Siam Cement

Weak 3Q14F net profit of Bt7bn, -29% YoY and -18% QoQ. The YoY drop reflects: 1) no extra gain from the revaluation of its investment of Bt1.7bn as in 3Q13; 2) the absence of 3Q13’s Bt840mn inventory gain from its chemical unit; 3) a slight decline in contribution from cement and building materials (lower sales volume) and paper (maintenance shutdown) units. The QoQ fall comes primarily off the absence of seasonal dividend income. Earnings will be released on October 29.

3Q14F highlights. Cement and building materials unit (45% of 1H14 earnings): With few new projects, we expect local cement and building material sales volume to slip 3% YoY (vs. +2% YoY in 1H14) and 5% YoY (vs. -7% YoY in 1H14), respectively. Product selling price is expected to be high for both cement (gradual price hike since 2Q13) and ceramic tiles (change in product mix to mid- to high-end market in 1H14). Chemical unit (28% of 1H14): We expect no material inventory gain/loss in 3Q14 vs. the inventory gain of Bt840mn in 3Q13. PE/PP-naphtha spreads continued to widen to US$685-710/ton (+20% YoY and +10% QoQ), amid gradual improvement for PVC-EDC/ethylene 

(-26% YoY but +6% QoQ) and associate spreads (better BD/MMA-naphtha spreads with weak PTA-PX spread). PE/PP sales volume is expected to be stable with a rise in PVC sales volume QoQ after the maintenance shutdown in 2Q14. Paper unit (11% of 1H14): Lower contribution on a planned maintenance shutdown.

Better 4Q14 and 2015: QoQ from seasonal dividend income and YoY from more contribution from the chemical unit without last year’s 45-day maintenance shutdown of MOC, plus a slight improvement in cement and building material sales volume on greater government disbursement and better sentiment. In 2015, SCC expects local cement and building material demand to grow ~5%, led up by the return of private and public investment. The favorable demand/supply picture will widen PE/PP-naphtha spread, with gradual improvement of PVC and associate spreads. Note that in 2015 SCC will start to book contribution from new capacity, specifically 2.7mn tons (+11% to capacity) from new cement plants in Cambodia and Indonesia in 2Q15-3Q15, followed by new packaging production lines (+17% to1 capacity) in 4Q14.

Maintain BUY with a mid-2015 SOTP PT of Bt520. SCC share price has dipped 7% and underperformed the SET by 11% over the past three months, as the market factors in its weak 3Q14 earnings. We expect a better 4Q14, both QoQ from seasonal dividend income and YoY from last year’s chemical unit shutdown. SCC is also attractive over the longer term, trading at 14x 2015PE against its 2-year EPS growth of 18%, brought by wider chemical spreads from favorable demand/supply, higher non-chemical volume and inorganic growth from new investments in ASEAN.