Siam City Cement

Siam City Cement Plc (SCC) 

 

SCCC announced the investment in a new cement plant in Cambodia that we expect will add 3% (Bt200mn) to profit annually from 2018 onwards. In 2015TD, SCCC’s share price has underperformed the SET by 10%, pricing in its weak 1H15. Thus far in 3Q15 signs are better that cement prices are stabilizing on expectation of better local sales volume YoY in 2H15 off last year’s low base. We like SCCC as a proxy for the revival of cement demand, with a better margin in late 2015 and 2016. BUY with a new mid-2016 SOTP PT of Bt440. 

 

First overseas project in Cambodia. SCCC’s board last week approved investing in a JV, Chip Mong Cement Corporation Limited. It will take 40% (US$60mn) of the registered capital of US$150mn and with Chip Mong Group Co. taking 60% (US$90mn). The plan is for this JV to build and operate a 1.8mn tons p.a. cement plant in Cambodia. The transaction is expected to be completed in Dec 2015 with startup in early 2018. SCCC is also studying new cement plants in Myanmar, Laos, and Vietnam.  

 

Comment: Its target project investment of US$250-260mn implies a reasonable investment cost of US$140/ton. We see high potential cement demand in Cambodia, which is now a net cement importer with demand growth in the double digits for the past few years. SCCC exports more than 1mn tons to Cambodia now (30% market share). The new plant will cut logistics costs and thus give it a better margin. Over the longer term, we estimate this plant will add 3% to its profit or Bt200mn/year. 

 

1H15 recap. Its 1H15 earnings dropped 14% YoY, hit by weaker sales and narrower margin. Revenue slipped 1% YoY, with a drop in local sales volume (-1% YoY) and selling price (-5-6% YoY) partly offset by higher export volume. Gross margin fell 80bps YoY to 46%: local cement price was lower and product mix poorer (higher low-margin exports). This outdid the drop in fuel costs: coal (45% of cost) and electricity (30%). 

 

2H15F and 2016F outlook. SCCC reports that local cement price has become more stable in 3Q15TD, halting a decline seen since 2Q14. In 2H15, we expect to see better domestic demand growth off last year’s low base (-2% YoY in 2H14) and the ramp up of government spending. However, 2H15 earnings will be down HoH from seasonal maintenance shutdowns and weak sales volume. In 2016F, SCCC expects domestic cement demand to grow at least 3-4% YoY, led by the government segment. It will take longer for demand from the residential and commercial segments to come back. Margin outlook is brighter, backed by: 1) higher domestic sales volume; 2) more favorable product mix (lower exports); 3) stable or better local cement price in tandem with local demand; 4) a continued drop in coal cost: spot price is -13% YoY in 9M15; SCCC locks in coal needs in advance, so the actual drop in costs will be seen in 2016F.  

 

Maintain BUY. To reflect weak the 1H15, we cut 2015 earnings by 20%, factoring in lower local cement price growth (-6%) and local demand growth (+1.5%). SCCC’s recent share price underperformance has priced in its weak 1H15. We like SCCC as a proxy for the revival of local cement demand with a better margin in late 2015 and 2016. We maintain BUY with a new mid-2016 SOTP PT of Bt440 (from Bt500 at end-2015). Key risks are changes of cement demand and fuel costs and price competition.