Siam Cement

Takeaways from SCG's Chemical Day

Siam Cement Plc (SCC)

Investment thesis

The information we grabbed from the Chemical Day, organized by SCC, at its plants in Rayong yesterday reaffirmed our thesis that 1H13 is a good time to take or increase positions in the stock ahead of a chemical spread up-cycle taking off. We expect robust YoY earnings growth to commence in 4Q12 and be sustained through FY13 and a three-year EPS CAGR of 25%. SCC's valuation remains attractive, despite its recent share price rally. It currently trades at 1SD above its long-term mean PER, but we think it deserves a higher multiple, as: 1) it is at the start of an earnings super cycle and 2) that its bottom-line will tend to be more sustainable than in the past, due to a higher proportion of HVA products in the sales mix. BUY!

Management is positive on spread outlook

Mr Cholanat Yanaranop, president of SCG Chemicals, shares our view that the chemical trough is passing and a spread uptrend is starting. He sees signs of improvements to both prices and spreads. In the short-term, spreads will be supported by a supply correction resulting from plant shutdowns in Japan; demand-driven effects should manifest in 2H13. This uptrend looks to be sustainable for the next several years—demand is expected to grow faster than supply until 2016 or 2017.

No concerns about shale gas

Mr Cholanat isn't concerned about new supply that uses shale gas as feedstock and expects that by 2020, shale gas-based crackers will account for only 4% of global Ethylene supply. He also pointed out that shale gas fields have rapid decline rates and that hydraulic fracturing causes significant ground water contamination.

Increasing sustainability through HVA

Although Naphtha seems to have some weaknesses—its price is volatile and tends to increase faster than the price of gas when oil prices surge—it can be cracked to many heavier petrochemical products, such as C3 and C4. In contrast, gas-based and coal-based crackers cannot offer competitive prices or volumes for the two products. Both C3 and C4 can be used to produce many HVA products, the prices of which are much higher and more stable than the prices of commodity grades. The firm plans to increase the proportion of HVA chemical products in its chemical sales mix to 36% by 2017 from 24% currently.

Moving forward through Asean integration

Last year, SCC announced acquisitions and greenfield projects with an investment value of Bt33.6bn in Thailand and Bt30.8bn in other Asean countries. This year, the firm is likely to spend Bt30-40bn, in line with its 5-year investment budget of Bt200bn. Besides expanding its empire, its regional investments will generate economies-of-scale and increase profitability. For example, by having two Naphtha crackers in Thailand and one in Indonesia (Chandra Asri, acquired in 2011), SCC can pool feedstock procurement, boosting its cost competitiveness.