Siam Cement

Siam Cement Plc (SCC)

Bolstered by petrochemical upcycle
Event with SCC. We arranged an event that brought together SCC management, led
by Khun Chaovalit Ekabut (Vice President Finance and Investment & CFO) and Khun
Cholanat Yanaranop (President, SCG Chemicals), and local institutional clients to
discuss the company’s petrochemical outlook and strategy. Management believes the
petrochemical upcycle will be present for the next few years. It also provided an update
on challenges to incremental supply from new production processes, and its LT plan to
focus on high value added (HVA) products & services and ASEAN expansion.
The petrochemical cycle generally covers 7-10 years, with the most recent trough
in 2011-12. SCC thus expects the ethylene and propylene upcycle to continue
through 2017, undergirded by favorable global demand and supply balance.
Demand for 2014-16 is expected to grow 4% p.a., greater than the growth in
supply of 2-3% p.a. In 2017, SCC expects supply growth at 4% (though nameplate
capacity for new capacity would add 6%) in view of potential delays of 2-3 years
from permit delays, execution risk and feedstock security.
PVC demand growth is forecast at a healthy at 3-4% p.a., with concerns about
oversupply eased by environmental issues with regards to the calcium carbide
process in China. PVC price should be firm, but high EDC cost may make a shortterm
dent in PVC spread.
Spreads at associates for BD, PTA and MMA remain weakened by fragile demand
amid high incremental supply. However, based on historical patterns, spreads and
earnings from its associates eventually move in tandem with its consolidated
earnings (ethylene/propylene/PVC chains).
Naphtha will continue to be major feedstock for ethylene and propylene
production in 2018. Of total ethylene capacity in 2018, 48% will come from
naphtha, followed by 43% from conventional gas, 5% from coal, methanol and
others, and 4% from shale gas. Of total propylene capacity in 2018, 53% will come
from naphtha, 30% from refinery, 11% from propane (PDH process) and 6% from
coal, methanol and others.
There are many challenges ahead from new production processes in the chemical
industry. The new processes and challenges include: 1) Shale gas - delayed license
approval on environmental issues and uneconomical bulk transportation. 2) coalto-
olefins (CTO) - high investment cost, remote location far from demand, water
supply availability, and environmental concerns. 3) methanol-to-olefins (MTO) -
feedstock security as it requires a substantial amount of imported methanol.
4) propane dehydrogenation (PDH) - high feedstock cost during winter season due
to heating demand.
SCC continues to keep ASEAN countries as its main investment focus. It is working
on developing a cracker in Indonesia and adding a cracker in Vietnam from the two
it already has in Thailand. Chandra Asri cracker in Indonesia (acquired in 2011) is
undergoing de-bottlenecking to raise upstream capacity (ethylene/propylene) to
1.3mn tons from 0.9mn tons, with target completion in 2015. For Long Son
Petrochemical cracker in Vietnam, it has signed a long-term feedstock and land
lease agreement and appointed a financial advisor. It is in the process of bidding
for equipment and financing. Assuming everything goes as planned it expects
completion of this project in late 2018. Having crackers in three locations will give
synergy in terms of coordinating feedstock, supply chain, product sales, and
HR/research.
SCC plans to raise competitiveness and reduce the swings inherent in commodities
by adding more HVA products and services. Of its 2013 chemical sales, 50% from
chemical subsidiaries and associates (100% portion).
Maintain BUY. We see the recent dip in share price of 5% over the past week as a
buying opportunity ahead of the good 1Q14F earnings (up YoY from wider chemical
spreads and QoQ from seasonality and no maintenance shutdown of MOC). Valuationwise,
SCC is trading at 12.5x 2014 PE (+0.5SD. over its 10-year PE at 11x), undemanding
against its EPS growth of 16% in 2014-16, brought by wider chemical spreads, higher
non-chemical volume and inorganic growth from new investments in ASEAN.