Siam City Cement Mediocre FY07 prospects

The outlook for the domestic cement industry this year appears uninspiring with a slowdown expected in domestic construction activity, particularly in the real estate sector. One positive driver for SCCC’s profitability will be its capability to shift sales to export markets to compensate for the fall in demand. Overall cement sales volume (both domestic and export) is expected to remain flat for this year. The baht’s appreciation has prompted some local analysts to revise down SCCC’s 2007 earnings by 6% to Bt4.07bn in 2007. The stock is currently trading at full valuations of 16x revised 2007 earnings forecast. A SELL rating is maintained with a revised price target (based on DCF methodology) of Bt268.

FY06 earnings very much in line - profits declined though sales roes. The company reported a 5% YoY decline in its FY06 net profits to Bt3.86bn (EPS of Bt16.43) despite a 6% increase in revenues. The results were in line with expectations. 4Q06 earnings came to Bt694m (EPS of Bt3.02), down 30% QoQ but up 5% YoY. The sharp decline in earnings quarter on quarter was largely due to a slowdown in domestic demand although rising export sales helped alleviate the shortfall.

Domestic demand is still soft. Overall domestic demand for cement declined 2% YoY to 27.5m tons in 2006, with the reason being the slowdown in private investment. The nationwide floods, rising crude oil prices and political turmoil were the key factors driving down private investment overall. SCCC has been performing in line with the industry, with its domestic sales

volume also down by 2.6% YoY to 7.6Mt in 2006. 4Q06 saw the poorest sales performance relative to other quarters. The company’s market share is estimated at 29.7% for 2006.

Meanwhile, management expects to see another competitive year in 2007, and its policy is to maintain its market share at within the 28-29% range. Marginal increase in selling prices. As mentioned, the market will stay competitive given the continued slowdown in new house registrations, particularly in Bangkok (a 2% decline in 2006). Management has thus been reluctant to raise selling prices across the board. There could be just a marginal increase in cement selling prices unless the cement cartel agrees on raising them higher. In our assumptions, a small 3% increase in SCCC’s selling price is assumed to Bt1,826/ton in 2007.

Vietnam - the main export market. Vietnam has been the main export destination for SCCC, with sales volume to Vietnam (of 2.5m tons) accounting for nearly half the total export sales volume (of 5.3m tons) in 2006. Export sales to the US market have slowed - just 1m tons last year. Sales to the Middle East comprise 20% of total exports. Management expects Vietnam to remain its major export destination for this coming year. Export sales volume is expected to remain relatively strong in 2007, offsetting the decline in domestic sales.