Aminul Haque, CFA

(880) 171 417 8460; amin@eplbangladesh.com

HeidelbergCement Bangladesh Ltd.

Recommendation: BUY Target Price: BDT 2,100

Company Summary 52-week Price Range (BDT) 1,780 Current 1,693 12-month 2,100 Total

1,011

Price

211.95 Valuation P/E 2.4x ROA Total Debt Cash Debt/Equity

Target

Price

16.1x 11.6x 11.3x P/B 2.1x ROE 19% 12% 14% 13% ROIC 20% 17% Misc BDT MM 968 968 968 768 1,183 1,636 29% 25% 21%

2.9x 23% 16%

20%

Return

26% Number of Shares MM 5.65 Market Cap BDT 9,565 BDT MM 2010E Revenue Ops Income Net Income Margi ns Gross Margin Margin

MM

2008A 6,370 7,705 8,987 972 1,233 1,348 593 827 848

2009E

19.2% 20.0% 15.3% 15.0% 9.3% 13% 17% 45%

20.0% Operating 16.0% Net Margin 10.7% 21% 71% 3%

9.4% Growth Revenue Growth

Net Income Growth Per Share EPS 104.87 150.05 Dividend 21.39 37.51 Book Value/Share 585.50 807.78 Cashflow BDT MM Operating 32.69 911.70 Capex 119.62 247.26 Dividend 120.86

146.32 36.58 695.24

867.91 246.26 206.68

HeidelbergCement Bangladesh Ltd. is the largest local cement manufacturing company in Bangladesh. The HeidelbergCement Group in Germany is the main sponsor and the majority shareholder (61%) of HeidelbergCement Bangladesh Limited (Heidelberg). The company has an installed capacity of 2.0 Million Metric Tons (MMT) of cement in two plants in Dhaka and Chittagong. The company produces cement under two brand names, Ruby and Scan cement. Heidelberg is considered both the quality and the volume leader in cement manufacturing in Bangladesh. After a lull during 2007-2008, activity has picked up in the construction sector of Bangladesh. While the domestic construction sector shows higher activities, both the scope and the efficiency of government spending in construction and infrastructure sectors are expected to pick up. Also, it does not appear that the government is considering a
2000 1800 1600 1400 1200 1000 800 600 400 200 0 9000 0 8000 0 7000 0 6000 0 5000 0 4000 0 3000 0 2000 0 1000 0 0

change in the import duty structure of various cement products, e.g. finished cement, semi-finished cement and basic raw materials for cement (25%, 12% and 7% respectively); such a disparity in import duties favor the local manufacturers. We initiate coverage of Heidelberg with a BUY recommendation and a 12-month target price of BDT 2,100. Our recommendation considers the price premium enjoyed by the company, the companys consistent top and bottom line growth, an anticipated pick up in activities in the construction sector and an overall positive outlook for the consumption of cement, especially in the backdrop of infrastructure investment. Our recommendation is based on a P/E of 15x an estimated 2010 EPS of BDT 150 and on a 2.5x estimated 2010 book value of Tk. 808. With an estimated dividend yield of 2% in 2010, this target price implies an estimated total return of 26%.
Table 1: Snapshot Production

2006 2007 2008 2009E 2010E 2011E Production Capacity '000 T 1450 1450 1900 2000 2000 2000 Production '000 T 1007.4 1018.8 1058.0 1186.8 1281.7 1384.2 Capacity utilization 69% 70% 56% 59% 64% 69% Sales '000 T 816.5 1018.9 1059.6 1186.8 1281.7 1384.2
Source: Company Annual Report and BRAC EPL estimates

Volume

Close

Busine ss

HeidelbergCement Bangladesh Ltd. (DSE, CSE:

