SRI LANKA CEMENT INDUSTRY

 Cement Industry is around 8Mn MT per annum (Imports & Local Production)
 Local Production Capacity - Insee - 2.7Mn MT / Tokyo 3Mn MT,

Local Production (000' MT)

Jan- Feb- Mar-19 Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Total (Jan-Dec)
19 19 19 19 19 19 19 19 19 19 19
275 264 325 223 274 288 327 334 292 282 258 255 3,397

Jan- Feb- Mar-20 Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- YTD Oct (Jan-
20 20 20 20 20 20 20 20 20 20 20 Oct)
202 318 235 158 247 370 413 392 375 366 3,076

YoY - 20.45 -27.69 -29.15 -9.85 28.47 26.30 17.37 28.42 29.79
(%) 26.55

Imports (000' MT)

Jan- Feb- Mar-19 Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Total (Jan-Dec)
19 19 19 19 19 19 19 19 19 19 19
391 230 709 233 674 254 430 507 374 340 269 313 4,724

Jan- Feb- Mar-20 Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- YTD Oct (Jan-
20 20 20 20 20 20 20 20 20 20 20 Oct)
378 222 364 44 102 404 422 306 300 223 2,765

YoY -3.32 -3.48 -48.66 -81.12 -84.87 59.06 -1.86 -39.64 -19.79 -34.41
(%)

YoY Production vs Imports (000'

MT)
2016 2017 YoY 201 YoY 2019 YoY YTD Oct 2020 YoY 2021 YoY
8 2020 Est Est
Local 2,695 2,819 5% 2,84 1% 3,397 20% 3,076 3,700 9% 4,700 27%
Production 1
Imports 5,299 5,676 7% 5,11 - 4,724 -8% 2,765 3,300 - 3,300 0%
4 10% 30%
Tota 7,994 8,495 7,95 8,121 5,841 7,000 8,000
l 5
Source - CBSL

 Overall Cement demand has declined by 1Mn MT in 2020 (8Mn MT to 7Mn MT per annum) due to the
COVID-19 pandemic, however we expect this to return to 8Mn MT per annum from 2021 onwards.

 The local cement production has rapidly increased despite the slowdown, and expected to report 10%
INCREASE YoY. This is mainly due to the firm and visionary policy decisions made by the
Government which is favorable for local manufacturers. We strongly believe the Govt. will continue to
support in line with their vision to be a self-sufficient Country.

 CESS imposed on Bulk Cement imports and import ban on Bagged cement which led to exit of small
players. Tokyo and Insee capitalized this opportunity and increased their capacity utilization to
maximize profitability. This was evident in Q2 results of Tokyo.

 The import restrictions and CESS will continue to protect the Foreign Exchange and pressure on LKR,
as Sri Lanka is getting ready to self-supply the Cement requirement with a new player (Langwa)
entering the industry, and Tokyo expanding capacity from 3Mn to 4Mn MT to cater to the increasing
Cement demand.
 Construction sector outlook is very promising with the 2021 budget proposal;
 100,000 km road project and 10,000 km x 3 large road projects for the road sector
 420,000 water supply projects for individual households
 10,000 bridges and 100,000 houses to be commenced.
 Exemption of all import duties on new technologies & machinery required for
construction sector
 Housing loan offered at 7% p.a to create a housing boom to boost construction sector.
 Many other projects related to Education, Health and Sports and the construction of
Bandaranayake International Airport and Colombo Port City

TOTAL LOCAL CEMENT PRODUCTION

000’ MT
2016 2017 2018 2019 2020 Est. 2021 Est.
Total "Local 2,695 2,819 2,841 3,397 3,700 4,700
Production"
Tokyo -
Tokyo - Tokyo - Tokyo - Tokyo - Tokyo - 50%
Market share 35% 40% 40% 45% 55% Insee - 40%
Holcim - Insee - 60% Insee - 60% Insee - 55% Insee - 45% Langwa -
65% 10%
Tokyo 943 1,128 1,136 1,529 2,035 2,350
Insee 1,348 1,691 1,705 1,868 1,665 1,880
Langwa Sanstha 0 0 0 0 0 470

2020 & 2021 Estimations are based on;

 The expected increase in local production by 27% YoY to 4.7Mn MT in 2021 - Due to CESS, and
import restrictions on bagged cement, and expecting a recovery of Country’s average annual Cement
volume of 8Mn MT - same levels were noted during 2016-2019.

 Imports are expected to remain flat, as Arpico & MELS entered the bulk import segment. For 2020, as
at Oct 2020, Cement imports have come down nearly 50% YoY. However, we have assumed that the
current import volume reported in 2020 will remain flat for 2021 as well, without a further reduction.

 Construction boom will further accelerate the Cement demand - Low interest housing loans,
economic/political stability, and large constructions projects being resumed, including port city.

 In our view, Tokyo will not lose their market share due to competition (i.e new entrants), as the target
market of Tokyo is unique with a strong brand loyalty, and Tokyo has the competitive advantage over
any other existing local cement producers, and bulk importers. Key points are as follows;

o A strong brand with loyal customers for generations since 1980s.

