Construction Materials

Construction Materials 

Demand will begin to show some improvement, but not clearly visible until late 2016 when infrastructure projects get moving, encouraging private investment. Ceramic margin will widen in 2016F from low fuel cost; cement margin will be weak in ST from lower price but improve in late 2016F along with better demand. Our top picks are SCC (solid chemical) and DCC (wider margin) on a better 2Q16F than peers. 

 

1Q16 recap. SCC led its sector, with 1Q16 core earnings growth of 42% YoY, mainly on a better chemical unit (gain on weak THB/US$ and wider spread) outpacing the softer cement and building materials units (lower cement price and higher depreciation). DCC reported earnings growth of 14% YoY from a rise in volume and wider margin on lower fuel costs. SCCC was the sector’s weakest, with earnings slipping 6% YoY from lower cement prices. Demand to show slow improvement in ST. In 4M16, local cement and ceramic tiles sales volume grew 1% YoY (vs. -1% in 2015) and dropped 6% YoY (-8% in 2015). In the near term, local demand will begin to show some slow improvement as the government disburses its investment budget, though private investment will remain dull. In 7MFY16 (Oct 2015-April 2016), the government disbursed Bt188bn (+33% YoY), mainly to water resource management and road projects, as it sped up disbursement to 38% of the budget (vs. 33% in 7MFY15) and boosted its investment budget to Bt544bn (+21% YoY) in FY2016. Private investment, on the other hand, is lackluster, with fragile sentiment and low capacity utilization in several industries. The Business Sentiment Index (BSI) slid for the third consecutive month in May to 49.7 points. Construction area permitted, a leading indicator for local construction material demand over the following 1-2 quarters, edged down 6% YoY in 4M16, with a drop in the property segment (-4%) and commercial and industrial segments (-11%). 

 

.. and strengthen in late 2016. In late 2016, we expect local sales volume to show more solid improvement, led by greater progress on infrastructure projects and the return of private investment. Of the 20 urgent infrastructure projects under the Ministry of Transport worth Bt1.4trn, 11 were approved by the Cabinet in May 2015-April 2016, and the rest will be approved in June-2H16. While construction of these projects will boost public investment in 2016-20, more importantly, the approval of and investment in big infrastructure projects will lift sentiment and stimulate private investment. In 2016, we expect cement and ceramic tile demand growth of 2%, off a low base, more public investment growth (+11%) and better private investment growth of 2%.

 

Ceramic margin to widen in 2016. In 4M16, local ceramic tile price remained stable YoY. Ceramic tile producers will enjoy a wider margin as fuel costs continue low (gas cost lags oil price ~6 months). Despite the recent rise over past few months, oil price is still down 27% YoY in 2016TD, which will help lower gas costs this year. 

 

Cement margin to improve in late 2016. For cement producers, there is concern about potential local price competition from new supply amid fragile demand. However, we expect prices to strengthen in tandem with demand in late 2016. In 4M16, local cement price dropped by 5% YoY, in line with our estimate, after -4% YoY in 2015. The plunge in spot coal price of 14% in 2016TD will help lower production costs this year, as cement producers typically lock in coal price 6-12 months in advance. 

 

Top picks: SCC and DCC. With slow local demand revival in the near term, we prefer SCC (solid chemical spreads and equity income from new capacity, and gain on weak THB/US$) and DCC (wider ceramic tile margin from low fuel costs), both of whom will enjoy better growth than SCCC (pure cement player).