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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.