siam cement getting dragged down by leveraged consumer

SCC’s valuations are near all-time highs, but earnings drivers have either already peaked

(chemicals) or look weak (domestic cement and autos). Something’s got to give.

What’s beyond the chemical high? In 2015, SCC is likely to see profit surpass its previous

peak in 2010, but the structure of the bottom line has changed materially since that time.

Unlike 2010, profit is now a lot more reliant on domestic and regional factors than global

industries like petchems. Petchem spreads delivered supernormal profits in 4Q14-1Q15 but, as

these drivers normalize, the sustainability of SCC’s profit growth would begin to depend

heavily on the performance of its domestic businesses – particularly cement and autos.

The hangover: Despite the potential growth from its coming regional cement expansion, a

weak domestic economy is a concern for SCC. Thai auto and cement sectors received

generous support from the previous government’s policies. 2012 witnessed car sales growing

by 81% and cement sales breaking the 30MT barrier for the first time since 1997. But, the

government-fuelled boom ended with a slump in 2014. A doubling of Thai household debt in

the last six years to 80% of GDP has left these businesses ex-growth. Auto sales are still

declining and cement sales growth is settling around its long-term CAGR of only 2%.

Peak in the past, weak in the future; reiterate Reduce: SCC’s 12-month forward PE is

about 1.5 standard deviations above its long-term average just as its growth is fading. We

estimate earnings growth of only low-to-mid single digits in 2H15e and 2016e, which is

12-13% below consensus. A 14% premium to the market PE also appears excessive when one

considers that even consensus estimates SCC’s earnings to grow at a slower pace than that of

the market. We trim 2015-17e earnings by 3% each. Our TP of THB414 is based on a 2015e

PE of 13.3x (13.1x earlier). It remains based on the trailing 12-month average of MSCI-TH.

Priced for perfection, a lot can go wrong: SCC is one of the best YTD performers among

non-financial ASEAN large caps. Sharp gains in chemical spreads reflated SCC’s premium

over a market which saw a once-in-a-decade rerating. Our estimates factor in stronger-for-

longer petchem spreads, a modest domestic recovery and a margin-accretive regional cement

expansion – all priced at above-average multiples. But we believe the market is pricing in

even better margins at steeper multiples. Our sensitivity analysis shows asymmetrical

downside if any of the cylinders fail to fire – we believe margin disappointment from regional

cement expansion is a prime candidate for this.

Siam Cement (SCC TB)

Reduce: Getting dragged lower by a leveraged consumer

Chemicals have peaked but domestic cement & auto demand will likely remain depressed with a leveraged consumer

Valuations still need to adjust to this low-growth future

Reiterate Reduce with lower TP of THB414 (THB420 earlier)

Industrials Construction Materials Equity – Thailand

Company report

Index^ THAI SET INDEXIndex level 1,503RIC SCC.BKBloomberg SCC TB

Source: HSBC

Reduce Target price (THB) 414.00 Share price (THB) 520.00 Upside/Downside (%) -20.4

Dec 2014 a 2015 e 2016 e

HSBC EPS 28.01 31.15 32.07 HSBC PE 18.6 16.7 16.2

Performance 1M 3M 12M

Absolute (%) -1.5 1.6 14.5 Relative^ (%) -0.9 2.2 12.1

Enterprise value (THBm) 726,114Free float (%) 100Market cap (USDm) 18,517Market cap (THBm) 624,000

Source: HSBC

18 June 2015

Shishir Singh* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4292 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

http://www.research.hsbc.com/

2

Siam Cement (SCC TB) Construction Materials 18 June 2015

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Financials & valuation Financial statements

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Profit & loss summary (THBm)

Revenue 487,545 451,926 477,381 500,813EBITDA 61,148 67,917 72,410 78,100Depreciation & amortisation -18,062 -19,512 -20,658 -21,921Operating profit/EBIT 43,086 48,405 51,753 56,179Net interest -7,266 -6,580 -7,179 -7,486PBT 41,928 48,660 50,123 54,267HSBC PBT 38,583 44,967 47,041 51,106Taxation -4,968 -7,588 -8,553 -9,502Net profit 33,615 37,378 38,489 41,603HSBC net profit 33,615 37,378 38,489 41,603

Cash flow summary (THBm)

Cash flow from operations 48,199 53,064 53,569 57,249Capex -40,857 -39,178 -39,836 -40,325Cash flow from investment -44,352 -38,493 -39,836 -40,325Dividends -14,956 -7,918 -16,169 -17,808Change in net debt 7,520 -6,792 2,436 885FCF equity 4,510 13,202 13,733 16,924

Balance sheet summary (THBm)

Intangible fixed assets 17,843 18,954 18,954 18,954Tangible fixed assets 205,085 224,357 243,535 261,939Current assets 137,998 151,968 158,069 154,655Cash & others 19,031 30,543 35,400 28,000Total assets 465,823 503,441 534,270 554,833Operating liabilities 60,547 61,423 59,557 59,681Gross debt 195,959 200,680 207,973 201,457Net debt 176,928 170,136 172,572 173,457Shareholders funds 177,283 188,176 209,495 232,546Invested capital 281,349 303,313 325,601 347,868

Ratio, growth and per share analysis

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Y-o-y % change

Revenue 12.3 -7.3 5.6 4.9EBITDA 4.9 11.1 6.6 7.9Operating profit 1.2 12.3 6.9 8.6PBT -2.1 16.1 3.0 8.3HSBC EPS -4.0 11.2 3.0 8.1

Ratios (%)

Revenue/IC (x) 1.8 1.5 1.5 1.5ROIC 13.9 14.0 13.6 13.8ROE 19.8 20.5 19.4 18.8ROA 9.6 9.6 9.2 9.4EBITDA margin 12.5 15.0 15.2 15.6Operating profit margin 8.8 10.7 10.8 11.2EBITDA/net interest (x) 8.4 10.3 10.1 10.4Net debt/equity 84.5 75.9 69.4 63.1Net debt/EBITDA (x) 2.9 2.5 2.4 2.2CF from operations/net debt 27.2 31.2 31.0 33.0

Per share data (THB)

EPS reported (fully diluted) 28.01 31.15 32.07 34.67HSBC EPS (fully diluted) 28.01 31.15 32.07 34.67DPS 12.50 13.76 14.31 15.46Book value 147.74 156.81 174.58 193.79

Key forecast drivers

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Cement Sales (mn tons) 21 22 25 27Cement ASP (USD/Ton) 60 60 64 67HDPE-Naphtha Spread (USD/Ton)

