Siam Cement

Siam Cement Plc (SCC) 

Investment thesis

We believe impressive 4Q14 results constitute only the introduction chapter of SCC’s long-term growth story. The Chemical business should benefit from an industry super-cycle, so continue to deliver impressive performances, while the Cement-Building Materials and Paper businesses are recovering. On this growth path, there may be occasional hiccups, such as losses during plant start-ups, but they should be viewed simply as noise, we believe. The long-term growth outlook is solid. Our BUY rating stands with a YE15 target price of Bt540.

4Q14 recap

SCC posted a 4Q14 net profit of Bt8.8bn, up by 10.6% YoY and 12.9% QoQ. Excluding non-recurring items (inventory gain/loss, FX gain/loss and income from insurance payouts), core profit would be Bt11.6bn, up by 57% YoY and 62% QoQ. The YoY increase was due to a higher Chemical profit, while the QoQ rise was the result of seasonal dividend income.

Chemical continues profit driver

Despite a huge inventory loss of B2.9bn, Chemical posted net profit growth of 58% YoY to Bt3.5bn, driven by stronger sales volume and spreads for downstream products (PE, PP). The sales volume of Polyolefins increased 27% YoY to 473k tonnes in 4Q14, due to a shift in orders from 3Q14 and the low base set by a plant shutdown last year. 1Q15 should be another strong quarter. Although we expect slimmer QoQ spreads, the inventory loss should be shallower, while customer restocking should sustain strong sales volume. Over the long-term, the Chemical business should remain a profit driver through to 2018, thanks to tightening olefins supplies.

Cement is recovering but new plants would be headwind

Domestic cement demand in 4Q14 dipped 3% YoY, due to lower demand for both residential (-3%) and commercial (-8%) construction. But there is now a nascent demand recovery in the public sector—it was flat in 4Q14 and should start rising soon. SCC expects cement demand growth of 6% this year; most of it will be in 2H15. The cement price dipped from Bt1,950-2,000/tonne in 3Q14 to Bt1,900-1,950/t in 4Q14, as demand softened. We aren’t concerned about prices, despite new supply, as we expect demand growth to absorb the new supply. The only headwind to earnings, in our view, is losses from depreciation expenses at SCC’s new plants in Cambodia (2Q15) and Indonesia (3Q15) during ramping up phases.

Building Materials—soft domestic, healthy in ASEAN

Domestic demand for housing products fell 12% YoY, while demand for ceramic tiles slipped 4% YoY. The weak demand climate is likely to persist through 1H15. A recovery is expected to start in 2H15 (a lag of 3-6 months after the cement recovery). On the other hand, SCC’s businesses in ASEAN are growing well. Exports increased 25.7% YoY, while sales at its ex-Thailand operations in ASEAN grew 14.7% YoY.