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Siam Cement

Key takeaways from NDR in HK

Siam Cement Plc (SCC)

Investment thesis

The information we grabbed during the NDR to Hong Kong last week reaffirms our view that SCC is one of the best plays on ASEAN market expansion. Its two core strategies, expansion in ASEAN and increasing the proportion of HVA products and services in the sales mix, should empower the firm to deliver high and sustained growth over the long-term. Our BUY rating stands with a YE14 target price of Bt500.

Bullish on Chemicals

SCC reaffirms a bullish outlook for its Chemicals business. The firm believes that olefin spreads are in mid-cycle and will rise further for at least the next three years, as global demand is expected to grow 4-5% per annum, while supply should increase by 3% a year during 2014-15, by 2% in 2016 and by 4% in 2017. SCC expects the HDPE-Naphtha spread to gradually fatten by around US$50-100/tonne a year and peak at a level fatter than the last cycle peak of $700-750/tonne in early 2008.

Besides spread expansion, the debottlenecking of Chandra Asri (to be completed in 2015) and the greenfield petrochemical complex in Vietnam (tentatively scheduled to start up in 2019) will add to the top-line.

Cement soft in short-term, but long-term outlook is good

Domestic cement demand is expected to post growth of 4% YoY for 1Q14. Growth will probably decelerate in 2H14, due to the slowdown in provincial property markets and the absence of any new state infrastructure projects since House Dissolution in Dec 2013. Next year may be even worse. If the political chaos continues and there is no functional government until 2H14, cement demand growth in 2015 may be flat at best. Prices may also come under pressure from soft demand in the face of 3.5mt of new supply from TPIPL next year.

The Cement business should start posting strong growth in FY16 onward, led by capacity additions from new plants in Cambodia, Indonesia and Myanmar with a combined capacity of 4.5mt, equal to 19% of SCC's current capacity. The scope for growth in these nations looks substantial, given annual per capita cement consumption of only 70kg in Myanmar, 200kg in Cambodia and 250kg in Indonesia, much lower than Thailand's 600kg or Vietnam's 450kg.

Paper growth to be slight this year; should start shining in FY16

Packaging paper, which comprises 82% of Paper EBITDA, is expected to grow slowly in line with GDP, while Fibrous chain should report a flat performance, as it is still in the process of transformation, which will take about two years. Over the long-term, the Paper business driver will be margin expansion. After the transformation of the Fibrous chain, we expect margin to fatten substantially—new product applications have much higher value than printing paper. The margin for Packaging Paper should also expand on integration into downstream production and the provision of total packaging paper solutions to customers.

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