Siam Cement

Auto & Audio June 11, 2014 00:00

By Bualuang Securities

2,256 Viewed

Cement plant visit

Siam Cement Plc (SCC)

Investment thesis

Last Friday, we visited an SCC cement plant in Kangkoi with an annual capacity of 7.3m tonnes (30% of SCC's total capacity) and returned even more confident that the stock is one of our best long-term core holdings. We were impressed not only by the highly efficient plant, but also by SCC’s efforts to create sustainability. We believe its sustainable business platform will enable the firm to deliver strong long-term growth.

Eco-friendly plant

On arrival at the Kang Koi site, we were impressed with the surrounding environment. A lush mini-forest with clear dust-free air, despite the fact that there is limestone quarrying nearby. The plant manager said that environmental issues are a top priority. For example, if the electrostatic precipitator—which removes dust and smoke—break downs, all production stops until it is working again. Moreover, the firm uses a semi-open cut technique for quarrying, which substantially reduces noise and dust to nearby residents. Also, SCC has rehabilitated old quarrying sites into forest.

Energy cost reductions

There is still scope to trim production costs by using more alternative fuels, such as biomass and industrial waste. At the same level of heat, the costs of alternative fuels are typically 10-15% less than conventional fuels, such as anthracite, lignite or petroleum coke. The proportion of heat combusted from alternative fuels was 17.1% in FY13, up from only 6.9% in FY09. SCC expects this proportion to eventually increase to 30%.

Adding 6.3m tonnes of new capacity over the next three years

SCC's reputation for environmental management eases the way for it to obtain licenses to build and operate cement plants and quarries in other nations. Four new cement plants in neighboring countries will increase its cement capacity by 26% to 31mt over the next three years—a 0.9mt second line in Cambodia in 2Q15, a 1.8mt facility in Indonesia in 3Q15, a 1.8mt facility in Myanmar in 2Q16 and a 1.8mt facility in Laos in 2Q17. Over the long run, we expect SCC to increase cement capacity in these countries further, 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.

Cement demand growth forecast upgrade

Cement demand growth this year is likely to be higher than SCC’s latest guidance of 0%, which is based on the assumption that demand would grow 2% YoY in 1H14 and decline 2% YoY in 2H14. Since the NCPO announced accelerated budget disbursement and its intention to push ahead with public infrastructure projects, we now expect YoY cement consumption growth in 2H14—not a decline. We have, thus, upgraded our demand growth assumptions to 2% for FY14 (from 0.5%) and to 5% in FY15-16 (from 3%). Our FY14-16 profit forecasts inch up 1% as a result.