Building material sector
Maintain underweight: In view of the challenging industry prospects arising from the lacklustre demand and intense competition from a relatively new entrant, the government is encouraging local steel sector players to consolidate. The export market represents a huge opportunity to tap, especially the Asian region. A key external risk arises from China not setting a blanket winter output cut for its steel producers (unlike in previous years). We maintain our “underweight” rating on the sector, “sell” on Ann Joo Resources Bhd with a target price (TP) of RM1.04 and “hold” on Malayan Cement Bhd (previously Lafarge Malaysia Bhd) with a TP of RM3.28.

 
We attended the 2019 Trade Forum on the Malaysian Iron and Steel Industry, walking away slightly disappointed as we felt the forum did not address structural issues faced by domestic steel players.

We understood from the forum that the ministry of international trade (Miti) will present its proposals to the ministry of finance for consolidation incentives (which may include, among others, tax incentives) to foster sector consolidation. Miti will also produce a White Paper on the steel industry to protect local players, including imposing a moratorium on licences granted to foreign steel manufacturers which intend to set up manufacturing facilities in Malaysia.

The forum panel suggested that local steel players explore opportunities outside of Malaysia, in particular markets in Asia given the region’s high steel consumption. We note that Asia consumed more than 15.9 billion tonnes of steel in 2018, higher than in other regions.

Apart from the conference’s highlights, which we deem “neutral” for the sector’s near-term prospects, we remain negative on the steel sector on the back of: i) renewed concerns over dumping from China; and ii) weak near-term demand prospects locally.

Also discussed at the forum was the subject of China directing local governments to set limits based on manufacturers’ emission level. We feel there is renewed concern that Chinese steel producers may dump their steel.

Domestic steel consumption remains weak given subdued construction activity. We believe the weak domestic demand will be protracted at least into the end of the first half of 2020, no thanks to delays in project implementation arising from past reviews. Based on our channel checks, some industry players expect a gradual recovery in steel demand to only materialise by mid-2020 largely on the back of a pickup in

megaprojects, such as the Sungai Buloh-Serdang-Putrajaya Mass Rapid Transit Line, the Light Rail Transit Line 3, the East Coast Rail Link, the Johor Baru-Singapore Rapid Transit System and Bandar Malaysia. — Hong Leong Investment Bank Research, Nov 5