467 453 455 466

PP-Naphtha Spread (USD/Ton) 667 642 658 677PVC-EDC/C2 (USD/Ton) 595 558 573 590Packaging Paper ASP (USD/Ton) 726 733 749 761

Valuation data

Year to 12/2014a 12/2015e 12/2016e 12/2017e

EV/sales 1.5 1.6 1.5 1.4EV/EBITDA 11.9 10.7 10.0 9.2EV/IC 2.6 2.4 2.2 2.1PE* 18.6 16.7 16.2 15.0P/Book value 3.5 3.3 3.0 2.7FCF yield (%) 0.8 2.4 2.5 3.1Dividend yield (%) 2.4 2.6 2.8 3.0

Note: * = Based on HSBC EPS (fully diluted)

Price relative

Source: HSBC Note: price at close of 16 Jun 2015

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2013 2014 2015 2016Siam Cement Company Rel to THAILAND SET INDEX

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Peak in the past, weak in the future

SCC’s net profit is driven by four segments. Two of these, namely cement and building materials

(C&BM) and chemicals, make up around three quarters of its net profits. Paper, focused mostly on

packaging, generates around 10% of the company’s earnings with the rest coming from SCG Investments,

primarily the company’s 10% stake in Toyota Motors Thailand (TMT).

SCC’s Net Profit* (THB bn) is driven by four segments: Cement, Chemicals, Paper & SCG Investments

Source: Company, HSBC estimates; * Includes exceptional gains/(losses) from FX, Inventory, Asset sales etc.

The company is yet to surpass its previous peak profit of THB37.3bn achieved in 2010, but we expect it

to do so this year. The structure of its profits, however, has changed materially during this period.

The balance of profits has shifted away from global industries like petrochemicals to domestically or

regionally-focused divisions of cement, building materials, paper and Toyota Thailand. Moreover, earnings

at the chemicals division appear to have recovered to cyclical highs along with PE-Naphtha spreads.

Incremental growth from here is more dependent on domestic and regional levers, which are a weak spot.

7.4 8.0 8.8 8.9 9.813.2

16.113.2 13.2

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2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e

Cement & Bldg. Mat. Chem Paper SCG Investment & Others

Siam Cement Chemical strength has driven SCC to be one of the best

performers YTD among the non-financial ASEAN big caps

But earnings growth is set to weaken now as chemical earnings

peak and domestic cement and auto earnings remain weak

We trim 2015-17e earnings by 3% each, leaving us 12% below

consensus for 2016-17e; reiterate Reduce with TP of THB414 on

13.3x 2015e PE

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Net profit: Segment-wise evolution (THB mn)

Source: Company, HSBC estimates

Investors may think that our thesis of domestic and regional drivers becoming more prominent in the

future runs contrary to the earnings evolution chart above but this isn’t the case. The earnings evolution

for 2015e as a whole would have been distorted by two specific factors in the first quarter.

Firstly, even though chemicals should be the biggest earnings driver in 2015e, this is largely due to a

doubling of profits in 1Q15 compared to a year ago. The 1Q15 jump in profits accounts for 70% of our

2015 chemical earnings growth forecast of THB3.5bn. Clearly, most of this year’s gains in chemicals are

behind us and, going forward, profit growth would be less spectacular as olefin spreads normalize.

Secondly, the THB0.4bn gain in earnings from SCG investment is due to a one-off gain of THB1.5bn

from the sale of stake in Siam Michelin in 1Q15. The one-off gain masks the underlying drag on earnings

from weak performance at Toyota Thailand. In essence, the one-off gain has postponed the earnings drag

for a year to 2016. Again, the key takeaway is that, going forward, earnings from SCG Investments

should decline.

After accounting for the above mentioned neutral-to-negative factors for earnings growth, our expectation

of continued profit growth of low-to-mid single digits forecast in the rest of this year and 2016e (still 12-

13% below consensus estimate) is driven by the following:

Stabilization of chemical profits near cyclical highs

Relatively strong rebound in profits from C&BM

Modest recovery in Toyota dividends following a c22% fall in 2015e

Chemicals: Profits have likely already peaked in this cycle

SCC’s chemical profits have been boosted by a recovery in profitability of naphtha crackers. Bulk of

chemical profit is driven by two of its 67%-owned naphtha crackers. The two crackers combined produce

1.7MT of ethylene and 1.2MT of propylene annually. Approximately two-thirds of these upstream

products, approximately in proportion of its equity stake in the crackers, are used by SCC for its

polyolefin output (HDPE, LDPE, LLDPE and PP). In addition, SCC’s biggest associate is Chandra Asri

27,2818,5003,337

229 1,232

8,602

1,215 27 1,5951,701

1,1692,912

1391,222

373,491 294 431

3,430

1,307341

1,847

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26,000

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46,000

2011

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Earnings ∆2012

Earnings ∆2013

Earnings ∆2014Earnings ∆2015

Earnings ∆2016

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Petrochemicals (CAP) in Indonesia. SCC owns a 30% stake in CAP, which produces 0.9MT of olefins

from its naphtha cracker and sells much of it as polyolefins. Given the naphtha cracker exposure, SCC’s

profits are heavily influenced by the HDPE-Naphtha and PP-Naphtha spreads. The link would only be

made stronger in the medium term as CAP expands its cracker capacity by more than 40% by the end of

2015. Other by-products and downstream products, like PVC (subsidiary Thai Plastic and Chemical has

0.9MTPA capacity) and butadiene (two of its biggest associates, namely CAP and Bangkok Synthetics,

have a combined 0.3MTPA capacity), also play a role in determining profitability, but weakness in the

pricing of these products has limited their influence on SCC’s bottom line in the recent past.

HDPE-Naphtha quarterly spread (USD/Ton) PP-Naphtha quarterly spread (USD/Ton)

Source: CMAI Source: CMAI

Ethylene spreads (Ethylene-Naphtha) have driven the strength while HDPE-Ethylene spreads are at cyclical lows

Source: CMAI

While PP-naphtha spread has been fairly stable since the global financial crisis (GFC), the PE-naphtha

spread has been volatile. The latter declined to cyclical lows in 2011 but have recovered to post-GFC

highs since then. The ethylene spread (ethylene-naphtha), in particular, has staged a strong recovery and

is now back to levels last seen at its cyclical peak of 2006. At the same time, non-integrated polyethylene

margins (HDPE-ethylene) are at cyclical lows.

