Housing Policies Boost Demand for Cement
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
In the domestic cement industry, we expect cost savings from increased demand for cement, price hikes, and investment in alternative fuel-based facilities to appear one by one from 2021. Expecting the entire cement industry to benefit, we draw attention to Ssangyong Cement, Sampyo Cement, and Asia Cement.
Three key investment points
From 2021, we expect the effects of rising cement demand from housing supply expansion policies, normalization in cement prices (which have fallen behind demand over the past eight years), and cost reduction from investment in alternative fuel-based facilities to become visible one by one for the domestic cement industry. Unlike over 2015~2017, when demand growth and price hikes failed to result in profitability improvement, this time around, the certainty of realizing cost savings is producing high profit visibility.
Policy to expand housing supply is being highlighted by the by-elections of the Seoul and Busan mayors in Apr 2021 and the 20th presidential election slated for Mar 2022. We expect domestic cement demand to recover to 48mn tons in 2021, given the increase in housing starts, expansion of SOC investment related to third New Town projects, and the more than 1mn tons of deferred volume resulting from the 2020 rainy season and Covid-19.
In 4Q20, some cement companies attempted to ease their cost burden stemming from minimum wage and freight rate increases over the past eight years, greater environmental costs (stemming from the implementation of a carbon credit trading system), and local resource facility taxes via cement price hikes. We expect price hikes to drive improvement in cement makers’ financials, which have been weakened by large-scale M&As over the past five years.
Investment in alternative fuel-based facilities should reduce bituminous coal input, hedge against bituminous coal price increase, and generate revenue from the use of waste in cement production. When producing 10mn tons of cement, economic benefits should exceed W60bn (based on bituminous coal price of W144,000/ton, alternative fuel substitution rate of 30%).
Comprehensive approach recommended
Over 2015~2017, the cement sector traded at a premium to the construction sector thanks to strong cement demand growth. During that period, the cement industry’s P/B climbed by over 90% compared to that of the construction industry in line with cement demand trends. As the three above-noted positives expected from 2021 apply to the entire cement industry, we recommended taking a comprehensive investment approach encompassing Ssangyong Cement, Sampyo Cement, and Asia Cement. For reference, excluding Ssangyong Cement, the cement sector is trading at 2021E P/E of 6.9x and P/B of 0.5x.