Asian Insights SparX: Resilient packaging demand while

ed: CK/ sa: PY, CS

Resilient packaging demand despite COVID-19 pandemic • Packaging demand to grow at CAGR of c.3-4%

• Upstream chemical players more affected by

environmental concerns than packaging producers

• Strong demand for hygiene and medical products can

boost the prices of certain chemicals in short-run

• PTL, SCGP and UTP are the winners

Packaging demand to grow at CAGR of c.3-4% over 2019-2022F, driven by megatrend of i) booming e-commerce, ii) low packaging penetration rate, iii) rising transportation/logistic activity, iv) COVID-19 pandemic concerns, v) demographics and lifestyle changes, vi) uptrend for fast-moving consumer goods (FMCGs), and vii) uptrend for parcel delivery services.

Upstream chemical players hit by environmental concerns and single-use plastic ban. Polystyrene (PS), Polyethylene (PE) and Polypropylene (PP) are the key raw materials of single-use plastic and are slated to be banned in the near future. As a result, upstream chemical players such as IRPC Plc (IRPC TB) and PTT Global Chemical (PTTGC TB) will be the most affected.

Increasing awareness of cleanliness and hygiene driven by COVID-19 pandemic. During the outbreak of COVID-19, there was a shortage of medical equipment and hygiene products – thanks to a spike in demand during 1H20. In turn, this has led to a surge in demand for certain chemical materials that are the key components for producing medical equipment and hygiene products, such as PE, PP, Polyethylene Terephthalate (PET) and butadiene, as there are still no signs that the coronavirus can be contained, at least in short-run.

PTL, SCGP and UTP are clear winners. According to 2Q20 results, sales of consumer products dropped by c.20% q-o-q, due to mall closures and travel restrictions caused by the COVID-19 pandemic. However, the packaging business’s performance was rather resilient than the overall consumer sector, as c.50-70% of the former’s sales volumes involve consumer staple goods. Additionally, packaging players are less affected by environmental concerns due to the higher recyclability of their products.

SET : 1,433.56

Analyst

Duladeth BIK, CFA, FRM, CAIA +66 28577833

[email protected]

Thailand Research Team +66 28577833; [email protected]

Index performance (year-to-date basis)

Source: SETSMART, DBSVTH, data as of 18 Nov 2020

DBS Group Research . Equity

27 Nov 2020

Asian Insights SparX: Resilient packaging demand while

sustainability principles remain intact

Chemical/Packaging/Paper Refer to important disclosures at the end of this report

STOCKS

12-mth

Price Mkt Cap Target Price Performance (%)

Bt US$m Bt 3 mth 12 mth Rating

Indorama Ventures 30.25 5,607 24.00 24.5 (13.6) HOLD

IRPC PCL 2.88 1,943 2.30 18.0 (17.7) HOLD

Polyplex (Thailand) 22.30 663 27.50 (10.8) 58.2 BUY

PTT Global

Chemical 59.25 8,776 44.00 24.7 8.7 HOLD

Siam Cement 375 14,855 417 7.8 (4.6) BUY

SCG Packaging

PCL 41.50 5,881 44.00 N.A N.A BUY

Thai Oil PCL 51.25 3,451 41.00 19.2 (27.3) HOLD

United Paper 13.50 290 16.50 (8.8) 37.8 BUY

Asian Insights SparX: Resilent packaging

demand while sustainability remains intact

Chemical/Packaging/Paper

Page 2

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination.

Table of Contents

Executive Summary 3

What is packaging? 8

Part 1: Resilient packaging demand driven by megatrends 9

Part 2: Long-run impact from environmental concern and sustainability principles 20

Part 3: Outbreak of COVID-19 boosts demand for certain types of plastic 26

Part 4: Implications and selection of winners 29

Stock Profile 37

Indorama Ventures 38

IRPC PCL 44

Polyplex (Thailand) 50

PTT Global Chemical 57

Siam Cement 63

SCG Packaging PCL 69

Thai Oil PCL 94

United Paper 101




Page 3

Executive Summary

Resilient packaging business amid COVID-19 pandemic. While

the global economy is being hit by the pandemic of COVID-

19, we think business segments related to consumer staples

goods and consumption, such as packaging, will be more

resilient than those related to cyclicality and exports such as

commodities and tourism. According to the 2Q20 results of

the consumer/commerce sectors, the revenue of key

consumer players such as HomePro, CPALL and Robinson

Department Store, to name a few, dropped by c.20% q-o-q,

weighed down by travel restrictions, city lockdowns, malls

closures during Mar-May 2020. On the other hand, the

packaging business was rather resilient than the overall

consumer sector with the former’s total sales volume, on

average, coming in flat. We believe that the reasons behind

the packaging business’s resilient sales volume are i) c.70% of

packaging sales volume came from consumer staples which

were least affected by the pandemic, ii) packaging cost

accounted for only c.3-4% of the total cost of finished

products, and iii) demand stickiness from food and beverage

manufacturers that are reluctant to change packaging

supplies for the fear of eroding the quality of their product

packaging.

Evidently, based on the data compiled by McKinsey, online

sales of grocery and fresh food in China doubled within a 10-

day period in Jan 2020, at the early stage of the country’s

outbreak of COVID-19. Moreover, there is a spike in volume

of online shopping as well as rising demand for delivery

services (both food and beverage and parcel), due to work-

from-home policies, and the high demand for medical care

and hygiene products. Hence, packaging products such as

corrugated paper, flexible, and rigid plastic were in high

demand.

Expect resilent packaging demand during 2020-2022F, driven

by megatrends. The outbreak of the COVID-19 pandemic in

early 2020 has caused disruptions to businesses and economic

activities the world over. This has temporarily led to a global

economic slowdown, and the packaging business is no

exception. However, we believe the adverse impact on

packaging demand would be limited in view of i) c.70% of

packaging material is used in consumer stable goods which

were least affected by the pandemic, ii) demographics and

lifestyle changes that will lead to a gradual increase in

packaging demand over time, and iii) the boom of e-

commerce that is supported by internet network

advancements and greater internet penetration rate.

As a result, we expect the demand for packaging, both paper-

based and polymer-based products, to remain solid and grow

at a CAGR of 3-4% in during 2019-2022F, driven by the

following factors: i) the boom of online shopping (e-

commerce), ii) low packaging penetration rate in ASEAN, iii)

rising transportation activity, iv) COVID-19 pandemic

concerns, v) demographic and lifestyle changes, vi) uptrend

for FMCG, vii) rising income from the middle class in

Southeast Asia (Indonesia, the Philippines, Vietnam and

Thailand), viii) improving Internet network and penetration

rate, ix) increasing digital banking transactions, x) uptrend for

parcel delivery services and cheaper delivery fee, and xi)

growing popularity of social and mobile commerce services.

More negative impact for chemical players than packaging

producers with respect to environmental concerns and

sustainability principles

i) Ban on seven types of single-use plastics

In 2018, the sub-committee on plastic waste management

looked at the plan of action on reducing and banning the

use of seven types of single-use plastics between 2019

and 2025. In 2019, the use of the following products is

expected to be banned i) cap seals made from PVC films,

ii) products that use Oxo alcohol (OXO), which is usually

found in HDPE and LDPE, and iii) micro-beads made from

plastic. In 2022, the targeted plastic products to be

banned include i) plastic carrier bags that are thinner than

36 microns (usually made from LLDPE), and ii) foam food

containers. As for 2025, the plastic products being

targeted are i) single-use plastic cups and ii) plastic straws.

The majority of foam containers, cups, and plastic straws

are made from PS. We believe LLDPE will be the most

affected chemical product. This because it is used in the

making of carrier bags and packaging films, accounting

for over 55% in the process of producing plastic products.




Page 4

Seven types of plastic bans by 2025F

Source: EIC, PTTGC, DBSVTH

Among chemical product lines, we think LLDPE and PS are

the most adversely affected in terms of demand disruption

by environmental concerns and single-use plastic bans,

due to their lowest level of recyclability. As mentioned

earlier, LLDPE is used in the making of carrier bags and

packaging films that account for over 55% of the total

LLDPE market for making plastic products whereas PS is a

key material for single-use containers and cutleries such as

foam containers, straws, cups, spoons, etc. As a result, we

think IRPC and PTTGC will be the most affected by such a

ban (IRPC with a PS capacity of 125kta, and PTTGC with

an LLDPE capacity of 630kta).

Impact on chemical players from single-use plastic ban

Source: IRPC, PTTGC, SCC, DBSVTH

*note: Joint venture with Dow Chemical and CAP.

ii) Recovery paper ban in China

In July 2017, the Chinese government wanted to

encourage paper recycling to address environmental

concerns. So, it announced that the country would start to

ban the imports of certain types of solid wastes including

wastepaper (recovered paper or RCP), with effect from Jan

2018. Such a ban is in force and expected to eliminate

almost all waste material imports by 2021.

As a result, with such a ban from China, we think that ex-

Chinese paper-based packaging producers will enjoy the

advantages of cheaper feedstock costs (declining RCP

prices) due to excess supply. Hence, SCGP and UTP are the

key beneficiaries of such a ban.

Cost of RCP by quarter

Source: Published regional prices, DBSVTH

iii) Uptrend for plastic waste collection rate

There is a growing trend of increasing plastic waste

collection (plastic bottles, plastic/foam containers for food,

etc.), especially in European and North America countries.

Recently, many giant food and beverage companies

throughout the world are demanding i) the use of more

recyclable products, and ii) higher waste collection amid

rising environmental awareness.

Based on the data compiled by Wood Mackenzie, global

plastic waste collection stood at 12m tonnes or only 56%

of total plastic usage at the end of 2018. Specifically

speaking, Europe and North America had the lowest

collection rates of 57% and 35% respectively. On the

other hand, Asia, especially China, had the highest

collection rate of 80%.

As a result, we expect an uptrend in the collection rate in

2020-2022F, with food and beverage manufacturers

along with packaging producers embracing sustainability

principles (which will be discussed in the next section).

7.57.95

7.65

6.75

5.7

6.45 6.66

4.95

4.054.5

3.75

4.65

0

1

2

3

4

5

6

7

8

9

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

THB/kgAOCC price (THB/KG)




Page 5

Plastic waste collection around the globe

Source: Company, Wood Mackenzie, DBSVTH

iv) Sustainability principles

There is growing concern over sustainability as well as ESG

(environment, social, and governance) for both end-

consumers, i.e. households, and packaging customers, i.e.

food and beverage manufacturers, homecare, personal-

care, healthcare products manufacturers. So, there is high

demand for the recycling of feedstock materials and/or

recyclable products from these producers. For example,

large multi-national companies (MNC) of beverage and

consumer-care product producers such as Coca Cola,

PepsiCo, Unilever, Procter and Gamble, and Starbucks

demand their packaging materials such as PET bottles,

product containers to be i) made from recycled materials,

and ii) recyclable. Hence, we expect many chemical and

packaging companies to start focusing on sustainability

initiatives going forward in 2021F. Our channel checks

with several companies reveal the growing popularity of

the following practices:

a) The need to utilise less energy

consumption/usage during the production

process

b) Increase renewable energy sources to reduce

greenhouse and carbon emissions to the

atmosphere

c) Optimise resources and energy sources for

maximum production efficiency

d) Increase the proportion of renewable and

recyclable feedstock

e) Increase investments in R&D for product

innovations that are environmentally friendly

As a result, most packaging companies are in the process of i)

improving their energy usage and production process

efficiency, ii) investing in projects to reduce their carbon

footprint, iii) developing environmentally friendly and

degradable products, and iv) investing in renewable energy

sources. Hence, we believe they might incur additional cost

that can erode their profitability as a result of complying with

sustainability principles.

In the following analysis, we will focus on the downside risks

to corporate earnings in light of the compression of margins

for stocks under our coverage (IVL, PTL, SCGP and UTP).

Based on our sensitivity analysis, every 1% reduction in gross

profit margin (GPM) would erode our FY21F net profit

projection for IVL/PTL/SCGP/UTP by c.53%/7%/15%/4%

respectively. This is based on the assumptions of i) gross profit

margin (GPM) of c.10%31%/26%/39% respectively, and ii)

holding everything else constant. Note that IVL has the

greatest downside risk relative to others, due to i) its

commodity-centric nature, as over 80% of its products are

linked to commodities prices, ii) its thinner GPM relative to

peers, and iii) only c.7% of its production volume comes from

the packaging business.

Sensitivity analysis of FY21F net profit

Source: DBSVTH

Increasing awareness of cleanliness and hygiene driven by

COVID-19 pandemic. During the outbreak of COVID-19, there

was a shortage of medical, surgery, and personal protective

equipment for the eye and face (safety glasses, and face

shields), hand (natural latex gloves, nitrile gloves, vinyl gloves),

body, and respiratory system (surgery masks, N95 masks, and

full-face respirators). Moreover, there is a spike in demand for

hygiene products in developing countries in Africa, Southeast

Asia, and South America, where the healthcare spending per

capita is relatively lower than the global averages and peers.




Page 6

The following table provides a summary of the major chemical

materials used in the production of personal protective

equipment (PPE).

Personal Protective Equipment breakdown by use

Source: Company, DBSVTH

Hence, we believe the demand for certain chemical products

that are key for producing medical equipment and hygiene

products such as BPA, PET, PP, and HDPE, will remain strong.

On a year-to-date basis, Brent oil prices has retreated by 33%

after oil prices collapsed in Mar 2020, caused by the oil price

war between Saudi Arabia and Russia and the outbreak of

COVID-19 that restricted travel by air and car.

Generally, most petrochemical prices will also move in tandem

with oil prices with a timelag of one month. However, BPA,

PET, PP, Butadiene, and HDPE film grade prices did not track

this trend, with their prices holding up quite well (+42%/-

22%/+2%/+10%/+8% YTD respectively). The stronger

demand for PPE equipment such as nitrile gloves, surgery

masks, face shields and other hygiene and healthcare

products has led to buoyant prices for these chemical

products.

Chemical price vs. Brent by quarter

Source: Bloomberg Finance, PTTGC, DBSVTH

As a result, we foresee limited adverse impact on major the

domestic chemical players, such as AJ, IRPC, IVL, PTL, PTTGC,

and SCC.

Stock picks – PTL, SCGP and UTP are the clear winners, in

our view. Given the analysis from the previous three parts,

we believe that AJ, PTL, SCGP, and UTP are the clear winners

thanks to the three key criteria: i) the rise of megatrends

such as booming e-commerce and increasing demand for

flexible packaging, ii) environmental concerns that led to

single-use plastic ban and recovered paper ban by China,

and iii) the COVID-19 pandemic that led to the rise in

demand for hygiene products as well as medical equipment

such as PPE.

Even though AJ and PTL are in the same business (BoPET,

BoPP, and metallised film manufacturing) and face the same

impact arising from the three abovementioned concerns, we

have omitted AJ from our top picks in view of i) AJ’s inferior

profitability as its gross profit margin and EBITDA margins in

2017-2019 averaged 7-8% and 5-6% respectively (vs. PTL’

20% and 18-19%), ii) AJ’s higher leverage as its debt-to-

equity ratio and net debt-to-equity ratio in 2017-2019

averaged 1.4-1.6x and 0.8-1.0x respectively (vs. PTL’s 0.5-

0.9x and 0.1-0.4x), and iii) AJ’s lower liquidity.

Net impact on key players

Source: DBSVTH

With respect to environmental concerns such as the ban on

single-use plastics, recovered paper ban in China, the uptrend

for waste collection rate and greater adoption of sustainability

principles, we think that companies that have i) a high

proportion of high-value added products (HVAs) and

recyclable products, ii) vertical business integration, and iii)

operational excellence, are more resilient than the ones

without such advantages. Hence, we believe IVL, PTL, SCGP,

and UTP will be more resilient than the others, as the bulk of

their packaging products are recyclable and environmentally

friendly.

However, we think IVL will enjoy less resilience in view of its

commodities-like business, with our sensitivity analysis on its

net profit revealing that it will be the most adversely impacted

by the growing popularity of sustainability principles (that

were discussed in the previous section). As a result, PTL, SCGP

and UTP are our stock picks in the packaging segment.




Page 7

Polyplex (Thailand) (PTL TB, BUY, TP of Bt27.50): uptrend for

flexible packaging demand, along with BoPET and BoPP capacity

expansion.

We like PTL for the following factors: i) its net profit CAGR of

23% over FY18-23F, ii) its status as one of Thailand’s largest

PET film producers and sixth largest PET film producer in the

world, iii) one of the low-cost producers, thanks to its

upstream and downstream integration, iv) minimal adverse

impact from the COVID-19 pandemic (vs. peers), v) its higher

operating efficiency relative to peers, vi) its higher EBITDA

margin and ROE relative to peers, and vii) its valuation

discount relative to peers.

We maintain our BUY rating on PTL with an FY21F TP of

Bt27.5. We used PE multiple method for valuing PTL, as its

chemical business is cyclical in nature. Given our FY21F

earnings projection of Bt2,509m or EPS of Bt2.79, our FY21F

TP works out to Bt27.5 a share (c.28% potential upside) –

based on a PE multiple of 9.9x or 1SD above its 5-year

average. Note that the average PE multiples for the SET index

and SETPETRO stand at 15x and 17x respectively.

SCG Packaging Plc (SCGP TB, BUY, TP of Bt44): A full-

integration of packaging producer in Asia.

We deem SCGP as a defensive stock company in the

packaging business compared to the commodity segment.

Historically, past business performance was growing at a rate

close to the GDP growth rate. Hence, we applied the

discounted cashflow model for our FY21 valuation.

We maintain BUY rating with estmated FY21F target price at

Bt44 a share, under assumptions of i) weighted average

discount rate and terminal growth rates of 8.2% and 1%

respectively, ii) annual capital expenditure of Bt20bn per year.

Our recommendation is supported by i) CAGR of 19% of net

profit growth during 2019-2023F, ii) supeiror profitablity (in

terms of EBITDA margin) relative to regional peers, iii) cost

optimisation with full-integration of packaging chain from

upstream to downstream businesses, and iv) attractive

valuation with respect to PER, PB, EV/EBITDA multiples relative

to peers.

Note that we expect the FY21F PER, PBV and EV / EBITDA

multiples at 22x / 1.7x / 11.6x respectively, compared to

regional peers average of (direct competitor Amcor, Sonoco,

Huhtamaki, and SIG Combibloc) of 19.2x / 3.2x / 11.7x,

respectively).

United Paper (UTP, BUY, TP of Bt16.50): Superior margins

while benefiting from RCP ban by China.

We like UTP for the following factors: i) its ability to maintain

a high level of EBITDA margin with healthy margins, ii)

expectations of an industry upcycle going forward, thanks to

the Chinese government’s stricter polices on the environment,

iii) its already secured customer base, vi) robust e-commerce

trend, vii) its valuation discount relative to peers, and viii) its

attractive dividend yield of 6%-6.5% in FY20F-FY21F.