Higher upstream profitability at the expense of downstream profits doesn’t work as much in SCC’s favour

because of its proportionally smaller upstream ownership (67% stake in crackers) compared to fully-

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owned downstream polyolefin capacities. Still, a mix of robust demand, limited supply growth, outages

(planned/unplanned shutdowns) as well as a sharp fall in oil/naphtha prices has pushed SCC’s blended

petchem spreads to cyclical highs.

Normalization of petchem spreads implies that SCC Chemical’s quarterly profits have likely peaked in this cycle

Source: Company, CMAI, HSBC estimates

SCC Chemicals P&L

Chemicals P&L (THBm) 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e

Revenue 130,223 136,527 101,115 144,317 192,929 203,539 209,997 248,118 203,686 219,623 Gross Profit 17,887 9,909 18,358 13,762 9,759 5,615 18,210 22,204 25,310 24,907 Gross Margin (%) 13.7 7.3 18.2 9.5 5.1 2.8 8.7 8.9 12.4 11.3 Other Income 730 531 756 912 3,445 1,554 2,389 2,127 1,875 2,049 OpEX -5,211 -5,162 -5,213 -6,538 -6,869 -7,194 -7,746 -8,709 -8,059 -8,035 EBIT 13,406 5,278 13,901 8,136 6,335 -25 12,853 15,622 19,126 18,922 EBIT Margin (%) 10.3 3.9 13.7 5.6 3.3 0.0 6.1 6.3 9.4 8.6 Associates 5,980 2,963 5,234 6,341 5,485 -606 2,774 2,795 3,644 2,172 Exceptionals 6,624 369 -52 18,032 0 0 1,701 0 0 0 Finance Cost, Net -986 -1,914 -1,437 -1,287 -2,603 -1,828 -3,388 -2,763 -1,969 -2,235 PBT excl. exceptionals 18,400 6,327 17,698 13,190 9,217 -2,459 12,239 15,654 20,801 18,859 PBT 25,024 6,696 17,646 31,222 9,217 -2,459 13,940 15,654 20,801 18,859 Tax -2,546 -1,140 -1,520 -9,252 -2,169 -865 -1,036 -1,236 -2,363 -2,434 PAT 15,854 5,187 16,178 21,970 7,048 -3,324 11,203 14,418 18,438 16,425 Minorities -3,587 577 -3,497 678 4,142 6,014 89 -1,957 -2,551 -1,875 Net Profit 12,267 5,764 12,681 22,648 11,190 2,690 11,292 12,461 15,887 14,550


The key question for SCC investors now is whether profits have peaked in this cycle after 1Q15 earnings

topped all quarters since 2006. In our view, this is likely to be the case as the strong gains in the HDPE-naphtha

spread due to fall in oil/Naphtha prices would normalize with time. Our chemicals team also believes that some

of the current strength in ethylene spreads and prices would abate once outages normalize and integrated

margins could continue to move higher over time as their ‘supply vacuum’ thesis plays out over 2015-16.

Consequently, we believe SCC’s steep PE multiple relative to its history is a lot harder to justify if

incremental earnings growth from the Chemicals segment becomes hard to come by after recent highs. In

fact, we forecast chemicals earnings growth (y-o-y) to turn negative over the 6-9 months after 1H15 due

to the high base of a year earlier.

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Chemical GP (USD/Ton, LHS) Core Olefin & Aromatic Spread (USD/Ton, RHS)

Forecast

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Cement: A soft Thailand to offset gains from regional expansion C&BM 2014 sales split among domestic & int’l business C&BM 2014 EBITDA split among domestic & int’l business

Source: Company; Total = THB185.4bn Source: Company; Total = THB26.7bn

Thailand cement demand growth (YoY %)

Source: Bank of Thailand

We are limited by the lack of granularity on segmental EBITDA provided by the company but it is easy to

ascertain from disclosed data that international business accounted for only 34% and 23% of C&BM’s

sales and EBITDA, respectively, in 2014. The international sales include the exports from Thailand as

well as company’s ASEAN operations. In other words, three-quarters of company’s EBITDA in C&BM

segment comes from its domestic business – mostly from cement sales, which is classified along with

other low-margin products like ready-mix concrete within the “structural” sub-segment.

EBITDA from ceramic products isn’t disclosed separately but, if EBITDA margins of 21-22% at Dynasty

Ceramics (DCC TH, Not Rated), SCC’s domestic peer, are any guide, then SCC likely makes over 70% of its

C&BM EBITDA from only two product lines – domestic cement and ceramics. Sales of both are driven by

Thai construction activity, which hammers home the point that domestic demand is of far greater importance

to the company’s profitability than overseas markets despite its coming regional expansion.

Thai cement demand growth has been weak since 1Q13; in 1Q15, demand held near its weakest level

since the GFC, when it plunged. However, recent strength in construction activity in Bangkok and its

Structural 33%

Housing 10%Logistics

14%

Ceramics9%

Internatnl' 34%

Structural59%

Ceramics, Housing & Logistics

18%

Internatnl' 23%

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Expectations of end of QE3, FX volatility & political

change/martial law

Demand fell sharply after Sep-06 coup but with a 3-month lag

Negative demand growth due to financial crisis

2010 riots - Red shirt vs. Yellow shirt protests

Thai Floods

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vicinity as well as a reversal in unemployment suggests a modest domestic recovery ahead. Despite the

bottoming of demand indicators, investors need to take note that we aren’t forecasting growth of anything

more than low-to-mid single digits over the next few years.

Previous two upcycles in cement demand were, in part, orchestrated by an increase in household debt

Source: HSBC

Thai cement consumption has grown at a CAGR of only 2% over last decade and, in our view, this is the

steady-state growth achievable in the country unless generous fiscal and monetary stimulus sends it

higher temporarily. It is worth noting that cement consumption in Thailand is already as high as

525kg/capita and it tends to peak at around 500-600kg/capita in most economies (China is an important

outlier because of its heavy focus on infrastructure investment). Yet, another cause of concern for those

looking for a stronger recovery is Thailand’s high household debt. The previous two growth phases were,

in part, triggered by a jump in household debt. This may well happen again, but we believe the chance of

it has receded with a steady build-up in leverage. Thai household debt of THB10.4trn was 80% of GDP at

the end of 2014 compared to only THB5.0trn or 52% of GDP at the end of 2008.

