Thursday, July 2, 2009

Siam Cement Clinches Thailand Title

Amid Economic and Political Headwinds, Company Ranks High by Sticking With Its Core Businesses and Shoring Up Finances

BANGKOK -- It's been a tough year for Siam Cement PCL, one of Southeast Asia's oldest and biggest industrial conglomerates. But that hasn't kept it from maintaining its status as one of Thailand's most-respected companies.

[Siam Cement photo]Bloomberg News

The logo for Siam Cement marks the entrance for the company headquarters in Bangkok.

The 96-year-old producer of cement, petrochemicals, paper and other products finished as overall most-admired company in Thailand in the most-recent Asia 200 survey of subscribers of The Wall Street Journal Asia and other businesspeople, showing how well-regarded companies can maintain their reputations in times of stress if they move quickly to shore up finances and don't abandon their basic business models.

Siam Cement topped a handful of other Thai blue chips, including local energy giant PTTPCL, and Charoen Pokphand Foods PCL, an agribusiness concern that sells meat products across the world, in second and third place, respectively. All three companies are perennial high-scorers in the survey.

Siam Cement's performance is especially impressive considering the harsh headwinds it has faced. The global economic crisis has walloped demand for many of the company's core products, including cement and building materials. In recent months, the company reported a sharp slowdown in earnings and predicted that full-year sales could fall as much as 25%. Fitch Ratings downgraded the company's local credit rating because of weaker-than-expected earnings.

In response, Siam Cement slashed inventories and deferred costly new projects, including a $3.8 billion petrochemical complex planned in Vietnam, according to media reports and analysts. But it said it is still looking for acquisitions that will enable it to keep growing as opportunities emerge to snap up weaker rivals.

The company has decided to "cancel or postpone projects that required lengthy project implementation and costly market-penetration efforts, and instead focus on regional M&A" deals that are easier and faster to execute, said President Kan Trakulhoon in an email response to questions. As a result, "I believe [the company] can weather through this financial crisis and emerge a stronger player," he wrote.

[Consumer Spending chart]

Siam Cement's strong showing may also have been related to the fact that many of Thailand's major companies are struggling. Because of its high reliance on exports, Thailand's economy is particularly vulnerable to the world-wide economic slowdown, with growth expected to contract more than 4% this year.

And now that the global economy is showing signs of bottoming out, Siam Cement may be sitting pretty. The Thai government is rolling out a $42 billion stimulus package that will include huge investments in new roads, rail lines and other infrastructure, all of which should boost the company's cement and building-materials businesses.

And while Siam Cement has deferred some projects, it hasn't significantly altered its core businesses or stopped investing in key assets, which include one of the best distribution networks in Thailand and a better-trained workforce than most other companies in Thailand, analysts said. For instance, it is continuing to send dozens of middle managers to Harvard and other top international business schools each year for mid-career training, which helps the company keep attracting top local talent.

Siam Cement "is probably, in my opinion, the best-managed and structured group in this country," said Sriyan Pietersz, an analyst at J.P. Morgan in Bangkok. "When you talk to them, they do have to manage with short-term issues, but they're very focused on five- to 10-year horizons," he says. Moreover, he said, it is "quite leveraged to an economic upturn."

Siam Cement was established by royal decree in 1913 to provide a local source of cement for Thailand's modernizing economy. It grew steadily along with Thailand and expanded into everything from ceramics to iron and steel to tires and auto parts. At its peak before the late 1990s, the company had more than 200 subsidiaries.

The company stumbled in the 1997 Asian financial crisis, though. A regional economic meltdown crippled Thailand's construction sector and a sharp devaluation in the Thai baht left Siam Cement with an unhedged $4.5 billion in foreign debt.

[Thailand Top 10 chart]

The company regrouped, ditching distracting units and reshaping the conglomerate around a handful of core businesses, primarily cement, petrochemicals, pulp and paper. It issued baht-denominated bonds to refinance its foreign debt and quickly returned to profitability.

Siam Cement has insisted on staying more or less the same ever since -- despite signs that some investors want more flash. The company's share price was largely flat throughout much of the recent China-led economic boom in Asia and nose-dived over the past year as global industrial production collapsed, though it has recovered some of its losses lately partly thanks to the Thai stimulus package. On Thursday, its shares closed at 148.50 Thai baht (US$4.36), down from 196 baht a year earlier and 252 baht two years before.

The stock's somewhat lackluster performance partly reflects investors' broader loss of interest in Thailand, which has undergone continuing political turmoil and a series of unstable governments since a military coup in 2006. But it also is an indication that investors thought Siam Cement's diversified business wasn't sexy enough at a time when many preferred faster-growing companies, including mining or other commodity-related businesses.

In January, the company said 2008 profits fell 45% to $480 million, including a roughly $100 million loss in the fourth quarter that was its first loss since the Asian financial crisis. In April, it said first-quarter profits were down 27% to about $150 million, and it warned that full-year sales could slump as much as 25%. In its ratings downgrade, meanwhile, Fitch said that deepening problems in Thailand would "put pressure on demand and pricing prospects in the company's core business in 2009."

But Fitch raised the company's ratings outlook to "stable" from "negative" in recognition of Siam Cement's leading market position and diversified cash flow base. "We still think they can manage their way through the cycle," said Lertchai Kochareonrattanakul, an analyst at Fitch in Bangkok.

In his email, Mr. Kan said the fourth-quarter loss was "unavoidable" considering market conditions, and that the company had responded quickly, not only delaying new projects but also slashing inventories by $470 million. He said the company had more than $1 billion in cash at the end of the first quarter, leaving it well-positioned for acquisitions in the second half; the company hasn't said which acquisition opportunities it is targeting.

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