We used PE multiple method for valuing UTP, as its

containerboard business is cyclical in nature. Given our FY21F


TP works out to Bt16.50 a share – based on a PE multiple of

10.5x or 1SD above its 5-year average.

Major packaging producers in Thailand (k tonne/year)

Source: Company, DBSVTH *note: only includes PE, PP, PET for packaging business **note: includes kraft paper and corrugated paper




Page 8

What is packaging?

Our daily-life activities involve the use of packaging for

essential household items (toothpaste tube, soap and

shampoo bottles, sanitizer bottles, etc.), food packaging and

cutlery (cup, straw, food ware, etc.), food preservation and

lifespan extension, and product containers (delivery boxes,

paper cushion, etc.). Generally, there are three types of

packaging, as follows:

i) Primary packaging – a packaging material, such as flexible

and rigid plastic in food and beverage and homecare

segments, is used for wrapping or enclosing goods and

products and is the innermost packaging closest to the

product itself such as a snack bag, yogurt cup, or any

packaging that has direct contact with the product.

ii) Secondary packaging – a packaging material, such as

folding carton, is used for product display and holds the

primary packaging together for protection purpose.

iii) Tertiary packaging – a packaging material, such as

corrugated containers, paper pallets, and corner guards in

the e-commerce and electronic segments, is designed to

hold the weight of products and to protect from damage

during storage and transportation.

Packaging value chain

Source: SCC, DBSVTH

Packaging is all around us. Packaging, which serves various

functions and has various properties, ensures that goods and

products reach customers in a safe and sound manner. These

functions and properties include:

i) Containment – preventing leakages (gas, air, liquid)

and preventing the loss of parts through numerous

handling processes.

ii) Protection – preventing physical damage during all

stages of the product life and ensuring its protection

from various transportation processes (the delivery of

packages may entail physical movements between

multiple locations), and changes in temperature and

humidity.

iii) Preservation – extending the shelf life, protecting

against biotic, temperature, humidity, acidity, oxygen,

nutrient and abiotic spoilage.

iv) Convenience – providing ergonomics, ease of

handling, and effectiveness in filling and packaging

line.

v) Production information – providing nutrition

information, weight, volume, instruction, and bar

code.

vi) Branding and marketing – acting like a “silent

salesman” using graphical colour displays and artwork.

Application of packaging business

Source: SCC, DBSVTH




Page 9

Part 1: Resilient packaging demand to be driven by megatrends

Expect resilient packaging demand during 2020-2022F, driven

by megatrends.

The outbreak of the COVID-19 pandemic has led to

disruptions in businesses and economic activities the world

over. This has temporarily led to a global economic

slowdown, and the packaging business is no exception.

However, we believe the adverse impact on packaging

demand would be limited in view of i) c.70% of packaging

material is used in consumer stable goods which were least

affected by the pandemic, ii) demographics and lifestyle

changes that will lead to a gradual increase in packaging

demand over time, and iii) the boom of e-commerce that is

supported by Internet network advancements and greater

Internet penetration rate.

As a result, we expect the demand for packaging, both paper-

based and polymer-based products, to remain resilient and

grow at a CAGR of 3-4% in during 2019-2022F, driven by

the following factors: i) the boom of online shopping (e-

commerce), ii) low packaging penetration rate in ASEAN, iii)

rising transportation/logistic activity, iv) COVID-19 pandemic

concerns, v) demographic and lifestyle changes, vi) uptrend

for FMCG, vii) rising income from the middle class in

Southeast Asia (Indonesia, the Philippines, Vietnam and

Thailand), viii) improving Internet network and penetration

rate, ix) increasing digital banking transactions, x) uptrend for

parcel delivery services and cheaper delivery fee, and xi)

growing popularity of social and mobile commerce services.

Factor 1 – Booming e-commerce sector. According to

Euromonitor, Thailand’s total e-commerce value, which

includes business-to-business (B2B) and business-to-customer

(B2C), increased from Bt17bn in 2010 to Bt155bn in 2019, or

a CAGR of 45.1% during the 9-year period. Such a rapid

growth rate was supported by i) greater online platform

variety, ii) greater customer penetration, iii) the launch of

more reliable services, iv) greater product variety , v) changes

in consumer behaviour, and vi) the government’s backing for

such services as PromptPay (that will be discussed in the

following section).

Looking ahead, thanks to the improving Internet network

capacity and availability of 5G bandwidth (that will be

discussed in the following section), we expect Thailand’s e-

commerce value to continue its uptrend in the next five years.

Euromonitor estimates that Thailand’s e-commerce value

could hit as high as Bt461bn in 2024, registering a CAGR of

c.24% during 2019-2024F. Hence, the demand for packaging

and delivery services is also expected to remain in an upcycle.

E-commerce value (2010-2024F)

Source: Euromonitor, DBSVTH

Specifically speaking, the beauty and personal care segment is

expected to enjoy the strongest growth during 2019-2024F

with a CAGR of 24.66%, followed by consumer appliances

and electronics with CAGRs of 15.23% and 13.14%

respectively.

E-commerce trend (2019-2024F)


Factor 2 – Low packaging penetration rate in ASEAN. The

packaging penetration rate (kg per capita) remains low in

developing Asian countries such as Indonesia, Thailand, and

Vietnam. Based on data compiled by Frost & Sullivan and

SCC, the average paper and polymer packaging consumption

per capita stood at 48kg and 31kg for such countries at the

end of 2018. Such readings are much lower than that of

developed countries whose average reading came in above

70kg. With the expansion of e-commerce along with a rise in

household income and lifestyle changes (that will be discussed

in the following section), we expect higher packaging

penetration and consumption in Asia for 2020-2022F.




Page 10

Packaging penetration rate as of 2018

Source: Frost & Sullivan, SCC, DBSVTH

According to a Frost and Sullivan report, consumption per

capita of containerboard packaging in developing countries is

still very low as compared to the matured markets, e.g.

Thailand’s consumption of containerboard is only 48 per

kg/person/year compared to South Korea’s 91 per

kg/person/year.

Containerbord comsumption by countries (as of 2019)

Source: Frost and Sullivan, DBSVTH

Factor 3 – Rise in transportation/logistic activities. Over 2015-

2018, total transported goods, both domestically and

internationally, increased from c.804m tonnes in 2015 to

c.962m tonnes in 2018, or a CAGR of c.4.6%, with rapid

growth of 6-8% seen during 2017-2018. Such growth was

driven by a rise in demand for consumer staple goods,

agricultural products, electronic devices, and construction

materials. Additionally, this was also supported by increasing

demand for door-to-door delivery services that was in tandem

with the growing e-commerce business.

Logistics activities (2015-2018)

Source: NESDC, DBSVTH

Moreover, the logistics business for e-commerce posted a

solid CAGR of 26% over 2015-2017, rising from Bt64.1bn in

2015 to Bt126bn in 2017. Such growth was driven by i)

Alibaba and Jingdong’s (JD) logistics developments, and ii)

increasing delivery activities by Thailand Post, Lazada, Kerry

and Sokochan. Hence, we also expect the uptrend to

continue in the near future.

E-commerce value of the logistics business (2015-2018)

Source: NESDC, DBSVTH

Factor 4 – COVID-19 pandemic concerns. We believe the

impact on packaging demand and supply from the outbreak

of COVID-19 pandemic is mixed, depending on the product

segment and portfolio position of the packaging players.

However, we think the high demand for food, grocery,

healthcare products, personal-care products, food delivery

and e-commerce transportation will continue, as COVID-19

has turned out to be a hard-to-contain virus with second

waves appearing in many countries. Based on the data

compiled by Mckinsey, the online sales of grocery and fresh

food in China doubled within a 10-day period in Jan 2020,

during the early stages of the outbreak. Hence, demand was

high for packaging materials such as corrugated paper,

flexible, and rigid plastic. On the other hand, demand for

packaging materials for the industrial, luxury, alcohol and

business-to-business (B2B) segments such as bulk and

91

87

73

70

48

35

22

15

11

0 20 40 60 80 100

South Korea

USA

Germany

Japan

Thailand

China

Vietnam

Indonesia

Philiphine

kg/person/year




Page 11

transportation packaging could see a downward trend, as the

demand for such segments is highly correlated with the

domestic GDP performance. Note that the Bank of Thailand

(BOT) has revised down Thailand’s 2020F GDP growth

forecast to -8.1% in June 2020.

Thailand GDP growth rate (2010-2020F)

Source: BOT, DBSVTH

Factor 5 – Demographic changes. Thailand is experiencing

changes in its population structure such as i) the downsizing of

the family size, ii) increasing population of senior citizens (i.e.

an aging population), and iii) increasing urbanisation. Data

from National Statistics Office shows that total population

growth remained flat with a CAGR of 0.5% during 2010-

2019, with Thailand’s population now standing at c.66.55m

people. However, the senior population saw the highest CAGR

of c.4.5% whereas the 0-14-year population has seen a lower

CAGR of 1.4% during the same period. As a result, the smaller

expansion of households and growing senior citizen population

have resulted in the demand uptrend for FMCG products

(which will be discussed in the following section) such as food,

beverages, consumer staples and healthcare products. Thus,

plastic packaging that are resizable, reusable, microwavable,

and can be used to preserve freshness and temperature of

products would enjoy high demand going forward.

Thailand population (2010-2019)

Source: National Statistical Office, DBSVTH

Thailand population growth rate (2010-2019)

Source: National Statistical Office, DBSVTH

Factor 6 – Lifestyle changes. With the fast pace of urban living

driving up the need for greater convenience, portability and

on-the-go usage as well as environmental-friendly products,

packaging demand for small-, pocket- and convenient-sized

products is on an uptrend. We can see many brands in beauty

and personal care become increasingly focused on a wide

range of packaging designs and size to attract customers.

In addition, the availability of more affordable smartphones has

allowed more Thais to go online. The NTBC expects total

mobile subscribers to reach as high as 132.5m in 2020, or a

CAGR of 6.3% over 2010-2020F. Moreover, a survey by ETDA

indicates that Internet usage averaged 10 hours and 22

minutes in 2019, or a CAGR of 5% over 2013-2019. The top

five online activities were social media, entertainment, surfing,

e-mail communication and online shopping. Specifically

speaking, food and parcel delivery services enjoyed the highest

growth rate among other online activities. At the end of 2019,

food and parcel delivery services enjoyed growth rates of 27%




Page 12

y-o-y and 20% y-o-y respectively. Hence, we expect such solid

growth to continue, on the back of COVID-19.

Thailand’s mobile subscribers (2010-2020F)

Source: NBTC, DBSVTH

Mobile usage per day (2013-2019)

Source: ETDA, DBSVTH

Growth of top five online activities (2018-2019)

Source: ETDA, DBSVTH

Factor 7 – Growing FMCG trend. Consumer goods are

products purchased for consumption by the average

consumer. They are divided into three different categories:

durable, non-durable goods, and services. Durable goods

have a shelf life of three years or more while non-durable

goods have a shelf life of less than one year. FMCGs – a.k.a.

packaged consumer goods – form the largest segment of

consumer goods. They fall into the non-durable category, as

they are consumed immediately and have a short shelf life

(source: Investopedia). FMCGs are purchased frequently on a

daily basis, consumed rapidly, priced affordably and sold in

large quantities, and have low cost of production. They also

have a high turnover and will not stay long on store shelves.

They can be categorised in the following broad segments: i)

processed foods, ii) ready-to-eat meals, iii) beverages, iv)

groceries, v) frozen and dry foods, and vi) home-care

products.

Since FMCGs are mostly substitute products and have low

cost of production, the major manufacturers such as Coca-

Cola, Pepsi, Unilever, Procter & Gamble (P&G), Nestlé,

Johnson & Johnson, L’Oreal, Colgate, and Ajinomoto, need to

differentiate their products to gain market share at the

expense of their competitors.

Hence, we believe packaging formats will play an important

role in the production process as well as marketing campaigns

of the FMCG companies. Generally, logistics and distribution

systems often require secondary and tertiary packaging to

maximise efficiency, whereas attractive product displays and

pleasant user experience can also play a key role in selling

products. The unit pack or primary package is critical for

product protection and shelf life, and also provides

information and sales incentives to consumers.

Different types of packaging

Source: SCC, DBSVTH




Page 13

Factor 8 – Rising household income. Thailand is one of fast-

growing economies, compared with its peers. At the end of

2018, its GDP per capita came in at US$7,274 – representing

a CAGR of c.4.1% vs. global/developing nations of

0.3%/3.0% respectively (note that Vietnam has the highest

GDP/capita growth rate of c.7.7% during the same period).

Specifically speaking, Thailand’s consumer spending per

capita was US$3,215 in 2018, delivering a CAGR of 2.2%

over 2010-2018. Hence, we believe Thailand’s domestic

consumption will remain strong relative to its peers.

Thailand GDP/capita vs. peers (2010-2018)

Source: World Development Indicators, DBSVTH

Thailand GDP/capita growth rate vs. peers (2010-2018)

Source: World Development Indicators, DBSVTH

Note that GDP per capita and consumer spending per capita

in developing countries such as Indonesia, the Philippines,

Thailand, and Vietnam are much lower than those of

developed countries such as EU nations, the US and Japan.

When GDP per capita exceeds approximately US$2,500 to

US$3,000, consumption per capita will begin to grow

exponentially. As mentioned in the previous section, we

expect GDP per capita and consumer spending per capita in

Indonesia, Thailand, and Vietnam to rise due to increasing

household incomes. Hence, packaging demand for both

paper- and polymer-based products is also expected to rise

during 2019-2022F.

GDP per capita projection (2019-2022F)

Source: SCC, DBSVTH

Factor 9 – Improving internet network and higher penetration

rate. Even though 4G bandwidth network was first

introduced in Thailand in 2013, its Internet penetration rate

remained low as most 4G devices were not exactly affordable

at that time. However, the total number of internet users

increased from 26.1m in 2013 to 50.1m in 2019, or a CAGR

of 11.4% over 2013-2019. As a result, the penetration rate

increased from 40% to 76% during the same period, thanks

to more intense competition among smartphone players such

as Apple, Samsung, Huawei, and Xiaomi.

Thailand’s internet users (2013-2019)

Source: NBTC, DBSVTH




Page 14

In addition, we expect online shopping activities and

packaging demand to continue enjoying strong growth, as

the latest 5G bandwidth technology will enter the

commercialisation stage nationwide by the end of 2020F. This

technology could give rise to a safer online shopping

experience as well as cost savings arising from the use of

drones for logistics and delivery. Consumers will also get to

experience new online shopping platforms with 4K 360-

degree live video streaming, which bodes well for e-

commerce sales volume and revenue. Thus, demand for

packaging will also rise on the back of improving Internet

network capability.

Factor 10 – Increasing digital banking transactions. There is a

growing use of digital banking for payment of goods and

services, transfer of money, and payment of utility bills. This is

mainly thanks to the Bank of Thailand’s (BOT) decision to

waive digital banking fees in 2017. As a result, total e-

payment value increased from Bt8,425bn in 1Q15 to

Bt12,690bn in 3Q18.

Total e-payments (1Q15-3Q18)

Source: Bank of Thailand, DBSVTH

In particular, total internal banking transactions and value

increased from 43.4m orders and Bt5,275bn in 1Q15 to

227,114m orders and Bt7,587bn in 1Q20 respectively.

Similarly, total mobile banking transactions and value

increased from 48.3m orders and Bt545bn in 1Q15 to

1,637m orders and Bt7,010bn in 1Q20 respectively. The rapid

growth of online shopping and cashless activities is one of the

megatrends that will boost the demand for packaging.

Internet banking transaction and value (1Q15-1Q20)


Mobile banking transaction and value (1Q15-1Q20)


Moreover, the BOT has also introduced the PromptPay service,

an online transfer payment with a use of either a mobile

phone or national identification number instead of a bank

account. Such services offer convenience, time savings and

ease of use for money transfer between accounts. Thus, they

also facilitate and boost online shopping activities.

Statistically, PromptPay’s total transactions and value

increased from 2.1m orders and Bt12.16bn in 1Q17 to

865.6m orders and Bt4,221bn in 1Q20 respectively.




Page 15

PromptPay transactions and value (1Q17-1Q20)


Nonetheless, credit/debit card payments and Internet banking

payments for e-commerce goods and services still accounted

for 43% and 28% of total e-commerce payments, as of 2019.

E-commerce payment breakdown as of 2019


Factor 11 – Uptrend for parcel delivery services and cheaper

delivery fees. Market surveys revealed that the parcel delivery

business has enjoyed a CAGR of 40% during 2017-2020F,

which is in line with the booming e-commerce business. Such

growth was driven by the change in consumer behaviour,

new online shopping platforms, and social media applications

such as Lazada, Shopee, JD Central, Priceza, Facebook, and

Instagram.

Parcel delivery service breakdown (as of 2019)

Source: EIC, DBSVTH

Moreover, we are seeing a rise in promotion campaigns from

many online shopping platforms such as 11.11 Singles Day

(Lazada, Shopee), 12.12 Birthday Sales (Shopee) and Black

Friday. Hence, the total number of delivered parcels is

expected be at least 4m pieces a day on average in 2020F, vs.

c.3m pieces a day in 2019. Note that there were c.11m

purchase orders in one day on Shopee 11.11 Big Sale Day in

Nov 2019. Statistically speaking, the total value of the parcel

delivery business is expected to hit Bt66bn in 2020F, or a

CAGR of 36% during 2015-2020F.

Market value of parcel delivery (2015-2020)


Factor 12 – Growing popularity of social and mobile

commerce platforms. We are experiencing a rapid increase in

the number of social and mobile commerce platforms –

thanks to the need for online platforms to offer variety and

Internet network advancements. In fact, social commerce is a

subset of e-commerce where the sellers of goods and services

use social media to assist online selling such as live streaming

on Facebook, Line, and Instagram. Similarly, mobile

commerce is similar to social commerce. The only difference is

mobile commerce facilitates selling through wireless handheld

devices such as smartphones and tablets.




Page 16

CAGR of c.2% for domestic packaging production during

2015-2019, driven by paper- and glass-based materials.

According to Packaging Industrial Intelligence Unit, the overall

packaging business (plastic-, paper-, glass-, and metal-based

materials) enjoyed a CAGR of 2% during 2015-2019, with

glass-based materials (glass bottles) delivering the highest

CAGR of 17%, followed by paper-based materials (primary

and secondary corrugated and protective boxes) with a CAGR

of 2%. Such strong growth was supported by the increasing

numbers of tourists, higher domestic consumption, and

increase in exports to CLMV countries, whereas paper-based

packaging growth was driven by the rapid expansion of e-

commerce, online shopping, and rise in delivery services (for

both food and parcels).

On the other hand, plastic-based materials such as polymers

experienced a decelerating growth rate, no thanks to the

rising awareness of environmental issues. Moreover, plastic

bags and cutlery demand also fell in line with the “no single-

use plastic“ campaigns introduced by the government and

many retail establishments such as shopping malls and

convenient stores.