Given these challenges, we forecast Thai cement sales to increase by1.4% y-o-y in 2015e before climbing by

4% y-o-y in 2016e. In our view, a stronger demand recovery is unlikely without broader fiscal stimulus

directed at Thai consumers, like the measures taken in 2012-13. Residential demand is the largest sub-

segment of demand in Thailand but the current environment is characterized by over-leveraged consumers,

particularly upcountry, that used the tax breaks and incentives offered by the previous government to

purchase big ticket items like cars and houses. Unless the government orchestrates a recovery in this segment,

possibly through targeted stimulus, we doubt if a stronger recovery could take place.

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Strong domestic recovery unlikely without broad fiscal stimulus Last upcycle was driven by government incentives; the decline after the same has abated but strength of the recovery is uncertain

Source: Thomson Reuters Datastream, Bank of Thailand, HSBC

Construction activity in Bangkok and its vicinity appears to have bottomed out with a strong rebound in 1Q15

Source: Thomson Reuters Datastream, Bank of Thailand, HSBC

Thai unemployment also appears to be tapering down after last year’s jump, setting the stage for a modest recovery*

Source: Thomson Reuters Datastream, Bank of Thailand, HSBC; * assuming no major fiscal stimulus other than government’s infrastructure spending

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01-Jan-09 01-Sep-09 01-May-10 01-Jan-11 01-Sep-11 01-May-12 01-Jan-13 01-Sep-13 01-May-14 01-Jan-15

Cement sales YoY% (LHS) Car sales YoY%3 per. Mov. Avg. (Cement sales YoY% (LHS)) 3 per. Mov. Avg. (Car sales YoY%)

Post-GFCrecovery

Surge in demand driven by government incentives including wage hikes, farm price guarantee, tax rebates for low-to-mid income houses, subsidies for first car purchase etc,

-50.00

-30.00

-10.00

10.00

30.00

50.00

70.00

90.00

110.00

130.00

150.00

-15.0

-5.0

5.0

15.0

25.0

35.0

45.0

01-Jan-02 01-May-03 01-Sep-04 01-Jan-06 01-May-07 01-Sep-08 01-Jan-10 01-May-11 01-Sep-12 01-Jan-14

Cement sales YoY% (LHS) New houses BKK & Vicinity YoY%3 per. Mov. Avg. (Cement sales YoY% (LHS)) 3 per. Mov. Avg. (New houses BKK & Vicinity YoY%)

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

01-Jan-02 01-May-03 01-Sep-04 01-Jan-06 01-May-07 01-Sep-08 01-Jan-10 01-May-11 01-Sep-12 01-Jan-14

Cement sales YoY% (LHS) Unemployment YoY%3 per. Mov. Avg. (Cement sales YoY% (LHS)) 3 per. Mov. Avg. (Unemployment YoY%)

10


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Thai demand growth YoY%, by segment

1Q14 2Q14 3Q14 4Q14 1Q15

Commercial/Retail (18-20%) 14 5 -4 -8 -6 Government (28-30%) 1 -2 -3 0 10 Residential (50-52%) 1 -1 -2 -3 -7 Total Market 4 0 -3 -3 -2

Source: Siam Cement

We expect Thai cement demand to grow by 1.4% in 2015e and 4%YoY in 2016e; ASPs are lower in 2015e due to lower input costs

2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e

Capacity (mn tons) 56.4 56.4 56.4 56.4 56.4 56.4 56.4 56.4 56.4 58.4 60.9 60.9 Utilization (%) 77.9 77.8 67.9 69.4 72.8 69.7 75.7 75.0 75.2 73.5 76.0 80.0 Domestic demand (mn tons) 29.2 25.6 24.2 24.7 26.9 28.1 31.2 34.3 34.2 34.6 36.0 37.1 YoY % 0.5 -12.3 -5.7 2.2 8.8 4.6 10.9 10.0 -0.4 1.4 4.0 3.0 Exports (mn tons) 14.7 18.2 14.1 14.4 14.2 11.2 11.5 8.0 8.2 8.2 10.2 11.6 YoY % 3.2 24.1 -22.7 2.2 -1.5 -21.4 2.8 -30.3 3.0 0.0 24.3 13.2 ASP - Retail (THB/Ton) 2,246 2,308 2,617 2,675 2,510 2,557 2,520 2,763 2,769 2,690 2,747 2,806 YoY % 3.0 2.8 13.4 2.2 -6.1 1.9 -1.5 9.7 0.2 -2.9 2.1 2.1 ASP ex-factory (THB/Ton) 1,328 1,390 1,698 1,756 1,650 1,838 1,813 1,894 1,975 1,896 1,953 2,011 YoY % 5.3 4.7 22.2 3.4 -6.0 11.4 -1.4 4.5 4.3 -4.0 3.0 3.0 Source: Thomson Reuters Datastream, Bank of Thailand, Cement Association of Thailand, HSBC estimates

Even though the market has gotten excited about a new infrastructure investment push in Thailand, we

doubt if this would be enough to generate anywhere close to double-digit growth, unless it is

accompanied by a broad-based revival in the residential segment. According to Siam Cement, a big

infrastructure push like the THB2trn plan envisaged by the previous government would only generate

1MT of incremental demand annually. Of course, the infrastructure build-out typically spurs residential

and commercial investments, but these effects tend to happen with a significant time lag i.e. the demand

growth outlook is unlikely to improve materially even with the launch of similar large-scale projects

unless a turnaround in residential segment materializes.

Despite the relatively weak recovery in domestic market, we remain optimistic on the resumption of earnings

growth in the cement segment due to the company’s regional expansion. The addition of capacity in relatively

high-ASP markets should be one of the primary drivers of growth at C&BM. The arrival of these capacities

from 3Q15 is likely to push C&BM’s earnings growth back into double digits, in our view. We forecast SCC’s

cement capacity to increase by c28% in little over three years. Among these, the Indonesian opportunity is well

known as offering exposure to the largest market in ASEAN (twice the size of the Thai market) with a 30-40%

higher ASP than in Thailand even for new entrants. In our view, both the regional expansion and a domestic

Siam Cement capacity expansion plan

m tons 2013 2014 2015e 2016e 2017e

North Thailand 2.0 2.0 2.0 2.0 2.0 Central Thailand 14.0 14.0 14.0 14.0 14.0 South Thailand 7.0 7.0 7.0 7.0 7.0 Cambodia 1.0 1.0 1.0 Vietnam 0.2 0.2 0.2 0.2 0.2 Indonesia 1.8 1.8 1.8 Myanmar 1.8 1.8 Laos 1.8 Total Cement Capacity 23.2 23.2 26.0 27.8 29.6 YoY % 0.0 0.0 12.1 6.9 6.5


