The Jakarta Post
It is a fallacy to say one should buy into interest rate-sensitive sectors like automotive, property and cement just because the central bank is lowering its benchmark rate. For investors, it is imperative to look at the detailed fundamentals of various sectors rather than just apply a blanket rule or assume a top-down effect.
During our recent two-week roadshow in the US and Canada, foreign investors were most intrigued by our non-consensus recommendations on underweighting Indonesia's automotive, property and cement sectors this year.
In our view, the government's 2016 tax amnesty program and continued aggressive taxation drive will dampen consumers' appetite for big ticket items like cars and property. With the government expecting Rp 60 trillion (US$3.33 billion) to come from tax-amnesty related fines, there will simply be less money to go around in our system.
We believe this condition will be exacerbated by lower farmers' incomes caused by decreased commodity prices, which were dragged down by the current low oil price. Hence, for the automotive sector, as we drive into 2016, we believe flat growth to be an optimistic assumption while discounting of both cars and motorcycles is likely to widen the detriment for margins.
On the property front, in the past week, two companies ' Summarecon Agung and Pakuwon Jati ' announced flat marketing sales targets in 2016, suggesting continued weak property demand in spite of Bank Indonesia's lower interest rates and expected GDP growth improvements this year, supported also by the government's push on infrastructure-related projects. In fact, at this stage of the market cycle, we believe there are downsides to those assumptions of flat marketing sales.
Furthermore, on the earnings front, property counters are likely to book unexciting performance due to last year's already weak marketing sales which will be reflected in 2016's numbers. Additionally, with secondary property prices down by up to 20 percent in some areas, we expect primary market prices to feel pressure. All in all, these negative factors will spell bad news for the Indonesian property market in 2016.
For the cement sector, without growth in the local property market, demand will be weak as 70 percent of cement goes toward property development, the other 30 percent being used for infrastructure
Thus, despite the government's attempt to jumpstart the economy through infrastructure projects, 2016 cement demand is likely to remain muted, dragged down by woes in the property market.
In cement, however, we are most concerned about developments in China. Due to its economic slowdown and over-capacity situation, China will need to export around 100-300 million tons of cement this year. While it may be too far for China to export its cement to Indonesia, lower cement prices in Thailand or Vietnam will undoubtedly apply pressure to Indonesia's cement sector. With China exporting its cement, Indonesia's overseas cement sales will be adversely impacted.
On a cost front, while the cement sector will benefit from the current low energy prices, we are of the view that margin contractions remain on the cards for industry players due to intense competition on the ground. This is particularly true as cement supply will continue to outstrip demand for the next couple of years (Graphic). ' Note that we expect an additional 10 percent capacity to come on stream this
Finally, it is worth noting that the benefits of the central bank's decision to lower interest rates will only be felt in the real sector in 9-12 months' time. Meanwhile, interest rate-sensitive sectors with poor fundamentals like auto, property and cement will continue to feel the brunt of hardships in the form of the government's aggressive taxation drive, including the tax-amnesty program, intense competition, widening discounts as well as the adverse impact of China's over capacity.
The writer is a senior associate director and head of corporate strategy and research at Bahana Securities.
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