Packaging production (2015-2019)

Source: Packaging Industrial Intelligence Unit, DBSVTH

Packaging production growth rate (2017-2019)


CAGR of c.2% for flexible packaging revenue over 2015-

2018

The domestic plastic packaging industry appears to have very

intense competition due to the availability of various product

types and different packaging sizes that cater to the needs of

various customers. Flexible plastic packaging is one of the

products in this industry. However, manufacturers in each

group have a different customer base. For instance, small-

sized manufacturers focus on pricing rather than quality,

while medium-sized manufacturers concentrate on

standardised products. Hence, there is keen competition for

manufacturers that target the same customers.

According to the data compiled by Department of Business

Development (DBD), Ministry of Commerce, the plastic

packaging industry features 1,148 manufacturers (of which

935 are small-scale manufacturers,130 medium-sized

manufacturers, and 83 large-sized manufacturers). When

zooming into the market segment by total revenue in 2017,

small- and medium-sized manufacturers collectively

commanded a market share of 44.43%, while large-sized

manufacturers had a share of 55.57 % .

Domestic flexible packaging manufacturer’s revenue CAGR

stood at c.2% over 2015-2018, based on DBD websit.

However, we expect such growth to continue in 2020-2022F,

driven by i) the booming e-commerce business, ii) the need to

address safety concerns arising from the COVID-19 pandemic,

iii) changes in consumer behaviour and lifestyle, and iv) low

market penetration rate in Southeast Asia countries.

Flexible packaging market in Thailand (as of 2017)

Source: DBD, DBSVTH




Page 17

Strong packaging demand driven by homecare product

demand CAGR of c.5.7% over 2013-2018

According to Euromonitor International, Thailand’s homecare

product industry continued to grow in recent years, with the

total value of homecare products reaching Bt55.19bn in 2018

vs. Bt42.15bn in 2013, or a CAGR of 5.70%. The growth in

all product groups was driven by the rise in middle-income

households and urbanisation, with the lifestyle of consumers

mainly revolving around convenience. Urban consumers will

look for products that make their everyday lives more

convenient. Moreover, given the intense competition among

consumer and homecare product manufacturers, they must

develop new products that meet the needs of customers. We

believe the growth of home care products will continue to

drive the sales of flexible plastic packaging for consumer

products such as softeners, washing detergents and

dishwashers.

Market value of homecare product over 2013-2018


Greater penetration of flexible packaging format

Technology advancements, growing awareness of

consumerism and environmental issues, increasing

urbanisation and population growth will result in higher

demand for flexible packaging products. Hence, PET films

now offer greater versatility and environmentally-friendly

characteristics. This opens up PET film to a wide range of

industrial applications.

PTL estimated that global PET thin film demand will reach

4,971ktpa by 2022F, or a CAGR of c.7% over 2011-2022F.

Global thin PET film demand (k tonnes/year)

Source: PTL, DBSVTH

Demand growth of c.5-7% for PET thin film over 2014-2019,

supported by uptrend for flexible packaging. Generally, the

largest application of thin PET films is flexible packaging,

which accounts for about 74% of the global thin PET film

demand. Better packaging not only improves the shelf life of

products but is also essential for improving product appeal in

a highly competitive consumer goods industry. Flexible

packaging also plays a key role in waste reduction at source

on the principle of “use less waste in the first place” which

has ensured higher-than-GDP growth for the flexible

packaging industry across the globe. PET film, being a higher-

end substrate within packaging, has historically grown more

rapidly than other substrates – with PET film sales growing at

an average of about 5-7% per year globally from c.3.02 mtpa

in 2014 to c.4.13 mtpa in 2019.

PET thin film demand

Source: PTL, DBSVTH

Packaging demand is resilient as it correlates with the

consumption of food products and consumer staples which

are to a large extent non-discretionary in nature. The historic

trend of demand growth is expected to continue in the long

term and also in the near future, despite the impact of the

on-going COVID-19 pandemic on the global economy.




Page 18

Demand growth of c.4-5% for PET thick films over 2014-

2019. Electrical and Industrial are the key segments in the PET

thick film industry. During 2014-2019, PET thick film demand

has been growing at a CAGR of about 4-5%. New

innovations and usage new applications in the electrical

segments (like flat screen panels, PV solar cells, etc.) have

been driving the growth in the past and would help this

industry to continue to grow at a healthy CAGR of about 4-

6% in the long term, although there is a temporary

contraction in demand due to the impact of COVID-19.

PET thick film global demand

Source: PTL, DBSVTH

Uptrend for flexible packaging demand that will unleash

higher value added

Currently, Thailand is importing plastic film packaging such as

plastic bags with aseptic aluminium lining that have high

value (due to demographics and lifestyle changes as

mentioned in the previous sections) while exporting

fundamental plastic goods including plastic carrier bags with

low added value. Therefore, when comparing the value of

plastic per tonne against plastic exporters in Asia, which are

China, Korea, Vietnam, Taiwan, Indonesia, and Japan,

Thailand is severely disadvantaged in the value of plastic

packaging per tonne. Thus, we believe there is an opportunity

for producers to develop the market for a plastic film that can

be used for flexible plastic packaging that will enjoy high

demand both domestically and internationally.

Based on the data collected by Packaging Intelligence Unit,

the amount of imported and exported plastic packaging

materials enjoyed CAGRs of 7% and 4% during 2013-2019.

This confirms our view that demand for flexible, reusable and

microwavable packaging that can be used to preserve

freshness and temperature of products, is on an uptrend.

Import/export of plastic packaging materials (2013-2019)


Key listed domestic packaging players

AJ Plast Plc – (AJ TB) - AJ is a bi-axially-oriented film

manufacturer (BoPET, BoPP, and BoPA) that meets world-class

quality and standards, and ensures customer satisfaction via

its experience, innovations and advanced technologies. It has

a production capacity of 261,000 tonnes per year.

Indorama Ventures Plc (IVL TB, HOLD, TP of Bt24) – IVL is a

vertically integrated chemical player in the aromatics (PX, PTA,

PET) and olefins (EO, EG, IPA, MEG, MTBE) businesses. IVL has

an effective PET capacity of 12.05 mtpa, which is used to

produce a wide range range of products such as polyester,

PET bottle, specialty chemical, packaging (c.0.3mtpa), and

HVA products.

Polyplex (Thailand) Plc (PTL TB, BUY, TP of Bt27.5) – PTL has

the sixth largest capacity PET film globally and produces both

thin and thick PET films with various surface properties

covering a wide spectrum of applications. It has also

diversified into BOPP, Blown PP/PE and CPP films that are

produced in its state-of-the-art plants with economies of

scale. Its integrated downstream business covers metallizing,

silicone coating (offline chemical coating), extrusion coating

and transfer of metallized paper that offer further value

added.

SCG Packaging Plc (SCGP TB, BUY, TP of Bt44) – SCG

Packaging (SCGP), a subsidiary of SCC that will be listed ion

the Stock Exchange of Thailand, is a holding company that

offers packaging solutions through innovative products &

services and embraces sustainable business practices. SCGP

engages in fibre-based packaging, performance and polymer

packaging, as well as food service product and corrugated

containers, offering capacities of 4.0 and 1.1 mtpa

respectively. Moreover, it also has a flexible packaging

capacity of c.820m sqm per year.




Page 19

Starflex Plc (SFLEX TB) – SFLEX is a leading manufacturer and

distributor of flexible packaging that specialises in producing

environmentally-friendly laminated roll forms and pouches

with a total capacity of c.208m meters that can cater to the

demand of domestic customers.

Thai Plaspac Plc (TPAC TB) – TPAC is leading manufacturer of

rigid plastic packaging materials, containers, plastic wares and

many other products. It offers a wide range of manufacturing

capabilities, including packaging design, R&D, injection-

moulding, blow-moulding, injection/blow-moulding, in-line

inspections, and quality assurance

United Paper Plc (UTP TB, BUY, TP of Bt16.5) – UTP is a

manufacturer of kraft liner papers (containerboard) and

corrugated containers. Its capacity of c.300 ktpa is mostly

used for auto-part, food, home appliance, and electronic

products. UTP is ranked fourth in terms of market share for

corrugating medium products behind Siam Cement Pcl (SCC)

with a 47.6% share, Panjapol Paper Industry’s 15.2% and

Elite Kraft & Mahachai’s 7.2%.

Major packaging producers in Thailand (k tonne/year)

Source: Company, DBSVTH *note: only includes PE, PP, PET for packaging business **note: includes kraft paper and corrugated paper




Page 20

Part 2: Long-run impact from environmental concerns

i) Single-use plastic ban

Since 2013, the usage of plastic packaging in Thailand has

shown signs of a downtrend, in contrast to the strong growth

enjoyed by the plastic packaging industry previously. Based on

the data compiled by EIC, the usage of plastic packaging

grew at a CAGR of 7% over 2008-2012 before decelerating

to a CAGR of 3% between 2013-2017. When assessing the

share of plastic packaging usage, it was found that the use of

rigid plastic packaging that has decelerated in the past five

years. It share was eroded by the use of flexible plastic

packaging, due to demographic and lifestyle changes, and

rising awareness of environmental issues.

More than 8m tonnes per year of plastic waste being dumped

into water sources around the world. The Ocean

Conservancy, a non-profit organisation that studies the

conservation of marine resources, estimated that there are

currently c.150m tonnes of plastic waste circulating in the

oceans, seas and water sources and such waste can be traced

all the way back to 1950. The amount of plastic waste is also

likely to increase due to the ineffective management of waste

and the low amount of plastic recycling, especially in

developing countries. Subsequently, a considerable amount of

plastic waste will flow into water sources and into the sea,

and subsequently the ocean. As for Thailand, the pollution

control department estimated that there are more than 2m

tonnes of plastic waste amounting to 12% of the total waste

in the country annually. Although a proportion of the waste is

destroyed or recycled, c.1m tonnes of waste would be

dumped into the sea.

Acceleration of phase-out of single-use plastic spurred by

government and private businesses. The government has

three important and integrative goals in reducing plastic

waste, which are i) reducing the volume of waste plastic, ii)

developing innovative new plastic packaging materials that

are re-usable and more environmentally friendly, and iii)

increasing the re-use of post-consumption plastic to 60% by

2021. In this vein, the government will revisit the concept of

collecting taxes or introducing fees associated with the use of

plastic packaging such as a plastic bag or packaging tax.

Additionally, the Pollution Control Department of the Ministry

of Natural Resources and Environment has signed an MOU

with bottled water producers to stop using cap seals with the

aim of reducing plastic waste of 520 tonnes per year, or

260,000 kilometres of waste that could circle the earth 6.5

times, from 1 April 2018.

Meanwhile, the Department of Medical Services, Ministry of

Public Health, also announced that it has stopped using

plastic bags for storing medicines in every unit from 1 October

2018. This measure will reduce the annual usage of plastic

bags in hospitals under the department by more than 9m

bags. Similarly, the Thai private retail sector has its own

initiatives to reduce plastic packaging, involving grocery and

convenient stores like Tops Daily, Tesco Lotus, 7-11 as well as

shopping malls like Central Department Store, The Malls and

Starbucks.

We believe such measures being introduced by both the

public and private sectors may not have serious consequences

in the short term, as Thai people use more than 7bn plastic

bags per year. However, should the government be able to

achieve the goal of re-using plastic bags by 60% after their

initial consumption and the campaign of reducing the use of

such bags persist, producers of single-use plastic packaging

such as carrier bags and water bottles will be impacted rather

significantly.

Ban on seven types of single-use plastics by 2025. In 2018,

the sub-committee on plastic waste management looked at

the action plan of reducing and banning the use of seven

types of single-use plastics between 2019 and 2025. In 2019,

the use of the following products is expected to be banned i)

cap seals made from PVC films, ii) products that use Oxo

alcohol (OXO), which is usually found in HDPE and LDPE, and

iii) micro-beads made from plastic. In 2022, the targeted

plastic products to be banned include i) plastic carrier bags

that are thinner than 36 microns (usually made from LLDPE),

and ii) foam food containers. As for 2025, the plastic products

being targeted are i) single-use plastic cups and ii) plastic

straws. The majority of foam containers, cups, and plastic

straws are made from polystyrene (PS). We believe LLDPE will

be the most affected chemical product. This because it is used

in the making of carrier bags and packaging films, accounting

for over 55% in the process of producing plastic products.




Page 21

Ban on seven types of plastics by 2025F


Implications of single-use plastic ban – IRPC and PTTGC

will be most adversely impacted. Among chemical product

lines, we think LLDPE and PS are the most adversely

affected in terms of demand disruption by environmental

concerns and single-use plastic bans, due to their lowest

level of recyclability. As mentioned earlier, LLDPE is used in

the making of carrier bags and packaging films that

account for over 55% of the total LLDPE market for

making plastic products whereas PS is a key material for

single-use containers and cutleries such as foam

containers, straws, cups, spoons, etc. As a result, we think

IRPC and PTTGC will be the most affected by such a ban

(IRPC with a PS capacity of 125kta, and PTTGC with an

LLDPE capacity of 630kta).

Impact on chemical players of single-use plastic ban

Source: IRPC, PTTGC, SCC, DBSVTH

*note: Joint venture with Dow Chemical and CAP.

ii) Recovered paper ban by China by 2021

The prices of containerboards in the region, including

Thailand, have been led by the demand and supply dynamics

in China, which is the largest market – both regionally and

globally. Thus, we remain optimistic about the improving

supply and demand dynamics in the industry. The supply side

of the industry will be constrained by increasingly stricter

environmental regulations being put in place by the Chinese

government. Tighter monitoring by the Chinese government

will also lower the utilisation rate of small- and medium-sized

containerboard manufacturers to ensure compliance with the

pollution limit.

In July 2017, the Chinese government wanted to encourage

paper recycling to address environmental concerns. So, it

announced that the country would start to ban the imports of

certain types of solid wastes including wastepaper (recovered

paper – RCP), with effect from Jan 2018. Such a ban is in

force and expected to eliminate almost all waste material

imports by 2021.

In China, after the closure of more than 5m tons of obsolete

containerboard manufacturing capacity in Dongguan, other

local governments in the region such as Tianjin, Shandong,

Anhui, and Ningxia have closed the obsolete capacity of small

manufacturers in the ten most polluting industries in recent

months. In addition, the Ministry of Environmental Protection

of China has rolled out the implementation plan for the

issuance of pollutant disposal permits. Industries with severe

pollution issues such as paper manufacturing will need to

obtain permits since 2017. Thus, we expect the paper

industry’s supply growth to be limited by the stricter

monitoring of pollutants disposal.

Declining competitiveness of China’s containerboard players.

As a result of such a ban, we think the Chinese

containerboard players will become less competitive vs. the

other Asian producers due to the following aspects:

i) Rising cost of packaging paper material – Chinese players

have to find more recyclable and environmentally friendly

raw materials. At the same time, additional capital

expenditures are required to ensure cleaner and less

pollution from the production process. Hence, declining

profitability for these players is expected.

ii) Shortage of fibre supply – as Chinese players are required

to invest and/or expand recycled fibre process plants.

Hence, fibre will be in high demand, mainly from China.

Thus, Chinese players’ raw material costs are expected to

head north.




Page 22

iii) Inventory build-up by customers – In anticipation of

increasing RCP prices, most customers have built up their

RCP inventory. However, as the Chinese government

becomes stricter on environment protection and US-China

trade war tensions become more intense, a number of

customers are destocking their inventory and dumping their

RCP stock.

iv) High cost producers will exit the market – We expect some

producers to exit the market, especially the ones with

higher operating cost and/or those without vertical

packaging business integration.

Implications for other Southeast Asia players – ample

opportunities abound

We see huge opportunities for fibre-based packaging players

in Southeast Asia in light of the abundant supply of RCP and

marketing opportunities in the Chinese market. The following

outlines the key implications for non-Chinese players:

i) Declining RCP price – As mentioned earlier, a large amount

of RCP supply will flow from China to Southeast Asia. This

will drive down the cost of raw material for fibre-based

packaging producers.

ii) Better RCP quality – Southeast Asia players will gain access

to better quality RCP at low prices, which bodes well for

their profitability.

iii) Geographical proximity – Countries in Southeast Asia

would be best positioned to fill the gap of undersupply of

processed recycled fibre, as recycled pulp can be

transported in wet form vs. the need to ship pulp in dry

form from the US.

iv) Market opportunities in China – Southeast Asia players are

able to provide cheaper packaging paper alternatives and

to look for new markets for Chinese customers.

v) Relocation of Chinese plants – Chinese producers are likely

to re-locate their recycled fibre plants to other counties in

Southeast Asia. However, such process will take some time,

as they could struggle to adapt to an unfamiliar local

culture, and new regulations, laws, customs, etc.

vi) Environmental footprint – China’s ban of RCP signals that

the country is serious about addressing environmental

issues. This could spur other Asian countries to introduce

similar measures to incentivise localised recycling efforts

going forward.

Cost of RCP by quarter

Source: Published regional prices, DBSVTH

As a result, we think that ex-Chinese paper-based packaging

producers will benefit via cheaper feedstock costs (declining

RCP prices) on the back of oversupply. Hence, SCC and UTP

should be the main beneficiaries of such a ban on RCP.

iii) Increasing collection rate of waste (plastic and papers)

Plastic waste – expect rising collecting rates in Europe and

North America

We are now seeing an uptrend for plastic waste collection

(plastic bottles, plastic containers for food, etc.), especially in

European and North America countries. Recently, the giant

food and beverage companies throughout the world are

demanding i) the use of more recyclable products, and ii)

higher waste collection on the back of growing environmental

concerns.

Based on the data compiled by Wood Mackenzie, global

plastic waste collection stood at 12m tonnes or only 56% of

total plastic usage at the end of 2018. Specifically speaking,

Europe and North America had the lowest collection rates of

57% and 35% respectively. On the other hand, Asia,

especially China, had the highest collection rate of 80%.

As a result, we expect an uptrend in the collection rate in

2020-2022F with food and beverage manufacturers along

with packaging producers embracing sustainability principles

(which will be discussed in the next section).

7.57.95

7.65

6.75

5.7

6.45 6.66

4.95

4.054.5

3.75

4.65

0

1

2

3

4

5

6

7

8

9

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20

THB/kgAOCC price (THB/KG)




Page 23

Plastic waste collection around the globe

Source: Company, Wood Mackenzie, DBSVTH

Paper waste – paper collection rate should trend up

The efforts to promote global waste paper collection (to

gather recycled paper or recovered paper (RCP)) are highly

uneven, with RCP use mostly stemming from the developed

world, especially Europe and the US. However, most Asian

paper companies are now acting as waste paper recyclers,

accepting and processing most of the RCP generated in

Europe and the US (a.k.a. EOCC and AOCC respectively).

Specifically, China has been by far the biggest recycler,

though this will likely soon change with significant

ramifications for the global recycling industry. Based on data

compiled by CEPI, China imported EOCC/AOCC of

c.80%/65% in 2017 and c.50%/40% in 2018. With the ban

on such imports by China, we expect the numbers to decline

in short to medium term. On the other hand, Europe’s paper

recycling rate increased to 72% in 2019 (vs. 69% in 2010),

with more paper being recycled by European paper mills.