Heidelberg is a majority owned subsidiary of HeidelbergCement Group of Germany. The HeidelbergCement Group is the global market leader in aggregates and a prominent player in the fields of cement, concrete and other downstream activities. With Eur 5.4 Billion in revenue, it is of the worlds largest manufacturers of building materials. The Group employs some 57,000 people at 2,600 locations in 40 countries. Heidelberg operates two plants in Bangladesh with a combined capacity of 2.0 million metric tons (MMT). Like most other cement manufacturers, both plants manufacture cement by grinding clinkers imported from outside the country. Heidelberg employs 241 people in its two plants. The company markets its cement under two names, Ruby and Scan Cement. Because of the perception of higher quality of Heidelbergs products, a 50KG bag of cement receives a Tk. 15.00 Tk. 30.00 premium on average over cement produced by local competitors. Industr y In terms of cement production, Bangladesh ranks about 40th in the world. Cement manufacturing is a highly fragmented business in Bangladesh. During the 1990s, many small cement companies entered the market as soon as the government started encouraging local production with a tariff differential favoring them. Currently there are 123 companies listed as cement manufacturers in the country. Of them 63 have actual production capacity while 35 do not have any production at all. The current installed capacity is 22.0 MMT. However, because of supply constraints for power and clinkers, the actual capacity is 17 MMT. Bangladesh is one of the few sizable producers of cement that does not have its own supply of limestone to produce clinkers. Except for Larferge-Surma, other cement manufacturers of Bangladesh are in essence grinders of clinkers. There is a strong tax-support for local cement manufacturers in Bangladesh. They receive a significant import tax advantage over finished cement (12% for semi-finished materials versus 25% for finished cement). If not for this tariff differential, most of the grinders would not be in business. However, any change in the tariff structure in the near future is not anticipated. Although construction takes up an important role in the economy (about 9% of the GDP), annual demand for cement is only about 10.0 MMT. Understandably the market has a capacity overhang. There is a small market for export of cement, mainly to the small northeastern states of India. However, the size of the export is quite small (about 200 KMT a year). There are four categories of cement consumers in the country. The largest with about 60% of the consumption are the individual homebuilders. This is also the most price sensitive segment. Real estate developers, especially in the countrys urban area constitute about 8% of the market. Construction contractors constitute another 3% of the market. Lastly, various government projects take up about 30% of the total cement constructio n. Demand for cement in Bangladesh was particularly weak in 2007-08 for several reasons. First, the anti- corruption drive of the incumbent military-backed caretaker government subdued expenditure of undeclared funds. Most of these funds usually

HeidelbergCement Bangladesh Ltd. go to the construction sector. Second, a rapid climb of raw materials and shipping (DSE, CSE:

costs in the global market escalated the price in the local market for cement and other construction materials, further squeezing consumers out of the market. Third, government spending in construction under the annual development programs (ADP), which constitutes a large part of the cement market, was particularly slow in these years. Consequently, many of the smaller and some major cement manufacturers operated at less that 50% capacity and incurred large losses during these years.

The industry anticipates over 20% sales growth in 2009, mostly because of the latent demand from last year. On a secular basis, ongoing demand growth is expected to be about 8%. The outlook for the cement industry seems positive for a number of reasons. First, the government seems to be on a war footing to increase both the amount and the efficiency of spending in social and physical infrastructure under the ADP. Second, the private sector is also energized because of certain tax advantage on undeclared funds if they are invested in real estate. Third, a number of large infrastructure construction projects (such as the Padma Bridge) are on the horizon. Both the government and the private sector are soliciting funds for such projects. If implemented, these projects would significantly improve demand for construction materials. Growth profitability
Table 2: Growth
2006 Sales volume growth Price growth Sales growth EBITDA growth Earnings growth 1.1% 35.4% 36.9% 91% 273% 2007 24.8% -10.0% 12.3% 24% 19% 2008 4.0% 9.0% 13.3% 4% -5% 2009E 12.0% 6.0% 21.0% 21% 40% 2010E 8.0% 6.0% 16.6% 8% 3% 2011E 8.0% 6.0% 16.6% 8% 6%

HeidelbergCement Bangladesh Ltd. (DSE, CSE:

and Despite various challenges during 2007-2008, Heidelberg achieved impressive top-line and bottomline growth. Heidelberg does not suffer from two recurring problems faced by other manufacturers, namely supply constraints for power and clinkers. Heidelberg has its own captive power supply and it receives its clinkers from

Source: Company Annual Report and BRAC EPL estimates

company is removing some bottlenecks from its existing Heidelberg subsidiaries. Th ch as bagging capacity. The plants, su has managed its operating and EBITDA company e cost differential margins in line with th between finished cement and semi-finished raw materials. Currently it does not have any plans for backword linkage. Liquidity
Table 3: Shareholding Pattern
Shareholders Sponsors Institutions General public Total Source: DSE 2008 60% 10% 30% 100%

Over 60% of the shares of Heidelberg are held by its majority shareholders. In addition, about 10% more shares are held by local institutional shareholders, leaving about 30% for the retail investors. The company averaged trading of about 16,000 shares or Tk. 26.0 MM in the last 30 days. With rest to its market cap, Heidelberg has ample liquidity in the market.

Dividen ds Although the company paid regular cash dividends since 2000 (except 2003-04), amount of the dividends and their payout ratio are somewhat random. The company paid between 7% and 62% of their earnings in dividends in the past years. The dividend yield has remained steady at around 2% over the last four years. Although the amounts are nothing spectacular, a regular return on capital in the form of dividends is a positive sign.

