China export growth slowed in August in line with consensus, butimport growth surprised on the upside.
Real exports solid: The August BoJ real exports, which indicate exports on avolume basis (announced 2pm), showed growth picking up to +3.0% MoM(Exhibit2). Jul-Sep real exports to date are up at a solid pace of +3.3% QoQ,indicating solid global demand. Estimates by region are released later, butlooking at the Cabinet Office’s export volume index by region, we see solidgrowth trend in exports to the US and Asia.
Domestic cement demand growth grew 9%YoY in August: Including the 80%YoYgrowth in exports, total cement sales grew by 12%YoY. These numbers indicate thatthe demand growth has been sustaining momentum seen since the start of 2Q17.
Stronger import growth is likely due to rebounding commodityprices and resilient domestic demand. Labour intensive goods wasa drag on exports.
Export values up sharply YoY: We focus on trends in the seasonally adjustedreal exports (volume) when looking at the overall economy, but in terms ofearnings at exporting companies and the impact on share prices, YoY moves inthe yen-based export value is also crucial. The August yen-based export value inMoF’s trade data shows export value up 18.1% YoY, rising for nine straightmonths and marking the strongest growth in nearly four years since Nov 2013.
Volumes have grown by 8%YoY (10%YoY including exports) during the last fivemonths. SMGR, our only Buy in the sector, reported August volumes growth of11%YoY but INTP’s volumes grew by only 3%YoY and under-performed the market.
We think global demand will continue to pick up mildly in the nearterm, providing support to China's export growth
That said, this was partly because of the YoY base effect from a weaker yen: Theaverage forex rate disclosed by the Directors-General of Custom-Houses back inAugust 2016 stood at ￥103.24/$ partly due to the impact of Brexit, but the yenweakened to ￥110.77/$ in Aug 2017, which boosted yen-denominated exportvalues. See Exhibits 4-7 for YoY trends in top export items by value to keyregions.
Unlike SMGR, INTP’s exposure to relatively weaker growth areas with greatercompetition as well as lack of export strategy continues to impede its volume growth.
Real imports mixed: Real imports in August continued to be mixed at +0.8%MoM. Real imports for Jul-Sep is running at a nearly flat pace of -0.3% QoQ fornow. Imports will very likely recover mildly ahead reflecting the recovery indomestic demand.
We remain optimistic about cement demand growth in Indonesia: We identifiedIndonesia as the most promising cement market in ASEAN in our recent sector report(see …all fall down…except one published on 17 August, 2017). A recovery in thecountry’s trade balance has typically preceded previous recoveries in cementdemand and the former continues to indicate brighter prospects ahead. In addition,benchmark interest rates have been cut to their lowest ever and property volumes inthe country have contracted for almost four years; i.e. both the pent-up demand andthe trigger to stimulate it are present. Thus, our Indonesian demand growth forecastfor 2H17-2018 remains around c9%YoY.
Next external demand contribution to lift Jul-Sep GDP: Reflecting the Augusttrade data, we estimate that net external demand contribution (exports minusimports) in the Jul-Sep GDP (1st prelim Nov 15) is currently up around +1.4%ptQoQ SAAR (or around +0.3%pt QoQ), boosting real GDP growth. While theprojection could change depending on the data ahead, unlike the Apr-Jun GDP,where net external demand contribution came in negative driven by domesticdemand, we expect the renewed upturn in net external demand contribution toshore up GDP growth for Jul-Sep. We now see an increasing likelihood that Jul-Sep real GDP would show positive growth for seven consecutive quarters, even ifdomestic demand contribution was marginally positive.
Likely rapid recovery in utilization & margins ahead, Buy SMGR: With cement ASPslipping below USD60/MT in 2Q17, the profitability of most players other than the Top-2has deteriorated to a level where we believe prices and margins are at a bottom and canonly go up. With no incremental supply coming in the market over next three years, arapid recovery in utilization, ASP and margins is likely, in our view. In this backdrop,relatively inexpensive valuations make SMGR a compelling Buy.