The Siam Cement Pcl (SCC TB) Tha nachart S ecurities Tha ...

BUY (Unchanged) TP: Bt 610.00 (From: Bt600.00 ) 2 SEPTEMBER 2015

Transfer of Coverage Upside : 23.0%

The Siam Cement Pcl (SCC TB)

CHAK REUNGSINPINYA 662 – 617 4900

[email protected]

The Bluest chip

We maintain our BUY recommendation on SCC and raise our TP to Bt610 from Bt600. We expect a strong petrochemical market, domestic cement demand growth, and an expanding ASEAN footprint to drive a 15% EPS CAGR over 2015-18. We still see the stock as attractive on a 12x forward P/E in light of forecast growth potential.

Most leveraged to infrastructure spending We maintain our positive view on Thailand’s cement demand outlook and forecast a 5.5% volume CAGR in 2015-18. We believe much of the demand growth will be driven by infrastructure spending where we estimate c.60% of new projects will be outside the Bangkok metropolitan area versus less than 40% in the past two years. This should play to SCC’s advantages as it is the sole operator of cement plants in the far North and far South which gives it an $11-18/tonne cost advantage over peers. We see this leading to market share gains for SCC (to 42-43% in the next few years from c.40% now) and EBITDA margin expansion. We also expect a limited impact from TPI Polene’s (TPIPL TB) 4m tpa of new capacity given high industry utilization rates and exports remaining a viable outlet for excess supply.

Foreign expansion raising EBITDA margin We are also positive on SCC’s regional cement expansion as it underscores SCC’s competitive advantages in distribution. In particular, we believe new plants in Myanmar, Cambodia and Laos would not only increase production capacity to capture fast-growing and attractive markets but also significantly reduce transportation and distribution overheads. We estimate savings of $22-38/tonne when these plants are operational, contributing to further EBITDA margin expansion.

Extended chemical up-cycle We see the petrochemical up-cycle as well and truly under way with SCC at the forefront in reaping its rewards. We expect an extended ethylene bull market and forecast HDPE-naphtha spread to remain at over $700/tonne through at least 2018. SCC could also benefit further as spreads shift downstream (HDPE-ethylene) from upstream (ethylene-naphtha) given that its asset configuration and shareholding structure effectively make it a net short ethylene producer and net long derivative producer. We also see SCC continuing to shift production to higher-margin (so-called “HVA”) products. This means total spreads that SCC realizes are likely to be higher — sometimes sharply so — than the average spreads we forecast for bulk chemicals. The key potential downside risk we see is weak co-product spreads.

A core holding We regard SCC’s current valuation as attractive at just 12x forward PE in light of our forecast of 15% four-year earnings CAGR. The stock is also trading in line with its historical average PE and PBV despite a stronger forecast growth outlook. We maintain our BUY call with a 12-month DCF-based TP of Bt610.

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COMPANY VALUATION

Y/E Dec (Bt m) 2014A 2015F 2016F 2017F

Sales 487,545 462,595 504,158 529,429

Net profit 33,615 48,075 50,880 55,164

Consensus NP 43,392 45,878 50,782

Diff frm cons (%) 10.8 10.9 8.6

Norm profit 33,615 48,075 50,880 55,164

Prev. Norm profit 40,614 45,717 52,749

Chg frm prev (%) 18.4 11.3 4.6

Norm EPS (Bt) 28.0 40.1 42.4 46.0

Norm EPS grw (%) (8.0) 43.0 5.8 8.4

Norm PE (x) 17.7 12.4 11.7 10.8

EV/EBITDA (x) 15.1 10.8 10.0 9.1

P/BV (x) 3.4 2.9 2.5 2.2

Div yield (%) 2.5 3.6 3.8 4.2

ROE (%) 19.8 25.0 23.0 22.0

Net D/E (%) 84.6 70.2 59.0 45.1

PRICE PERFORMANCE

(5)05101520253035

350380410440470500530560

Aug-14 Dec-14 Apr-15 Aug-15

(%)(Bt/shr) SCC Rel to SET Index

COMPANY INFORMATION

Price as of 2-Sep-15 (Bt) 496.00

Market cap (US$ m) 16,637.8

Listed shares (m shares) 1,200.0

Free float (%) 67.7

Avg daily turnover (US$ m) 21.0

12M price H/L (Bt) 548.00/430.00

Sector Building Materials

Major shareholder Crown Property Bureau 31.9%

Sources: Bloomberg, Company data, Thanachart estimates

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Please see the important notice on the back page

COMPANY NOTE SCC CHAK REUNGSINPINYA

Most leveraged to infrastructure spending

We expect Siam Cement Pcl (SCC) to benefit more than its peers from the Thai government’s infrastructure spending. This is due to a shift in cement demand along with infrastructure spending moving increasingly into the provinces where SCC has distribution and logistics advantages versus its competitors.

Cement demand to shift upcountry

Delayed growth outlook

We maintain our positive view on the Thai cement sector despite slower demand growth and capacity additions. Given weak private sector demand and the relatively slow implementation by the government of infrastructure projects, we have trimmed our domestic cement demand forecast. Our base-case forecast is now for a 5.5% domestic demand CAGR in 2015-18 versus 7.7% previously.

Despite our more conservative view, we believe this level of demand growth is still enough to keep competition in check in light of additional domestic capacity which we expect to come on line toward end 2015. With currently high utilization rates (85-90%) and potential growth in exports as an additional outlet for excess capacity, we expect relatively mild competition over the next four years.

Ex 1: We Forecast A 5.5% Cement Demand CAGR In 2015-18

2527 28.1

31.234.3 34.2 35.2 36.9

39.542.3

0

5

10

15

20

25

30

35

40

45

2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F

(m tonnes)

Sources: Company data, Thanachart estimates

We are beginning to see the effect of government efforts to boost the domestic economy via public infrastructure spending. According to SCC, cement demand from the government sector grew by c.10% y-y in 1H15. This has helped offset lower cement demand from the private sector (residential and commercial) which turned negative YTD along with a slowdown in private consumption and investment. We believe domestic demand is likely to gather pace from 2H15 onward as more public infrastructure spending gets under way.

Cement demand growth outlook still positive albeit less bullish than before

Cement demand from government projects has grown by 10% YTD

THANACHART SECURITIES | DAIWA CAPITAL MARKETS 2


Ex 2: Cement Demand By Segment Ex 3: Cement Demand Growth By Segment

20%

30%

Residential50%

Commercial, retail

Government

(10)

(5)

0

5

10

15

20

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

(y-y%) Commercial, retail Govt Residential

Sources: Company Data, Thanachart estimates

Sources: NSO, Thanachart estimates Note: Estimated from construction permits by region, 2013 data

Public spending should shift upcountry

We expect an increasing portion of public spending on infrastructure to shift upcountry from the Bangkok area. Over the past few years, much of the infrastructure development has been concentrated in the capital in general, and in the mass rail transit (sky train system) in particular. Meanwhile, dual-track rail, high-speed rail and other such projects have not yet come to fruition and there have been virtually no large-scale infrastructure projects upcountry. The result is that nearly two-thirds of civil engineering projects in 2013 (latest available data) were concentrated in Bangkok and its vicinity. At the same time, the share of civil engineering projects in key population areas such as the North and the Northeast was less than 10% each while in the South it has been at just 1%.