Tokyo Super Cement is a superior household name in Sri Lanka, building the trust of
their loyal customers over the generations.
Cement is a product which would take years to build a loyalty towards a brand, and
most of the people building their dream house would go for an established brand
such as Tokyo or Sansta (Insee).

o Largest Cement distribution network

Tokyo has the largest distribution network for Cement with over 3000 dealers island wide, and these
are very strong ties for the last few decades. On the other hand, new entrants Langwa, or any other
bagged cement players do not have an established distribution network. This is no easy task, and
will take a significant effort to build.
o Transportation Advantage
Tokyo has their own Ship to transport Tons of Cement from Trinco to Colombo,
which brings significant cost savings from recurring expenses on transportation.
Strategically located in Trinco to cater to their key market segment - North & East,
whereas Insee, and the new entrant Langwa are located in down-south.
Tokyo has a state-of-art cement storage facility at the Tokyo Cement Colombo
Terminal, which enables them to quickly supply for leading construction projects in
and around Colombo.

o Tokyo Power
23MW of Single largest contributor of biomass power in Sri Lanka (Renewable
energy), and 100% self-sufficient for their energy needs for Cement operation.

o Demand for Cement - On the Rise with ever evolving constructions projects
 THE TURN-AROUND & FUTURE POTENTIAL OF TOKYO CEMENT - 2020 ONWARDS

 On 27th Dec - Govt. approved a MRP of Rs.1,005/- for locally manufactured Cement, however both
Tokyo and Insee sell at Rs.950/- giving the consumer the benefit of removal of NBT and VAT reduction
(NBT was removed and VAT was reduced from 15% to 8% in Dec 2019).

 Post presidential-election, the accelerated completion of large-scale construction projects. Extension of

the Southern Expressway, the Outer Circular Highway, and the rapid progress of the Central
Expressway project, in addition to the multiple condominium development projects largely contributed
to the expansion in construction activities.

 Corporate Income Tax Revised for Construction Industry: Reduced from 28% to 14% with effect from
1st Jan 2020.

 Credit to Private Sector for Construction Activities and Personal Housing saw a sharp increase due to
lower interest rates regime since beginning of 2020. Govt, has given further boost by offering Housing
loans at 7% which will create a housing boom across the island, and severe demand for Cement is
expected in 2021.

As depicted in Softlogic’s report on TKYO, Northern and Eastern region lags in terms of permanent
housing, hence we expect the 7% housing loan will boost retail demand for housing constructions. Most
importantly, North & East are stronghold of TOKYO SUPER Brand.

 Import restrictions to control the outflow of foreign exchange and encourage domestic value addition;

 A CESS was imposed on imports of bag and bulk cement, and this resulted in a Rs.54 increase
in the cost of a 50Kg bag of imported bagged cement, while the impact of the CESS is Rs.47 per
50Kg of imported bulk cement.

 Further, the Import of Bag Cement suspended.

 Domestic Cement Manufacturers (i.e Tokyo) enhanced their respective capacity utilization and thereby
saved valuable foreign exchange to the country. We expect the suspension of bagged cement will
continue to reduce the pressure on LKR.

 Govt. has made initiatives to settle the long-delayed payments to the Contractors. This was a barrier in
the sustainable growth momentum of Cement industry over the last few years.

 Govt. has directed all Government entities to source raw materials exclusively from local manufacturers
for government projects.

 As per the Annual Report, Tokyo has reported avg. 60% of capacity utilisation for year 2019 (Producing
1.7Mn MT of Cement / above 140,000 MT per month). Since June 2020 onwards, Tokyo operates with
80% Capacity utilisation producing 2.4Mn MT per annum / 200,000 MT per month. This roughly
accounts for 60% of Market share of locally produced cement. Tokyo is expected to report super
earnings, if the 80% capacity utilization continue throughout 2021.

 Strong distributor network of over 3000 island wide dealers of Tokyo Cement, and this was created over
the last few decades since 1980s.

 Tokyo reports a lower distribution cost due to cost optimization strategies carried out by transporting
Cement from their own vessels from Trinco to Colombo. Tokyo Power of 23MW biomass power
reduced the energy cost as 100% self-sufficient renewable energy produced by the company.

 The in-house made Fly ash has significantly reduced the clinker imports, and forex exposure for Tokyo.
 Peak seasonal consumption of Cement to be reported during Jan-Mar 2021. Rapid increase of Sales
expected during this period.

TOKYO WILL CONTINUE THEIR GROWTH TRAJECTORY FOR FY 2021/22, AND WE CAN EXPECT
A BETTER EARNINGS OUTLOOK AS A SOLID MEDIUM-TERM INVESTMENT.

Local Production Tokyo's

EPS
Volume Share (50%+)
Oct-Dec (Q3) 795 398 0.64
Jan-Mar (Q4) 755 378 1.72
Apr-June (Q1) 775 388 1.73
Jul-Sep (Q2) 118 590 5.28
0
Oct-Dec Est. 966 483 4.40
(Q3)
Jan-Mar Est. 105 525 5.00
(Q4) 0
EPS Est. for FY 16.41
2020/21