Siam Cement's SEA Expansion A Positive
Thailand's largest industrial conglomerate Siam Cement (SCG) has announced that it plans to invest THB200bn (US$6.3bn) between 2012 and 2016, with more than half of the capital expenditure to be spent outside Thailand, mainly in South East Asia (SEA). BMI believes this announcement is in line with the company's plan to diversify away from the Thai market, a prudent move given the strong demand for cement across SEA.
This five-year investment plan will mainly focus on acquiring overseas companies that belong to one of SCG's core businesses - petrochemicals, cement, building materials, paper and distribution - according to SCG's CEO Kan Trakulhoon. At present, the company is holding discussions with the relevant parties about investing in these sectors within SEA and is evaluating opportunities to acquire companies in Europe.
|Seeking Geographical Diversification|
|Siam Cement Q1 Financial Data, By Sector, %|
We believe this announcement is in line with the company's long-term plan to diversify away from the Thai market. The company had previously stated in 2011 that it plans to invest THB100bn (US$3.2bn) between 2011 and 2015, with most of the spending to go towards acquisitions (See BMI's Company News Alert - Overseas Diversification Is Best Move Forward For Siam Cement - January 2011). Since that announcement, the company has made or started several major investments in SEA ( see table), with Vietnam and Indonesia being the company's top two investment destinations. Besides major SEA economies, SCG is also planning to invest in the frontier SEA markets. The company is looking to develop a US$283mn cement production plant in Myanmar within 2012 and set up retail shops for its products in Cambodia and Laos.
|Investment||Sector||Country||Announcement Date||Value (US$mn)|
|Source: Siam Cement, BMI|
|A majority stake in Keramika Indonesia Asosiasi||Ceramics||Indonesia||Apr-11||na|
|A stake in Kokoh Inti Arebama||Building Materials||Indonesia||Apr-11||na|
|A 30% stake in Chandra Asri Petrochemical||Petrochemicals||Indonesia||Sep-11||425|
|A stake in Boral Indonesia||Building Materials||Indonesia||Feb-12||135|
|A 46% stake in Long Son Island petrochemical complex||Petrochemicals||Vietnam||Feb-12||4500|
|A 37% stake in Mariwasa Siam Ceramics||Ceramics||Philippines||Mar-12||4.9|
We believe it is a positive move by SCG to expand into South East Asia. Many SEA countries are still lacking the necessary fixed assets (ie, residential/non-residential buildings, infrastructure) to support their economic and social development, and have large capital expenditure plans to address this deficit. This could create sizeable demand for cement, plastics and building materials, which are key products offered by SCG. We are forecasting cement consumption in Indonesia, Thailand, Vietnam and the Philippines to average 5-6% growth per annum between 2012 and 2020.
|Thailand, Vietnam, Philippines, Indonesia - Cement Consumption, mn tonnes|
Moreover, various SEA countries are currently embarking on a monetary easing policy to reignite economic growth in the face of softening global activity. This could make it increasingly tenable for construction companies to finance their capital expenditures through debt and take on new projects in 2012. We are forecasting real GDP growth in SEA to reach 4.4% in 2012 and average 5.4% per annum between 2013 and 2021.
|Diversification Deficiency A Factor|
|Siam Cement Q1 Financial Data, THBbn|
This expansion into SEA could also hedge SCG against idiosyncratic risks from its domestic market. SCG has been suffering from a sharp decline in earnings since severe flooding took place in many parts of Thailand in mid-July 2011. With the exception of its cement business, which benefited from the Thai government's flood reconstruction and protection programs, all of SCG's businesses had suffered financially due to the natural disaster and due to declining export demand for its products in Europe and the rest of Asia. An investment into the high-growth markets of South East Asia could therefore improve the long-term sustainability of the company. At present, SCG derives almost all of its revenues from Thailand, with less than 5% of its revenues generated from its plastics operations in Vietnam and Indonesia.