Ex 4: Private Construction By Region (2013) Ex 5: Civil Engineering Projects By Region (2013)

Bangkok and vicinity

42%

Central2%East

18%

West3%

North10%

Northeast12%

South13%

Bangkok and vicinity

64%Central1%

East13%

West4%

North9%

Northeast8%

South1%

Sources: NSO, Thanachart estimates Note: Based on construction permits by area in 2013 (latest available data)

Sources: NSO, Thanachart estimates Note: Based on construction permits by length in 2013 (latest available data)

However, we expect the situation to reverse over the next three to five years, with the Bangkok’s area share of total infrastructure projects declining to just 40% and provincial areas picking up as the main growth driver. The majority of the infrastructure projects that

We expect 60% of new infrastructure projects to be upcountry versus 40% in the past two years



are likely to be bid out are dual-track railways, high-speed railways and provincial highways. The only major projects in Bangkok are mass rapid transit and airport expansions.

Ex 6: Upcoming Infrastructure Spending By Region Ex 7: Upcoming Infrastructure Spending By Project Type

Bangkok40%

Upcountry60%

Railway45%

Highway20%

Airport4%

Mass transit31%

Sources: Company data, Thanachart estimates Note: As measured by budget

Sources: Company data, Thanachart estimates Note: As measured by budget

We see SCC’s domestic competitive advantage as unassailable

In our view, SCC has significant advantages over its competitors because of its production locations distribution, enabling it to dominate regional markets, particularly the North, the South and, potentially in the future, the Northeast. This enables it to maintain market share as well as generate industry-leading profit margins.

Poor rail transportation network working to SCC’s advantage

Thailand has extraordinarily poor rail infrastructure relative to its industrial development. According to the National Statistical Office, rail transportation accounts for just 1.4% of all goods transported as measured by tonnage. Instead, the primary mode of goods transportation is by truck. This is in line with our conversation with SCC which transports almost all of its cement by truck. All this adds up to a highly inefficient logistics network and leads to significant transportation overheads for any manufacturer. Logistics costs are particularly taxing for producers of low-priced, high-volume and heavy products such as cement and concrete. For example, SCC spends almost Bt3/tonne-km to transport cement in Thailand or nearly double the cost of doing so in the US. This means that to transport cement for a mere 100km from its plant in Saraburi to Bangkok, the cost is Bt300/tonne, or more than 15% of its ex-factory prices. Other modes of transportation such as rail and shipping have lower costs per tonne-km but the break-even distance needs to be sufficient to offset the higher handling costs (e.g. loading/unloading).

SCC’s cement transport costs are as much as Bt3/tonne-km



Ex 8: Goods Shipments By Mode Of Transport Ex 9: Transportation Cost By Mode Of Transport

Road88%

Rail1%

Water11%

Air0.02%

10.00

2.12

0.95 0.65

0

2

4

6

8

10

12

Air Road Rail Water

(Bt/tonne-km)

Sources: Ministry of Transport, Thanachart estimates Sources: Ministry of Transport, Thanachart estimates

In our view, SCC enjoys unparalleled advantages over its competitors. The company has the largest capacities outside of Saraburi province in the central region where more than 80% of Thailand’s cement capacity is located. As such, SCC enjoys significant cost advantages over other players in areas furthest away from Saraburi, namely the far North and the far South.

Ex 10: Cement Capacity By Company And Location (end-2015F)

Company Province Region Distance from Capacity Total capacity

Saraburi (km) (m tpa) (m tpa)

SCC Saraburi Central 0 14.2 23.2

Lampang North 540 2.1

Nakhon Si Thammarat South 890 6.9

TPIPL Saraburi Central 0 13.1 13.1

SCCC Saraburi Central 0 14.8 14.8

ACC/JCC Saraburi Central 0 5.0 7.4

Nakhon Sawan North 180 1.2

Petchburi West 280 1.2

Cemex Saraburi Central 0 0.8 0.8

Thai Pride Saraburi Central 0 1.0 1.0

Total

60.3


We can gauge SCC’s relative competitiveness by looking at the cost of transporting cement from Saraburi (where the majority of Thailand’s cement factories are located) and comparing it to the cost of transporting cement from SCC’s nearest plants, if available. For the 15 most populous provinces and assuming a Bt3/tonne-km ($0.085) transportation cost by truck, Bt1/tonne-km ($0.03) by rail and Bt0.7/tonne-km ($0.02) by ship, we estimate that SCC has cost advantages of as much as $18/tonne for provinces in the far South and $11/tonne for those in the far North. For example, if a competitor with a cement plant in Saraburi were to sell cement in Chiang Mai (a major province in the North), it would have to transport it over 600km by rail and perhaps have to pay transportation costs of as much as $19/tonne, or 35% of its ex-factory price. By contrast, SCC would transport the cement from its plant in Lampang, a distance of barely 100km and it would cost just $8.4/tonne.

SCC is the only operator of cement plants in the North and South



Ex 11: Distance And Cost For Cement Transport To Thailand’s 15 Most Populous Provinces

Province Region Population ———— From Saraburi ———— — From SCC plants — Difference

Distance Mode Cost Distance Cost

(m) (km)

(US$/tonne) (km) (US$/tonne) (US$/tonne)

Bangkok Bangkok metro 8.52 112 Truck 9.5 112 9.5 0.0

Nakhon Ratchasima Northeast 2.51 151 Truck 12.8 151 12.8 0.0

Samut Prakan Bangkok metro 1.94 130 Truck 11.1 130 11.1 0.0

Khon Kaen Northeast 1.74 342 Truck 29.1 342 29.1 0.0

Ubon Ratchathani Northeast 1.73 496 Truck 42.2 366 31.1 11.1

Chiang Mai North 1.73 629 Rail 18.9 99 8.4 10.5

Chonburi East 1.61 174 Truck 14.8 174 14.8 0.0

Songkhla South 1.51 1074 Water 21.5 181 15.4 6.1

Nakhon Si Thammarat South 1.49 893 Water 17.9 0 0.0 17.9

Nonthaburi Bangkok metro 1.42 104 Truck 8.8 104 8.8 0.0

Pathum Thani Bangkok metro 1.40 82 Truck 7.0 82 7.0 0.0

Udon Thani Northeast 1.27 453 Truck 38.5 334 28.4 10.1

Buriram Northeast 1.26 283 Truck 24.1 283 24.1 0.0

Chiang Rai North 1.16 709 Rail 21.3 226 19.2 2.1

Surin Northeast 1.12 323 Truck 27.5 323 27.5 0.0

Sources: Company data, Thanachart estimates Note: Distance by road; assuming Bt3 ($0.085)/tonne-km transportation cost via truck, Bt1 ($0.03)/tonne-km cost via rail and Bt0.7 ($0.02)/tonne-km via ship

Laos cement plant should add to SCC’s advantages in Thailand

We expect the new cement plant in Laos (scheduled to start up in mid-2017) to add to SCC’s geographical advantages in Thailand. Unlike plants in Myanmar and Cambodia, which are aimed primarily at serving their respective domestic markets, the new cement plant in Laos is aimed largely at re-exporting back into Thailand. Geographically, the new Lao plant is much closer to major provinces in Northeast Thailand (100km from the border) than the Saraburi plants (600km to the border). This means SCC can serve the large Northeast area from Laos and potentially save a significant amount on transportation costs. We also believe it may enable SCC to increase its market share in the Northeast since it would be the only player with localized production.

