Building materials sector
Maintain neutral: Despite the government’s relentless efforts in curbing the influx of cheap imported steel products into Malaysia, performance of the domestic steel players remained weak in 2014.

Moving into 2015, Malaysia Iron and Steel Federation (MISF) projects steel consumption in Malaysia to grow moderately by 3% to 4%, underpinned by sustained construction and infrastructure spending.

Despite the decent consumption growth, we are holding the less-than-bullish view on the local steel producers’ fortunes, on the back of a persistent overcapacity issue in the region and muted global economic growth and falling raw material prices, this will continue to weigh on steel product prices and restocking sentiment.

We believe the weak results registered will continue into the first quarter of 2015 (1Q15), due to several factors including rainy seasons in the 4Q14 and festive holidays in 1Q15, and the absence of lumpy cement demand from property development projects and potentially, continued intense price competition among cement players.

Despite the expected weak near-term performance, we are still expecting a better longer-term outlook that is beyond 1Q15 due to the implementation of various large scale infrastructure projects as well as lower coal and diesel prices.

Catalysts are more effective measures introduced by the authorities in China to curb steel capacity and a potential effective trade action by the government on steel dumping activities in the steel sub-segment.

For the cement sub-segment, catalysts are the timely implementation of Economic Transformation Programme projects and sustainable demand from property development projects.

Overcapacity in China remains over the longer term and the increase in raw materials will reduce margins.

Steel sub-segment: Negative is overcapacity results in volatile earnings. Positive is the potential trade action on steel dumping activities.

Cement sub-segment: Positive is the positive demand outlook. Negative is the pricey valuation.

We are maintaining our “neutral” stance on the building materials sector with a “sell” on Ann Joo Resources Bhd, TP: RM1; “hold” on CSC Steel Holdings Bhd, TP: RM1.06; and “buy” on Lafarge Malaysia Bhd, TP:RM10.72. — Hong Leong Investment Bank Bhd, Jan 14

This article first appeared in The Edge Financial Daily, on January 15, 2015.