Siam Cement

Siam Cement Plc (SCC)
Investment thesis
SCC remains our favorite long-term play. Despite the slowdown in domestic consumption, the company should still deliver a good 3Q13 profit. We are not concerned about the likelihood of weak 4Q13 numbers as a result of MOC’s planned 45-day maintenance shutdown, as it is widely anticipated and should be priced in. The long-term outlook is very favorable, led by the chemical up-cycle, massive government spending on infrastructure projects and regional expansion. Our BUY rating stands with a YE14 target price of Bt500.
3Q13 preview
On October 30, we expect SCC to report a 3Q13 net profit of Bt9.1bn, up 42% YoY and but down 8% QoQ. Stripping out an accounting profit of Bt1.5bn from a fair value adjustment for the investment in Siam Sanitary Ware & Fittings, core profit would be Bt7.6bn, up 18% YoY but down 24% YoY. The stronger expected YoY number is attributable to better performances across all business units (Chemicals from fatter spreads, Cement from higher prices and volume and Paper from the low base set by fire at a pulp line in 3Q12). The QoQ drop is mainly due to the absence of dividend income from SCC’s stake in Toyota and a weaker Paper performance.
Decelerating cement consumption growth, but price is improving
Domestic cement demand is expected to post growth of 4-5% YoY for 3Q13. That would represent a deceleration from 9.5% in 1H13 in tandem with weakening provincial property markets and slow state infrastructure project construction progress. But demand should still be considered strong, given that it would be a 3% QoQ increase, despite the impact of the rainy season. As such, the ex-factory cement price could still have risen to Bt1,875-1,925/tonne in 3Q13, up by 5.6% YoY and 1.3% QoQ.
Weaker chemical spreads offset by higher volume and stock gains
Although seasonal demand pushed up olefin prices in 3Q13, a faster rising Naphtha price squeezed the HDPE-Naphtha spread to US$571/tonne in 3Q13 (from $585/tonne in 2Q13) and PP-Naphtha spread to $598/tonne (from $617/tonne in 2Q13). However, higher run rates prompted by high seasonal demand and the need to build stocks before the MOC’s 45-day maintenance shutdown in 4Q13 should have substantially reduced the average per-unit conversion cost. Moreover, we expect an inventory gain of Bt300-500m (versus an inventory loss of Bt800m in 2Q13), due to increases in both product and feedstock prices.
Weakening Paper business
The Paper business looks set to continue posting weak results through 2H13. Apart from declining demand for printing and writing paper, SCC’s packaging paper division has suffered from sales slippage, due to lower exports and diminishing price competitiveness against Indonesian producers—the baht has strengthened against the rupiah in recent months.