

Development Boom in oil-rich Gulf nations:

High prices of oil, maintained above US$100/bbl over the past three years have allowed for increased overall liquidity in the Gulf countries which now appear to be heading in the direction of a second construction boom. Construction is spearheaded by megaprojects by the public sector, while private sector activity also appears strong. The public-sectors of most countries in the Gulf Cooperation Council (GCC) continued to spend after the bursting of the real estate bubble in 2008. Investments in development have been consistently increased since 2004, with an average of USD 115bn in 2011-12, up by 69% against average of USD 68bn spent in 2008. Saudi Arabia and Qatar have led the regional boom since real estate crash in 2008, both countries having grown by 10% in 2010-12 and appear to be accelerating in 2013. Megaprojects in Qatar are estimated around US$ 200bn to prepare for the 2022 football World Cup. Saudi Arabia has been improving its transportation infrastructure by introducing metros in Jeddah and Riyadh at a cost of US$50bn while construction of the King Abdullah Economic City is expected to be completed at a cost of US$ 90bn.

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2012

Brief Report

Brief Report

SECOND DEVELOPMENT BOOM IN THE GULF

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Heightened development to invite imports to the Gulf:

Public Capital Expenditure by country (USD bn)(2012)
80 60 40 20 0
Oman Qatar Bahrain Saudi Arabia Kuwait UAE

70

12

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Plans of such megaprojects and widespread construction activities in the Gulf region could invite an inflow of foreign cement in coming years, many firms will be trying to set up a position to get a piece of the action. Gulf States have an annual capacity of ~81 MTPA, with the major producer being Saudi Arabia with capacity of ~45mn tons per annum. Saudi Arabia engrossed in heavy production activities already is currently importing from UAE to manage shortfall. As UAE and other Gulf nations will be focusing on their own development activities, we believe need for imports may be needed.

Race to take greater market share:

Exporting prospects by Pakistani firms could face increased competition from other nations, the most notable being India and Iran. India currently has a foothold in Dubais market with Indian giants such as UltraTech Cement (Star Cement) and Binari Cement already present in the UAE, further penetration is also likely under increased demand. Star Cement in UAE currently has production capacity of 3.5 MTPA. Binari Cement; owned by Indian conglomerate Braj Binari Group has increased production capacity to reach 2 MTPA. Iran, with total national capacity of 50 MTPA on the other hand could also be a strong contender in Gulf imports as international trade sanctions have been relaxed.

60 38 40 20 0

PK Capacity vs Dispatches
42 30 31 46 34 43 31 45 33 45 33 14 45

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FY13

Capacity MTPA

Dispatches MTPA

Pakistans exporting ability:

Pakistan has a total installed capacity of 44.68mn tons which allows for significant exporting power depending on circumstances. With increased domestic development activities also active during the year, we estimate total exporting margin of 9-11 mn tons annually. This can be further enhanced as several big cement firms have announced production of new facilities to enhance production capacity. DG Khan Cement has planned to open a new plant in Hub, Baluchistan which will increase the companys capacity by 2.6mn tons, DGKC also has an additional production unit in Mozambique with 0.5mn tons which could further the companys earnings once local demand of 4mn tons is met. Lucky Cement Company, Pakistans largest cement manufacturer is also planning expansion projects. If Pakistan is able to fully take advantage by exporting the entire 9-11 MTPA in its power, cement firms will be able to gain PKR 86-110bn annually under the current average retention price which is expected to grow over the years in turn resulting in greater revenue.

Local currency depreciation and relatively lower coal prices:

PKR depreciation and lower price of coal will further complement final earnings from exports. In FY13 local currency has depreciated by 8% YoY overall detrimental for the economy, however, beneficial for exporters who will receive an inflow from changes in exchange rate. The exchange rate has shown signs of improvement so far in FY14; however, in the long term period of 4-6 years, we can expect further depreciation on account of Pakistans increased debt and balance of payment stresses. Coal prices dipped during the year and have begun to rise once again. Increase in international coal prices are expected to moderately affect production costs; however, as prices are still relatively lower than last year production costs will still be relatively low. In the next few years any fluctuation in coal prices will have an effect of the industrys earning power but as trade with the Gulf will be strong, increased production costs can be subdued.

