Siam Cement

Siam Cement Plc (SCC)
Investment thesis
Earlier this week, we hosted an SCC group meeting for local institutional investors. Kan Trakulhoon, CEO, and Chaovalit Ekabut, CFO, updated the fund managers on the firm's operations, the current market situation and outlook and shared insights into the economy. The information we grabbed during the meeting makes us confident in our BUY rating. Although domestic consumption won’t be as strong as we had earlier assumed, SCC should still deliver good earnings growth. Coupled with its solid long-term outlook, we expect it to outperform the SET over the next 12 months.
Slow domestic businesses
The CEO said businesses related to domestic consumption will tend to slow down in 2H13. GDP growth is likely to be in the range of 2-3% YoY in 2H13 and domestic cement demand is expected to rise less than 5% YoY, decelerating from 9% YoY in 1H13, as the property market will tend to soften and state infrastructure projects are moving slowly. Demand for building materials is also weakening, particularly at the low-end of the market, but there is still some scope for sales growth of mid- to high-grade materials.
But strong earnings growth momentum continues
The Chemical business remains strong and investments in the region have started to bear fruit. The 3Q13 Chemical performance should strengthen QoQ, underpinned by sustained fat spreads, higher operating rates, rising equity income from associates and some inventory gains. The impact of the shutdown of PTT’s GSP#5 will be only minimal, as the increase in feedstock costs as a result of having to import LPG shouldn’t exceed Bt100m per month. The PTA business is expected to turn around in 2H13, as margin has improved to US$100/tonne from a $50-60 trough, and management anticipates that Chandra Asri will contribute greater equity income.
Two long-term drivers
SCC's growth drivers for the next couple of years will be the Chemical and Cement-Building Material businesses. Chemical expansion will come from fattening spreads, given that supply is expected to rise at a slower pace than demand until at least 2017. The group’s chemical capacity will remain at the current level until the de-bottlenecking of Chandra Asri is completed in late 2016. Capacity will rise again with the start-up of a new complex in Vietnam. The CEO expects groundbreaking in late 2014 and COD in 2018.
Cement-Building Material growth will be mainly volume-driven, led by new investments and robust demand expansion in Cambodia, Myanmar and Indonesia. SCC reaffirmed that new cement plants will be completed in Indonesia (1.8mt/year) and Cambodia (0.9mt) by mid-2015, while groundbreaking is planned next year for a 1.8mt cement factory in Myanmar (COD in 2016). Building Materials capacity will expand mainly through M&As.