A Buy recommendation on Siam City Cement is reiterated with a share price objective of Bt265. The price objective is based on discounted cash flow with a sustainable growth rate of 5% and a discount rate (cost of equity) of 10.8%. Risks to achieving a share price objective include a potential temporary price war and SCCC’s low share liquidity, which could cause the share price to be volatile in response to any upcoming news flow. Fuel costs are expected to rise by 20% in 2004 and a further 13% in 2005. In sum, production costs are expected to rise by 8% this year and another 7% in 2005.
Profitability of cement companies are expected to weaken in 2H04 owing to higher energy costs from rising coal/lignite and oil prices. Fuel costs normally account for about 25%-30% of total production costs. Greater impact will be seen from the higher coal price as coal/lignite accounts for 70%-80% of total fuel costs. The remaining fuel costs are from bunker oil and recycled energy.
Although major cement players in Thailand have signaled their intention to reduce exports this year and focusing on domestic sales due to higher freight costs, demand from the export market remains strong. Cement exports in the first seven months of 2004 totaled 7.2mn tonnes, edging up by 6% YoY.
If a cement price war really takes place, the impact will be greater on Siam City Cement (SCCC), which is a pure cement play. Every Bt100/ton decline in cement prices is estimated to affect SCCC’s earnings by Bt426mn or 13% in 2004E. The impact will be less for Siam Cement (SCC) at Bt719mn or 3% in 2004, by the estimate.
Rebates provided to dealers will remain until the end of the rainy season, which is early 4Q04. However, cement prices of competitive brands and their distribution coverage will be kept monitoring.
Cement companies now concentrate on competitive brands, i.e. mortar cement, which has lower clinker content rather than mixed cement. The products are sold in the northern and northeastern parts of Thailand, which accounted for 30%-40% of total sales. Currently, mortar cement is priced Bt100-200/ton below mixed cement.
Currently, cement companies are achieving an average price of Bt1,480/ton for mixed cement versus the exfactory price ceiling of Bt1,958/ton, and average price of Bt1,820/ton for Portland cement versus the exfactory price of Bt2,294/ton. This is the lowest level during the past two years.
Cement prices in the Bangkok metropolitan area softened by a further Bt150/ton quarter-to-date from weak sales in the rainy season. Currently, wholesale cement prices are Bt1,827 per ton for mixed cement and Bt2,196 per ton for Portland cement.
Cement demand in 2005 is estimated to grow by another 8%, driven by the government’s plan to spend Bt1.5 trillion on infrastructure projects during the next five years. Assuming government spending of Bt100bn per year for these infrastructure projects during the next five years, cement demand would increase by about 1.3mn tonnes, which is roughly equivalent to an additional 5% growth in cement demand per annum.
Cement demand growth estimate for this year is revised up to 9% from 5%, assuming 5% cement demand growth for the remaining five months of the year. An indicator supporting cement demand growth is the total construction area permitted, which increased by 41% YoY to 10.8mn square meters in the first half of this year. Domestic cement demand remained solid in the first seven months of this year. According to the Bank of Thailand, domestic cement demand rose consistently by 12% YoY to 2.1Mt in July. Cement demand for the first seven months also grew by 12% YoY to 15.9Mt. Strong growth is attributed to strong construction activity in the residential and commercial/retail property sectors.