11


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price recovery are likely to drive margin- accretive growth in C&BM division. We expect C&BM’s net profit

to remain flattish y-o-y in 2015 but expect it to rise by 30% in 2016e. SCC: Cement & Building Materials P&L

THBm 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e

Revenue 96,204 109,977 104,442 114,240 128,346 154,537 174,642 185,423 189,352 197,165 Gross Profit 23,984 27,285 26,338 28,898 32,621 37,664 41,699 44,021 44,774 50,644 Gross Margin (%) 24.9 24.8 25.2 25.3 25.4 24.4 23.9 23.7 23.6 25.7 Other Income 812 1,272 1,469 1,524 1,618 2,142 1,731 1,808 1,518 1,504 OpEX -13,961 -16,694 -15,168 -17,543 -19,488 -21,999 -23,947 -27,077 -27,663 -28,284 EBIT 10,835 11,863 12,639 12,879 14,751 17,807 19,483 18,752 18,629 23,865 EBIT Margin (%) 11.3 10.8 12.1 11.3 11.5 11.5 11.2 10.1 9.8 12.1 Associates 448 251 339 273 238 453 394 539 492 517 Exceptionals 0 0 0 0 0 0 0 0 0 0 Finance Cost, Net -1,109 -1,014 -518 -434 -638 -1,223 -1,460 -2,086 -2,019 -2,009 PBT excl. exceptionals 10,174 11,100 12,460 12,718 14,351 17,037 20,118 17,205 17,103 22,373 PBT 10,174 11,100 12,460 12,718 14,351 17,037 20,118 17,205 17,103 22,373 Tax -2,699 -3,051 -3,452 -3,473 -4,128 -3,308 -3,417 -3,230 -3,215 -4,317 PAT 7,475 8,049 9,008 9,245 10,223 13,729 16,701 13,975 13,888 18,057 Minorities -123 -52 -180 -374 -384 -553 -609 -795 -497 -678 Net Profit 7,352 7,997 8,828 8,871 9,839 13,176 16,092 13,180 13,391 17,379


Shrinking car sales in Thailand would be an earnings drag

C&BM isn’t the only domestically focused segment of the company. SCG Investments, the third biggest

swing factor for SCC’s net profit after Chemicals and C&BM, is also under pressure from the soft

economy. The contribution of SCG Investments to group net profit rose from 6% in 2010 to as much as

18% of the company’s profits in 2012. But, in our view, it would decline to only 8% in 2016e. The

reason for this volatility is the company’s 10% stake in Toyota Motor Thailand (TMT).

TMT’s dividends to SCC almost doubled in 2012-13 from their level in 2011 as Thai auto sales surged on

the back of government subsidies for the first car purchase. These dividends are the single largest

contributor to SCG Investments’ bottom line and are accounted for by the company in “Other Income” of

SCG Investments. Since TMT is not listed, the details of its P&L and dividend payout are unavailable.

However, TMT’s dividends to SCC exhibit a very noticeable correlation to Thai car sales (TMT’s market

share has been consistent mid-30s). Consequently, our view on its dividends and SCG Investments’

contribution to group earnings is also driven by our forecasts of Thai car sales.

Thailand monthly car sales SCC’s dividends from SCG Investments (primarily Toyota)

Source: Toyota Thailand Source: Toyota Thailand, HSBC estimates

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

0100200300400500600700800900

0

500

1,000

1,500

2,000

2,500

3,000

1H09

2H09

1H10

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

2H14

1H15

e2H

15e

1H16

e2H

16e

LT Invt. Divy (THBm. LHS) Car sales ('000 units)

12


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Monthly car sales in Thailand exceeded 100,000 for most of 2012 and 2013 with total sales close to

almost 2.8m units during this two-year period. A subsequent drop in car sales has taken annual sales

down below 900k units in 2014 and a further decline to less than 800k appears likely in 2015e.

A Bangkok Post article on 22 May 2015 reported that TMT believes its car sales are likely to fall below

900,000 in 2015. At the start of the year, the company expected the market and its own sales to remain

flattish y-o-y in 2015 but a soft start to the year makes this target difficult to reach now. TMT’s sales

declined by 16.8% y-o-y to 70,042 in 1Q15 compared to an 11.8% y-o-y fall in market sales.

Given the continued weakness in car sales, we expect income from long-term dividends like TMT to fall

by 20% y-o-y to THB3bn in 2015. Our forecast of declining long-term dividends also factors in the sale

of SCC’s stake in Michelin Siam, which has been generating recurring dividends of around THB200m

per year. The company recorded a one-off gain of THB1.5bn from the Michelin Siam sale in 1Q15 that

should help smooth out the decline in TMT dividends in 2015e. However, the likely absence of any such

one-offs thereafter would make SCG Investments an earnings drag in 2016e.

We cut 2015-17e EPS by 3% each; we are 12% below Street in 2016-17e

Our earnings estimates for SCC’s chemical and paper segments are largely unchanged for 2015-17e, but

we cut our estimates for the C&BM division by 2% and also account for the sale of stake Michelin Siam

by removing its potential dividends of around THB200m from our earnings forecasts. These changes

result in a 3% lower aggregate EPS forecast for each of 2015-17e.

New vs. Old estimates

__________ Old estimates ___________ _________ New estimates _________ __________ New vs. Old ___________ 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e

Revenue 456,115 482,976 506,232 451,926 477,381 500,813 -0.9 -1.2 -1.1 EBITDA 69,147 74,037 79,451 67,917 72,410 78,100 -1.8 -2.2 -1.7 EBIT 49,628 53,333 57,447 48,405 51,753 56,179 -2.5 -3.0 -2.2 PBT 49,876 51,693 55,533 48,660 50,123 54,267 -2.4 -3.0 -2.3 Net Profit 38,443 39,853 42,708 37,378 38,489 41,603 -2.8 -3.4 -2.6

Source: HSBC estimates

It is always difficult to pinpoint exactly the source of difference from consensus in the forecasts for a

complicated conglomerate. However, a comparison with consensus estimates suggests that even though

we are 12% below Street on EPS estimates, our EBITDA estimates are generally in line. Consequently,

the source of our lower RoE estimate has to be one or more of the following: depreciation, other income

(which includes TMT dividends), associate earnings, interest and tax. In our view, the difference is most

likely in the estimates of depreciation and TMT dividends. Moreover, it is possible that some analysts’

estimates may not yet have factored in the sale of the Siam Michelin stake.

