Building:Foundations set for recovery
Positive outlook for 2010. The steel and cement sectors are prime beneficiaries of government infrastructure spending, where projects are expected to gain momentum in 2010. We are Overweight on Building Materials. Buy Kinsteel and Lafarge Malayan Cement. Hold Ann Joo. Steel: Slow but steady recovery. Steel millers grappled with low selling prices in 1H09, but capacity utilization is expected to improve by 4Q09 from estimated low levels of 40%, with breakeven levels expected by 3Q09. Recovery would stem from the resurgence in domestic and regional demand as significant infrastructure projects are rolled out towards end-2009/early 2010. Upstream steel players should benefit significantly from larger-scale infrastructure projects. Cement could recover faster. After the 7-8% YoY demand contraction in 1Q09, 1H09 is expected to dip 2-3% YoY, and we expect modest 1.5% YoY growth for the full year as demand improvement skews towards 2H09. We expect stronger 8% growth in 2010. Recovery should be swift as smaller sized infrastructure and building projects spark cement demand. The industry benefits from a broad base of construction projects of various sizes, unlike the long steel players which rely on large-scale infrastructure works to drive profit growth. Buy Kinsteel and Lafarge, Hold Ann Joo. We continue to like Kinsteel for its attractive valuations and integrated operations with the ability to reap economies of scale. Lafarge’s dominant position in the cement market places it at the forefront of the sector recovery. Continue to Hold Ann Joo as valuations appear fair.