We see SCC as the key beneficiary of shifting demand growth

Given the shift in public spending to provincial areas, we also expect cement demand to grow in a similar manner. This would play into SCC’s distribution and cost advantages. We expect two benefits for SCC:

Market share gains: SCC enjoys a natural monopoly in certain regional markets, notably the far North, the far South, and potentially the upper Northeast when its plant in Laos starts up in mid-2017. As we have demonstrated in the figures above, transportation costs to these regions from Saraburi could be prohibitively high, thereby limiting any competitor from being able to enter the market without sacrificing profitability. This means that as cement demand shifts further into these areas along with infrastructure spending, SCC should naturally capture higher market share relative to peers. We forecast SCC’s market share to increase from c.39-40% currently to 42-43% in a few years’ time. We also note that with cement plants in neighboring countries starting up, the effective capacity SCC has for the domestic market would also increase, thereby enabling it to capture more market share as well.

Laos cement plant should give SCC’s advantages in Northeast Thailand

We expect market share gain and EBITDA margin expansion for SCC’s cement business



EBITDA margin expansion: We also expect improved EBITDA margin from cement and ready-mixed concrete (RMC) sales as SCC commands the highest pricing power in areas where demand growth is strongest. Regional expansion (discussed in detail below), should also help to further enhance its margin expansion.

Limited and localized impact from supply growth

We see only a limited impact from TPIPL’s new cement capacity on the domestic market.

Industry utilization rate remains high

We expect the impact of new domestic capacity from TPI Polene’s (TPIPL TB, Bt2.34, NR) new 4m tpa cement plant (due to start up at end 2015) to be limited and largely localized. TPIPL’s capacity is in one location (Saraburi province) and any pricing or volume impacts are likely to be restricted to the central region and the Bangkok area where we expect demand growth to be slower than upcountry. While this could lead to marginal price competition, we do not expect an aggressive price war. The clinker utilization rate for the industry remains high at 85% or above which has helped support strong domestic prices. As such, even with new capacity, we believe the already high industry utilization rate together with demand growth would help keep utilization rates at above 80% for all the players in the coming years. We expect this to help the industry avoid the pricing competition seen back in 2009-11 when utilization dropped to as low as 75%.

Ex 12: Clinker Utilization Rate Remains High, Helping To Support Domestic Prices

50

55

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100

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2009

2010

2011

2012

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2014

2015

YTD

(%)(Bt) Domestic retail price (50kg bag) (LHS) Utilization rate (RHS)

Sources: Bank of Thailand, Thanachart estimates

Exports remain a viable outlet in our view

Even if domestic demand were to fall short of our expectation, we believe exports remain a viable outlet for any excess capacity. Thailand’s cement exports have declined from nearly 20m tpa in 2007 to about 11m tpa currently. In our view, this leaves room for as much as 9m tpa of additional exports. Note also that exports could be a more profitable outlet than domestic sales, especially for players with production concentrated only in the central region. This is due to differing transportation overheads as discussed previously.

Cement industry utilization at > 80%, pointing to low risk of aggressive price war

We see room for up to 11m tpa in additional cement exports from Thailand



Ex 13: Cement Exports Remain A Viable Outlet For Excess Domestic Capacity

15.7

20.0

15.4 15.7 15.5

12.0 12.3

8.310.6 11.2

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

(m tonnes)

Sources: TCMA, Thanachart estimates Note: Exports in tonne cement-equivalent, including clinker converted at a ratio of 1.13x

For TPIPL in particular, we believe the export market is the most attractive outlet for its new capacity. This is because of a number of disadvantages:

Brand value: TPIPL is a relative newcomer to Thailand’s cement market and, as such, its brand is not as widely recognized and valued compared with SCC’s. This means it has had to sell its products at 10-20% discounts to SCC’s in order to gain and maintain market share. This translates to a $5-10/tonne disadvantage versus SCC.

Transportation overheads: TPIPL only has cement plants in Saraburi. As such, it is not able to compete effectively outside of Bangkok and the central region. For example, if TPIPL were to sell in Chiang Mai, it would have to pay $19/tonne transportation costs versus SCC’s $8/tonne. This translates into another $10/tonne disadvantage.

By contrast, we believe TPIPL has no such disadvantages in the export market. As such, even if its realized export price were at a discount to the domestic ex-factory price (by say $5/tonne), we believe exports could be as much as $10-15/tonne more attractive than selling in the provinces in Thailand.

We see limited room for further price cuts

We see limited room for TPIPL to engage in aggressive price competition to gain further market share. Its EBITDA margin is already much lower than peers’ and it already reports close to zero net profit. As such, while we expect domestic cement prices to remain soft, we see limited risk of an aggressive price war.

TPIPL’s new domestic supply likely to be exported



Ex 14: SCC Cement And Concrete Division More Profitable Than Peers’

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5

10

15

20

25

30

2012 2013 2014

(%) EBITDA margin

SCC SCCC ACC/JCC TPIPL

Sources: Company data, Thanachart estimates Note: SCC – EBITDA margin for domestic structural products which include cement and ready-mixed concrete (RMC) SCCC – Based on reported operating EBITDA ACC/JCC – Asia Cement / Jalaprathan Cement data from Italcementi, a major shareholder TPIPL – Total EBITDA margin adjusted for one-offs; cement/RMC make up c.70% of sales and 75% of total assets



Regional expansion the next growth driver

Growing in attractive regional markets

Thailand’s neighboring countries, especially Myanmar, Cambodia and Laos, have seen strong demand growth over the past several years. This has been a result of economic growth as well as still-low consumption per capita. These frontier markets have provided avenues for excess domestic capacity in Thailand. For example, exports to Myanmar have grown by a cumulative 70%-plus over the past four years while those to Cambodia and Laos have seen similarly strong growth.