13


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HSBC vs. Consensus forecasts

% 2015e 2016e 2017e

Sales -0.8 -3.4 0.2 YoY % -0.8pp -2.9pp 3.8pp EBITDA 2.2 -1.5 1.1 YoY % -18.6pp -4.0pp 2.7pp EBITDA Margin (%) 0.4pp 0.3pp 0.1pp Net Profit -6.7 -12.0 -12.3 YoY % -8.0pp -6.2pp -0.3pp Net Margin (%) -0.5pp -0.8pp -1.2pp

Source: Thomson Reuters Datastream, HSBC estimates

Valuation close to decade highs; EPS growth set to moderate

We reiterate our Reduce rating with a lower target price of THB414 (THB420 earlier) based on a 2015e

PE of 13.3x (13.1x earlier), which is the trailing 12-month average of MSCI-Thailand’s one-year forward

PE. Note that SCC has typically traded at a 12-month forward PE which is within +/-10% of MSCI-

Thailand’s PE. This close a link to the benchmark makes sense since SCC is and has been one of the

biggest non-financial companies in the local benchmark. Consequently, we have always valued the stock

relative to the market and have typically used a suitable premium to MSCI-Thailand’s one-year forward

PE, which is in line with the company’s fundamentals.

Given the prospect of weaker earnings growth (low-to-mid single-digit growth in 2H15e and 2016e vs. MSCI-

Thailand consensus forecast of 15% y-o-y earnings growth over the next 12 months), we believe a premium to

the market PE is not justified and choose a target multiple which is at par with the rest of the market.

The key upside risks are:

A continued re-rating of the local market despite weaker fundamentals could take the stock higher.

Further strength in olefin spreads or another sharp drop in feedstock costs could delay the

normalization of spreads and strengthen the earnings upcycle in chemicals.

SCC has typically traded at a 12M forward PE which is within +/-10% of MSCI-Thailand's 12m fwd PE

Source: Thomson Reuters Datastream, HSBC

-30

-20

-10

0

10

20

30

40

50

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

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Thai government may announce new and broad-based fiscal stimulus to revive domestic demand.

This may drive stronger-than-expected recovery in auto and cement demand.

EPS growth (YoY) at SCC likely saw its cyclical peak in 1Q15 SCC12M fwd PE is close to +1.5SD from its long-term mean

Source: Company, HSBC estimates Source: Thomson Reuters Datastream, HSBC

SCC: 12M forward PE based on consensus forecast

Source: Thomson Reuters Datastream, HSBC

-4.7-14.0

-19.9

7.9

-100.0

-50.0

0.0

50.0

100.0

150.0

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Mar

-15

Jun-

15Se

p-15

Dec

-15

Mar

-16

Jun-

16Se

p-16

Dec

-16

forecast

5.0x7.0x9.0x

11.0x13.0x15.0x17.0x19.0x

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15

1-yr fwd PE +2STDEV +1STDEV

Avg -1STDEV -2STDEV

0

100

200

300

400

500

600

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

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08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

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May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

P 10.0x 12.0x 14.0x 16.0x

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Earnings and target price sensitivity In this section, we provide the key sensitivities to our earnings and target price. The variance to our base

case could come from three sources:

Earnings could be higher or lower than expected

The stock may trade at a premium or discount to the market

The market itself may be re-rated or de-rated

We define our bull case scenario as one in which:

The petchem spreads for core products and associates are 10% higher than our base case. This would

result in 4.4% higher EPS in 2015e.

The cement and ceramic product ASPs are 5% higher than our base case. This would result in 10.1%

higher EPS in 2015e.

Market trades at two standard deviation above its long-term average on 12-month forward PE of

13.5x. Our base case assumption is that it would trade on a 12-month trailing average of 13.3x.

The stock trades at a 10% premium to MSCI-Thailand on a 12-month forward PE of 14.9x. Our base

case assumption is that there is no premium or discount.

We define our bear case scenario as one in which:

The petchem spreads for core products and associates are 10% lower than our base case. This would

result in 4.4% lower EPS in 2015e.

The cement and ceramic product ASPs are 5% lower than our base case. This would result in 10.6%

lower EPS in 2015e.

Market trades at one standard deviation above its long-term average on 12-month forward PE of 13.5x.

Our base case assumption is that it would trade at a 12-month trailing average of 13.3x as in above.

The stock trades at a 5% discount to MSCI-Thailand on 12-month forward PE of 11.5x. Our base

case assumption is that there is no premium or discount.

Bull and bear case valuations relative to the base case


293414

53115

4344

18 0 1844 7

48

0

100

200

300

400

500

600

Bear

TP

Stoc

k at

5%

disc

ount

tom

arke

t

MSC

I-Th

atM

ean+

1SD

5% lo

wer

C&B

MAS

P

10%

low

erPe

tChe

m s

prea

d

TP

10%

hig

her

PetC

hem

spr

ead

5% h

ighe

r C&B

MAS

P

MSC

I-Th

atM

ean+

2SD

Stoc

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10%

prem

ium

tom

arke

t

Bull

TP

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Earnings sensitivity

Since more than three quarters of the company’s earnings come from chemicals or C&BM, the bulk of

the earnings risk is due to volatility in the chemical and cement prices.

Sensitivity to HDPE-Naphtha and PP-Naphtha spreads

We consider the sensitivity of earnings to two of the company’s core chemical products, namely, HDPE

and PP prices. A 10% move in the spread between the prices of these products and naphtha would change

our 2015 and 2016 earnings estimates by about 3% and 7%, respectively.

2015e earnings sensitivity to change in HDPE-Naphtha and PP-Naphtha prices

_____________________________ HDPE-Naphtha Spread ______________________________ -10.0% -5.0% 0.0% 5.0% 10.0%

PP-Naphtha Spread

-10.0% 30.2 30.5 30.8 31.1 31.5 -5.0% 30.3 30.7 31.0 31.3 31.6 0.0% 30.5 30.8 31.1 31.5 31.8 5.0% 30.7 31.0 31.3 31.6 32.0 10.0% 30.8 31.2 31.5 31.8 32.1


2016e earnings sensitivity to change in HDPE-Naphtha and PP-Naphtha prices

_____________________________ HDPE-Naphtha Spread ______________________________ -10.0% -5.0% 0.0% 5.0% 10.0%

PP-Naphtha Spread

-10.0% 29.8 30.5 31.3 32.1 32.9 -5.0% 30.2 30.9 31.7 32.5 33.3 0.0% 30.6 31.3 32.1 32.9 33.7 5.0% 31.0 31.7 32.5 33.3 34.1 10.0% 31.4 32.1 32.9 33.7 34.6


Core olefin and aromatic spread is correlated to company’s GP/ton in Chemicals


200

250

300

350

400

450

500

550

600

0

50

100

150

200

250

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Mar

-15

Jun-

15Se

p-15

Dec

-15

Mar

-16

Jun-

16Se

p-16

Dec

-16

Chemical GP (USD/Ton, LHS) Core Olefin & Aromatic Spread (USD/Ton, RHS)

Forecast

17


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Sensitivity to volume-weighted core and associate chemical spreads

We consider the sensitivity of earnings to the company’s chemical products weighted by their estimated

production volumes. These volume-weighted spreads are a reasonably close proxy to the company’s gross

profit and associate profits.