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Brief Report

Brief Report

SECOND DEVELOPMENT BOOM IN THE GULF

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LUCK - Valuations
FY13A EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 30.04 8.00 3% 10.6 FY14F FY15F 35.8 10.00 3% 8.9 38.14 12.00 4% 8.3

Bigger cement plants with greater market share to benefit most:

Larger firms with greater producing and pricing power are expected to be the major beneficiaries under the elevated development activities in the Gulf nations. Pakistani cement giants such as Lucky, DG Khan, Bestway, Fauji, Maple Leaf and Attock cement companies are expected to focus on their exporting abilities and position themselves to benefit under enhanced exporting prospects in the next few years. Among these firms Lucky and DG have a greater advantage of having in-house power generating units which will allow them to manage the high power rates and curtail high production costs. Lucky and DG have already announced plans to expand overall production capacity, we expect all other larger firms to follow suit.
N o . N a m e O f Unit ( unit s in T o ns ) 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 20 21 22 23 24 Lucky Cement Limited -P ezu B estway Cement Limited - Chakwal Lucky Cement Limited - Indus Highway, Karachi Fauji Cement Co mpany Limited - Fateh Jang M aple Leaf Cement Facto ry Limited - Daudkhel Ko hat Cement Co mpany Limited - Ko hat GharibWal Cement Limited - Jehlum D.G.Khan Cement Limited - D.G.Khan D.G.Khan Cement Limited - Chakwal Lafarge P akistan Cement Co mpany Limited - Chakwal P io neer Cement Limited - Khushab A tto ck Cement P akistan - Hub Cho wki, Lasbela A skari Cement - Nizampur B estway Cement Limited - Hattar Flying Cement Limited - Lilla Dewan Hattar Cement Limited - Hattar A skari Cement Limited - Wah Cherat Cement Co mpany Limited-No wshera B estway - M ustehkum Cement Limited - Hattar A l-A bbas Cement Limited - No o riabad, Dadu Fecto Cement Limited - Sangjani Dewan Hattar Cement Limited - Dhabeji Dando t Cement Limited - Jehlum Thatta Cement Limited - Thatta O pe ra t io na l C a pa c it y C link e r 3,605,71 4 3,428,571 3,428,571 3,270,000 3,21 0,000 2,550,000 2,01 0,000 2,01 0,000 2,01 0,000 1 ,950,000 1 ,933,571 1 ,71 0,000 1 ,500,000 1 ,1 70,000 1 ,1 40,000 1 ,080,000 1 ,050,000 1 ,050,000 1 ,035,000 900,000 780,000 750,000 480,000 465,000 C e m e nt 3,786,000 3,600,000 3,600,000 3,433,500 3,370,500 2,677,500 2,1 1 0,500 2,1 1 0,500 2,1 1 0,500 2,047,500 2,030,250 1 ,795,500 1 ,575,000 1 ,228,500 1 ,1 97,000 1 ,1 34,000 1 ,1 02,500 1 ,1 02,500 1 ,086,750 945,000 81 9,000 787,500 504,000 488,250

DGKC - Valuations
FY13A FY14F FY15F EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 12.56 3.00 3% 7.2 15.45 4.00 4% 5.9 16.2 5.00 6% 5.6

MLCF - Valuations
FY13A FY14F FY15F EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 6.11 0% 4.8 6.3 1.00 3% 4.6 6.5 1.00 3% 4.5

FCCL - Valuations
FY13A FY14F FY15F EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 1.58 1.25 8% 10.0 1.75 1.38 9% 9.1 1.94 1.53 10% 8.2

CHCC - Valuations
FY13A FY14F FY15F EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 4.57 2.50 4% 14.8 4.94 2.50 4% 13.7 5.33 3.00 4% 12.7

PIOC - Valuations FY13A FY14E FY15F EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 6.76 4.00 10% 5.8 6.90 4.00 10% 5.7 7.11 4.50 11% 5.5

T o t a l 4 2 ,5 16 ,4 2 8 4 4 ,6 4 2 ,2 5 0 So urce: A P CM A

KOHC - Valuations FY13A FY14F FY15F EPS (PKR) DPS (PKR) D/Y (%) P/E (x) 20.45 21.28 5.00 5% 5.1 5.50 5% 4.9 22.98 6.00 6% 4.5

Source: PSL Research, APCMA

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