Ex 15: Thailand’s Cement Export Boom To Myanmar, Cambodia And Laos

2.0

2.5

2.9

3.4

2.22.1

2.83.0

3.5

1.8

0.60.7 0.8 0.9

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2011 2012 2013 2014 1H15

(m tonnes) Myanmar Cambodia Laos

Sources: Company data, Thanachart estimates Note: Including clinker converted at a 1.13x ratio

Given that SCC is already exporting as much as 4m tpa into these markets, we are positive on SCC’s regional expansion. In particular, Myanmar, Cambodia and Laos are likely to provide significant growth opportunities. These countries share common characteristics of strong demand growth and a lack of competitive domestic production. The only weak market into which SCC is expanding is Indonesia. However, the company already has a local RMC business which would likely become a captive customer for more than 50% of the new factory output there.

Ex 16: SCC’s New Cement Plants In ASEAN

Plant Location Capacity Primary market Estimated distance to market Start-up

Cambodia #2 Kampot province 0.9m tpa Phnom Penh 120 km 3Q15

Indonesia Sukabumi, West Java 1.8m tpa Jakarta, Bandung 100-130 km 4Q15

Myanmar Mawlamyine 1.8m tpa Yangon 150 km (via shipping) 3Q16

Laos Khammouane province 1.8m tpa Laos, Northeast Thailand 100-400 km 3Q17


We estimate that within three years, ASEAN ex-Thailand capacity should account for 25% of SCC’s total cement capacity. We see the recent announcement of a third production line in Cambodia further increasing the importance of regional markets to the group.

Cement exports to Myanmar, Cambodia and Laos have grown strongly

We expect ASEAN to take up 25% of SCC’s cement capacity by 2017



Ex 17: ASEAN To Account For 25% Of SCC’s Cement Capacity By 2017F

23.2 23.2 23.2 23.2

0

5

10

15

20

25

30

35

2014A 2015F 2016F 2017F

(mtpa) Thailand Cambodia Vietnam Indonesia Myanmar Laos


We summarize our view on each regional market below:

Myanmar: Myanmar has been the fastest-growing cement market in ASEAN judging by the export volume from Thailand, the primary supplier for the country. Growth since 2011 has averaged nearly 27% p.a. The country still has low cement consumption at just 100kg per capita versus Thailand’s 600kg and Vietnam’s 550kg. In terms of supply, the majority of Myanmar’s cement makers are small, state-owned companies with capacity of less than 0.5m tpa each. Nearly half of total consumption must be imported, largely from Thailand. The low per-capita consumption, large population base (more than 50 million people), and relative lack of competition makes Myanmar the most attractive growth market in ASEAN, in our view.

Cambodia: Cambodia has been the second-best performer judging by exports from Thailand with an annualized growth rate of 20% since 2011. Export growth has remained strong despite two new cement plants (c.1m tpa capacity each) being built over the past three years. Consumption per capita remains low at 250kg so we believe there is potential upside, although the relatively small population (less than 16 million) may limit long-term growth prospects.

Laos: Laos has been another key growth market for Thailand’s cement exports with an 18% CAGR since 2011. However, it has a small population (c.6 million) and its consumption per capita is already relatively high at over 400kg. As such, we do not see Laos as a significant growth market. While we are more cautious about demand, we are positive from a supply perspective. Laos is land-locked, has mountainous terrain, and as such is likely to incur high logistics costs for imports. Therefore, we believe it has some of the highest barriers to entry of any cement market in ASEAN and represents an attractive captive market for producers with a foothold in the country. Laos also has sizeable coal/lignite production that could supply cheap energy to domestic cement makers. This could further add to the cost advantages of local producers.

Indonesia: Of all the markets into which SCC is expanding its cement operation, we believe Indonesia is the least attractive from a supply-demand perspective. Structurally, the market comprises of large, well-run players and we believe SCC will be starting off at a significant disadvantage given its relatively small capacity and limited distribution capability there. The market also looks weak from a demand perspective. Cement demand declined by 5% y-y in 7M15 with the pace accelerating in July (-10% y-y). With the still-poor economic outlook, we do not expect the situation to reverse course soon. The only positive we see from the Indonesian cement market is that consumption per

Myanmar and Cambodia are the two strongest markets in ASEAN

Weak Indonesia market a concern, but captive RMC demand should cushion downside risks for SCC



capita remains relatively low at less than 250kg which leaves room for significant long-term growth potential.

Ex 18: Cement Consumption And Installed Capacity Per Capita

0

100

200

300

400

500

600

700

800

900

1,000

Thailand Vietnam Laos Cambodia Indonesia Myanmar

Per capita (kg) Domestic consumption Installed capacity


Localized product leading to EBITDA margin expansion

We believe SCC’s cement capacity build-out across ASEAN is positive not only for volume growth but also margin expansion. Currently, SCC exports c.4m tpa of its cement production, the majority of which is to Myanmar (2.3m tpa). While the free-on-board (FOB) price of cement exports is more or less equivalent to the ex-factory price in Thailand, SCC has to pay as much as US$12-15/tonne for transportation costs from its cement plant to the export terminals. This means the net-back ex-factory price is only US$40-45/tonne, representing a steep discount to the volume sold in the Thai market which has an ex-factory price of US$55-60/tonne.

Ex 19: Realized Export Value Can Be At A Steep Discount To Foreign Ex-factory Price

0

10

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30

40

50

60

70

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Cambodia Laos Myanmar Thailand

(US$/tonne) Local ex-factory price FOB price Realized price

Sources: Company data, Thanachart estimates Note: Local ex-factory prices from SCC (mid-point); FOB price based on 1H15 data from Customs Department; Realized price is FOB price less $15/tonne (cost of local transportation to port)

SCC also has to bear the cost of bringing cement to market in foreign countries. This incurs additional transportation costs and, for some markets, they can be very significant. For example, to bring cement from its Tung Song plant (in Southern Thailand) to market in Myanmar, SCC has to first truck it to port (the “domestic” portion), ship it, then truck it again

We expect new cement plants in ASEAN to lead to EBITDA margin expansion

Major transport overhead savings on moving from exports to local production



to market. This loading/unloading incurs substantial time and costs in addition to the actual transportation cost itself. We estimate that transportation for exports (from port to the respective export destinations) could add another $7-22/tonne to the costs.

Ex 20: Transport Costs To Bring Cement To Market In Export Destinations Could Amount To As Much As $22-38/tonne

FOB price Local ex-factory price Export transportation Domestic transportation Total transportation

(1) (2) (3) = (1)-(2) (4) (5) = (3) + (4)

Myanmar 62.0 72.5 10.5 15.0 25.5

Cambodia 52.3 75.0 22.7 15.0 37.7

Laos 64.9 72.5 7.6 15.0 22.6

Sources: Company data, Thanachart estimates Note: FOB price based on 1H15 data from the Customs Department

Localized production in these markets would eliminate nearly all of these transportation overheads. We believe this would enable SCC to achieve the full foreign ex-factory prices which can be up to 67% higher than the ex-factory price when exporting from Thailand.

