Siam Cement

Siam Cement Plc (SCC)

After attending SCC’s Paper event yesterday, we are now more positive on the outlook for its Paper business (which currently comprises about 15% of the conglomerate’s sales and profit). The long-term growth of this business may be stronger than our current assumption. In our view, the highlight of the event was the announcement of plans to transform the Paper division by replacing its sunset printing and writing (P&W) paper production with non P&W products, which have much greater potential for growth. We think this is an excellent strategic move that strengthens SCC’s long-term outlook. Our BUY rating stands with a YE13 target price of Bt520.
Transformation of P&W paper
Given diminishing demand for P&W paper with the emergence of cheap digital reading devices, SCC has broadened its P&W Paper division to Fibrous Chain. Going forward, the firm will use pulp not only to make P&W paper, but also for high-growth applications, such as Dissolving Grade Pulp (raw material for textile rayon, melamine, food chemicals, cosmetics and pharmaceuticals) and Machine-Glazed Paper (raw material for a wide range of applications—food wrap paper, medical packaging, laminated floors, furniture veneers and image transfers on textile). SCC expects P&W paper to decline from 80% of Fibrous Chain output currently to 30% following the transformation, expected within 2-3 years.
Small near-term contribution, but we buy the idea
The firm is upgrading its existing pulp facilities to produce Dissolving Grade Pulp with a capacity of 96K tonnes/year, starting 4Q13, and has established a 45:55 JV with Nippon Paper to produce machine-glazed paper with a capacity of 43K tonnes/year, COD in 2014. Although, in the short-term, these ventures won’t contribute much, particularly in percentage terms, we really like the transformation theme from sunset business to high growth and high value businesses. We anticipate that there is more to come and that the contribution will be substantial in the future.
Packaging paper remains key growth driver
Packaging paper—responsible for about 75% of Paper EBITDA—will remain the key growth driver, thanks to: 1) strong demand in the face of limited new supply in ASEAN countries, 2) capacity expansion and 3) a rising proportion of HVA products and services. SCC expects ASEAN demand to rise 5% in FY13, while supply may inch up only 1-2%. With regard to capacity expansion, the firm will focus on vertical integration into packaging production. The capacity of upstream packing paper sheets now stands at 1.88m tonnes/year, of which only 0.86m tonnes/year (45%) can currently be integrated into packaging production. Packaging plants in Indonesia are priority targets, due to robust consumption growth.