In line with the plastic waste collection trend, we also expect

a higher waste paper collection rate due to rising awareness

of environmental and social issues.

Europe’s recycling rate

Source: CEPI, DBSVTH

iv)Sustainability principles

The principle of “business sustainability” is any organisation

that participates in environmentally friendly or green activities

to ensure that all processes, products, and manufacturing

activities adequately address current environmental concerns

while maintaining a profit. In other words, it is a business that

meets the needs of the present [world] without compromising

the ability of future generations to meet their own needs. It is

the process of assessing how to design products that will take

advantage of the current environmental situation and how

well a company’s products perform with renewable resources

(source: Wikipedia website).

There is growing concern over sustainability as well as ESG

(environment, social, and governance) for both end-

consumers, i.e. households, and packaging customers, i.e.

food and beverage manufacturers, homecare, personal-care,

healthcare products manufacturers. So, there is high demand

for the recycling of feedstock materials and/or recyclable

products from these producers. For example, large multi-

national companies (MNC) of beverage and consumer-care

product producers such as Coca Cola, PepsiCo, Unilever,

Procter and Gamble, and Starbucks demand their packaging

materials such as PET bottles, product containers to be i)

made from recycled materials, and ii) recyclable. Hence, we

expect many chemical and packaging companies to start

focusing on sustainability initiatives going forward in 2021F.

Our channel checks with several companies reveal the

growing popularity of the following practices:

i) The need to utilise less energy consumption/usage during

the production process

ii) Increase renewable energy sources to reduce greenhouse

and carbon emissions to the atmosphere

iii) Optimise resources and energy sources for maximum

production efficiency

iv) Increase the proportion of renewable and recyclable

feedstock

v) Increase investments in R&D for product innovations that

are environmentally friendly

Here are some initiatives rolled out by Thai listed companies.




Page 24

Indorama Ventures Plc (IVL TB, HOLD, TP of Bt24) – To ensure

economic prosperity and sustainability

The goal is to ensure economic prosperity and sustainability

for all its stakeholders in the energy business. IVL measures its

success not just by economic gains but by the achievements in

preserving the environment, thereby benefiting the society at

large. IVL undertook several initiatives in 2018 that are in line

with the commitment to increase its focus on long-term

sustainability through recycling, lowering its carbon footprint,

increasing the use of renewable energy, and developing

human capital.

By 2020F, IVL aims to achieve the following sustainability

goals: i) investing in recycled PET products in its portfolio (with

a targeted capacity of 750ktpa), ii) reducing its carbon

footprint by 10%, iii) reducing its energy consumption by 5%,

iv) increasing its renewable energy resources by 10%, and v)

reducing its water consumption by 10%. Moreover, one of its

directors has been directly assigned to spearhead IVL’s

sustainability initiatives.

SCG Packaging Plc (SCGP TB, BUY, TP of Bt44) – ESG in its

core DNA

Generally, SCGP is leading the change to replace single-use

plastic with paper and green packaging. Its business model is

compatible with the green trend, as it embarks on replacing

plastic by using 95% RCP and building out plastic

replacements. Moreover, it aims to achieve 100% recyclable

plastic and plastic substitute products.

Additionally, SCGP will also focus on maximising packaging

material lifecycle through the following processes:

i) Production stage – Reduce raw material usage while

maintaining product strength, improve the tensile and

burst strength of fibre-based products, improve barrier

properties, improve product shelf life and recyclability.

ii) Manufacturing stage – Build 10MW waste-to-energy

facility that can recycle up to 100k tonnes of waste paper

per year, with 95% of its raw materials sourced from RCP

and 25% of its water consumption coming from internal

water treatment systems.

iii) Recovery and recycling stage – Collaborate with retail

stores to promote drop off points for used packaging by

end-consumers.

iv) Product usage stage – invest in R&D to develop flexible

packaging that a) extend the shelf life of fresh products,

and b) is a substitute for single-use plastic and Styrofoam

for food containers.

Polyplex (Thailand) Plc (PTL TB, BUY, TP of Bt27.50) – Aiming

to be a total packaging substrate solution provider

PTL is committed towards sustainability and aims to be a total

packaging substrate solution provider for its customers while

developing products with minimal environmental impact and

providing the highest standards of health and safety to the

workforce. As an organisation, PTL strives to i) improve

production and operational efficiencies to ensure optimal

consumption of resources like electricity, water and raw

materials, ii) limit the impact on the environment by reducing

emission levels of industrial wastes and effluents, and iii)

improve safety and health standards by continuously

improving working conditions, minimising workplace hazards

and raising awareness through involvement, participation and

continuous training of the shop floor workforce.

Additionally, PTL has undertaken the following decisive

initiatives in the realm of environmental conservation:

i) Developed and optimised “chemical recycling” process for

manufacturing recycled PET (rPET) polyester film with post-

consumer recycled content of up to 90% for packaging

applications. The film has made available commercially

using post-consumer PET bottle flakes as input material.

ii) Developed PET film-based monomeric structure for use as

a single layer for applications, including cold seal release

film and applications.

iii) Developed biodegradable PET film as per internationally

accepted biodegradability (anaerobic) standards ASTM

5526 & ASTM551.

iv) Implemented the latest technologies to save power across

plant locations that resulted in substantial energy

efficiency improvements.

v) Promoted the use of bio-based renewable raw materials

and energy sources for the manufacture of polyester films

through R&D.

vi) PTL successfully established a recycling plant in Thailand in

2013, a subsidiary of EcoBlue Co., Ltd. to solve sustainable

problems for film waste in the production process. This

represents the company's maiden environmentally friendly

initiative.




Page 25

Implications – Expect profitability to be eroded due to

investment in sustainability initiatives

As mentioned earlier, most packaging companies are in the

process of i) improving their energy usage and production

process efficiency, ii) investing in projects to reduce their

carbon footprint, iii) developing environmentally friendly and

degradable products, and iv) investing in renewable energy

sources. Hence, we believe they might incur additional cost

that can erode their profitability as a result of complying with

sustainability principles.

In the following analysis, we will focus on the downside risks

to corporate earnings in light of the compression of margins

for stocks under our coverage (IVL, PTL, SCGP and UTP).

Based on our sensitivity analysis, every 1% reduction in gross

profit margin (GPM) would erode our FY21F net profit

projection for IVL/PTL/SCGP/UTP by c.53%/7%/15%/4%

respectively. This is based on the assumptions of i) gross profit

margin (GPM) of c.10%31%/26%/39% respectively, and ii)

holding everything else constant. Note that IVL has the

greatest downside risk relative to others, due to i) its

commodity-centric nature, as over 80% of its products are

linked to commodities prices, ii) its thinner GPM relative to

peers, and iii) only c.7% of its production volume comes from

the packaging business.

Sensitivity analysis of FY21F gross profit projection

Source: DBSVTH

Sensitivity analysis of FY21F net profit projection

Source: DBSVTH




Page 26

Part 3: COVID-19 will drive up prices of certain types of plastics such as polyester, polypropylene, and vinyl on rising demand for hygiene products and medical equipment The outbreak of COVID-19 began in Wuhan, China, during

early 2020. The pandemic has spread widely to countries all

over the world by end-1Q20. Based on data compiled by

World Health Organization (WHO), total confirmed cases

and confirmed deaths reached 55.6m cases and 1.34m

deaths in over c.220 countries, respectively, as of 17 Nov

2020. European nations as well as Brazil, Indonesia, the

Philippines, and US are experiencing a rapid rise in new

cases where there results in the second city lockdown in

many countries

COVID-19 total cases and death (as of 17 Nov 2020)

Source: Worldmeters, DBSVTH

The outbreak has given rise to the new normal in society,

forcing us to i) embrace social distancing, ii) temporarily

consume more single-use plastic products such as cutlery, and

iii) use more healthcare and medical-care products and

equipment.

We believe the announcement of the progress of COVID-19

vaccine development by Pfizer and Moderna will lift up

investment sentiment of COVID-19 affected industries,

chemical and packaging business included. However, we

think it might take more time to reach safety and

manufacturing standing for mass production. Thus, we

consevatively remain caustious on enery price and margin

recovery in short- to medium-term.

Healthcare spending CAGR of c.4-7% over 2018-2023F.

Sri Trang Gloves Thailand (STGT TB) predicted that the

healthcare industry will see global healthcare spending CAGR

c.4-7% during 2018-2023F, with Asia and Australia enjoying

the highest expected growth rate of c.7% during the period.

Such growth would be driven by i) an increasingly ageing

population (as mentioned in Part 1), ii) supportive government

policies and access to medical services, iii) increase in non-

communicable diseases, and iv) the outbreak of epidemic

and/or pandemic diseases such as COVID-19. Thus, we believe

higher healthcare spending, especially on medical equipment

during the COVID-19 pandemic, will also drive the demand

for key chemical materials used for producing Personal

Protective Equipment (PPE).

Global healthcare spending projection (2018-2023F)

Source: STGT, DBSVTH

Increasing awareness of cleanliness and hygiene driven by

COVID-19 pandemic. During the outbreak of COVID-19,

there was a shortage of medical, surgery, and personal

protective equipment for the eye and face (safety glasses, and

face shields), hand (natural latex gloves, nitrile gloves, vinyl

gloves), body, and respiratory system (surgery masks, N95

masks, and full-face respirators). Moreover, there is a spike in

demand for hygiene products in developing countries in

Africa, Southeast Asia, and South America, where the

healthcare spending per capita is relatively lower than the

global averages and peers.

The following table summarises the major chemical materials

used in the production of PPE.

Personal Protective Equipment breakdown by uses

Source: DBSVTH

Expect PPE demand uptrend to be driven by COVID-19, at

least in short-run. Demand and prices for PPE are soaring

across regions such as North America and Europe, as

coronavirus cases continue to rise. However, according to a

recent quarterly report released by the International Trade

Centre (ITC), the world’s supply of PPE is highly concentrated




Page 27

in five countries – China, the US, Germany, Malaysia and

Vietnam. These five countries alone make up nearly c.67% of

global PPE exports, with China in the lead. As reported by ITC,

in 2018, China alone had accounted for 46% of the world’s

PPE exports.

As known widely, COVID-19 first originated in China in late

last year. So it would be natural for the demand for medical

supplies to far exceed supply in China, leading to the non-

fulfilment of various orders in Feb 2020. The WHO declared

COVID-19 a pandemic a month later after it had spread to

several other countries including Thailand, the US, Iran, Italy

and Spain.

Soon after, the EU, Turkey and Switzerland introduced a

licensing and permission scheme “to protect the availability of

supplies of PPE, by requiring that exports of such equipment

outside of the EU be subject to an export authorisation by

member states”. More countries eventually followed suit,

putting 75% of the world supply into question on the back of

the ban or restrictions on the exports of PPE.

As mentioned in the previous section, the COVID-19

pandemic is seeing a deterioration on a global scale. It has yet

to be contained with the second wave of the pandemic

expected to hit any nation without any warning. As a result,

we believe the demand for PPE such as surgery masks, safety

glasses, nitrile gloves, and protective suits will be in high for a

certain time period, at least until the end of 2020. Moreover,

as a result, to prevent mass infections, we expect the

government’s social distancing policy to be maintained.

Hence, we believe the strong demand for chemical materials

for hygiene and healthcare product will persist in the short to

medium term.

Rising global nitrile gloves demand a key indicator of rising

demand for PPE, in our view. With limited access to

information of individual component demand and the supply

of PPE, we rely on the demand for medical gloves (latex and

nitrile gloves) as a key indicator for the demand for PPE. The

medical gloves market is expected to grow at a CAGR of over

15% over 2019-2025F.

The global medical gloves market is growing at a healthy rate.

The strong growth can be attributed to the surge in demand

for protective equipment to ensure compliance with safety

and hygiene standards to prevent the risk of contamination

and infections in the healthcare environment. The growth in

surgical procedures for a number of diseases and the need to

reduce surgical site infection (SSI) risks are likely to fuel the

growth of the global medical gloves market.

Health care professionals will continue to demand the latest

medical gloves to treat acute and chronic diseases, which will

help promote the adoption of safe and effective treatment

methods. The emergence of pandemics such as COVID-19 will

drive the future growth of the market, with the strong

preference for non-powdered medical gloves also likely to

boost the market’s growth prospects.

Hence, we expect the demand for other medical equipment,

such as eye and face protection (safety glasses, and face

shields), body protection, and respiratory system protection

(surgery masks, N95 masks, and full-face respirators), will

grow in a similar fashion. Thus, BPA, PET, PP, and HDPE film

grade prices and margins will be supported by the rising

demand for medical-care products and equipment.

Sustainable certain chemical prices despite downward

pressure from oil price collapse in Mar 2020.

On a year-to-date basis, Brent oil prices has retreated by 33%

after oil prices collapsed in Mar 2020, caused by the oil price

war between Saudi Arabia and Russia and the outbreak of

COVID-19 that restricted travel by air and car. Generally, most

petrochemical prices will also move in tandem with oil prices

with a timelag of one month. However, BPA, PET, PP,

Butadiene, and HDPE film grade prices did not track this

trend, with their prices holding up quite well (+42%/-

22%/+2%/+10%/+8% YTD respectively). The stronger

demand for PPE equipment such as nitrile gloves, surgery

masks, face shields and other hygiene and healthcare

products has led to buoyant prices for these chemical

products.

As a result, we foresee limited adverse impact on major the

domestic chemical players, such as AJ, IRPC, IVL, PTL, PTTGC,

and SCC.

Chemical price vs. Brent by quarter

Source: Bloomberg Finance, PTTGC, DBSVTH




Page 28

Key listed domestic chemical players.

IRPC Plc (IRPC TB, HOLD, TP of Bt2.3) – IRPC is a fully

integrated refinery and naphtha-based petrochemical

producer that is involved in the upstream and downstream

aromatics supply chain. Its refinery is the second largest in

Thailand. Most of its refinery (total refining capacity of

c.210kbd) products serve as feedstock for the chemical

business.

Indorama Ventures (IVL TB, HOLD, TP of Bt24) – IVL is a

vertically integrated chemical player in the aromatics (PX, PTA,

PET) and olefins (EO, EG, IPA, MEG, MTBE) businesses. IVL has

an effective PET capacity of 12.05 mtpa which is used to

produce a wide variety of products such as polyester, PET

bottle, specialty chemical, packaging (c.0.3mtpa), and HVA

products.

PTT Global Chemical (PTTGC TB, HOLD, TP of Bt43) – PTTGC,

PTT’s flagship chemical company, operates an integrated

petrochemical complex that is mainly used for producing gas-

based olefins crackers and ethylene derivatives such as

polyethylene and polypropylene products.

Siam Cement (SCC TB, BUY, TP of Bt417) – SCC’s chemical

business, generally, contributes c.40% of its consolidated

EBITDA. SCC is a naphtha-cracker player that produces

polyethylene and polypropylene producers such as HDPE and

PP.

Thaioil Plc (TOP TB, HOLD, TP of Bt41) - Thaioil is Thailand's

largest refinery and the flagship refinery under PTT group. The

refinery is an integrated plant for producing petrochemicals

and lube base. Its by-products such as reformate/platformate

are upgraded to value-added products for use in the

upstream aromatics business.

Major chemical producers in Thailand (k tonne/year)


*note: Integrated PET/PTA capacity in Asia, West, and North America




Page 29

Part 4: Implications and selection of winners

PTL, SCGP and UTP are the clear winners, in our view. Given

the analysis from the previous three parts, we believe that

AJ, PTL, SCGP, and UTP are the clear winners thanks to the

three key criteria: i) the rise of megatrends such as booming

e-commerce and increasing demand for flexible packaging,

ii) environmental concerns that led to single-use plastic ban

and recovered paper (RCP) ban by China, and iii) the COVID-

19 pandemic that led to the rise in demand for hygiene

products as well as medical equipment such as PPE.

Even though AJ and PTL are in the same business (BoPET,

BoPP, and metallised film manufacturing) and face the same

impact arising from the three abovementioned concerns, we

have omitted AJ from our top picks in view of i) AJ’s inferior

profitability as its gross profit margin and EBITDA margins in

2017-2019 averaged 7-8% and 5-6% respectively (vs. PTL’s

20% and 18-19%), ii) AJ’s higher leverage as its debt-to-

equity ratio and net debt-to-equity ratio in 2017-2019

averaged 1.4-1.6x and 0.8-1.0x respectively (vs. PTL’s 0.5-

0.9x and 0.1-0.4x), and iii) AJ’s lower liquidity.

Net impact to key players

Source: DBSVTH

The summary of the impact of the identified concerns on

each individual company is as follows:

AJ – Megatrends: Positive

AJ will benefit from higher demand for flexible

packaging products – BoPA, BoPET, BoPP, and

metallised film (which happen to be AJ’s only

products).

Environmental concerns: Neutral

Most film products are recyclable and the single-use

plastic ban is only applicable to disposable items such

as plastic carry bags, foam containers, straws, and

single-use cutleries.

COVID-19 pandemic: Positive

Unemployment and the decline in consumer

spending have led to the delay in the purchases of

durable goods such as automobiles, electronics, and

electrical appliances. However, note that consumer

staples (whose demand is resilient to the pandemic)

make up c.60% of the sales volume for consumer

products. On the other hand, there is a rise in

demand for packaging of hygiene and healthcare

goods such as hand sanitizers, and homecare and

healthcare brands.

IRPC – Megatrends: Neutral

As IRPC’s business mainly revolves around refinery

and chemical (downstream business of aromatics

chain), the consumer behaviour megatrends have

minimal impact on the company.

Environmental concerns: Negative

Scoring low on recyclability, PP and PS are the

primary targets of the single-use plastic ban. Both are

the flagship products of IRPC.

COVID-19 pandemic: Negative




electrical appliances. IRPC’s aromatics business (that

churns out such products as BZ, PS and ABS) has

exposure to the auto industry.

IVL – Megatrends: Neutral

Integrated PET and PTA are the main businesses for

IVL (c.70% of consolidated EBITDA) and these

segments are not affected by the new consumer

behaviour megatrends. Note that only c.7% of its

production capacity is used for the packaging

business.


PET, which is the flagship product of IVL, is a highly

recyclable material compared with the other chemical

components. As a result, the single-use plastic ban

should have no adverse impact on IVL.




luxurious and durable goods such as automobile,

electronics, and electrical appliance. Some 10% of

IVL’s business has exposure to the auto industry, with

its special PET fibre used in tyre production. However,

the rising demand for PPE and hygiene products,




Page 30

driven by the COVID-19 pandemic, could boost the

demand for PET as well.

PTL – Megatrends: Positive

PTL can benefit from the increasing use of flexible

packaging. BoPET, BoPP, and metallised film happen

to be its only products.