HeidelbergCement Bangladesh Ltd. (DSE, CSE:

Valuati on Comparing the valuation levels of the six publicly listed cement companies on the DSE, We found that three had negative earning in 2008. The average P/E and P/B for the rest are a 160x 2008 earning and

20x book value respectively, which are unrealistic. With a 15.0x 2010E earnings and a 2.5x 2010E book value, we estimate 12-month prices of Tk. 2,250 and 2,019 respectively, and set a 12-month target price of Tk. 2,100. Our target price is also supported by a DCF analysis. With an estimated dividend yield of 2%, we expect this target price to provide a total return of approximately 26%.
Table 4: Valuation Comparative
Heidelberg valuation EPS 2010 estimates Multiple Target price 150.05 15.0x 2250.78 BVPS 807.78 2.5x 2019.45

Other construction materials Price EPS P/E BVPS P/B Lafarge Cement 478.75 3.04 157.5x 59.00 8.1x Confidence Cement 796.25 -14.98 NA -13.62 NA Meghna Cement 829.5 10.28 80.7x 255.49 3.2x Niloy Cement 177.75 -2.97 NA 29.4 6.0x Aramit Cement 408.5 1.72 237.5x 16.4 24.9x Padma Cement 32.8 1.44 NA 0.57 57.5x Average 158.6x 20.0x Heidelberg Cement 1680.75 2.9x 104.87 16.0x 585.50

Average Target price 2,095.63 Dividend yield 1.26%

Source: DSE and BRAC EPL estimates

Table 5: Discounted Free Cash Flow Valuation

Discounted FCF Operating Cash Capital Expendture Change in Debt Net Terminal Value Terminal Value Terminal Debt Discount Rate Terminal Growth Rate Source: BRAC EPL estimates 13.5% 7% NPV NPV/Share 11,394 2,016.66 2008 2009 868 -246 622 2010 912 -247 664 2011 972 -250 722 2012 1,085 -253 832 2013 1,224 -222 1,002 2014 1,370 -222 1,148 2015 1,523 -222 1,301 21,291 21,414 123

Table 6: Income Statement MM BDT Sales Cost of goods sold Gross Profit Other operating income Operating Expenses Operating Profit Other Non-operating Income Financial Expenses Contribution to WPPF EBT Tax PAT Number of shares MM EPS

2006

2007

2008

2009E

2010 E

2011 E

5,004.4 5,621.3 6,369.5 7,704.6 8,986. 10,482. 4,033.5 4,410.7 5,148.8 6,163.7 6 7,189. 08,490. 3 4 970.9 1,210.6 1,220.7 1,540.9 1,797. 1,991. 15.3 54.9 87.5 77.0 3 89.9 6 104. 8 261.3 318.8 335.7 385.2 539. 628. 2 9 724.9 946.7 972.5 1,232.7 1,348. 1,467. 4.3 1.8 5.9 7.7 0 9.0 5 10. 5 107.7 73.7 86.9 91.9 91.9 91. 9 31.5 44.7 45.5 46.2 53.9 62. 9 590.0 830.1 845.9 1,102.3 1,211. 1,323. 1 1 68.4 208.6 253.4 275.6 363. 423. 3 4 521.6 621.5 592.5 826.7 847. 899. 8 7 5.4 96.93 5.7 110.01 5.7 104.87 5.7 146.32 5.7 150.0 5 5. 7 159.2 5

Table 7: Cash Flow Statement MM BDT Operating Cash Flow Net Income Add back non cash expense Change in working capital Cash Flow from operations Investing Activity Other investments Capital Expenditure Cash Flow from Investing Financing Acitivity Increase/(reduction) in debt Dividend Paid Cash flow from Financing Net cash Beginning Balance Cash in Hand Operating cash per share

2006

2007

2008

2009E

2010E

2011 E 899. 7 217. 4 -971. 6

826.7 214.1 -172.9 1,009.3 1,127.7 32.7 867.9

847.8 215.0 -151.1 911.7

19.1

418.1

119.6

0 246.3 246.3

0 247.3 247.3

0 250. 0 250. 0 0 -224.9 224.9

0 -206.7 -918.9 71.3 19.9 91.2 187.57 50.4 760.0 91.2 851.2 199.59 4.2 -82.7 851.2 768.5 5.79 -206.7

0 -211.9 -211.9

415.0 452.5 496. 7 768.5 1,183.4 1,635. 9 1,183.4 1,635.9 2,132. 6 153.61 161.36 171.9 7

HeidelbergCement Bangladesh Ltd. (DSE, CSE:

Table 9: Balance Sheet MM BDT Non-current Assets PPE Capital WIP Intangible assets 2006 2007 2008 2009E 2010E 2011 E

