According to analysts at KGI Securities, cement sales volume in Thailand are expected to remain weak in the near term, but this is not a surprise as sales volume have posted negative growth for the past three years. Besides, the low base in domestic cement sales volume in 2H08 indicates cement sales volume will drop at a decelerating pace in 2H09, compared to 1H09. Meanwhile, the market will shift its focus to the end of the negative cement demand period from 2010 onward, powered by the sizeable government stimulus package in the next three years. On the cost side, cement producers will reap the rewards from the startup of cost saving projects in 2009. In light of the cost reductions taking effect, once cement demand recovers, the earnings for cement producers will be much improved. Thus, the cement sector is upgraded to Neutral from Underweight.
In 4M09, domestic cement sales volume growth dropped 12.1% YoY, due to the lack of private and public investment. Meanwhile, target for domestic sales volume growth of -10.0% YoY in 2009 is maintained as local cement demand is poised to drop at a decelerating pace in 2H09, due to the low base effect from 2H08 and improved private demand ahead of the sizeable government investment in the next three years. For the export market, cement sales volume growth declined by 6.4% YoY in 4M09 due to fragile cement demand from overseas amid the global recession. In the meantime, target for export sales volume growth is maintained in 2009 at -15.0% YoY, due to the high base effect in 2H08. Besides, the recent dip in cement export selling price indicates the unattractiveness of increasing export sales volume for cement producers.
After cement producers invested in cost saving projects to alleviate the impact of poor cement sales volume over the past few years, the completion of these projects indicates the benefits will be seen from 2009 onward. While waste heat generator projects will help to reduce electricity usage by turning waste heat from cement production to make electricity, the geocycle platform project will help to reduce fuel consumption by using alternative fuel from waste such as tires, plastic and wood, to generate substitute fuels.
Though the cost savings might be minimal in the startup phase in 2009, the benefits are set to be more significant in the longer term once the projects are running at full capacity. At that time, these projects will help to reduce cement production costs for Siam Cement (SCC, Bt141, N), Siam City Cement (SCCC, Bt165, N), and TPI Polene (TPIPL, Bt5.35, U) by 4.3%, 6.7-7.7%, and 3.5-4.2% per year, respectively.
A healthy cement margin is expected to continue. In the near term, though the cement price selling price has been somewhat eased, the benefits from the startup of cost saving projects will help to support the downside. Besides, in the longer term, should the cement selling price drop further, the downside will be supported by a recovery in cement sales volume, which could cover the fixed production cost.
Among cement players, we prefer a pure cement producer like SCCC. First, SCCC is a laggard compared to its cement peers. In 2009 YTD, SCCC’s share price has increased only 23.0%, compared to the appreciation of SCC and TPIPL of 37.0% and 69.0%, respectively. Secondly, the company offers the most appealing dividend yield of 6.1% per annum. Lastly, a pure cement player like SCCC would be in a better position than its peers whose earnings are exposed to the chemical industry, as the outlook for the chemical industry is gloomy, weighed down by slower global demand and the start up of new supply from 2H09 onward.
Though the near term outlook for cement sector will still be unexciting in the rest of this year, the market will shift the focus to the end of negative cement demand from 2010 onwards. When the cement demand kicked in and the result from cost saving plan come into full effect, the earnings for cement producers will be much improved. Thus, cement sector is upgraded to Neutral from Underweight rating. SCCC is our top pick.
(KGI Securities (Thailand): 25 June 2009)