Cement
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4Q14 quiet, back to action in 2015
Cement
We expect 4Q14F to be quieted by seasonally muted demand - except for SCC, which
will grow: QoQ on seasonal dividend income and YoY without last year’s shutdown
of MOC and wider chemical spreads (thanks to lower oil price). In 2015, local cement
demand is set to revive by 5% in tandem with the return of investment and margin
will be bulked up by lower fuel costs and a lower portion of exports. Top picks are
SCC (best 4Q14 & LT growth) and SCCC (sector laggard).
4Q14F: Down QoQ on low season and high SG&A – except for SCC. All but SCC will report
lower profit QoQ from seasonality –SCC, on the other hand will report growth both QoQ,
from dividend income, and YoY, without last year’s shutdown of its cracker and wider
chemical spreads. On a YoY basis, cement sales volume will be unchanged from zero growth
in 9M14, from the slow revival of investment. With oil prices plunging, conglomerates with
chemical exposure will benefit from a more rapid drop in feedstock costs than in product
prices, widening chemical spreads. In 4Q14TD, PE/PP-naphtha spread was US$752-800/ton
(+20% QoQ and +30-40% YoY), positive to SCC, and LDPE-ethylene was US$182/ton (+180% QoQ
but still -34% YoY), somewhat positive to TPIPL.
4Q14F: Down QoQ on low season and high SG&A - except for SCC. In 4Q14, sector
earnings will soften QoQ from seasonally lower sales volume and the usual high year-end
SG&A expenses. SCC is the exception, reporting growth both QoQ - from seasonal dividend
income - and YoY – without last year’s shutdown of its cracker plus wider chemical spreads.
On a YoY basis, cement sales volume will be unchanged from 9M14 with zero growth, as
investment is returning only slowly. Amid the dip in oil price, conglomerates with exposure to
chemicals will benefit from a faster fall in feedstock costs than in product prices, resulting in
wider chemical spreads. In 4Q14TD, PE/PP-naphtha spread was US$752-800/ton (+20% QoQ
and +30-40% YoY), positive to SCC, and LDPE-ethylene was US$182/ton (+180% QoQ but still -
34% YoY), somewhat positive to TPIPL.
Demand returning in 2015. We estimate 2015 domestic cement sales volume of 39mn tons
(+5% YoY vs. 0% in 2014F) with export sales volume of 10mn tons (flat YoY). In 2015, SCB EIC
projects public investment growth of 13.6% (from +1.5% in 2014F) and private investment
growth of 7.0% (from -1.9% in 2014F) off the low base from the political instability plus
greater government budget disbursement and better investment sentiment.
Private investment (60-70% of demand). There are several positive leading indicators pointing
to a revival in cement demand next year. 1) Construction area permits (70% correlation with
cement usage for the following six months) picked up by 4% YoY in Sep 2014 and 11% YoY in
Oct 2014. 2) Presales for listed property developers began to show improvement in 3Q14 (+4%
YoY and +32% above that during the unrest in 4Q13-2Q14). 3) BoI approvals returned to a
normal Bt95bn/month in Jun-Oct 14 from the tiny Bt10bn/month during Nov 2013-May 2014.
Public investment (30-40% of demand). The FY2015 budget was voted in and government
budget disbursement should return to normal levels. The government’s 8-year Bt2.4trn
infrastructure plan will shoot cement usage up by ~1mn tons p.a., but more importantly, will
stimulate positive sentiment and greater private investment.
Minimal supply addition in 2015. In mid-2015F, TPIPL will add 4.5mn tons to its cement
capacity, +8% to industry capacity. We expect TPIPL to make a slow ramp up in its new
capacity, as it has with other projects. After factoring in new supply, industry utilization will
stay high at above 80% in 2015-16F. We thus do not expect material impact on the industry.
Favorable sector margin. We expect sector margin to be healthy in 2015, backed by firm
and continued high product prices (stable local and export price YoY in 10M14) with lower coal
costs (30% of cost). The drop in spot coal price of 16% YoY in 2014TD is positive to production
costs in 2015, as cement producers typically lock in coal price 6-12 months in advance. Backed
by a steady rise in local demand, low-margin exports will come down to 21% in 2015F and 20%
in 2016F from 22% in 2014F, adding to the sector’s margin going forward.
Top picks: SCC and SCCC. We like SCC the most, backed by its lead position in 4Q14 earnings
(up QoQ and YoY) and most attractive 2-yr PEG at 0.85x (14.6x 2015PE vs. 2-yr EPS growth of
17%), brought by wider chemical spreads, higher non-chemical volume and inorganic growth
from new investments in ASEAN. We also like SCCC as the sector’s greatest laggard and as a
proxy for cement demand recovery and healthy margin in 2015.