Volume-weighted associate spread approximates the company’s profit from Chemicals associates


2015e earnings sensitivity to change in core and associate chemical spreads

_________________________ Core Olefin & Aromatics Spread __________________________ -10.0% -5.0% 0.0% 5.0% 10.0%

Associate Spreads

-10.0% 30.2 31.1 32.1 33.0 33.9 -5.0% 30.2 31.1 32.1 33.0 33.9 0.0% 30.2 31.1 32.1 33.0 33.9 5.0% 30.2 31.1 32.1 33.0 33.9 10.0% 30.2 31.1 32.1 33.0 33.9


A 10% move in the core and associate spreads would change our 2015e and 2016e earnings by about 4%

and 6%, respectively. 2016e earnings sensitivity to change in core and associate chemical spreads

_________________________ Core Olefin & Aromatics Spread __________________________ -10.0% -5.0% 0.0% 5.0% 10.0%

Associate Spreads

-10.0% 29.8 30.4 31.1 31.8 32.5 -5.0% 29.8 30.5 31.1 31.8 32.5 0.0% 29.8 30.5 31.1 31.8 32.5 5.0% 29.8 30.5 31.2 31.8 32.5 10.0% 29.8 30.5 31.2 31.9 32.5


-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

80

90

100

110

120

130

140

150

160

170

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Representative Associate Spread (USD/Ton, LHS) Associate Profits (Chemicals, THB mn, RHS)

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Sensitivity to cement and ceramic prices

As mentioned earlier, domestic cement and ceramic products make up close to 70% of C&BM EBITDA.

We estimate that, including exports and non-Thailand production, the proportion of segmental EBITDA

from these products would come to over 80%. We currently forecast a slight decline (less than 1% y-o-y)

in the blended price of these products in 2015 but expect them to rise by over 7% y-o-y in 2016, largely

driven by the company’s cement expansion in regional economies. We also assume that approximately

25-30% of the ASP variance is passed onto the gross margins with the rest being accounted for by a

change in cost structure.

2015e earnings sensitivity to change in cement and ceramic ASPs

_________________________________ Domestic ASP __________________________________ 31.1 -10.0% -5.0% 0.0% 5.0% 10.0%

Export ASP

-10.0% 28.4 29.6 30.6 31.6 32.5 -5.0% 28.7 29.8 30.9 31.9 32.8 0.0% 29.1 30.1 31.1 32.1 33.0 5.0% 29.4 30.4 31.4 32.4 33.3 10.0% 29.6 30.7 31.7 32.6 33.5


We estimate that a 10% change in cement and ceramic product prices would change the 2015e and 2016e

earnings by 8% and 20%, respectively. 2016e earnings sensitivity to change in cement and ceramic ASPs

_________________________________ Domestic ASP __________________________________ 32.1 -10.0% -5.0% 0.0% 5.0% 10.0%

Export ASP

-10.0% 25.0 28.0 30.9 33.6 36.3 -5.0% 25.7 28.7 31.5 34.2 36.8 0.0% 26.5 29.3 32.1 34.7 37.3 5.0% 27.2 30.0 32.7 35.3 37.9 10.0% 27.9 30.7 33.3 35.9 38.4