Ex 21: Significant Savings On Transportation Costs (For Illustrative Purposes Only)

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Export ex-factoryprice

Domestictransport

FOB price Export transport Foreign ex-factory price

(US$/tonne)

Sources: Company data, Thanachart estimates Note: Export ex-factory price reflects the net realized price for export volume; FOB price reflects value of goods shipped and also implicitly the cost of bringing such goods to port



Riding the chemical up-cycle

Ethylene bull, propylene bear

As we have discussed in detail in our PTT Global Chemical (PTTGC TB, Bt56.75, BUY) report, “More than meets the eye,” dated 27 July 2015, we are taking a bullish view on ethylene and its derivatives but a bearish view on the propylene chain. Our bearish stance on propylene is based on the demand-supply outlook where we believe propylene will be pressured from overcapacity in Asia and competition from non-oil feedstock such as propane via propane dehydrogenation. On the other hand, we believe ethylene and its derivatives spreads will continue to be supported by strong demand and limited new supply.

Ex 22: New Ethylene Capacity By Region (2015-19F) Ex 23: New Propylene Capacity By Region (2015-19F)

N Asia23%

SE Asia15%

ME22%

N America30%

Europe10%

N Asia61%

SE Asia10%

ME7%

N America18%

Europe4%

Sources: Company data, Thanachart estimates Sources: Company data, Thanachart estimates

The diverging supply-demand outlook for ethylene and propylene will likely lead to the ethylene-naphtha spread being much higher than the propylene-naphtha spread. Given that ethylene and propylene are still largely manufactured as co-products, the low margin on propylene could also support ethylene spreads as naphtha crackers seek to balance profitability among the various co-products. On the downstream side, we similarly expect ethylene derivatives to do better than PP/PO. As such, we forecast HDPE-naphtha spreads to remain elevated in the $700-750/tonne range while we expect the PP-naphtha spread to normalize in the coming years.

We see an extended ethylene bull market through 2018

Diverging outlook for ethylene and propylene



Ex 24: We Expect Ethylene And Its Derivatives To Outperform Propylene Value Chain

200

300

400

500

600

700

800

2011 2012 2013 2014 2015F 2016F 2017F 2018F

(US$/tonne) HDPE - naphtha PP - naphtha


Naphtha cracker regaining competitiveness

The fall in oil price has made naphtha much more competitive relative to other feedstocks. We estimate that with the oil price now below $50/bbl, the ethylene production cash cost for naphtha crackers (feedstock plus cash conversion cost) has fallen below $500/tonne from nearly $1,000/tonne a year ago. Note that we assume a fixed cash cost of $250/tonne whereas in reality the cash cost could come down significantly as the value of product losses and energy costs decline. As such, while gas-based feedstock, especially from the Middle East, may still have lower costs ($100-200/tonne), the cost gap has shrunk significantly. With the tight ethylene market, we expect this to enable naphtha crackers to maintain high utilization rates despite falling spreads.

Ex 25: Naphtha Cracker’s Ethylene Cash Cost ($/tonne)

2013 2014 1Q15 2Q15 Current

Dubai (US$/bbl) 105.52 96.61 51.89 61.3 48.29

Naphtha feedstock 2,971 2,777 1,594 1,816 1,442

Propylene (684) (643) (430) (485) (413)

Other co-products (1,483) (1,397) (905) (941) (828)

Net feedstock cost 804 738 259 390 201

Cash processing cost 250 250 250 250 250

Total cash cost 1,054 988 509 640 451

Sources: Datastream, Thanachart estimates

Margin shifting back downstream is good for SCC

While total integrated spreads are largely unchanged, the fact that spread is shifting downstream (i.e. HDPE-ethylene) from upstream (ethylene-naphtha) is beneficial to SCC. The company is net short ethylene, meaning that it configures its capacities such that there is always more downstream product capacity than cracker capacity. On a 100% basis and including all of its capacities, both consolidated and JV, SCC is net short ethylene by nearly 700k tpa, meaning it has to buy upstream product from external parties such as PTTGC. On an equity basis, the net short ethylene position is even bigger because SCC only holds

Cheaper oil is positive for naphtha crackers…

…with the ethylene cash cost falling below $500/tonne at $50/bbl oil

SCC benefits from being net short ethylene as margins move downstream



67% of its crackers (the rest is held by Dow Chemical) whereas it holds 100% in the majority of its downstream facilities.

Ex 26: SCC Is Net Short Ethylene

Product —————— Capacity (ktpa) —————— ——— Ethylene capacity / demand (ktpa) ———

100% basis Equity basis 100% basis Equity

Polyethylene 2,181 1,613 2,272 1,682

PVC 966 824 467 399

Others 928 355 254 099

Equivalent ethylene demand 2,994 2,180

Ethylene capacity 2,300 1,319

Net long / (short) ethylene (694) (861)

Sources: Company data, Thanachart estimates Note: We assume the following ethylene demand per tonne of downstream products: HDPE 1.05, LLDPE 1.03, LDPE 1.03, PS/SM 0.29, PET 0.21, PVC 0.48 We assume the following propylene demand per tonne of downstream products: PP 1.02, PO 0.85

We have already begun to see downstream spread (i.e. HDPE-ethylene) improving with upstream spread (ethylene-naphtha) softening. This reverses the trend seen in 2Q where the HDPE-naphtha spread turned negative. Given its asset configuration and shareholding structure, SCC may be able to enjoy even higher profits relative to other integrated players which may be net long or neutral ethylene in the current price environment. As such, while total spreads may soften slightly from the 2Q15 level, we believe SCC’s profitability could improve even further, and that this could become more evident in 3Q15F and onward.

Ex 27: Ethylene-naphtha Spread Softens… Ex 28: …While HDPE-ethylene Spread Rebounds Strongly

0

100

200

300

400

500

600

700

800

900

1,000

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

(US$/tonne)

(100)

(50)

0

50

100

150

200

250

300

350

400

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

(US$/tonne)

Source: Datastream Source: Datastream

Ethylene-naphtha spread heading down while HDPE-ethylene spread going up



Attractive valuation in light of growth

15% EPS CAGR in 2015-18F

We have revised up our EPS forecasts in 2015-18 by 4-18% largely as a result of higher chemical spreads and increased EBITDA margin assumptions for the construction materials division. This is offset partially by weaker cement volume (and hence revenue). Key changes to our assumptions are:

Stronger chemical spreads: In line with our forecasts for PTTGC, we have revised up our assumptions for key chemical spreads (i.e. HDPE-naphtha). SCC, as a pure naphtha-based player, gets the full benefit of higher spreads regardless of the oil price level. In fact, lower oil prices are beneficial to SCC as they help reduce cash production costs and the value of losses in the process.

Lower cement volume offset by higher margins: As mentioned previously, we are now more conservative on domestic cement demand growth. Therefore we have marginally trimmed our cement volume forecasts for SCC by 0.6-3.2% over 2015-18. Nonetheless, as we expect demand to grow upcountry where we believe SCC has competitive advantages, we expect SCC to be able to enjoy higher margins. Contribution from new plants in ASEAN should also help lift overall EBITDA margin for the construction materials division.

