Construction Materials

Construction Materials 

 

The Business sentiment Index rose in Sep-Oct, good news for local demand. The lag between results from stimulus plus seasonality suggest muted sales volume for the sector in 4Q15F, with recovery from 1Q16 as demand gets back on its feet with more public spending. The government has outlined a stimulus package of Bt122bn and a large Bt544bn investment budget (+21% YoY) in FY2016 and this will spur more private investment. With fuel prices still low and product prices more stable as demand picks up, margin is set to improve in 2016. Our top pick is SCC, which is looking at the best 4Q15F with a good 2016F and attractive valuation. 

 

Sentiment revived in Sep-Oct, demand to recover in 1Q16F. In Oct, the Business Sentiment Index (BSI) picked up for the second month to 50.2 points from 47.3 points in Sep, reflecting hopes of improvement after the government outlined a stimulus package and a drop in retail gasoline price. This is a leading indicator for better sector sales volume. Given the lag effect of stimulus plus seasonality (harvest season), we expect 4Q15F sales volume to be lackluster - slip QoQ on seasonality and flat or drop slightly YoY (close to 9M15’s cement and ceramic demand growth of -1% YoY and -7% YoY) - before recovering from 1Q16F.  

 

Demand to return in 2016F. In 2016F, we expect cement demand growth of 3% (vs 0% in 2015F) with ceramic tiles demand growth of 3% (vs -5% in 2015F). This will be backed by public investment growth of 10% and private investment growth of 2% in 2016, based on SCB EIC. The primary boost next year will come from more rapid disbursement of the government budget. This will indirectly stimulate private investment and thus demand for cement and other building materials.  

 

Most of the new Bt122bn government stimulus package (1% of GDP) - Bt60bn for village funds, Bt38bn for community fiscal measures, and Bt24bn for small public investment projects - will be disbursed in 4Q15-1Q16. Of this, Bt40bn (33% of budget), mostly for village funds, was disbursed as of Nov 23, 2015 (Figure 3). Adding to this is the Bt544bn allocated for investment in the FY2016 government budget of Bt2.72trn (Oct 2015-Sep 2016). This is a 21% jump from the 1% growth in the FY2015 budget. The portion designated for investment in the budget was 20% in FY2016, up from 17% in FY2015.  

 

Wider margin in 2016F. Sector margin will be healthier in 2016F, backed by the continued fall in fuel costs, stable prices and better product mix. The drop in spot coal and oil prices of 17% YoY and 47% YoY respectively in 2015TD will help lower production costs in 2016F: Cement producers typically lock in coal price 6-12 months in advance, and, for ceramic tile producers, natural gas price lags oil price by 6 months on average. In 2015TD, local cement price slid 3.5% YoY but was flat QoQ in Oct-Nov; prices for local ceramic tiles were relatively unchanged. With better demand ahead, local price should gain more stability. Backed by a steady rise in local demand, low-margin exports will come down, bulking up the sector’s margin going forward. 

 

Top pick is SCC: 1) It has underperformed the SET by 6% over the past three months, pricing in its weak 3Q15 (one-time FX loss from unwinding hedging of Bt1.5bn and inventory loss of Bt2.2bn). 2) It is set to report the sector’s best 4Q15F earnings, up YoY and QoQ (no repeat of the FX and huge inventory loss, plus seasonal dividend income), with 2H15F dividend yield of 2.2%. 3) LT earnings will improve on the chemical up-cycle, better cement contribution in Thailand and new overseas projects boosted by robust ASEAN growth in 2015-17F.  4) Valuation is attractive, trading at 13x 2015PE and 11x 2016PE (below its 7-year PE of 14x).