Based on the current political and economic prospects, it looks unlikely that Siam Cement (SCC) will be able to maintain its healthy earnings going into 2007, after achieving stable operating profit in 2006. Earnings growth projection is revised down from -1% previously to - 7% for 2007, largely pulled down by the worsening outlook for overall domestic construction activity in both the public and private sectors. The concerns over politics and new regulations to the foreign business law are the main factors contributing to an overhang on new investments. In addition, the petrochemical division - making up half of consolidated earnings - is expected to face narrower margins from mid-2007 onwards. But sustained cash flows will allow SCC to maintain its DPS at Bt15 (offering a 6.4% yield) for 2007. Based on new price target of Bt241/share (at 2007 P/E of 10x), a call is downgraded from Buy to HOLD.  
 
Flat 4Q06 operating profit improves YoY but deteriorates QoQ. 4Q06 operating profit will be announced this coming Wednesday, to decline 29% QoQ but improve 17% YoY to Bt6bn, making full-year operating profit grow a moderate 1%. Weak cement operations due to the floods in early-4Q06 should be partially offset by moderate growth in chemical earnings.  
 
No new catalysts - cement demand just flat. According to management, domestic cement demand will grow by 1% at most - suggesting a downward revision from the previous 3-5% growth target. A 5% decline in domestic sales volume is assumed for this year. The recent restrictions on foreign investments - the new Foreign Business Act or the 30% capital control regulation - may have a short-term impact on new investments while longerterm investments should remain intact. Therefore, new construction activity by the private sector could possibly decline, particularly in 1H07. The slowdown in government spending also does not help. Based on the latest statistics, the government’s disbursement has been way below target. The domestic cement price increase should help sustain SCC’s profit margin.  
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