Most film products are recyclable and the single-use

plastic ban is only applicable to disposable items such

as plastic carry bags, foam containers, straws, and

single-use cutleries.





electrical appliances. However, note that consumer

staples (whose demand is resilient to the pandemic)

make up c.70% of the sales volume for consumer

products. On the other hand, there is a rise in

demand for packaging of hygiene and healthcare

goods such as hand sanitizers, and homecare and

healthcare brands.

PTTGC – Megatrends: Neutral

As PTTGC’s business mainly revolves around

chemical, the consumer behaviour megatrends have

minimal impact on the company.

Environmental concerns: Negative

Scoring low on recyclability, LLDPE, LDPE, and PP are

the primary targets of the single-use plastic ban.

These three are the key products of PTTGC.

COVID-19 pandemic: Neutral




electrical appliances. However, PTTGC will partly

benefit from a spike in demand for BPA, butadiene

and PP on the back of rising demand for PPE and

other medical equipment.

SCGP – Megatrends: Positive

SCGP should benefit from the consumer behaviour

megatrends such as the e-commerce boom, growing

population, and demographics and lifestyle changes.

Thus, demand for SCGP’s flexible and paper-based

packaging products is likely to head north.

Environmental concerns: Positive

PE, PP, and PVC are the flagship products of SCC’s

chemical business (c.40% of consolidated EBITDA).

Hence, the single-use plastic ban is bound to have a

negative impact on PVC, in our view. However, the

production of the other polymers can be upgraded to

churn out flexible packaging whose demand is on the

rise. Moreover, c.95% of raw materials for the

packaging business are recyclable.


Unemployment and spending decline caused a

purchase delay on durable goods such as auto,

electronics, and electrical segments. However, note

that consumer staples (whose demand is resilient to

the pandemic) make up c.70% of the sales volume

for consumer products. On the other hand, there is a

rise in demand for packaging of hygiene and

healthcare goods such as hand sanitizers, and

homecare and healthcare brands (that bodes well for

PP demand).

TOP – Megatrends: Neutral

As TOP’s business mainly revolves around refinery

and aromatics, the consumer behaviour megatrends

have minimal impact on the company.


Most chemical products such as PX and BZ stem from

the aromatics supply chain that will be not affected

by the single-use plastic ban, unlike products from

the olefins and polymers supply chains. Thus, we

think there will be minimal impact on TOP in this

area.

COVID-19 pandemic: Negative




electrical appliances. TOP’s aromatics business (which

produces such products as BZ and derivatives) has

exposure to the auto industry.

UTP – Megatrends: Positive

UTP should benefit from the consumer behaviour

megatrends such as the e-commerce boom, growing

population, and demographics and lifestyle change..

Thus, demand for UTP’s containerboards and

corrugated packaging should be on an uptrend.




Page 31

Environmental concerns: Positive

The single-use plastic ban will apply to most chemical

components that are difficult to recycle. Moreover, in

view of China’s ban of imported waste paper (RCP),

UTP will benefit from rising paper-based packaging

demand and cheaper raw materials.

COVID-19 pandemic: Neutral

Unemployment and spending decline caused a

purchase delay on durable goods such as auto,

electronics, and electrical segments. However, note

that consumer staples (whose demand is resilient to

the pandemic) make up c.70% of the sales volume

for consumer products.

More business integration and M&As in the future?

Given the rapid changes in consumer behaviour and

competitive dynamics as well as rising awareness of

environmental concerns, we expect both chemical and

packaging players to strive for operational excellence and

embrace environmentally friendly practices. Towards this

end, the companies could pursue the following strategies:

i) Vertical business integration – This is to capture value-

chain and synergy benefits arising from feedstock

security to ensure higher margins and profitability for

end-user products.

ii) Horizontal integration – This is to capture and explore

market opportunities in the Southeast Asia region whose

population is growing.

iii) Merger and acquisition – Given the more intense

competition, we expect the higher cost players or those

with sub-optimal costs to become M&A targets for the

market leaders.

iv) Production base shift – Given the recent ban on single-

use plastic in many countries and recovered paper in

China, we expect players to move their production sites

to countries with less environmental restrictions and

regulations such as Indonesia.

v) Investing in green and product-differentiation initiatives –

In view of the rising awareness of environmental

concerns, we expect more capital spending on

operational improvements (cleaner energy, less energy

consumption, and less carbon emissions). There will also

be more efforts to upgrade production capacity to

ensure more environmentally friendly and degradable

products such as recyclable PET (rPET) and biochemicals.

vi) Knowledge sharing with the public – We note that many

chemical and packaging players are now promoting the

green nature of their businesses, with some highlighting

the environmentally-friendly practices used in the

production process. They are cognisant of the fact that

consumers are now becoming increasingly aware of

environmental issues, including the global greenhouse

effect and waste pollution (i.e. ocean waste).

Share price performance – SETPKG and SETPAPER have

outperformed SETPETRO and SET Indices

On a YTD basis, the SETPKG and SETPAPER indices have

outperformed the SETPETRO and SET indices. This is not a

surprise as packaging and paper businesses are more

resilient than the oil & gas and petrochemical businesses

that are highly cyclical. Moreover, the fortunes of the

SETPKG and SETPAPER segments are closely tied to the

everyday lives of consumers. As of 18 Nov 2020, the SETPKG

and SETPAPER indices delivered a YTD positive return of

35% and 47% respectively, whereas the SETPETRO and SET

indices plunged by 12% and 14% respectively.

Indices performance (year-to-date basis)

Source: SETSMART, DBSVTH, closing price as of 18 Nov2020

Going forward to 2021F, we expect some chemical and

packaging players such as PTL, SCGP, and UTP to remain

resilient to the short-term and long-term adverse

developments such as the COVID-19 pandemic and

environmental concerns. This is mainly thanks to their

diversified business portfolio and business practices that are

compatible with the various green energy initiatives. On the

other hand, IRPC, PTTGC and IVL should benefit from the

short-term spike in demand for medical equipment

(including PPE) and hygiene products. However, they could

be weighed down by the single-use plastic ban in the longer

term.




Page 32

SETPETRO Index has outperformed SET Index. As of 18 Nov

2020, the SETPETRO index dropped 12% YTD,

underperforming the SET index that declined 14% during

the same period. The outperformance was due to the fact

that Pfizer and Moderna have made announcement of the

progress of COVID-19 vaccine development where the cure

rate is as high as c.95%. Hence, this has lifted up investment

sentiment (risk-on mode) of COVID-19 affected industries,

oil and gas included.

However, we note that the SETPETRO Index’s performance

has shown an improvement over the past one to three

months (+19% and +17 respectively). This was buoyed by

the loosening of lockdowns and travel restrictions, along

with the collaboration between OPEC and non-OPEC

members to cut crude output by 9.7mbd for May-Jun 2020

and 7.7bmd for 2H20.

Share price performance (%) (as of 18 Nov 2020)

Source: SETSMART, DBSVTH

Petrochemical performance (last 12 months)

Source: SETSMART, DBSVTH, closing price as of 18 Nov 2020

SETPKG and SETPAPER outperformed SET Index. The

packaging and paper sectors are among the top 10

performing sectors YTD. As of 21 Aug 2020, the SETPKG and

SETPAPER indices delivered positive returns of 35% and 47%

YTD, respectively, thus outperforming the SET Index that

delivered a negative return of 14% over the same period.

Among the packaging and paper companies under our

coverage, Polyplex (Thailand) (PTL; +52%YTD) and United

Paper (UTP; +47% TYD) have outperformed peers. On the

other hand, SCGP Plc’s (SCGP; +10% since IPO on 22 Oct

2020) and Siam Cement Plc (SCC; -7% YTD) as share price

performance is lagging behind its peers, as its packaging

business contributes only c.20% of consolidated EBITDA (with

the rest coming from its chemical business, and cement and

building material division).

Share price performance (%) (as of 18 Nov 2020)

Source: SETSMART, DBSVTH

Note that SCGP is listed on 18 Nov 2020

Packaging performance (last 12 months)

Source: SETSMART, DBSVTH, closing price as of 18 Nov 2020




Page 33

Valuations – SETPETRO is trading at discount vs. SET,

while SETPKG and SETPAPER are trading at premium

In terms of 2021F valuation, the chemical/packaging/paper

stocks under our coverage are trading at FY21F price-to-book

(PBV) multiples of 0.9-1.0x/1.2x/2.3x, compared to the 5-year

average of 1.1-1.2x/1.0x/1.4x respectively. As mentioned in

the previous section, the share price performance of

packaging and paper companies has outperformed the SET

index. This explains why they are trading at a premium

relative to the SET index in terms of PBV multiples. UTP is

trading at the highest PB multiple of 1.1x (trumping its peers’

and the SETPAPER index’s PB valuation), as its share price has

appreciated by c.47% YTD. The premium is supported by i) an

e-commerce boom, ii) demand upcycle for paper-based

packaging due to environmental concerns, and iii) cheaper

feedstock cost due to the RCP ban in China. Similarly, PTL is

trading at a PB of 0.8x, which is above that of its peers and

the SETPKG index, as its share price has appreciated by c.52%

YTD. This is supported by i) panic buying for hygiene and

healthcare products, driven by COVID-19, ii) increasing

demand for flexible packaging, iii) declining feedstock cost,

and iv) new capacity from its BoPET plant (44ktpa) in

Indonesia.

However, the SETPETRO index is trading at a discount relative

to the SET index. This is no thanks to the i) demand disruption

caused by the outbreak of COVID-19, especially for durable

goods such as automobiles, ii) the oil price collapse in Mar

2020, and iii) excess supply in the market, especially with

regard to the polyethylene supply chain from Asia.

Price-to-Book multiple (times)

Source: DBSVTH

Earnings per share (Bt per share)

Source: DBSVTH

Stock recommendations

While the global economy is being hit by the pandemic of

COVID-19, we think business segments related to consumer

staples goods and consumption, such as packaging, will be

more resilient than those related to cyclicality and exports

such as commodities and tourism. According to the 2Q20

results of the consumer sectors, the revenue of key consumer

players such as HomePro, CPALL and Robinson Department

Store, to name a few, dropped by c.20% q-o-q, weighed

down by travel restrictions, city lockdowns, malls closures

during Mar-May 2020. On the other hand, the packaging

business was rather resilient than the overall consumer sector

with the former’s total sales volume, on average, coming in

flat. Based on the data compiled by McKinsey, online sales of

grocery and fresh food in China doubled within a 10-day

period in Jan 2020, at the early stage of the country’s

outbreak of COVID-19. Moreover, there is a spike in volume

of online shopping as well as rising demand for delivery

services (both food and beverage and parcel), due to work-

from-home policies, and the high demand for medical care

and hygiene products. Hence, packaging products such as

corrugated paper, flexible, and rigid plastic were in high

demand.

We believe the impact on packaging demand and supply from

the outbreak of COVID-19 pandemic is mixed, depending on

the product segment and portfolio position of the packaging

players. However, we think that the high demand for food,

grocery, healthcare products, personal-care products, food

delivery and e-commerce delivery will continue, as the COVID-

19 pandemic can be hard to contain and fears of a second

wave of infections have come to pass in some countries. Thus,

we think that AJ, PTL, SCGP, and UTP will be more resilient

than the other players, as c.50-70% of their sales volumes

stem from consumer staple goods.




Page 34

With respect to environmental concerns such as the ban on

single-use plastics and recovered paper ban in China, we

think that companies that have i) a high proportion of high-

value added products (HVAs) and recyclable products, ii)

vertical business integration, and iii) operational excellence,

are more resilient than the ones without such advantages.

Hence, we believe IVL, PTL, SCGP, and UTP will be more

resilient than the others, as the bulk of their packaging

products are recyclable and environmentally friendly.

As mentioned early, we have omitted AJ from our stock picks

in view of its inferior profitability, leverage, and liquidity. We

have also left out IVL due to its commodities-like business. As

a result, PTL, SCGP and UTP are our top picks.

Polyplex (Thailand) (PTL TB, BUY, TP of Bt27.50): uptrend for

flexible packaging demand, along with BoPET and BoPP

capacity expansion

We like PTL for the following factors: i) its net profit CAGR of

23% over FY18-23F, ii) its status as one of Thailand’s largest

PET film producers and sixth largest PET film producer in the

world, iii) one of the low-cost producers, thanks to its

upstream and downstream integration, iv) minimal adverse

impact from the COVID-19 pandemic (vs. peers), v) its higher

operating efficiency relative to peers, vi) its higher EBITDA

margin and ROE relative to peers, and vii) its valuation


We maintain our BUY rating on PTL with an FY21F TP of

Bt27.5. We used PE multiple method for valuing PTL, as its

chemical business is cyclical in nature. Given our FY21F


TP works out to Bt27.5 a share (c.28% potential upside) –

based on a PE multiple of 9.9x or 1SD above its 5-year

average. Note that the average PE multiples for the SET index

and SETPETRO stand at 15x and 17x respectively.

Expect net profit CAGR of 23% over FY18-23F. We expect its

net profit to increase at a CAGR of 23% over FY18-23F. This

is supported by i) BoPET, BoPP, and metallised film capacity

expansion after making significant investments in a thin PET

film plant and BoPP film plant in Indonesia, ii) HVA product

expansion, iii) vertical business integration that reduces

operating cost, and iv) increasing utilisation rate due to strong

demand for flexible packaging.

Net profit projection


Note: PTL’s fiscal year is April to March

SCG Packaging Plc (SCGP TB, BUY, TP of Bt44): A full-

integration of packaging producer in Asia.

We deem SCGP as a defensive stock company in the

packaging business compared to the commodity segment.

Historically, past business performance was growing at a rate

close to the GDP growth rate. Hence, we applied the

discounted cashflow model for our FY21 valuation.

We maintain BUY rating with estmated FY21F target price at

Bt44 a share, under assumptions of i) weighted average

discount rate and terminal growth rates of 8.2% and 1%

respectively, ii) annual capital expenditure of Bt20bn per year.

Our recommendation is supported by i) CAGR of 19% of net

profit growth during 2019-2023F, ii) supeiror profitablity (in

terms of EBITDA margin) relative to regional peers, iii) cost

optimisation with full-integration of packaging chain from

upstream to downstream businesses, and iv) attractive

valuation with respect to PER, PB, EV/EBITDA multiples relative

to peers.

Note that we expect the FY21F PER, PBV and EV / EBITDA

multiples at 22x / 1.7x / 11.6x respectively, compared to

regional peers average of (direct competitor Amcor, Sonoco,

Huhtamaki, and SIG Combibloc) of 19.2x / 3.2x / 11.7x,

respectively).

Net profit to grow CAGR of 19% during 2019-2023F. We

project net profit will grow CAGR of 19% during 2019-

2023F, supported by i) full-year realisation of revenue in

2020F from debottlenecking of paper packaging plant unit 2

in Vietnam and food packaging plants unit 3 in Malaysia that

have started commercialisation (COD) in 4Q19 and 2Q19

respectively, ii) additional capacity of the vertical integrated

packaging chain with the installed capacity of 0.62mtpa of

the packaging paper and 137 msqm per year of flexible

packaging which can be divided into a) flexible packaging

plant in Vietnam with production capacity 84 msqm / year




Page 35

(expected to COD in 3Q21), b) paper mill factory in Indonesia

with production capacity of 0.4mtpa (expected COD in

1Q21), c) local paper factory at The Philippines with

production capacity of 0.22 mtpa (expect COD in 2Q21) and

d) Expanded Prepack factory in Thailand with production

capacity of 53 msqm / year, (expected COD in 3Q21).

CAGR of 19% of net profit during 2019-2023F


Expect EBITDA margin of 16% in the 2020F-2023F. In

addition to the similarity of earnings performance with

consumer business segment, we expect EBITDA margin to be

at least 16% during 2020F-2023F. This was driven by i) the

synergy benefit from the upstream to downstream business

(vertical integration), ii) the expansion of the capacity of both

packaging paper and performance polymers packaging (PPP)

where we expect gross profit margin and EBITDA margin of

20% and 15% respectively, and iii) potential merger &

partnership in a fragmented market that will create synergy

benefits and value chain for the packaging chain.

Solid gross and EBITDA margins during 2018-2023F


United Paper (UTP, BUY, TP of Bt16.50): Superior margins

while benefiting from RCP ban by China.

We like UTP for the following factors: i) its ability to maintain

a high level of EBITDA margin with healthy margins, ii)


the Chinese government’s stricter polices on the environment,


trend, vii) its valuation discount relative to peers, and viii) its

attractive dividend yield of 6%-6.5% in FY20F-FY21F.

We used PE multiple method for valuing UTP, as its

containerboard business is cyclical in nature. Given our FY21F


TP works out to Bt16.50 a share – based on a PE multiple of

10.5x or 1SD above its 5-year average.

Margin improvement over the past five years. During the

past five years, UTP’s EBITDA margin rose from 16.6% in

2015 to 34.2% in 2019. This is mainly due to i) increase in

capacity by 170% from 100,000 tons per year to 300,000

tons per year in July 2017 that resulted in better economies

of scale, ii) an industry upcycle, thanks to the Chinese

government's stricter policies on environment that caused a

supply shortage in China, and iii) high demand in the

domestic market.

We expect UTP to maintain its high EBITDA levels of 34%-

35% in FY20F-22F, thanks mainly to i) higher revenue

contribution from kraft liner boards that yield higher margins

of 30%-35% vs. margins of 20-25% for corrugating

medium boards, ii) wider product spreads arising from a

supply shortage in China, and iii) the accelerating e-

commerce trend in Thailand.

Gross and EBITDA margins


13.5%15.7% 16.1%

26.1%

31.8% 32.0% 33.0% 33.0%

16.6%18.9%

21.8%

28.3%

34.2% 34.3%35.5% 35.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2015 2016 2017 2018 2019 2020F 2021F 2022F

GPM EBITDA margin




Page 36

Peers comparison

Mkt Price Target % PE PBV Div Yield ROE

Bloomberg Cap 26-Nov Price Upside (x) (x) (%) (x) Rcmd

Code (US$m) (Bt) (Bt) 20F 21F 20F 21F 20F 21F 20F

IVL TB 5,377 29.00 24.00 -17% 42.3 20.1 1.2 1.2 0.7 1.5 2.9 HOLD

IRPC TB 1,957 2.90 2.30 -21% nm 325.9 0.8 0.8 1.7 0.2 -9.0 HOLD

PTL TB 657 22.10 27.50 24% 11.0 7.9 1.5 1.3 2.9 5.0 14.7 BUY

PTTGC TB 8,742 59.00 44.00 -25% 6.6 6.6 0.9 0.9 0.0 1.7 -0.4 HOLD

SCC TB 14,703 371.00 417.00 12% 13.0 12.7 1.5 1.4 3.1 3.1 11.8 BUY

SCGP TB 3,356 39.00 44.00 13% 25.2 22.1 1.9 1.7 0.8 0.9 10.2 BUY

TOP TB 3,419 50.75 41.00 -19% nm 18.6 0.9 0.9 1.0 2.4 -5.8 HOLD

UTP TB 292 13.60 16.50 21% 9.0 8.6 2.4 2.1 5.6 5.8 28.6 BUY

Simple average 17.9 52.8 1.4 1.3 2.0 2.6 6.7 Source: DBSVTH, Bloomberg Finance L.P.