2,711.7 2,602. 6.5 1 344. 0 4.6 2.9 2,721.1 2,950. 7

2,830.7 2,862.8 2,895.0 2,927. 14.9 14.9 14.9 7 14. 95. 5.7 5.7 5.7 7 2,851.2 2,883.3 2,915.6 2,948. 2 1,454.9 1,759.8 2,052.6 2,394. 604.8 731.5 853.2 2 995. 2 191.2 230.0 267.2 310. 6 768.5 1,183.4 1,635.9 2,132. 6 3,019.3 3,904.7 4,809.0 5,832. 6 6,788.1 7,724.6 8,780. 8

Current Assets Inventories Trade and othe Receivables Other current assets Cash

677. 0 564. 2 109. 5 851. 2 1,417.4 2,201. 9

635.7 511.1 179.4 91.2

Total Assets Liabilities & Equities: Current Liabilities: Trade and other payables Short-term loans Provisions Unpaid dividend Non-current Liabilities: Loans Quasi equity Loans Deferred liabilities

4,138.5 5,152. 5,870.5 7 4

1,067.3 1,348. 512.2 3 704. 747.3 31.5 15.1 37.0 1,626.2 2,137. 2 65.0 122.6 3.3 190.9 15.3 122. 620.7 158. 6

1,433.6 1,716.2 2,001.8 2,364. 829.7 829.7 829.7 1 829. 7 75.7 90.6 105.7 124. 941. 41.6 41.6 41.6 6 2,380.6 2,678.1 2,978.8 3,360. 2 15.3 122.6 43.9 181.8 15.3 122.6 43.9 181.8 15.3 122.6 43.9 181.8 15. 3 122. 643. 9 181. 8

Total Liabilities

1,817.1 2,295. 9

2,562.5 2,860.0 3,160.6 3,542. 0

Shareholder's Equity Share capital Reserves Retained earnings Total Equity Total Liabilities & Equities

538.1 565. 0 629.3 629. 3 1,154.0 1,662. 5 2,321.4 2,856. 8 4,138.5 5,152. 7

565.0 565.0 565.0 565. 0 629.3 629.3 629.3 629. 3 2,113.8 2,733.8 3,369.7 4,044. 5 3,308.1 3,928.1 4,564.0 5,238. 8 5,870.5 6,788.1 7,724.6 8,780. 8

HeidelbergCement Bangladesh Ltd. (DSE, CSE:

Table 9: Indicators Indicators Production '000 MT Sales '000 MT Capacity utilization Sales growth Earning growth Gross profit margin Operating margin Net margin Total debt Tk. MM Debt/Total equity Effective tax rate Per share figures Number of shares (MM) Earning per share (EPS) Dividend per share Payout ratio Return on equity Return on assets Book value per share 2006 1,007 816 NA 1% 273% 19% 14% 10% 699.8 30% 12% 2007 1,019 1,019 NA 25% 19% 22% 17% 11% 842.6 29% 25% 2008 1,058 1,060 56% 4% -5% 19% 15% 9% 967.6 29% 30% 2009E 1,187 1,187 59% 12% 40% 20% 16% 11% 967.6 25% 25% 2010E 1,282 1,282 64% 8% 3% 20% 15% 9% 967.6 21% 30% 2011 E 1,38 4 1,38 4 69% 8% 6% 19% 14% 9% 967. 6 18% 32%

5.4 96.93 6.66 7.22% 25% 15% 325.47

5.7 110.01 14.71 13.37% 24% 15% 410.86

5.7 104.87 21.39 20.40% 19% 12% 505.63

5.7 146.32 36.58 25.00% 23% 14% 585.50

5.7 150.05 37.51 25.00% 20% 13% 695.24

5. 7 159.2 539.8 1 25.00 % 18% 12% 807.7 8

HeidelbergCement Bangladesh Ltd. (DSE, CSE: IMPORTANT DISCLOSURES

Analyst Certification: Each research analyst and research associate who authored this document and whose name appears herein certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe. Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, BRAC-EPL may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which BRAC-EPL is registered and any distribution outside those jurisdictions is strictly prohibited. Compensation of Analysts: The compensation of research analysts is intended to reflect the value of the services they provide to the clients of BRAC-EPL. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to specific corporate finance transaction. General Risk Factors: BRAC-EPL will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks that can impact future operational and financial performance: (1) Industry fundamentals with respect to customer demand or product / service pricing could change expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes; (3) Unforeseen developments with respect to the management, financial condition or accounting policies alter the prospective valuation; or (4) Interest rates, currency or major segments of the economy could alter investor confidence and investment prospects.