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Siam Cement P&L

P&L (THB mn) 2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e

Cement & Bldg. Material 96,204 109,977 104,442 114,240 128,346 154,537 174,642 185,423 189,352 197,165 203,505 Chemicals 130,223 136,527 101,115 144,317 192,929 203,539 209,997 248,118 203,686 219,623 236,482 Paper 43,890 47,109 42,728 51,714 54,839 57,430 59,135 64,614 70,376 72,081 72,314 SCG Investment 164 401 307 239 0 0 52 91 0 0 0 Inter-segment elimination -2,745 -783 -9,928 -9,187 -7,535 -7,906 -9,575 -10,701 -11,488 -11,488 -11,488 Revenue 267,737 293,230 238,664 301,323 368,579 407,600 434,251 487,545 451,926 477,381 500,813 YoY % 0.0 9.5 -18.6 26.3 22.3 10.6 6.5 12.3 -7.3 5.6 4.9 Cement & Bldg. Material 23,984 27,285 26,338 28,898 32,621 37,664 41,699 44,021 44,774 50,644 55,094 Chemicals 17,887 9,909 18,358 13,762 9,759 5,615 18,210 22,204 25,310 24,907 25,492 Paper 8,374 7,549 8,190 10,562 10,327 10,527 11,219 11,846 13,262 13,327 13,159 SCG Investment 60 209 154 111 0 0 22 36 0 0 0 Inter-segment elimination + others 157 183 168 75 61 99 5 7 25 0 0 Gross profit 50,462 45,135 53,208 53,408 52,768 53,905 71,155 78,114 83,371 88,879 93,746 Cement & Bldg. Mat incl. elimination 24.9 24.8 25.2 25.3 25.4 24.4 23.9 23.7 23.6 25.7 27.1 Chemicals 13.7 7.3 18.2 9.5 5.1 2.8 8.7 8.9 12.4 11.3 10.8 Paper 19.1 16.0 19.2 20.4 18.8 18.3 19.0 18.3 18.8 18.5 18.2 Gross Margin 18.8 15.4 22.3 17.7 14.3 13.2 16.4 16.0 18.4 18.6 18.7 Cement & Bldg. Material 812 1,272 1,469 1,524 1,618 2,142 1,731 1,808 1,518 1,504 1,587 Chemicals 730 531 756 912 3,445 1,554 2,389 2,127 1,875 2,049 2,227 Paper 191 241 263 233 309 539 558 493 351 362 363 SCG Investment/Others 3,213 1,957 1,576 3,259 4,542 5,477 6,972 5,783 6,747 5,134 5,466 Other Income 5,345 4,156 4,292 6,384 10,894 10,737 11,440 9,924 10,437 9,050 9,643 Cement & Bldg. Material -13,961 -16,694 -15,168 -17,543 -19,488 -21,999 -23,947 -27,077 -27,663 -28,284 -28,724 Chemicals -5,211 -5,162 -5,213 -6,538 -6,869 -7,194 -7,746 -8,709 -8,059 -8,035 -8,605 Paper -4,270 -4,479 -4,279 -4,927 -5,077 -5,576 -6,143 -6,779 -7,279 -7,332 -7,250 SCG Investment -89 -171 -154 -126 -107 -110 -2,376 -2,572 -2,415 -2,526 -2,632 Inter-segment elimination -1,557 -767 -847 -1,192 -1,597 -1,639 179 185 12 0 0 OpEx -25,088 -27,273 -25,661 -30,326 -33,138 -36,518 -40,033 -44,952 -45,404 -46,176 -47,210 Cement & Bldg. Material 10,835 11,863 12,639 12,879 14,751 17,807 19,483 18,752 18,629 23,865 27,958 Chemicals 13,406 5,278 13,901 8,136 6,335 -25 12,853 15,622 19,126 18,922 19,114 Paper 4,295 3,311 4,174 5,868 5,559 5,490 5,634 5,560 6,334 6,358 6,273 SCG Investment & Others 2,183 1,566 1,124 2,583 3,879 4,852 4,592 3,152 4,315 2,608 2,834 EBIT 30,719 22,018 31,838 29,466 30,524 28,124 42,562 43,086 48,405 51,753 56,179 Cement & Bldg. Material 448 251 339 273 238 453 394 539 492 517 543 Chemicals 5,980 2,963 5,234 6,341 5,485 -606 2,774 2,795 3,644 2,172 2,028 Paper 15 19 19 21 2 1 7 -66 -26 0 0 SCG Investment & Others 1,800 1,436 1,608 1,706 1,049 1,712 3,569 2,840 2,724 2,860 3,003 Share of Associate Profits 8,243 4,669 7,200 8,341 6,774 1,560 6,744 6,108 6,835 5,549 5,574 Exceptionals 6,624 369 -52 18,032 0 0 1,701 0 0 0 0 Cement & Bldg. Material -1,109 -1,014 -518 -434 -638 -1,223 -1,460 -2,086 -2,019 -2,009 -2,067 Chemicals -986 -1,914 -1,437 -1,287 -2,603 -1,828 -3,388 -2,763 -1,969 -2,235 -2,296 Paper -728 -870 -923 -893 -872 -648 -672 -821 -994 -801 -738 SCG Investment & Others -3,807 -2,291 -2,771 -2,056 -1,935 -2,622 -2,673 -1,596 -1,597 -2,134 -2,386 Finance Cost -6,630 -6,089 -5,649 -4,670 -6,048 -6,321 -8,193 -7,266 -6,580 -7,179 -7,486 Cement & Bldg. Material 10,174 11,100 12,460 12,718 14,351 17,037 20,118 17,205 17,103 22,373 26,434 Chemicals 18,400 6,327 17,698 13,190 9,217 -2,459 12,239 15,654 20,801 18,859 18,846 Paper 3,582 2,460 3,270 4,996 4,689 4,843 4,969 4,673 5,313 5,557 5,535 SCG Investment & Others 177 711 -39 2,232 2,993 3,942 5,488 4,396 5,442 3,334 3,451 PBT (incl. one-offs) 38,957 20,968 33,337 51,169 31,250 23,363 42,814 41,928 48,660 50,123 54,267 Cement & Bldg. Material -2,822 -3,103 -3,632 -3,847 -4,512 -3,861 -4,026 -4,025 -3,712 -4,995 -5,997 Chemicals -6,133 -563 -5,017 -8,574 1,973 5,149 -947 -3,193 -4,914 -4,309 -4,489 Paper -773 -803 -985 -1,506 -1,358 -1,283 -1,382 -1,225 -2,160 -2,064 -1,920 SCG Investment & Others -150 272 642 91 -72 211 260 130 -494 -267 -257 Tax & Minorities -9,878 -4,197 -8,992 -13,836 -3,969 216 -6,095 -8,313 -11,281 -11,634 -12,663 Cement & Bldg. Material 7,352 7,997 8,828 8,871 9,839 13,176 16,092 13,180 13,391 17,379 20,437 Chemicals 12,267 5,764 12,681 22,648 11,190 2,690 11,292 12,461 15,887 14,550 14,357 Paper 2,809 1,657 2,285 3,490 3,331 3,560 3,587 3,448 3,153 3,492 3,615 SCG Investment & Others 27 983 603 2,323 2,921 4,153 5,748 4,526 4,948 3,068 3,195 Net Profit 29,079 16,771 24,346 37,332 27,281 23,579 36,719 33,615 37,378 38,489 41,603 Wtd. Number of shares (mn) 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 EPS (THB) 24.2 14.0 20.3 31.1 22.7 19.6 30.6 28.0 31.1 32.1 34.7 DPS (THB) 15.0 7.5 8.5 12.5 12.5 11.0 15.5 12.5 13.8 14.3 15.5


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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Shishir Singh

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

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Rating distribution for long-term investment opportunities

As of 17 June 2015, the distribution of all ratings published is as follows: Buy 39% (29% of these provided with Investment Banking Services)

Hold 44% (29% of these provided with Investment Banking Services)

Sell 17% (20% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

Share price and rating changes for long-term investment opportunities

Siam Cement Company (SCC.BK) Share Price performance THB Vs HSBC

rating history

Recommendation & price target history

From To Date

N/A Underweight 17 September 2013 Underweight Neutral 04 February 2014 Neutral Overweight 04 June 2014 Overweight Reduce 29 April 2015 Target Price Value Date

Price 1 377.00 17 September 2013 Price 2 375.00 30 October 2013 Price 3 434.00 04 February 2014 Price 4 500.00 04 June 2014 Price 5 501.00 28 August 2014 Price 6 504.00 29 October 2014 Price 7 561.00 28 January 2015 Price 8 420.00 29 April 2015

Source: HSBC

Source: HSBC

88138188238288338388438488538

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10

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HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

SIAM CEMENT COMPANY SCC.BK 520.00 16-Jun-2015 6Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 31 May 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 This report is dated as at 18 June 2015. 2 All market data included in this report are dated as at close 16 June 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. 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siam cement getting dragged down by leveraged consumer

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