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Siam Cement

Bolstered by petrochemical upcycle BUY

Siam Cement Plc (SCC)

Bolstered by petrochemical upcycle

Event with SCC. We arranged an event that brought together SCC management, led

by Khun Chaovalit Ekabut (Vice President Finance and Investment & CFO) and Khun

Cholanat Yanaranop (President, SCG Chemicals), and local institutional clients to

discuss the company's petrochemical outlook and strategy. Management believes the

petrochemical upcycle will be present for the next few years. It also provided an update

on challenges to incremental supply from new production processes, and its LT plan to

focus on high value added (HVA) products & services and ASEAN expansion.

The petrochemical cycle generally covers 7-10 years, with the most recent trough

in 2011-12. SCC thus expects the ethylene and propylene upcycle to continue

through 2017, undergirded by favorable global demand and supply balance.

Demand for 2014-16 is expected to grow 4% p.a., greater than the growth in

supply of 2-3% p.a. In 2017, SCC expects supply growth at 4% (though nameplate

capacity for new capacity would add 6%) in view of potential delays of 2-3 years

from permit delays, execution risk and feedstock security.

PVC demand growth is forecast at a healthy at 3-4% p.a., with concerns about

oversupply eased by environmental issues with regards to the calcium carbide

process in China. PVC price should be firm, but high EDC cost may make a shortterm

dent in PVC spread.

Spreads at associates for BD, PTA and MMA remain weakened by fragile demand

amid high incremental supply. However, based on historical patterns, spreads and

earnings from its associates eventually move in tandem with its consolidated

earnings (ethylene/propylene/PVC chains).

Naphtha will continue to be major feedstock for ethylene and propylene

production in 2018. Of total ethylene capacity in 2018, 48% will come from

naphtha, followed by 43percent from conventional gas, 5percent from coal, methanol and

others, and 4percent from shale gas. Of total propylene capacity in 2018, 53% will come

from naphtha, 30percent from refinery, 11percent from propane (PDH process) and 6percent from

coal, methanol and others.

There are many challenges ahead from new production processes in the chemical

industry. The new processes and challenges include: 1) Shale gas - delayed license

approval on environmental issues and uneconomical bulk transportation. 2) coalto-

olefins (CTO) - high investment cost, remote location far from demand, water

supply availability, and environmental concerns. 3) methanol-to-olefins (MTO) -

feedstock security as it requires a substantial amount of imported methanol.

4) propane dehydrogenation (PDH) - high feedstock cost during winter season due

to heating demand.

SCC continues to keep ASEAN countries as its main investment focus. It is working

on developing a cracker in Indonesia and adding a cracker in Vietnam from the two

it already has in Thailand. Chandra Asri cracker in Indonesia (acquired in 2011) is

undergoing de-bottlenecking to raise upstream capacity (ethylene/propylene) to

1.3mn tons from 0.9mn tons, with target completion in 2015. For Long Son

Petrochemical cracker in Vietnam, it has signed a long-term feedstock and land

lease agreement and appointed a financial advisor. It is in the process of bidding

for equipment and financing. Assuming everything goes as planned it expects

completion of this project in late 2018. Having crackers in three locations will give

synergy in terms of coordinating feedstock, supply chain, product sales, and


SCC plans to raise competitiveness and reduce the swings inherent in commodities

by adding more HVA products and services. Of its 2013 chemical sales, 50percent from

chemical subsidiaries and associates (100% portion).

Maintain BUY. We see the recent dip in share price of 5% over the past week as a

buying opportunity ahead of the good 1Q14F earnings (up YoY from wider chemical

spreads and QoQ from seasonality and no maintenance shutdown of MOC). Valuationwise,

SCC is trading at 12.5x 2014 PE (+0.5SD. over its 10-year PE at 11x), undemanding

against its EPS growth of 16% in 2014-16, brought by wider chemical spreads, higher

non-chemical volume and inorganic growth from new investments in ASEAN.

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