Siam Cement

Siam Cement Plc (SCC) 

 

Last week, we arranged an NDR and corporate access day in Singapore with SCC, led by Khun Chaovalit Ekabut, CFO, Khun Kulachet Dharachandra, Corporate Planning Director, and the IR team. The meeting was attended by 24 companies and 33 fund managers. We like SCC, which is situated to benefit from: 1) a chemical up-cycle, better cement contribution in Thailand and new overseas projects over the next few years; 2) low oil price (aiding both chemical and non-chemical units); 3) weak baht, as a net exporter. BUY.  

 

Long-term plan. SCC intends to expand throughout ASEAN with a higher portion of HVA (high value-added) products and services (37% now). It has budgeted CAPEX at Bt50bn/year for the next five years. Of this, ~50% will be invested in cement and building material units (new cement plants and buying building materials assets), and the rest in the chemical (Vietnam chemical complex and debottlenecking of Chandra Asri) and paper (packaging solution and improving productivity in fibrous chain) units. It maintains its dividend policy at 40-50% of net profit. 

 

Chemical unit. The favorable global demand and supply status will continue to at least to 2018, with supply growth at 3-4% p.a. vs. demand growth at above 4% p.a. The upcycle will help to widen spreads further. The dip in oil price will also fatten spreads and improve cost efficiency. As a net exporter (60% of sales), it in addition gains from the weak baht. In 4Q15, Indonesia’s only chemical complex - Chandra Asri, in which it holds 30%, - will shut down for a 40-day debottlenecking, raising capacity by 44% to 1.3mn tons p.a. The plant modernization and lift in capacity to world scale will improve earnings contribution in 2016. Construction bids have opened for Vietnam’s new and only chemical complex (US$4.5bn investment; 46% stake for SCC, 29% for Vietnamese partners, and 25% from Qatar Petroleum) and it is preparing the funding. These are set to complete in early 2016, with project startup in 2020.  

 

Cement and building materials unit. The startup of its new cement capacity of 6.3mn tons (26% of its capacity) in Cambodia, Indonesia, Myanmar and Laos in 2015-17 are on course. These will gain from high long-term demand potential given the lower cement consumption per capita than Thailand with a healthy margin similar to local sales in Thailand. SCC estimates it will take six months to a year to ramp up new cement plants. When these are up and running, it will gradually change some low-margin cement exports from Thailand (4.5mn tons now; export price at US$45/ton) into sales on the high-margin local market (local price at US$60/ton).  

 

 Thailand. SCC maintains local cement demand growth target of 3% in 2015 (vs. 0% in 1H15), with better 2H15 growth off last year’s low base (-3% in 2H14). Government spending (30% of total) will lead the improvement. For the commercial segment (20% of total), existing projects are ongoing but new projects will be monitored after the recent unrest in Thailand. It will take time for the residential segment (50% of total) to recover from low crop prices upcountry despite better presales in Bangkok. Local cement price dropped slightly in 1H15 on weak demand but has stabilized in 3Q15TD. With lower production costs (electricity and coal costs), cement margin remains healthy. Longer term, SCC expects local cement demand to normalize with mid-single digit growth.  

 

 Cambodia. Adding to its first production line of 1.1mn tons, SCC started its second production line of 0.9mn tons in mid-2015, with commercial runs expected within the next couple months. Local cement demand in Cambodia is growing in the strong double digits each year to now stand at 4mn tons. With local supply at just 3mn tons, 2mn tons from SCC and 1mn tons from a new player, it is running full out and imports of up to 1mn tons are needed annually.  

 

Indonesia. Its greenfield cement plant of 1.8mn tons will start up in late 3Q15, with commercial runs scheduled for end-2015. The cement market in Indonesia is 

undersupplied (demand growth -5% in 1H15), but the competition varies from city to city. SCC has done its homework on this and to lay the groundwork, it exported 30,000 tons/month from Thailand beginning in 4Q14 in order to set up a network to handle the output of this plant. Of this new capacity, 50% is captive for its own ready-mix concrete and building materials plants and the other 50% (0.9mn tons, 2% of local demand) will be sold as bag cement via its distributor Kokoh and other points in its network. It will focus its market on areas close to its plant in Sukabumi, mainly in Bogor, and Bandung, where SCC is the only cement player – meaning competitors face shipping hurdles. SCC believes LT cement demand will revive, led by government infrastructure projects.  

 

 Myanmar and Laos. Its new greenfield cement plants in Myanmar (1.8mn tons) and 

 

Laos (1.8mn tons) are under construction and will start up in mid-2016 and mid-2017, respectively. Demand in Myanmar grew in the double digits and in Laos high single-digits, and both countries are net cement importers. 

 

Packaging unit. SCC expects the packaging business to enjoy high growth in regional markets, specifically Thailand, Vietnam, and Indonesia, as industrial production bases. It will expand into packaging solutions, both paper and non-paper packaging (plastics). The fibrous chain will be moved to more high-margin HVA products after completion of the investment from Nippon Paper (30% stake) in 2014.