Page 37

Company Guide

ed: CK/ sa: PY, CS

HOLD Last Traded Price (26 Nov 2020): Bt2.88 (SET : 1,433.56)

Price Target 12-mth: Bt2.30 (20% downside)

Analyst

Duladeth BIK, CFA, FRM, CAIA +66 28577833 [email protected]

What’s New • 3Q20 net profit came in at Bt1.55bn, supported by

significant inventory gain and strong chemical showing

• Expect solid chemical performance to carry on in

4Q20F, backed by strong demand for medical products

• Refinery margins hampered by city lockdowns, no

thanks to the second wave of COVID-19 pandemic

• Maintain HOLD and TP of Bt2.3

Source of all data on this page: Company, DBSVTH, Bloomberg Finance

L.P.

4Q20F lifted by chemical business Investment Thesis: Plant upgrades could improve crude runs. As IRPC’s crude runs

in the last five years hovered between 170,000 and 208,000

barrels per day (80-95% utilisation), it had to optimise its

operating rate to minimise high-sulphur fuel oil (HSFO) output.

IRPC’s fuel oil output could be further upgraded to propylene

with better margins. Its fuel oil output should decline from

>20% to below 10% over time. We expect an average crude

run of 200kbd (93% utilisation rate) in 2021F.

Strong chemical business will carry on in 4Q20-1Q21F,

supported by i) inventory restocking of Asian manufacturers

after inventory level fell below the 5-year average, and ii) rising

demand for packaging materials for healthcare and homecare

products, driven by the COVID-19 pandemic.

Maintain HOLD rating. We maintain our HOLD rating with a TP

of Bt2.30, pegged to 0.63x P/BV, which is 1.5 SD below its 5-

year average P/BV. This is underpinned by i) limited downside

risk based on our calculated liquidation value of Bt1.80 a share,

ii) downtrend for crude OSP premium cost despite refinery

margin recovery, iii) expectation of solid chemical performance

following the pick-up in demand for durable goods, and iv) solid

PP business that rides on robust packaging demand. Valuation:

We applied a P/BV multiple of 0.63x, 1.5 SD below its 5-year

historical average, to derive our new TP of Bt2.3 for IRPC.

Where we differ:

We remain cautious over crude prices, refinery margin

recovery, and operating cash cost per unit. Key Risks to Our View:

Oil price, refinery margin and volatility of petrochemical

spreads are key determinants of IRPC’s earnings. Another risk

is the lack of reliability of operating plants that could hurt

profitability.

At A Glance

Issued Capital (m shrs) 20,434

Mkt. Cap (Btm/US$m) 58,851 / 1,943

Major Shareholders (%)

PTT Plc 47.6

Thai NDVR 6.0

Social Security Office 2.4

Free Float (%) 52.4

3m Avg. Daily Val (US$m) 7.5

GIC Industry : Energy / Oil, Gas & Consumable Fuels


27 Nov 2020

Thailand Company Update

IRPC PCL Bloomberg: IRPC TB | Reuters: IRPC.BK Refer to important disclosures at the end of this report

Price Relative

Forecasts and Valuation

FY Dec (Btm) 2018A 2019A 2020F 2021F

Revenue 280,551 239,315 206,981 229,414 EBITDA 18,419 6,846 348 9,520 Pre-tax Profit 8,915 (1,924) (8,902) 269 Net Profit 7,735 (1,174) (7,156) 182 Net Pft (Pre Ex.) 7,266 (2,770) (7,156) 182 Net Pft Gth (Pre-ex) (%) (24.8) nm (158.3) nm EPS (Bt) 0.38 (0.1) (0.3) 0.01 EPS Pre Ex. (Bt) 0.36 (0.1) (0.4) 0.01 EPS Gth Pre Ex (%) (25) nm (158) nm Diluted EPS (Bt) 0.38 (0.1) (0.3) 0.01 Net DPS (Bt) 0.19 0.10 0.05 0.01 BV Per Share (Bt) 4.27 4.07 3.72 3.73 PE (X) 7.6 nm nm 323.6 PE Pre Ex. (X) 8.1 nm nm 322.6 P/Cash Flow (X) 3.2 7.8 17.0 6.6 EV/EBITDA (X) 6.3 17.5 351.6 12.7 Net Div Yield (%) 6.6 3.5 1.7 0.2 P/Book Value (X) 0.7 0.7 0.8 0.8 Net Debt/Equity (X) 0.7 0.7 0.8 0.8 ROAE (%) 8.9 (1.4) (9.0) 0.2 Earnings Rev (%): 0 0 Consensus EPS (Bt): (0.3) 0.10 Other Broker Recs: B: 9 S: 5 H: 11

44

64

84

104

124

144

164

184

204

1.7

2.7

3.7

4.7

5.7

6.7

7.7

8.7

Nov-16 Nov-17 Nov-18 Nov-19 Nov-20

Relative IndexBt

IRPC PCL (LHS) Relative SET (RHS)

Page 2

Company Update

IRPC PCL

WHAT’S NEW

4Q20F lifted by chemical business

3Q20 supported by strong chemical performance and

substantial inventory gain. 3Q20 net profit came in at

Bt1,556m (vs. 3Q19’s net loss of Bt1,321m and 2Q20’s net

loss of Bt411m), 43% above our estimate. The improved

performance was due to i) improving chemical showing from

the restart of businesses and COVID-19-driven demand for

hygiene products, and ii) net inventory gain of Bt3.77bn.

However, its earnings recovery was weighed down by i)

weakening refinery business as OSP rose and crack spreads

softened, and ii) forex loss of Bt129m.

Total market GIM came in at US$8.74/bbl, -14% y-o-y and

+3% q-o-q, supported by wider chemical margins. However, it

was still below the breakeven level of c.US$10.89/bbl,

regardless of other income and non-recurring items.

IRPC’s overall performance by quarter

Source: IRPC, DBSVTH

3Q20’s key operating metrics

i) Refinery utilisation rate was at 91%, (vs. 90% in 3Q19

and 88% in 2Q20), as there was no maintenance

activities. On a 3Q20 basis, JET/GO/HSFO/ULG crack

spreads stood at US$-1.1/4.16/-2.58/3.93 (1000%/-

27%/-59%/+54% in q-o-q). Refining crack spreads were

weighed down by a slower-than-expected petroleum

demand recovery on fears of a second wave of COVID-

19. Market GRM stood at US$0.73/bbl, -79% y-o-y and -

72% q-o-q.

The softer market GRM was due to the rise in OSP

premium for major oil producers in the Arab Gulf.

Specifically, Murban, Arab Light, and Arab Extra Light

stood at c.US$1.20/0.77/0.70 per barrel respectively (vs.

2Q20’s US$-4.72/-5.43/-5.67 per barrel).

ii) Crude inventory impact resulted in a net inventory gain

of Bt3.77bn where average Dubai and Arab premium

crude prices increased by c.US$4/bbl and c.US$6/bbl

respectively. Note that IRPC booked realised oil hedging

gain of Bt1.018m this quarter.

iii) Petrochemical business was supported by wider chemical

spreads as a result of the rebound in sales such as

durable good sales. On a 3Q20 basis, PP/HDPE/ABS/PS

spreads stood at US$577/633/1,117/618 per tonne, -

4%/+1%/+23%/-4% q-o-q. Hence, market GIM came in

at US$6.76/bbl, +22% y-o-y and +45% q-o-q.

iv) However, total accounting GIM stood at c.US$15.41/bbl

that is above the group’s breakeven point of

US$10.89/bbl – which can be broken down into

operating cash expense/interest expense/depreciation

expense of US$6.1/US$0.8/US$4.0 per barrel

respectively.

v) Expected extraordinary items in 3Q20 include: i) foreign

exchange loss of Bt129m as the THB depreciated

against USD by c.Bt0.70 per USD, and ii) impairment

expense of Bt24m.

Strong chemical business will carry on in 4Q20F-1Q21F as

refinery business expected to remain weak. We anticipate the

strong chemical performance (both downstream of aromatics

chain and polyolefins chain) to carry on in 4Q20F-1Q21F,

supported by i) inventory restocking by Asian manufactures

after their inventory level breached the 5-year average, and ii)

rising demand for packaging materials for healthcare and

homecare products, driven by of COVID-19 pandemic.

For the refinery business, we expect gasoil margin to be still

under pressure as most refineries, responding to the still-low jet

oil demand, are producing more road fuels instead (gasoil and

gasoline). Another challenge, in our view, is whether gasoline

markets will hold up, as people avoid public transport by driving

their own cars. However, should additional lockdown measures

be imposed due to a second wave of the COVID-19 pandemic,

gasoline demand could be significantly disrupted. On 4Q-to-

date basis, JET/GO/ULG spreads averaged US$1.99/2.75/4.09

per barrel, n.a./-34%/-8% respectively.

Page 3

Company Update

IRPC PCL

However, we are see positive signals for the refinery sector, as

crude OSP from the Arab Gulf is expected to enter a

downward trend. On a 4Q-to-date basis, Murban, Arab Light,

and Arab Extra Light averaged c.US$-0.43/-0.47/-0.70 per

barrel respectively. On average, OSP has decreased by

c.US$1/bbl compared with the 3Q20 average.

OSP discount/premium by month

Source: TOP, DBSVTH

Company Background

IRPC is a fully integrated refinery and naphtha-based

petrochemical producer. Its refinery is the second largest in

Thailand with a capacity of 215kbd. The refinery and

petrochemical complexes have been upgraded to improve

efficiency and product yields. The upgrade was completed in

2Q16 under the UHV project to optimise the utilisation rate for

its refinery (vs. 85-87% previously).

Historical PB band

PB band (x)

Source: Bloomberg Finance L.P., DBSVTH estimates

Quarterly / Interim Income Statement (Btm)

FY Dec 3Q2019 2Q2020 3Q2020 % chg yoy % chg qoq

Revenue 60,127 35,529 43,330 (27.9) 22.0

Cost of Goods Sold (59,864) (35,496) (39,554) (33.9) 11.4

Gross Profit 263 32.9 3,776 1,335.6 11,396.3

Other Oper. (Exp)/Inc (1,710) (1,615) (1,565) (8.5) (3.1)

Operating Profit (1,447) (1,582) 2,211 (252.8) (239.8)

Other Non Opg (Exp)/Inc (64.9) 1,232 231 nm (81.3)

Associates & JV Inc 108 66.4 90.0 (16.3) 35.5

Net Interest (Exp)/Inc (499) (482) (455) 8.7 5.5

Exceptional Gain/(Loss) 260 318 (153) nm (148.1)

Pre-tax Profit (1,643) (447) 1,924 nm nm

Tax 330 38.8 (365) (210.6) (1,041.2)

Minority Interest (8.1) (2.6) (3.0) 62.8 14.7

Net Profit (1,321) (411) 1,556 nm (478.6)

Net profit bef Except. (1,581) (729) 1,709 nm (334.4)

EBITDA 741 1,884 4,792 546.4 154.4

Margins (%)

Gross Margins 0.4 0.1 8.7

Opg Profit Margins (2.4) (4.5) 5.1

Net Profit Margins (2.2) (1.2) 3.6

Source: TOP, DBSVTH

Avg: 1.19x

+1sd: 1.55x

+2sd: 1.92x

-1sd: 0.83x

-2sd: 0.47x0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Nov-16 Nov-17 Nov-18 Nov-19

(x)

Page 4

Company Update

IRPC PCL

Key Assumptions

FY Dec 2017A 2018A 2019A 2020F 2021F

Crude run (kbd) 180 208 197 190 200

Market GIM (US$/bbl) 14.5 13.6 8.70 6.60 7.30

OPEX (US$/bbl) 6.41 6.32 7.23 7.00 7.00

Capex (Bt m) 11,223 5,846 5,830 5,000 7,000

Dubai oil price (US$/bbl) 53.2 71.3 65.0 40.0 42.0

Income Statement (Btm)

FY Dec 2017A 2018A 2019A 2020F 2021F

Revenue 214,101 280,551 239,315 206,981 229,414

Cost of Goods Sold (192,946) (264,637) (236,569) (208,164) (221,425)

Gross Profit 21,155 15,914 2,745 (1,183) 7,989 Other Opng (Exp)/Inc (6,897) (6,973) (7,056) (6,728) (6,728)

Operating Profit 14,258 8,941 (4,311) (7,910) 1,261 Other Non Opg (Exp)/Inc (732) 787 2,358 500 500

Associates & JV Inc 388 679 363 400 400

Net Interest (Exp)/Inc (2,067) (1,961) (1,931) (1,892) (1,892)

Exceptional Gain/(Loss) 1,695 469 1,596 0.0 0.0

Pre-tax Profit 13,541 8,915 (1,924) (8,902) 269 Tax (2,181) (1,147) 779 1,780 (53.9)

Minority Interest (5.0) (33.7) (28.5) (34.0) (33.0)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 11,354 7,735 (1,174) (7,156) 182 Net Profit before Except. 9,659 7,266 (2,770) (7,156) 182

EBITDA 20,718 18,419 6,846 348 9,520 Growth

Revenue Gth (%) 15.7 31.0 (14.7) (13.5) 10.8

EBITDA Gth (%) 18.9 (11.1) (62.8) (94.9) 2,634.3

Opg Profit Gth (%) 1.3 (37.3) (148.2) 83.5 (115.9)

Net Profit Gth (Pre-ex) (%) 0.4 (24.8) nm (158.3) nm Margins & Ratio

Gross Margins (%) 9.9 5.7 1.1 (0.6) 3.5

Opg Profit Margin (%) 6.7 3.2 (1.8) (3.8) 0.5

Net Profit Margin (%) 5.3 2.8 (0.5) (3.5) 0.1

ROAE (%) 13.5 8.9 (1.4) (9.0) 0.2

ROA (%) 6.4 4.2 (0.7) (4.1) 0.1

ROCE (%) 5.2 3.6 (3.2) (6.3) (1.2)

Div Payout Ratio (%) 52.2 50.2 N/A N/A 59.3

Net Interest Cover (x) 6.9 4.6 (2.2) (4.2) 0.7


Page 5

Company Update

IRPC PCL

Quarterly Income Statement (Btm)

FY Dec 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 60,127 55,758 48,910 35,529 43,330


Gross Profit 263 (400) (7,854) 32.9 3,776 Other Oper. (Exp)/Inc (1,710) (1,971) (1,606) (1,615) (1,565)

Operating Profit (1,447) (2,371) (9,460) (1,582) 2,211 Other Non Opg (Exp)/Inc (64.9) 1,029 (763) 1,232 231

Associates & JV Inc 108 61.1 49.5 66.4 90.0

Net Interest (Exp)/Inc (499) (480) (465) (482) (455)

Exceptional Gain/(Loss) 260 811 (504) 318 (153)

Pre-tax Profit (1,643) (950) (11,143) (447) 1,924 Tax 330 445 2,246 38.8 (365)


Net Profit (1,321) (513) (8,905) (411) 1,556 Net profit bef Except. (1,581) (1,324) (8,401) (729) 1,709

EBITDA 741 909 (8,002) 1,884 4,792 Growth

Revenue Gth (%) (5.6) (7.3) (12.3) (27.4) 22.0

EBITDA Gth (%) (73.4) 22.6 nm nm 154.4

Opg Profit Gth (%) 123.9 63.9 298.9 (83.3) (239.8)

Net Profit Gth (Pre-ex) (%) (959.4) (16.2) 534.5 (91.3) (334.4) Margins

Gross Margins (%) 0.4 (0.7) (16.1) 0.1 8.7

Opg Profit Margins (%) (2.4) (4.3) (19.3) (4.5) 5.1

Net Profit Margins (%) (2.2) (0.9) (18.2) (1.2) 3.6

Balance Sheet (Btm)

FY Dec 2017A 2018A 2019A 2020F 2021F Net Fixed Assets 127,061 124,737 121,069 118,710 118,352

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0

Other LT Assets 9,900 11,080 13,135 11,376 11,835

Cash & ST Invts 2,145 2,338 3,036 756 2,926

Inventory 30,052 28,459 25,995 26,251 26,508

Debtors 12,784 13,051 11,845 11,987 12,131

Other Current Assets 2,602 2,782 2,771 2,772 2,773

Total Assets 184,544 182,446 177,850 171,852 174,525

ST Debt

13,618 13,804 15,090 15,499 15,929

Creditor 31,573 31,463 26,869 27,508 29,324

Other Current Liab 4,173 3,628 3,748 3,935 4,132

LT Debt 47,529 46,170 48,742 48,717 48,717

Other LT Liabilities 0.0 0.0 0.0 0.0 0.0

Shareholder’s Equity 87,512 87,286 83,256 76,100 76,282

Minority Interests 137 93.5 146 93.0 141

Total Cap. & Liab. 184,543 182,446 177,850 171,852 174,525

Non-Cash Wkg. Capital 9,691 9,200 9,994 9,566 7,956

Net Cash/(Debt) (59,002) (57,637) (60,795) (63,460) (61,720)

Debtors Turn (avg days) 19.4 16.8 19.0 21.0 19.2

Creditors Turn (avg days) 50.7 44.8 46.7 49.4 48.5

Inventory Turn (avg days) 54.7 41.6 43.6 47.5 45.0

Asset Turnover (x) 1.2 1.5 1.3 1.2 1.3

Current Ratio (x) 1.0 1.0 1.0 0.9 0.9

Quick Ratio (x) 0.3 0.3 0.3 0.3 0.3

Net Debt/Equity (X) 0.7 0.7 0.7 0.8 0.8

Net Debt/Equity ex MI (X) 0.7 0.7 0.7 0.8 0.8

Capex to Debt (%) 16.0 10.0 9.1 7.8 10.8

Z-Score (X) 1.9 2.3 1.8 1.5 1.8


Page 6

Company Update

IRPC PCL

Cash Flow Statement (Btm)

FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 13,541 8,915 (1,924) (4,156) 182

Dep. & Amort. 6,804 8,012 8,435 7,358 7,358

Tax Paid (52.0) (1,277) (95.6) 0.0 0.0

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (320) (62.3) 1,199 258 1,433

Other Operating CF 272 2,716 (86.6) 0.0 0.0

Net Operating CF 20,245 18,304 7,527 3,461 8,974 Capital Exp.(net) (9,768) (5,992) (5,830) (5,000) (7,000)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 (545) (125) (125) (125)

Net Investing CF (9,768) (6,537) (5,954) (5,125) (7,125) Div Paid (4,722) (7,982) (1,867) (1,025) (109)

Chg in Gross Debt (5,653) (3,592) 993 409 430

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CF (10,375) (11,575) (874) (616) 321 Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 103 193 698 (2,280) 2,170

Opg CFPS (Bt) 1.01 0.90 0.31 0.16 0.37

Free CFPS (Bt) 0.51 0.60 0.08 (0.1) 0.10


Target Price & Ratings History

Source: DBSVTH

Analyst: Duladeth BIK, CFA, FRM, CAIA

THAI-CAC (as of Jun 2019) Certified

Corporate Governance CG Rating (as of Oct 2019)

THAI-CAC is Companies participating in Thailand's Private Sector

Collective Action Coalition Against Corruption programme (Thai CAC)

under Thai Institute of Directors (as of May 2018) are categorised into:

Score Description

Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance practices

of listed companies. The assessment covers 235 criteria in five

categories including board responsibilities (35% weighting), disclosure

and transparency (20%), role of stakeholders (20%), equitable

treatment of shareholders (10%) and rights of shareholders (15%).

