Construction materials

Still not reflecting investment recovery

Construction materials

- Business sentiment picking up. The Business Sentiment Index (BSI) picked up to 49.6

points in July from 48 points in June, reflecting the greater political stability, a functional

government and less uncertainty about government policy.

- Clear revival in demand next year. The FY2015 budget is now voted in and government

budget disbursement should return to normal levels. At the same time, private investment is

set to get back on the road, moving at a moderate pace until demand recovery is clearly on

board. It is positioned to benefit from progress on the government’s 8-year Bt2.4trn

infrastructure plan as public investment (30-40% of cement usage) helps stimulate private

investment, i.e. residential property and commercial projects (60-70% of cement usage). A

rise in cement demand is typically followed by rise in demand for building materials within six

months. In 2015, SCB EIC projects public investment growth of 16.5% (from +1.5% in 2014F)

and private investment growth of 13.0% (from -0.5% in 2014F) off the low base from the

political instability plus greater government budget disbursement and better investment

sentiment. Though sales volume growth will not be very interesting in 4Q14F, seasonally flat

QoQ but up slightly YoY upon gradual return of public and private investment, for 2015F we

estimate sales volume growth of 5% for cement and ceramic tiles (vs. 0% in 2014F and +1%

and -3% respectively in 7M14).

- Sector margin still favorable, backed by: 1) high product selling price (+2% YoY for cement

price and flat YoY for ceramic tile price in 8M14); 2) continued low fuel costs, with lower coal

costs (spot coal price in THB terms -9% YoY in 8M14) and relatively unchanged natural gas

costs (oil price in THB terms flat YoY in 8M14). Cement producers typically lock in coal price 6-

12 months in advance, and natural gas price lags oil price by 6 months on average.

- Investment recovery ahead, but not yet in this sector. The positive developments

related to public and private investment should support price performance for investmentrelated

stocks, but the construction materials sector has yet to reflect this. Over the past

three months, the Construction Materials sector has picked up by only 4% (or 2% if excluding

TPIPL) compared to 11% for contractors, 10% for property development and 8% for the SET.

- Top picks: SCC and SCCC. SCC is our lead pick, as 1) one of the sector’s laggard plays (SCC

+2% vs. sector +4% and SET +8% over the past 3 months); 2) better 4Q14 earnings momentum,

both QoQ from seasonal dividend income and YoY from without the MOC maintenance

shutdown in 4Q13; 3) the sector’s most attractive 2-yr PEG at 0.8x (14x 2015PE against its 2-yr

EPS growth of 18%), brought by wider chemical spreads from favorable D&S, higher nonchemical

volume and inorganic growth from new investments in ASEAN. Note that, of SCC’s

1H14 earnings, 45% came from its cement and building materials unit, 28% from chemical,

11% from paper, and 16% from others. SCCC is our second pick as the sector’s most laggard

(SCCC -2% vs. sector +4% and SET +8% over the past 3 months) and a proxy for the better

cement demand and healthy margin next year.