Siam Cement

Siam Cement Plc (SCC)

Key takeaways from NDR in Singapore. We arranged a non-deal roadshow with
SCC, led by its CFO, Khun Chaovalit Ekabut, in Singapore last week. Questions centered
on cement volume if the government’s infrastructure projects are delayed, the effect
on the chemical cycle of the weaker demand in China and the progress in investments.
While investors are cautioned by a slowing economy, they are still positive on SCC’s ST
outlook after management confirmed continued solid performance by cement and
building materials units, improvement in the chemical unit, and LT business plans,
including expansion in ASEAN (Indonesia, Vietnam, Myanmar and the Philippines) and a
higher proportion of HVA (high-value-added) products and services.
Progress of investments. SCC has set its CAPEX at Bt40-50bn/year for the next four
to five years, keeping its dividend policy stable at 40-50% of net profit. In 2013, it will
invest in a new greenfield cement plant in Myanmar with capacity of 1.8mn tons
(equivalent to its 2012 export volume to Myanmar), pending board approval in the
next one to two months, with targeted completion in late 2015. Including the power
plant, investment cost will be a bit higher than its Indonesia greenfield project at
U$370mn, but the electricity cost will be lower. It is looking for an opportunity to buy a
cement plant in Vietnam, where prices are more reasonable. The debottlenecking of its
chemical cracker - Chandra Asri - in Indonesia will begin this year, with completion in a
few years. The investment in a chemical complex in Vietnam will be concluded in 2014.
Outlook. Cement: SCC expects domestic cement sales volume growth of 10% this year,
backed by residential, government (i.e. road/bridge improvements), and commercial
projects. This does not include the government’s Bt350bn water management system
(earliest in late 2014) and Bt2trn infrastructure projects (in the more distant future).
Domestic cement selling price is up by ~Bt50-100/ton since early 2013 and it expects
price to improve further from the rise in production costs plus a tighter demand and
supply climate. With better local demand, export volume will trend down to 4-4.5mn
tons in 2013 from 5.7mn tons in 2012. Every 1 ton shift from exports to the local
market adds US$20 to its earnings. Building materials: SCC recently acquired Vietnam’s
largest ceramic tile producer, Prime Group. It has since improved production efficiency
and this should show up in earnings in 2H13. Chemical: SCC sees the worst as behind,
with improvement ahead from a better demand and supply picture. With PE/PP spread
already strong in 1H13, SCC expects 3Q13 to be even better, as third quarter is normally
buying season and its advance orders in the next 1-2 months are firm. Outlook for PVC
is for continued health, with PTA (contributing a small loss) still facing challenges for
the next couple years, and BD (contributing minimal profit) waiting for recovery of the
auto industry. While China’s weakening economy might be a negative factor, it has not
had any impact thus far, SCC will closely monitor the situation and expects
improvement in the US economy to be a positive factor. Paper: Packaging chain
margin should be stable, with volume recovery after last year’s pulp plant shutdown.
Maintain BUY. We like SCC for: 1) solid 2Q13F earnings, with seasonal dividend income
offsetting the seasonally lower sales volume in all units; 2) strong 3-year earnings
growth at 25% from higher volume at the non-chemical units, spread widening at the
chemical unit and inorganic growth from its new investments in ASEAN.