Negeri Sembilan Cement Industries Sdn Bhd - 2007

The rating of Negeri Sembilan Cement Industries Sdn Bhd’s (“NSCI”) RM200 million Bai’ Bithaman Ajil Islamic Debts (“BaIDS”) has been affirmed at AA- ID (bg) whilst the ratings of its RM130 million Murabahah Notes Issuance Facility (“MUNIF”) have been reaffirmed at A- ID /MARC-2 ID.

The affirmation of the bank guaranteed BaIDS reflects use of the “weakest link approach” to evaluate the strength of the unconditional and irrevocable bank guarantee provided by guarantor banks, AmInvestment Bank Bhd (“AmInvestment Bank”) and CIMB Bank Bhd (“CIMB Bank”). The Stable outlook on the bank guaranteed bonds mirrors that of AmInvestment Bank. AmInvestment Bank’s ratings of AA-/MARC-1 reflect its strong and defensible domestic investment banking franchise, which enables the investment bank to maintain a solid financial performance, and sound capital measures. CIMB Bank’s ratings of AA/MARC-1, meanwhile, recognise the bank’s status as a core entity of CIMB Group Sdn Bhd (“CIMBG”), the universal banking entity that is Malaysia’s second largest banking group. The ratings are supported by CIMB Bank’s strong presence in its domestic market in the retail and commercial banking segments, its increasing integration with the other entities within CIMBG, the sustained improvement in the bank’s financial fundamentals, and focused management strategies.

The reaffirmation of stand alone ratings for NSCI’s MUNIF reflects its competitive position as a leading domestic cement producer and its good earnings and cash-generating ability. The Positive rating outlook reflects an improving revenue environment and expectations that NSCI’s credit measures will improve along with its earnings.

NSCI manufactures cement at two plants in Bukit Ketri and Bahau. The Company is a wholly owned subsidiary of Cement Industries of Malaysia Bhd which is part of UEM World Bhd, a Khazanah Nasional Bhd owned company. NSCI is the third largest cement producer in Malaysia with a 17.28% market share, that is supported by a formal industry agreement which has been in existence since December 2005 and valid through June 2008. The concentration of domestic production capacity among relatively few producers continues to limit oversupply conditions.

For FY2006, NSCI exhibited improved performance through a year on year increase in profit before tax by 81.1% to RM38.4 million (FY2005: RM21.1 million) attributable to an increase in the ceiling price of cement since December 2006. This more than offset the 3.2% decrease in NSCI’s year on year sales volume in 2006. This was reflected in an improvement in NSCI’s cash flows. An arrangement with its sole off-taker and sister company, Pemasaran Simen Negara Sdn Bhd allows NSCI to maintain an average collection period of about 120 days. With the partial early redemption of its MUNIF, outstanding total amounts under the rated facilities were RM150 million as at April 2007. The early retirement of its borrowings evidences NSCI’s commitment to maintain a sound capital structure.

The near term outlook for the cement industry is favourable in light of the recovery in the construction industry in 2007 stemming from the roll out of more projects under the 9MP and the anticipated recovery in the property market. Additionally, the 10% hike in cement prices has eased cost pressures on cement producers somewhat, as reflected in their improved operating margins. The Cabinet Committee on Essential Products announced recently that it would replace the current cement price control mechanism system with an Automatic Pricing Mechanism (“APM”) that is cost-plus in nature. Cement prices will be adjusted via the APM every 4 months starting from 1 January 2008. This should alleviate concerns of cement producers over rising production cost and will benefit players that have implemented cost optimization strategies like NSCI. The announcement drew considerable opposition from the developers and contractors, following which the Government has given its commitment to conduct a review of the APM a year after its implementation. MARC believes that the cement producers will continue to face regulatory uncertainty with respect to the framework for cement pricing so long as the decision making process remains susceptible to reversals.