Key takeaways from NDR in Singapore. Last week, we arranged a non-deal roadshow in Singapore with SCC, led by Khun Nithi Patarachoke (VP Cement and Building Materials, Domestic Market), Khun Kulachet Dharachandra (Corporate Planning Director) and the IR team. Management seems positive towards the short-term outlook, with cement and building materials units already at bottom and an improving chemical unit. Investors were impressed by its concrete LT plans for all business units.
LT plans. These include expansion into ASEAN and a higher portion of HVA (high-value-added) products and services (34% now, rising to 50% over the LT). SCC has set capex at Bt40-50bn/year for the next five years. Of this, ~50% will be invested in cement and building material units (new cement plants and buying building materials assets), and the rest in the chemical (Vietnam chemical complex and debottlenecking of Chandra Asri) and paper (packaging solution and improving productivity in fibrous chain) units. It maintains its dividend policy at 40-50% of net profit.
Cement and building material unit (43% of 9M14 earnings).
SCC said domestic cement demand hit bottom at -3% YoY in 3Q14, improving to flat growth in Oct 2014. It expects local cement demand to grow at least 5% in 2015 (vs. 7% in 2009-13) from 0% in 2014F thanks to a return of government projects (30% of usage) from normal budget disbursement, growth in commercial projects (20% of usage) after the appointment of a BOI board, plus greater construction permit approvals and better sentiment. It also expects residential use (50% of usage) to improve, particularly for developer-initiated projects (40% of residential) with a return of presales, but it does not expect owner-built housing (60% of residential) to grow much given the fragile farm income and high household debt. Local building material demand is set to grow at least 5% in 2015 from -4% in 2014F.
Government disbursement for the Bt2.4trn in infrastructure projects is expected at earliest in late 2015. The direct impact on cement usage is not high (~8-10mn tons over 8-10 years); indirect impact is much larger via stimulating private investment.
Local cement price will be firm, backed by tight industry utilization rate at 85-90% with minimal impact from TPIPL's incremental supply (5% of demand in 2015F).
Cement production cost per unit is set to be unchanged in 2015, with lower coal costs (35% of cost) offset by a potential rise in electricity cost (35% of cost).
Construction of its new cement plants is on schedule, adding 6.3mn tons to cement capacity: 0.9mn tons in Cambodia (2Q15), 1.8mn tons in Indonesia (3Q15), 1.8mn tons in Myanmar (2Q16), and 1.8mn tons in Laos (2Q17).
SCC will enjoy double-digit cement demand growth as supply remains limited in Cambodia, Myanmar, and Laos (all net importers). To lower its logistics cost, it can use these overseas plants to serve demand based on location rather than country; for example, its Laos plant is much closer to northeastern Thailand (100km) than its Saraburi plant is (400km). For Indonesia, though there will be more supply over the next few years, the impact on its new cement plant is limited, given: 1) 50% captive demand from its RMC and lightweight concrete block plant; 2) 50% is sold via its distribution channel (Kokoh), with just 2% of that depending on local demand.
SCC conservatively expects to achieve the same margin at its overseas plants as Thailand's, thanks to higher ex-factory selling price (US$60-75/ton vs. Thailand's local price of US$60/ton and export price at US$45/ton), relatively the same or cheaper production costs, though initially operating costs will be higher.
After the startup of new overseas capacity, with the lower logistics costs, SCC will gain because a portion of the low-margin export sales (4mn tons now) will be instead directed to the local market, where margin is higher (+6.3mn tons, +40% to current local sales volume of 16mn tons). The remaining capacity in Thailand can serve local demand over the next 5-10 years.
Of global ceramic players, SCC is #1 in terms of capacity but #6 in terms of revenue. Longer term, it plans to rationalize product mix in each country.
SCC is an integrated player in ASEAN, providing structure (cement), and building materials and distribution, providing more value than would just one activity alone.
Chemical unit (35% of 9M14 earnings).
The dip in oil price will give a ST benefit in the form of wider chemical spreads, seen in the PE/PP-naphtha spread of US$810-849/ton (+40% YoY and +20% QoQ) in Oct 2014. Though spread might narrow for the rest of 4Q14 from the drop in product selling prices in tandem with the dip in feedstock costs, it should be somewhat better than 3Q14's US$691-716/ton from a favorable demand/supply picture. The inventory loss should be manageable at Bt500-700mn in 4Q14. Its chemical sales volume will be solid, as some buyers delayed shipments from late 3Q14 (when prices began to trend down) to 4Q14.
PE/PP spreads (70% of its consolidated earnings) are slightly above mid-cycle and SCC expects to see spreads widen further given firm demand growth of 4% p.a. (consumer and capital goods) and limited new supply growth of 3-4% p.a. through 2017. Recovery of PVC spreads (30% of its consolidated earnings) will take at least six months in the presence of weak demand on low construction activities in China and high EDC costs. For its associates, MMA spreads will be healthy from firm demand in consumer and capital goods, while BD and PTA spreads will be weak in the ST from weak rubber prices and high incremental supply from China.
Progress of investments: The debottlenecking of Chandra Asri (30percent stake), Indonesia's only chemical complex, will add 44% to bring production to 1.3mn tons from 0.9mn with targeted completion in late 2015. The shareholder structure for the new chemical complex in Vietnam (US$4.5bn investment, 1.4mn tons capacity), has been settled: SCC will hold 46%, Vietnamese partners 29% and Qatar Petroleum 25%. SCC will be in charge of operations, Qatar Petroleum will provide feedstock, both gas and naphtha (flexible feedstock: 0-70% gas and 30-100% naphtha), and the Vietnamese partners will handle local issues and regulations. It is waiting to open bidding for contractors and discussing the financing with lenders, expected to wind up in 1H15. The startup of new plant is planned for in 2019.
Paper unit (11% of 9M14 earnings).
Packaging chain (80% of earnings): SCC expects high demand regional growth with greater expansion into packaging solutions, both paper and non-paper packaging (plastics). The fibrous chain (20%) will be moved to more high-margin HVA products after completion of the investment from Nippon Paper (30percent stake) in 2014.
BUY; SOTP PT of Bt520. Time to accumulate: 1) 8% underperformance to the SET over six months; 2) YoY and QoQ earnings growth in 4Q14F: QoQ on seasonal dividend income and better chemical spread and volume and YoY without last year's chemical unit shutdown; 3) attractive valuation, trading at 14x 2015PE against 2-year EPS growth of 17%, from wider chemical spreads, higher non chemical volume and inorganic growth from new investments in ASEAN.
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