Ex 29: Key Assumption And Earnings Revisions

2015F 2016F 2017F 2018F

EPS (Bt/share) New 40.06 42.37 45.87 49.25

Old 33.85 38.10 43.96 46.68

Change (%) 18.4 11.2 4.3 5.5

HDPE-naphtha spreads (US$/tonne) New 750 750 700 700

Old 680 680 680 650

Change (%) 10.3 10.3 2.9 7.7

Cement volume (m tonnes) New 20.0 22.9 24.9 26.7

Old 20.6 23.0 25.4 27.2

Change (%) (3.2) (0.6) (2.0) (2.0)

Construction material EBITDA margin (%) New 14.1% 14.9% 16.0% 17.1%

Old 13.6% 14.5% 15.4% 16.4%

Change (bps) 48 38 63 78


We forecast strong earnings growth, driven by…

…high chemical spreads, and cement volume growth with margin expansion



Valuation remains attractive in our view

Given our earnings revisions, we have also boosted our 12-month DCF-derived SOTP-based TP to Bt610/share from Bt600 previously. Our TP implies a 15x forward PE. We believe SCC remains attractive in light of its 15% earnings CAGR in 2015-18F and current valuation of 12x forward PE which implies a PEG ratio of less than 1x.

Ex 30: SCC’s Forward P/E Ex 31: SCC’s Forward P/BV

3

6

9

12

15

18

21

Jan-02 Apr-04 Jul-06 Oct-08 Jan-11 Apr-13 Jul-15

(x)

+2 STD = 17.8x

+1 STD = 14.5x

Average = 11.2x

-2 STD = 4.6x

-1 STD = 7.9x

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-02 Apr-04 Jul-06 Oct-08 Jan-11 Apr-13 Jul-15

(x)

+1 STD = 3.8x

-2 STD = 0.9x

+2 STD = 4.8x

-1 STD = 1.9x

Average = 2.8x

Sources: Bloomberg, Thanachart estimates Sources: Bloomberg, Thanachart estimates

Ex 32: Our 12-month DCF-derived SOTP-based Valuation

(Bt m) 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F Terminal

Value

EBITDA 71,152 75,942 81,500 87,189 84,504 85,593 90,785 96,498 102,271 108,118 114,273 120,879

Free cash flow 6,420 17,548 33,961 43,303 47,742 52,544 58,859 62,149 66,819 71,695 76,683 81,929 1,221,744

PV of free cash flow 6,402 14,813 26,340 30,858 31,258 31,600 32,523 31,552 31,168 30,719 30,187 29,633 441,892

Risk-free rate (%) 4.5

Market risk premium (%) 7.5

Beta 1.0

WACC (%) 8.8

Terminal growth (%) 2.0

Enterprise value at parent level 768,945

GLOBAL @ Bt11 TP 11,708

Other investments at 2x P/BV 150,000

Total enterprise value 930,653

Net debt 167,018

Minority interest 32,034

Equity value 731,602

# of shares (m) 1,200

Equity value / share (Bt) 610


SCC still attractive in our view at 12x forward PE given strong EPS growth



Valuation Comparison

Ex 33: Valuation Comparison With Regional Peers

EPS growth —— PE —— — P/BV — EV/EBITDA − Div yield −

Name BBG code Country 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F

(%) (%) (x) (x) (x) (x) (x) (x) (%) (%) Regional Peers

Sinopec Shanghai 338 HK HK na 3.9 10.8 10.4 1.6 1.4 10.9 10.7 2.8 3.0

AKR Corporindo AKRA IJ Indonesia 36.9 10.6 20.3 18.4 3.7 3.2 13.7 12.1 1.4 1.7

Reliance Industries Ltd RIL IN Indonesia 4.2 7.4 11.4 10.6 1.2 1.1 10.0 8.8 1.2 1.3

LG Chem 051910 KS S. Korea 34.5 19.6 12.2 10.2 1.3 1.2 5.5 5.0 1.8 1.9

SK Energy 096770 KS S. Korea na (11.0) 6.9 7.7 0.6 0.5 5.9 6.6 2.8 2.9

Petronas Chem Group Bhd PCHEM MK Malaysia (8.6) 17.7 19.0 16.1 2.0 1.9 9.2 7.9 2.7 3.2

Formosa Chemical 1326 TT Taiwan 26.0 9.4 18.5 16.9 1.4 1.3 13.3 12.8 3.2 3.5

Far Eastern New Century 1402 TT Taiwan (3.8) 7.9 15.0 13.9 0.5 0.5 10.7 10.1 4.7 5.1

Indorama Ventures * IVL TB Thailand na 32.3 20.4 15.4 1.3 1.2 9.0 7.9 1.7 2.3

PTT Global Chemical * PTTGC TB Thailand 57.3 15.3 8.9 7.7 1.0 0.9 6.2 5.4 5.6 6.5

Siam Cement * SCC TB Thailand 43.0 5.8 12.4 11.7 2.9 2.5 10.8 10.0 3.6 3.8

Thai Plastic & Chem TPC TB Thailand na na na na na na na na na na

Vinythai VNT TB Thailand 64.9 (12.8) 19.6 22.4 na na 6.7 5.5 1.8 1.6

Average 28.3 8.8 14.6 13.5 1.6 1.4 9.3 8.6 2.8 3.1

Thailand Peers

Bangchak * BCP TB Thailand 341.7 9.7 9.2 8.4 1.2 1.1 5.8 6.1 4.3 4.5

ESSO (Thailand) * ESSO TB Thailand na 25.8 6.3 5.0 1.2 1.1 7.1 6.3 7.5 8.0

IRPC Pcl * IRPC TB Thailand na na 17.2 12.1 1.0 1.0 9.2 9.1 4.6 4.1

Indorama Ventures * IVL TB Thailand na 32.3 20.4 15.4 1.3 1.2 9.0 7.9 1.7 2.3

PTT Pcl * PTT TB Thailand 28.4 32.3 13.2 10.0 1.0 1.0 5.8 4.9 4.6 5.0

PTTEP * PTTEP TB Thailand (15.0) (4.6) 12.3 12.9 0.7 0.7 2.6 2.7 4.9 5.2

PTT Global Chemicals PTTGC TB Thailand 57.3 15.3 8.9 7.7 1.0 0.9 6.2 5.4 5.6 6.5

Siam Cement * SCC TB Thailand 43.0 5.8 12.4 11.7 2.9 2.5 10.8 10.0 3.6 3.8

Thai Oil * TOP TB Thailand na 2.7 8.4 8.2 1.1 1.0 6.5 6.1 4.3 4.5

Average 91.1 14.9 12.0 10.2 1.3 1.2 7.0 6.5 4.6 4.9

Source: Bloomberg Note: * Thanachart estimates, using normalized EPS Based on 2 September 2015 closing prices


APPENDIX SCC CHAK REUNGSINPINYA

COMPANY DESCRIPTION COMPANY RATING

The Siam Cement Pcl (SCC) is a diversified industrial company. The company's operations include the manufacturing of cement, petrochemicals, paper, building products, and distribution. SCC is the leader in most of the businesses it is involved in. Thirty five percent of its sales come from exports and overseas operations.