The IOD then assigns numbers of logos to each company based on

their scoring as follows:

Score Range Number of Logo Description

90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass

<50 No logo given N/A

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 13 Feb 20 2.98 3.30 HOLD

2: 25 Mar 20 2.10 1.95 HOLD

3: 08 May 20 2.64 1.95 FULLY VALUED

4: 08 Jun 20 3.00 3.14 HOLD

5: 11 Aug 20 2.46 2.70 HOLD

6: 21 Oct 20 2.02 2.30 HOLD

7: 10 Nov 20 2.46 2.30 HOLD

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

56

7

1.78

2.28

2.78

3.28

3.78

Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20

Bt

ed: CK/ sa: PY, CS



Analyst


What’s New • 3Q20 net profit came in at Bt380m, supported by rising

volume and inventory gain

• Core EBITDA/tonne came in at US$68/tonne (-19%y-o-

y, -28% q-o-q), hit by weakening demand amid COVID-

19 pandemic

• We expect 2021F to see normalised sales volume and

rebound of PET margins that are below the industry’s

conversion cash cost

• Maintain HOLD with an unchanged TP of Bt24


L.P.

Bottoming of PET margins Investment Thesis: Capacity continues to grow. Acquiring operating assets in key

markets and consolidating the industry to rationalise market

supply are IVL’s main strategies to gain market share. Based on

its announced acquisitions, we expect its capacity to rise from

10.7mtpa at the end of 2017 to over 14mtpa by the end of

2021 (excluding joint ventures), implying an CAGR of c.10%.

This is thanks to acquisition of Huntsman’s assets in early 2020.

Expect earnings to recover in 2021F, supported by normalised

operations and rebound in margins, on the back of i)

normalising production volume after the integration of

Huntsman’s assets in early 2020, ii) gradual integrated PET

demand recovery, and iii) bottoming of margins, as they are

falling below the breakeven level for certain Asian producers.

Maintain HOLD and TP of Bt24, in view of the following: i) the

share price has factored in expectations of weak earnings in

2H20F after retreating more than 20% since Jul 2020, ii) signs

of recovery for integrated PTA/PET margins, iii) MTBE margin

recovery after the easing of lockdowns in many countries, and

iv) minimal impact from the COVID-19 pandemic, as c.75% of

its revenue is contributed by consumer staples.

Valuation:

Our FY21F TP of Bt24, pegged to a PE of 17x that is equivalent

to 0.5SD below its 5-year average.

Where we differ:

We are more conservative on the chemical outlook, as any

recovery in demand and purchasing power depends on the

discovery of an effective COVID-19 vaccine. Our FY20F/FY21F

EPS is 50%/27% below consensus.

Key Risks to Our View:

(1) Fluctuation in product spreads from demand and supply

balancing. (2) Lower-than-expected efficiency improvement for

newly acquired assets. (3) Operational instability. At A Glance Issued Capital (m shrs) 5,615

Mkt. Cap (Btm/US$m) 169,840 / 5,607


Indorama Resources 62.4

Thai NVDR 5.6

Bangkok Bank 4.8

Free Float (%) 35.1


GIC Industry : Materials / Chemicals


27 Nov 2020


Indorama Ventures Bloomberg: IVL TB | Reuters: IVL.BK Refer to important disclosures at the end of this report

Price Relative


FY Dec (Btm) 2018A 2019A 2020F 2021F

Revenue 347,171 352,692 393,750 425,700 EBITDA 44,126 25,843 24,700 29,799 Pre-tax Profit 30,151 5,898 5,575 10,579 Net Profit 26,467 5,252 3,853 8,099 Net Pft (Pre Ex.) 24,054 5,239 3,853 8,099 Net Pft Gth (Pre-ex) (%) 19.4 (78.2) (26.5) 110.2 EPS (Bt) 4.71 0.94 0.69 1.44 EPS Pre Ex. (Bt) 4.28 0.93 0.69 1.44 EPS Gth Pre Ex (%) 12 (78) (26) 110 Diluted EPS (Bt) 4.71 0.94 0.69 1.44 Net DPS (Bt) 1.40 1.23 0.21 0.43 BV Per Share (Bt) 25.8 23.1 23.5 24.6 PE (X) 6.4 32.3 44.1 21.0 PE Pre Ex. (X) 7.1 32.4 44.1 21.0 P/Cash Flow (X) 5.3 4.2 7.4 15.2 EV/EBITDA (X) 7.4 13.1 14.6 12.4 Net Div Yield (%) 4.6 4.0 0.7 1.4 P/Book Value (X) 1.2 1.3 1.3 1.2 Net Debt/Equity (X) 1.0 1.2 1.3 1.3 ROAE (%) 20.2 3.8 2.9 6.0 Earnings Rev (%): 0 0 Consensus EPS (Bt): 0.92 2.08 Other Broker Recs: B: 15 S: 2 H: 5

65

85

105

125

145

165

185

205

15.2

25.2

35.2

45.2

55.2

65.2


Relative IndexBt

Indorama Ventures (LHS) Relative SET (RHS)

Page 2

Company Update

Indorama Ventures

WHAT’S NEW

Bottoming of PET margins

3Q20 performance supported by rising production volume and

inventory gain despite softer PET margins. 3Q20 net profit came

in at Bt380m (-52% y-o-y and +147% q-o-q), 51% below our

estimate. The recovery of its earnings was supported by i)

production volume rising by 10% y-o-y and 14% q-o-q, and ii)

inventory gain of Bt281m.

However, this was offset by i) one-month shutdown of the

olefins and derivative (IOD) plant in the US after hurricane Laura

hit in Aug, and ii) softer integrated PET and MEG margins. Thus,

core EBITDA/tonne came in at US$68/tonne (-19% y-o-y, -28%

q-o-q) on the back of total production volume of 3.68m tonnes

(+10% y-o-y, +14% q-o-q).

Hence, normalised profit, excluding inventory impact and non-

recurring items, was reported at Bt160m (vs. 3Q19’s Bt3.25bn

and 2Q20’s Bt3.18bn).

IVL’s EBITDA performance by quarter (per tonne basis)

Source: IVL, DBSVTH

3Q20’s key operating statistics

i) The performance of integrated PET/PTA (c.69% of total

3Q20 EBITDA – PET, PTA, PX, recycle PET) deteriorated, as

PET/PTA margins narrowed due to a) normalising demand

after the panic buying of hygiene and healthcare products

in 2Q20, and b) the rise in feedstock costs. Total

production volume stood at 2.57m tonnes, +3% y-o-y and

+16% q-o-q. Integrated PET/PTA margins in Asia/Europe

stood at US$190/386 per tonne, -23%/-9% q-o-q. Hence,

core EBITDA came in at US$67/tonne, -10% y-o-y and -

21% q-o-q.

ii) The performance of Olefin & derivatives (c.3% of total

3Q20 EBITDA - EOEG, PEO, MEG) had deteriorated. This

was caused by a) one-month production shutdown due to

power outage from Hurricane Laura, and ii) MEG margin

declining by -7% y-o-y and -64% q-o-q, arising from

COVID-19-induced demand disruption. However, total

production volume came in at 0.46m tonnes (+265% y-o-y,

-16% q-o-q). Core EBITDA margin came in at US$16/tonne

(-87% y-o-y, -74% q-o-q), weighed down by the high level

of fixed costs, as production lines were temporarily put on

hold due to the hurricane. However, this was partly offset

by the rise in MTBE demand (gasoline component) after the

easing of lockdowns in many countries. MTBE margins

averaged US$141/tonne, -65% y-o-y and +76% q-o-q.

iii) The performance of specialty chemical business (c.4% of

total 3Q20 EBITDA – PET resins, IPA, NDC) weakened q-o-q.

Total production volume stood at 0.19m tonnes, -1% y-o-y

and +27% q-o-q. Core EBITDA came in at US$45/tonne (-

46% y-o-y, -54% q-o-q), hit by softer margins for the HVA

of PET value chains.

iv) The packaging business (c.7% of total 3Q20 EBITDA – PET

bottle) weakened q-o-q. Total production volume is

projected at 0.05m tonnes, flat y-o-y and flat q-o-q. Core

EBITDA stood at US$338/tonne (-1% y-o-y, -33% q-o-q),

hit by normalised demand hygiene and personal-care

products such as ready-to-eat and on-the-go food and

beverage – such demand was driven by safety concerns

arising from the outbreak of the COVID-19 pandemic.

v) The fibre business (c.16% of total 3Q20 EBITDA – HVA

product) was softer q-o-q. Total production volume came in

at 0.40m tonnes (-16% y-o-y, +43% q-o-q), thanks to

higher sales revenue for the mobility and lifestyle segment

after the lockdowns (that curtailed travel and shopping

activities) were eased in my countries . On the other hand,

there was normalised demand for medical masks,

disposable wipes and diapers, and gowns applications.

Core EBITDA came in at US$97/tonne, -8% y-o-y and -25%

q-o-q.

vi) Inventory impact resulted in a stock gain of Bt281m (vs.

3Q19’s loss of Bt2.17bn and 2Q20’s loss of Bt3.29bn), as

PX, PTA and MEG prices rose by US$50/18/43 tonne from

the previous quarter respectively.

vii) Extraordinary items in 3Q20 included property damage

expenses of c.US$8m – an amount deductible from

insurance – arising from a lightning strike at its ethylene

plant (c.440ktpa) in the US in Aug 2020.

Page 3

Company Update

Indorama Ventures

Expect earnings recovery in 2021F, supported by normalised

operations and rebound in margins. Its performance in 2020F

was hit by i) softer overall chemical margins, hit by demand

disruptions caused by the COVID-19 pandemic, ii) sub-optimal

production volume where IOD plants in the US were shut down

for c.70 days in 1Q20 and c.30 days in 3Q20 after Hurricane

Laura hit in Aug, and iii) substantial inventory loss (1H20’s loss

stood at Bt6.7bn) after PX/PTA/MEG prices rose sharply in

tandem with crude oil prices.

We believe its performance in 2021F will be driven by i)

normalising production volume after the completion of the

integration of Huntsman’s assets in early 2020, ii) gradual

integrated PET demand recovery, and iii) bottoming of margins,

i.e., PET and MEG, as the current levels are below the operating

cash cost/breakeven for certain Asian producers.

Company Background

IVL is a global integrated PET/PTA producer with a combined

PET, fibre and PTA capacity of 13mtpa. Including MEG and

other high value-added products, its total capacity was 14mtpa

in 2019. The group operates production facilities in 21

countries, with a sales footprint covering over 100 countries.



Revenue 84,478 75,010 81,019 (4.1) 8.0


Gross Profit 4,923 4,250 6,332 28.6 49.0

Other Oper. (Exp)/Inc (3,009) (3,921) (4,259) 41.5 8.6

Operating Profit 1,914 329 2,073 8.3 530.7

Other Non Opg (Exp)/Inc 356 722 522 46.5 (27.8)

Associates & JV Inc (4.8) 65.6 41.7 nm (36.5)

Net Interest (Exp)/Inc (1,357) (1,785) (1,899) (39.9) (6.4)

Exceptional Gain/(Loss) (290) 260 (60.8) 79.0 (123.4)

Pre-tax Profit 618 (409) 677 9.5 nm

Tax (27.1) 569 (188) 595.1 (133.1)

Minority Interest 202 (6.3) (109) nm 1,637.2

Net Profit 793 154 380 (52.1) 147.5

Net profit bef Except. 1,083 (106) 441 (59.3) (515.1)

EBITDA 5,873 5,496 7,189 22.4 30.8

Margins (%)


Opg Profit Margins 2.3 0.4 2.6

Net Profit Margins 0.9 0.2 0.5

Historical PE and PB band

Forward PE band (x) PB band (x)

Source: Bloomberg Finance L.P., DBSVTH estimates Source: Bloomberg Finance L.P., DBSVTH estimates

Avg: 27.9x

+1sd: 44.6x

+2sd: 61.3x

-1sd: 11.2x

-4.9

5.1

15.1

25.1

35.1

45.1

55.1

65.1


(x)

Avg: 1.8x

+1sd: 2.27x

+2sd: 2.75x

-1sd: 1.32x

-2sd: 0.85x

0.6

1.1

1.6

2.1

2.6

3.1


(x)

Page 4

Company Update

Indorama Ventures

Key Assumptions

FY Dec 2017A 2018A 2019A 2020F 2021F

Total capacity (ktpa) 10,668 13,029 14,132 14,362 14,403

Utilization rate (%) 88.0 88.0 86.3 87.0 89.8

Core EBITDA/t 110 138 90.0 102 105

Capex & investment (US$

m)

865 1,333 843 816 517


FY Dec 2017A 2018A 2019A 2020F 2021F

Revenue 286,332 347,171 352,692 393,750 425,700


Gross Profit 29,665 39,490 22,132 24,325 29,412 Other Opng (Exp)/Inc (8,147) (10,311) (13,005) (13,125) (13,545)

Operating Profit 21,518 29,179 9,127 11,200 15,867 Other Non Opg (Exp)/Inc 1,263 2,200 2,367 0.0 0.0

Associates & JV Inc 28.4 586 5.32 0.0 0.0


Exceptional Gain/(Loss) 733 2,413 13.6 0.0 0.0

Pre-tax Profit 19,678 30,151 5,898 5,575 10,579 Tax 1,400 (3,812) (1,534) (781) (1,481)

Minority Interest (195) 128 888 (942) (998)


Net Profit 20,883 26,467 5,252 3,853 8,099 Net Profit before Except. 20,150 24,054 5,239 3,853 8,099

EBITDA 33,488 44,126 25,843 24,700 29,799 Growth

Revenue Gth (%) 12.5 21.2 1.6 11.6 8.1

EBITDA Gth (%) 30.6 31.8 (41.4) (4.4) 20.6

Opg Profit Gth (%) 47.4 35.6 (68.7) 22.7 41.7

Net Profit Gth (Pre-ex) (%) 110.7 19.4 (78.2) (26.5) 110.2 Margins & Ratio

Gross Margins (%) 10.4 11.4 6.3 6.2 6.9

Opg Profit Margin (%) 7.5 8.4 2.6 2.8 3.7

Net Profit Margin (%) 7.3 7.6 1.5 1.0 1.9

ROAE (%) 20.3 20.2 3.8 2.9 6.0

ROA (%) 7.7 8.0 1.4 1.0 2.0

ROCE (%) 7.3 7.3 (0.1) (0.5) 0.8

Div Payout Ratio (%) 25.1 29.7 131.0 30.0 30.0

Net Interest Cover (x) 5.6 6.9 1.6 2.0 3.0


Page 5

Company Update

Indorama Ventures


FY Dec 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 84,478 77,509 92,024 75,010 81,019


Gross Profit 4,923 3,318 4,221 4,250 6,332 Other Oper. (Exp)/Inc (3,009) (3,315) (4,012) (3,921) (4,259)

Operating Profit 1,914 3.18 209 329 2,073 Other Non Opg (Exp)/Inc 356 942 886 722 522

Associates & JV Inc (4.8) 15.8 14.9 65.6 41.7


Exceptional Gain/(Loss) (290) (432) 1,616 260 (60.8)

Pre-tax Profit 618 (802) 539 (409) 677 Tax (27.1) (1,330) 6.77 569 (188)

Minority Interest 202 617 25.0 (6.3) (109)

Net Profit 793 (1,516) 571 154 380 Net profit bef Except. 1,083 (1,084) (1,045) (106) 441

EBITDA 5,873 4,747 5,329 5,496 7,189 Growth

Revenue Gth (%) (11.0) (8.3) 18.7 (18.5) 8.0

EBITDA Gth (%) (22.9) (19.2) 12.2 3.1 30.8

Opg Profit Gth (%) (44.7) (99.8) 6,479.9 57.1 530.7

Net Profit Gth (Pre-ex) (%) (55.7) (200.0) (3.5) (89.8) (515.1) Margins

Gross Margins (%) 5.8 4.3 4.6 5.7 7.8

Opg Profit Margins (%) 2.3 0.0 0.2 0.4 2.6

Net Profit Margins (%) 0.9 (2.0) 0.6 0.2 0.5

Balance Sheet (Btm)



Other LT Assets 38,203 49,728 49,388 56,147 57,712

Cash & ST Invts 6,877 5,578 10,447 22,163 12,218

Inventory 46,036 70,085 62,165 43,881 47,140

Debtors 32,098 38,961 35,591 43,151 46,652


Total Assets 282,358 379,195 380,568 402,321 413,236

ST Debt

15,060 43,022 40,651 42,089 43,684

Creditor 39,301 54,565 57,173 43,722 46,969


LT Debt 97,750 113,639 129,410 161,193 159,958



Minority Interests 1,925 7,018 8,455 8,721 8,995

Total Cap. & Liab. 282,358 379,195 380,568 402,321 413,235


Net Cash/(Debt) (105,933) (151,083) (159,614) (181,118) (191,424)




Asset Turnover (x) 1.1 1.0 0.9 1.0 1.0

Current Ratio (x) 1.4 1.1 1.1 1.2 1.1

Quick Ratio (x) 0.6 0.4 0.4 0.7 0.6

Net Debt/Equity (X) 0.9 1.0 1.2 1.3 1.3


Capex to Debt (%) 25.4 36.1 14.9 12.4 7.4

Z-Score (X) 2.1 1.8 1.6 1.7 1.8


Page 6

Company Update

Indorama Ventures


FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 21,078 26,338 4,364 3,853 8,099

Dep. & Amort. 10,679 12,161 14,344 13,500 13,932

Tax Paid (2,247) (3,186) (3,248) 0.0 0.0

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (3,984) (11,600) 15,074 5,532 (10,858)

Other Operating CF 3,381 8,267 10,311 3.00 4.00


Other Invts.(net) (159) 251 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 0.0 0.0 0.0 0.0

Net Investing CF (28,786) (56,227) (25,298) (25,298) (15,000) Div Paid (4,049) (8,993) (8,060) (1,156) (2,430)

Chg in Gross Debt (3,082) 22,045 3,906 20,908 1,595

Capital Issues 15,504 15,852 0.0 0.0 0.0

Other Financing CF (5,643) (6,338) (6,642) (5,625) (5,288)

Net Financing CF 2,730 22,567 (10,796) 14,127 (6,123) Currency Adjustments 0.37 381 119 0.0 0.0

Chg in Cash 2,851 (1,299) 4,870 11,716 (9,946)

Opg CFPS (Bt) 6.27 7.76 4.59 3.09 3.92

Free CFPS (Bt) 0.05 (4.4) 2.77 (0.4) (0.7)



Source: DBSVTH







Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 28 Jan 20 27.75 29.00 HOLD

2: 27 Feb 20 27.75 29.00 HOLD

3: 21 Apr 20 27.00 24.00 HOLD

4: 22 Apr 20 28.00 24.00 HOLD

5: 13 May 20 28.50 24.00 FULLY VALUED

6: 24 Jun 20 27.25 31.00 HOLD

7: 10 Aug 20 24.90 28.00 HOLD

8: 14 Aug 20 25.25 28.00 HOLD

9: 28 Oct 20 22.90 24.00 HOLD

10: 10 Nov 20 27.25 24.00 HOLD


1

2

3

4

5

6

78

9

10

16.05

21.05

26.05

31.05

36.05


Bt

ed: CK/ sa: PY, CS

BUY Last Traded Price (26 Nov 2020): Bt22.30 (SET : 1,433.56)

Price Target 12-mth: Bt27.50 (23% upside)

Analyst


What’s New • 2Q21 net profit came in at Bt292m (-61% y-o-y and -

76% q-o-q ), hit by significant forex loss

• Expect 3Q21F core earnings to be weighed down by

rising feedstock costs (PTA, MEG)

• Minimal impact from the outbreak of COVID-19

• Maintain BUY rating with unchanged TP of Bt27.50


L.P.