012345

Liquidity

Riskmanage

ment

Management

Financial management

*Corp. governance

Rating Scale

Very Strong 5

Strong 4

Good 3

Fair 2

Weak 1

None 0

Source: Thanachart Source: Thanachart; *CG Awards

THANACHART’S SWOT ANALYSIS

S — Strength W — Weakness

Very strong market position in most of its businesses and

products.

Very high franchise value via both its product brands and as a

prominent Siam Cement Group name.

Robust financial position.

Very strong and prudent management team.

Given the already very large scale of most of its businesses

in Thailand, continued strong long-term growth from here

looks to be a challenge.

Petrochemical is a very cyclical business that can cause high

earnings volatility for the company.

In its new capex cycle, returns are likely to be low in the initial

years.

O — Opportunity T — Threat

Due to its strong franchise in regional markets, SCC is looking

to expand in the ASEAN region.

SCC has lots of cash on hand, sizeable EBITDA and high

borrowing capability which should be able to support its

regional expansions.

Organic growth at home and the global slowdown.

Global slowdown may delay new investments.

Shale gas revolution increases the risks for its existing

petrochemical business while it could delay new

petrochemical investments.

CONSENSUS COMPARISON RISKS TO OUR INVESTMENT CASE

Consensus Thanachart Diff

If the global slowdown turns into a crisis, the major risk is to petrochemical spreads and SCC incurring inventory losses.

If there is prolonged political turmoil, downside risk would be to cement consumption (via delayed infrastructure and a weak housing market).

If SCC decides to invest too early in the Vietnam petrochemical project, the return outlook for which we are not bullish on, there may be upside to capex and downside to returns.

Target price (Bt) 580.81 610.00 5%

Net profit 15F (Bt m) 43,392 48,075 11%

Net profit 16F (Bt m) 45,878 50,880 11%

Consensus REC BUY: 19 HOLD: 6 SELL: 2

HOW ARE WE DIFFERENT FROM THE STREET?

Our earnings forecasts are higher than the Bloomberg consensus which we attribute to our more bullish view on the petrochemical business and spreads.

Sources: Bloomberg consensus, Thanachart estimates

Source: Thanachart


FINANCIAL SUMMARY SCC CHAK REUNGSINPINYA

INCOME STATEMENTFY ending Dec (Bt m) 2013A 2014A 2015F 2016F 2017FSales 434,251 487,545 462,595 504,158 529,429Cost of sales 363,096 409,431 366,204 400,888 420,191 Gross profit 71,155 78,114 96,391 103,270 109,237% gross margin 16.4% 16.0% 20.8% 20.5% 20.6%Selling & administration expenses 40,033 44,952 46,259 49,407 50,825 Operating profit 31,123 33,162 50,131 53,863 58,412% operating margin 7.2% 6.8% 10.8% 10.7% 11.0%Depreciation & amortization 15,718 18,062 21,021 22,080 23,088 EBITDA 46,840 51,224 71,152 75,942 81,500% EBITDA margin 10.8% 10.5% 15.4% 15.1% 15.4%Non-operating income 13,141 9,924 9,450 11,295 11,851Non-operating expenses 0 0 0 0 0Interest expense (8,193) (7,266) (8,097) (8,478) (8,715) Pre-tax profit 36,070 35,819 51,484 56,679 61,547Income tax 5,003 4,968 7,723 8,502 9,848 After-tax profit 31,067 30,851 43,762 48,178 51,700% net margin 7.2% 6.3% 9.5% 9.6% 9.8%Shares in aff iliates' Earnings 6,546 6,108 12,252 10,222 10,337Minority interests (1,091) (3,345) (7,938) (7,520) (6,873)Extraordinary items 0 0 0 0 0NET PROFIT 36,522 33,615 48,075 50,880 55,164Normalized profit 36,522 33,615 48,075 50,880 55,164EPS (Bt) 30.4 28.0 40.1 42.4 46.0Normalized EPS (Bt) 30.4 28.0 40.1 42.4 46.0

BALANCE SHEETFY ending Dec (Bt m) 2013A 2014A 2015F 2016F 2017FASSETS:Current assets: 135,130 137,998 131,975 141,623 147,254 Cash & cash equivalent 17,434 19,031 20,000 20,000 20,000 Account receivables 49,453 51,842 50,695 55,250 58,020 Inventories 55,557 52,747 48,158 52,720 55,258 Others 12,686 14,378 13,121 13,653 13,977Investments & loans 95,482 95,597 95,597 95,597 95,597Net f ixed assets 183,842 205,085 242,064 264,985 276,897Other assets 26,235 27,143 25,754 28,068 29,475Total assets 440,688 465,823 495,390 530,272 549,223

LIABILITIES:Current liabilities: 89,792 95,518 94,438 96,946 93,694 Account payables 51,211 45,080 40,132 43,933 46,048 Bank overdraft & ST loans 13,005 12,599 13,541 13,102 11,548 Current LT debt 20,879 33,023 35,979 34,814 30,683 Others current liabilities 4,697 4,815 4,786 5,097 5,415Total LT debt 153,547 150,426 143,918 139,256 122,734Others LT liabilities 4,465 4,231 4,015 4,376 4,595Total liabilities 253,927 256,506 248,377 247,124 227,898Minority interest 25,223 32,034 39,972 47,491 54,365Preferreds shares 0 0 0 0 0Paid-up capital 1,200 1,200 1,200 1,200 1,200Share premium 0 0 0 0 0Warrants 0 0 0 0 0Surplus (6,115) (9,166) (9,166) (9,166) (9,166)Retained earnings 166,453 185,249 215,008 243,623 274,927Shareholders' equity 161,538 177,283 207,042 235,656 266,960Liabilities & equity 440,688 465,823 495,390 530,272 549,223


We expect a new earnings base of Bt40bn from 2015 onward

Healthy balance sheet with >Bt30bn of cash under management



CASH FLOW STATEMENTFY ending Dec (Bt m) 2013A 2014A 2015F 2016F 2017FEarnings before tax 36,070 35,819 51,484 56,679 61,547Tax paid (4,711) (5,539) (7,404) (8,521) (9,610)Depreciation & amortization 15,718 18,062 21,021 22,080 23,088Chg In w orking capital (7,502) (5,710) 787 (5,315) (3,192)Chg In other CA & CL / minorities 12,892 8,217 12,142 9,935 10,006Cash flow from operations 52,466 50,849 78,030 74,858 81,839

Capex (34,267) (39,306) (58,000) (45,000) (35,000)ST loans & investments 683 (1,007) 937 0 0LT loans & investments (12,961) (115) 0 0 0Adj for asset revaluation 0 0 0 0 0Chg In other assets & liabilities (7,236) 428 930 (1,328) (771)Cash flow from investments (53,781) (39,999) (56,132) (46,328) (35,771)Debt f inancing 11,856 8,617 (2,611) (6,265) (22,207)Capital increase 0 0 0 0 0Dividends paid (18,600) (15,000) (18,317) (22,265) (23,860)Warrants & other surplus 430 (2,871) 0 0 0Cash flow from financing (6,314) (9,253) (20,928) (28,530) (46,067)

Free cash flow 18,199 11,543 20,030 29,858 46,839

VALUATIONFY ending Dec 2013A 2014A 2015F 2016F 2017FNormalized PE (x) 16.3 17.7 12.4 11.7 10.8Normalized PE - at target price (x) 20.0 21.8 15.2 14.4 13.3PE (x) 16.3 17.7 12.4 11.7 10.8PE - at target price (x) 20.0 21.8 15.2 14.4 13.3EV/EBITDA (x) 16.3 15.1 10.8 10.0 9.1EV/EBITDA - at target price (x) 19.3 17.7 12.7 11.8 10.8P/BV (x) 3.7 3.4 2.9 2.5 2.2P/BV - at target price (x) 4.5 4.1 3.5 3.1 2.7P/CFO (x) 11.3 11.7 7.6 8.0 7.3Price/sales (x) 1.4 1.2 1.3 1.2 1.1Dividend yield (%) 3.1 2.5 3.6 3.8 4.2FCF Yield (%) 3.1 1.9 3.4 5.0 7.9

(Bt)Normalized EPS 30.4 28.0 40.1 42.4 46.0EPS 30.4 28.0 40.1 42.4 46.0DPS 15.5 12.5 18.0 19.1 20.7BV/share 134.6 147.7 172.5 196.4 222.5 CFO/share 43.7 42.4 65.0 62.4 68.2 FCF/share 15.2 9.6 16.7 24.9 39.0


PE isn’t excessive in our opinion given 2015-16F earnings growth

Low-risk capex cycle in our view given huge forecast cash flows



FINANCIAL RATIOSFY ending Dec 2013A 2014A 2015F 2016F 2017FGrowth RateSales (%) 6.5 12.3 (5.1) 9.0 5.0Net profit (%) 54.9 (8.0) 43.0 5.8 8.4EPS (%) 54.9 (8.0) 43.0 5.8 8.4Normalized profit (%) 54.9 (8.0) 43.0 5.8 8.4Normalized EPS (%) 54.9 (8.0) 43.0 5.8 8.4Dividend payout ratio (%) 50.9 44.6 45.0 45.0 45.0

Operating performanceGross margin (%) 16.4 16.0 20.8 20.5 20.6Operating margin (%) 7.2 6.8 10.8 10.7 11.0EBITDA margin (%) 10.8 10.5 15.4 15.1 15.4Net margin (%) 7.2 6.3 9.5 9.6 9.8D/E (incl. minor) (x) 1.0 0.9 0.8 0.7 0.5Net D/E (incl. minor) (x) 0.9 0.8 0.7 0.6 0.5Interest coverage - EBIT (x) 3.8 4.6 6.2 6.4 6.7Interest coverage - EBITDA (x) 5.7 7.0 8.8 9.0 9.4ROA - using norm profit (%) 8.7 7.4 10.0 9.9 10.2ROE - using norm profit (%) 24.0 19.8 25.0 23.0 22.0

DuPontROE - using after tax profit (%) 20.4 18.2 22.8 21.8 20.6 - asset turnover (x) 1.0 1.1 1.0 1.0 1.0 - operating margin (%) 10.2 8.8 12.9 12.9 13.3 - leverage (x) 2.7 2.7 2.5 2.3 2.1 - interest burden (%) 81.5 83.1 86.4 87.0 87.6 - tax burden (%) 86.1 86.1 85.0 85.0 84.0WACC (%) 8.8 8.8 8.8 8.8 8.8ROIC (%) 9.1 8.6 12.0 12.0 12.2 NOPAT (Bt m) 26,806 28,563 42,612 45,783 49,066



DISCLAIMER SCC CHAK REUNGSINPINYA

Important Disclosures and Disclaimers:

This publication is prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Thanachart Securities Public Company Limited (“Thanachart Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Thanachart Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

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Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Japan Disclosure of Interest of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co., Limited (1107 HK), econtext Asia Ltd (1390 HK), ACCORDIA GOLF TRUST (AGT_SP), Hua Hong Semiconductor Ltd (1347 HK), GF Securities Co Ltd (1776 HK); MIRAE ASSET LIFE INSURANCE CO LTD (085620 KS). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. This research may only be distributed in Japan to “qualified institutional investors”, as defined in the Financial Instruments and Exchange Act (Article 2 (3) (i)), as amended from time to time. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Securities and Futures Act, Chapter 289 of Singapore, as amended from time to time and is not for, nor intended for, distribution to any other persons in Singapore. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore should contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.


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Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect Thanachart Securities’ or DCMA’s views at any time. Neither Thanachart Securities, DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of Thanachart Securities’ or DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no.212-612-7000).


http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf

http://www.pse.com.ph/

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory


Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect: Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 10% or more, the rating is BUY. If the downside is 10% or more, the rating is SELL. For stocks where the upside or downside is less than 10%, the rating is HOLD. Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. For the sector, Thanachart looks at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the word “Positive”, is used when Thanachart sees the industry trend improving. An arrow pointing down, or the word “Negative”, is used when Thanachart sees the industry trend deteriorating. A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is Thanachart’s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers. An “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap. “Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap. “Neutral” is used when there are relatively equal weightings of BUYs and SELLs]. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationships (TNS) TNS may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. TNS market making

TNS may from time to time make a market in securities covered by this research.









Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with

such experts as certified public accountants.

* The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association Thanachart Securities Pcl. Research Team 28 Floor, Siam Tower Unit A1 989 Rama 1, Pathumwan Road, Bangkok 10330 Tel: 662 - 617 4900 Email: [email protected]

Pimpaka Nichgaroon, CFA Head of Research Economics & Strategy [email protected]

Siriporn Arunothai Small Cap Research, Healthcare [email protected]

Sarachada Sornsong Bank, Financial, Telecom [email protected]

Saksid Phadthananarak Construction, Electronics, Transportation [email protected]

Chak Reungsinpinya Energy, Petrochemical [email protected]

Supanna Suwankird Energy, Utilities [email protected]

Kalvalee Thongsomaung Food, Hotel, Media [email protected]

Phannarai Tiyapittayarut Property, Retail [email protected]

Rata Limsuthiwanpoom Industrial Estate, Property Fund, REITs [email protected]

Adisak Phupiphathirungul, CFA Retail Market Strategy [email protected]

Pattarawan Wangmingmat Senior Technical Analyst [email protected]

Witchanan Tambamroong Technical Analyst [email protected]

Wichaya Wongpanuwich, CFA, FRM Analyst, Retail Market [email protected]

Chalida Tantriyanont Assistant Analyst [email protected]

Chatchawin Lertapiruk Assistant Analyst [email protected]


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