A resilient packaging company Investment Thesis: Expect EBITDA margin to sustain above 20%, buoyed by

increasing sales proportion of HVA products. Since 2016, the

sales proportion of HVA products increased from c.19 ktpa to

c.49 ktpa, or a CAGR of c.26% over FY2016-2020. In general,

HVA products provide higher value and margins compared with

necessity-grade products. As a result, the contribution of HVA’s

EBITDA to overall consolidated EBITDA increased from 28% in

FY16 to 40% in FY20. We expect an EBITDA margin of 22-23%

in FY21F-22F after i) the commercialisation of a BoPET film plant

(44 ktpa) in Nov 2019, and ii) the commercialisation of the BoPP

film plant in Indonesia (60 ktpa, COD in Apr 2021-Sep 2021).

Maintain BUY rating with TP of Bt27.50, underpinned by i) its

net profit CAGR of 23% over FY2018-2023F, ii) its status as one

of Thailand’s largest PET film producers and sixth largest PET

film producer in the world, iii) one of the low-cost producers,

thanks to its upstream and downstream integration, iv) minimal

adverse impact from the COVID-19 pandemic (vs. peers), v) its

higher operating efficiency relative to peers, vi) its higher

EBITDA margin and ROE relative to peers, and vii) its valuation


Valuation: Our FY21F of Bt27.5 a share is based on a PE multiple of 9.9x

or 1SD above its 5-year average.

Where we differ:

We are more bullish about the packaging business as it is one

of most resilient segments during the COVID-19 pandemic. Key Risks to Our View:

i) Feedstock cost (PTA, MEG, PET) volatility, ii) production

disruption, iii) inability to adjust selling prices, iv) change in

consumer lifestyle and demand, and v) foreign exchange risk. At A Glance

Issued Capital (m shrs) 900

Mkt. Cap (Btm/US$m) 20,070 / 663


Polyplex (Asia) PTE 33.7

Polyplex Corporation 17.1

Thai NVDR 5.0

Free Float (%) 48.9




27 Nov 2020


Polyplex (Thailand) Bloomberg: PTL TB | Reuters: PTL.BK Refer to important disclosures at the end of this report

Price Relative


FY Mar (Btm) 2019A 2020A 2021F 2022F

Revenue 14,746 14,051 16,926 21,029 EBITDA 2,792 2,990 3,888 4,709 Pre-tax Profit 2,374 2,060 2,649 3,426 Net Profit 2,324 1,803 2,509 3,211 Net Pft (Pre Ex.) 1,874 1,804 2,509 3,211 Net Pft Gth (Pre-ex) (%) 30.7 (3.7) 39.1 28.0 EPS (Bt) 2.58 2.00 2.79 3.57 EPS Pre Ex. (Bt) 2.08 2.00 2.79 3.57 EPS Gth Pre Ex (%) 31 (4) 39 28 Diluted EPS (Bt) 2.58 2.00 2.79 3.57 Net DPS (Bt) 0.64 0.65 1.12 1.43 BV Per Share (Bt) 12.9 14.3 17.1 20.7 PE (X) 8.6 11.1 8.0 6.3 PE Pre Ex. (X) 10.7 11.1 8.0 6.3 P/Cash Flow (X) 8.5 7.0 5.9 5.3 EV/EBITDA (X) 7.8 7.2 5.6 4.3 Net Div Yield (%) 2.9 2.9 5.0 6.4 P/Book Value (X) 1.7 1.6 1.3 1.1 Net Debt/Equity (X) 0.2 0.1 0.1 0.0 ROAE (%) 21.0 14.7 17.7 18.9 Earnings Rev (%): 0 0 Consensus EPS (Bt): 2.79 3.57 Other Broker Recs: B: 1 S: 0 H: 0

74

94

114

134

154

174

194

214

234

254

7.5

12.5

17.5

22.5

27.5


Relative IndexBt

Polyplex (Thailand) (LHS) Relative SET (RHS)

Page 2

Company Update

Polyplex (Thailand)

WHAT’S NEW

A resilient packaging company

2Q21 hit by substantial forex loss. Polyplex (Thailand) reported a

2Q21 (Jul-Sep 2020) net profit of Bt292m, -61% y-o-y and -

76% q-o-q. The performance deterioration is due to significant

foreign exchange loss of Bt510m. However, its core

performance remained healthy, supported by i) the rise in sales

volume, and ii) declining feedstock cost. Normalised net profit

came in at Bt803m, +65% y-o-y and -2% q-o-q.

2Q21 operating metrics

i) Sales volume – Total BoPET film sales volume stood at

55,218 tonnes, +28% y-o-y and +1% q-o-q. This is

thanks a) to the commercialisation of BoPET plant with a

capacity of 44ktpa in Indonesia in Nov 2019, and b)

increasing demand for flexible packaging materials such

as BoPET thin film.

Sales volume by quarter (tonnes)



ii) Feedstock cost – PTA and MEG are major feedstock

materials for BoPET film production. On a calendar year

3Q20 basis, PTA and MEG reference prices averaged

US$442/tonne (-37% y-o-y and +4% q-o-q) and

US$584/tonne (-16% y-o-y and flat q-o-q). This is caused

by the oil price collapse since Mar 2020 arising from the

COVID-19 pandemic and oil price war.

PTA/MEG/PET price by quarter (US$/tonne)


Note: calendar year

iii) Gross and EBITDA margins – Profitability is maintained at

the similar level q-o-q despite the lower selling product

prices given to the clients. Gross and EBITDA margins

came in at 31% and 29% respectively. This is thanks to

the softer feedstock costs for both PTA and MEG.

Gross and EBITDA margins



iv) Extraordinary items – forex exchange loss of Bt510m as

the THB and IDR depreciated against the USD and EUR.

Page 3

Company Update

Polyplex (Thailand)

3Q21F weighed down by rising feedstock cost and expected

forex loss. We expect softer core earnings in 3Q21F (Oct-Dec

2020), pressured by i) up-trending feedstock cost where PTA

and MEG, on 4Q-to-date basis, averaged US$421/635 per

tonne, (-4%/+9% QTD), and ii) appreciation of the THB against

USD.However, we expect sales volume to remain flat q-o-q,

driven by strong demand for hygiene products and flexible

packaging materials.

Minimal adverse impact from COVID-19 outbreak, in our view.

We believe the impact on packaging demand from the

outbreak of COVID-19 pandemic is mixed, depending on the

product segment and portfolio position of packaging players.

However, we think that the high demand for food, grocery,

healthcare products, personal-care products, food delivery and

e-commerce delivery will continue, as the COVID-19 pandemic

can be hard to contain and fears of a second wave of

infections have come to pass in some countries. Based on the

data compiled by McKinsey, online sales of grocery and fresh

food in China doubled within a 10-day period in Jan 2020, at

the early stage of the country’s outbreak. Hence, packaging

products such as corrugated paper, flexible, and rigid plastic

were in high demand. On the other hand, packaging demand

(pertaining to bulk and transportation packaging) for industrial,

luxury, alcohol and business-to-business (B2B) merchandises

could see a downtrend, as such demand is highly correlated

with domestic GDP growth.

For PTL, consumer staples goods, which make up

approximately 70% of its sales volume, are expected to see

stable to elevated demand. In developed economies such as

Japan, Korea, Europe and the US, there is an increase in

demand for films going into flexible packaging, as consumers

gravitate towards more packaged goods to avoid the inherent

risk of contamination for fresh food. On the other hand, we

expect declining demand for the remaining c.30% of PTL’s PET

film sales volume, which is mostly used in durable and

industrial goods such as electronic devices. This can be

attributed to a global economic slowdown and consumers

delaying their purchases of durable goods. Hence, we

anticipate minimal net impact of COVID-19 on PTL’s

performance

Company Background

Since its inception in 2002, PTL has grown from a single-line

facility into a multinational with a turnover of more than half a

billion dollars, with manufacturing and distribution facilities in

India, South East Asia, Europe, the Americas and China. PTL’s

expansion model has allowed it to move geographically closer

to its regional markets, thus it now has the efficient and cost-

effective ability to deliver products to its customers. Its fully

integrated green-field film lines with upstream resin plants and

downstream metallisers, and other offline coating capabilities

ensure cost-competitiveness and environmental-friendliness,

besides being able to offer the advantages of being a single-

point supplier for a portfolio of film products to its customers.

PTL has a unique model of on-shore, off-shore and near-shore

business locations which complement its focus on customer

relationship, access and intimacy

Page 4

Company Update

Polyplex (Thailand)


FY Mar 2Q2020 1Q2021 2Q2021 % chg yoy % chg qoq

Revenue 3,348 3,759 3,748 12.0 (0.3)

Cost of Goods Sold (2,529) (2,576) (2,587) 2.3 0.4

Gross Profit 818 1,182 1,161 41.9 (1.8)

Other Oper. (Exp)/Inc (317) (327) (360) 13.6 10.0

Operating Profit 502 855 802 59.8 (6.3)

Other Non Opg (Exp)/Inc 12.9 8.97 15.9 23.4 77.0

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc (15.0) (18.4) (14.8) 1.1 19.5


Pre-tax Profit 752 1,246 293 (61.1) (76.5)

Tax (11.9) (26.6) 0.02 (100.2) (100.1)

Minority Interest (0.9) (1.1) (0.6) 37.9 (47.9)

Net Profit 739 1,219 292 (60.5) (76.0)

Net profit bef Except. 487 818 802 64.8 (2.0)

EBITDA 702 1,096 1,050 49.6 (4.1)

Margins (%)







Avg: 7.2x

+1sd: 8.7x

+2sd: 10.2x

-1sd: 5.7x

-2sd: 4.2x

2.7

4.7

6.7

8.7

10.7

12.7


(x)

Avg: 1.21x

+1sd: 1.41x

+2sd: 1.61x

-1sd: 1.02x

-2sd: 0.82x

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9


(x)

Page 5

Company Update

Polyplex (Thailand)

Key Assumptions

FY Mar 2018A 2019A 2020A 2021F 2022F

Thin PET film capacity 131,000 131,000 175,000 175,000 175,000

Crude price 71.6 64.2 42.0 45.0 45.0

PET price 1,236 960 800 750 750

MEG price 1,109 754 645 600 650

Capex 519 1,492 1,651 2,790 1,600


FY Mar 2018A 2019A 2020A 2021F 2022F

Revenue 12,673 14,746 14,051 16,926 21,029



Operating Profit 1,540 1,968 2,054 2,660 3,442 Other Non Opg (Exp)/Inc 54.5 67.6 73.9 80.0 83.0

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (122) (112) (66.4) (90.8) (98.8)

Exceptional Gain/(Loss) (264) 450 (0.9) 0.0 0.0

Pre-tax Profit 1,208 2,374 2,060 2,649 3,426 Tax (30.4) (41.3) (254) (132) (206)




EBITDA 2,348 2,792 2,990 3,888 4,709 Growth

Revenue Gth (%) 9.8 16.4 (4.7) 20.5 24.2

EBITDA Gth (%) 19.0 18.9 7.1 30.0 21.1

Opg Profit Gth (%) 33.4 27.8 4.4 29.5 29.4

Net Profit Gth (Pre-ex) (%) 37.8 30.7 (3.7) 39.1 28.0 Margins & Ratio

Gross Margins (%) 20.9 21.7 23.4 24.7 25.4



ROAE (%) 11.6 21.0 14.7 17.7 18.9

ROA (%) 7.9 15.0 10.8 13.1 14.4

ROCE (%) 9.9 12.6 11.6 14.0 15.4

Div Payout Ratio (%) 42.3 24.8 32.4 40.0 40.0



Page 6

Company Update

Polyplex (Thailand)


FY Mar 2Q2020 3Q2020 4Q2020 1Q2021 2Q2021

Revenue 3,348 3,256 3,863 3,759 3,748


Gross Profit 818 786 808 1,182 1,161 Other Oper. (Exp)/Inc (317) (286) (338) (327) (360)

Operating Profit 502 501 470 855 802 Other Non Opg (Exp)/Inc 12.9 11.5 16.8 8.97 15.9


Net Interest (Exp)/Inc (15.0) (13.6) (18.1) (18.4) (14.8)

Exceptional Gain/(Loss) 253 (77.3) (227) 400 (510)

Pre-tax Profit 752 421 242 1,246 293 Tax (11.9) (8.5) (226) (26.6) 0.02

Minority Interest (0.9) 0.0 (1.2) (1.1) (0.6)

Net Profit 739 413 14.9 1,219 292 Net profit bef Except. 487 490 242 818 802

EBITDA 702 715 771 1,096 1,050 Growth

Revenue Gth (%) (6.6) (2.7) 18.6 (2.7) (0.3)

EBITDA Gth (%) (12.5) 1.8 7.8 42.2 (4.1)

Opg Profit Gth (%) (13.8) (0.2) (6.1) 82.0 (6.3)

Net Profit Gth (Pre-ex) (%) (16.9) 0.7 (50.7) 238.8 (2.0) Margins

Gross Margins (%) 24.4 24.1 20.9 31.5 31.0


Net Profit Margins (%) 22.1 12.7 0.4 32.4 7.8

Balance Sheet (Btm)

FY Mar 2018A 2019A 2020A 2021F 2022F Net Fixed Assets 9,063 9,527 10,706 13,210 13,625


Other LT Assets 413 543 409 361 1,678

Cash & ST Invts 1,335 869 1,204 1,798 2,510

Inventory 2,112 2,338 2,354 2,354 2,354

Debtors 2,000 2,120 2,411 2,660 3,306

Other Current Assets 206 389 396 396 396

Total Assets 15,136 15,851 17,490 20,790 23,879

ST Debt

2,085 2,016 1,054 1,147 1,147

Creditor 1,137 1,147 1,186 1,382 1,752

Other Current Liab 344 443 614 614 614

LT Debt 1,031 634 1,715 2,209 1,709



Minority Interests 25.2 31.6 34.5 41.3 49.6

Total Cap. & Liab. 15,136 15,851 17,490 20,790 23,879


Net Cash/(Debt) (1,782) (1,781) (1,564) (1,558) (346)




Asset Turnover (x) 0.9 1.0 0.8 0.9 0.9

Current Ratio (x) 1.6 1.6 2.2 2.3 2.4

Quick Ratio (x) 0.9 0.8 1.3 1.4 1.7

Net Debt/Equity (X) 0.2 0.2 0.1 0.1 0.0


Capex to Debt (%) 17.2 54.9 62.3 83.1 56.0

Z-Score (X) NA NA NA NA NA


Page 7

Company Update

Polyplex (Thailand)


FY Mar 2018A 2019A 2020A 2021F 2022F

Pre-Tax Profit 1,208 2,374 2,060 2,509 3,211

Dep. & Amort. 754 756 863 1,149 1,185

Tax Paid (29.7) (41.7) (30.8) (132) (206)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (581) (436) (163) (52.6) (276)

Other Operating CF 345 (294) 133 (90.8) (98.8)

Net Operating CF 1,696 2,358 2,862 3,382 3,816 Capital Exp.(net) (537) (1,454) (1,726) (2,790) (1,600)

Other Invts.(net) 17.6 (38.0) 75.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CF (519) (1,492) (1,651) (2,790) (1,600) Div Paid (493) (614) (622) (585) (1,004)

Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (112) (589) (167) 587 (500)

Net Financing CF (605) (1,203) (789) 2.35 (1,504) Currency Adjustments 27.3 (137) (74.6) 0.0 0.0

Chg in Cash 599 (474) 348 594 712

Opg CFPS (Bt) 2.53 3.10 3.36 3.82 4.55

Free CFPS (Bt) 1.29 1.00 1.26 0.66 2.46

Source: Company, DBSVTH Target Price & Ratings History

Source: DBSVTH


THAI-CAC (as of Jun 2019) n/a





Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 14 Jul 20 22.50 27.50 BUY

2: 13 Aug 20 23.90 27.50 BUY

3: 10 Nov 20 22.20 27.50 BUY


1

2

3

7.93

9.93

11.93

13.93

15.93

17.93

19.93

21.93

23.93

25.93


Bt

ed: CK/ sa: PY, CS



Analyst


What’s New • 3Q20 net profit came in at Bt908m, hit by softer

refinery and aromatics margins, and forex loss

• 4Q20F to be supported by strong polymer business,

driven by the second wave of COVID-19 pandemic

• HDPE/PP prices rose +5%/+13% QTD

• Maintain HOLD rating with unchanged TP of Bt44


L.P.

Chemical unit to stay solid in 4Q20F Investment Thesis: Upcoming PO/polyol and ORP projects. The company’s two

current projects are the propylene oxide (PO)/polyols project

(c.0.33mtpa) and expansion of its naphtha cracker

(c.0.75mtpa) in Rayong under the “Olefins Reconfiguration”

(ORP) project. Both projects are expected to reach

commercialisation stages in 1H21F.

Utilisation rate to improve on better gas flow. Smoother gas

flow from PTT should be positive for PTTGC’s ethane-based

cracker operations. We expect the average utilisation rate of

PTTGC’s polyethylene business, its major business segment, to

gradually increase. We expect ethane-to-naphtha ratio of

90:10 for PTTGC’s cracker base

Maintain HOLD rating. From a valuation standpoint, we

maintain our HOLD call with a TP of Bt44. This is underpinned

by: i) slower-than-expected petroleum demand recovery

caused by the second wave of COVID-19, and ii) expectations

of a strong polymer business performance on the back of high

demand for homecare and healthcare packaging products. Valuation:

We apply P/BV target multiple to derive our TP of Bt44. Our TP

is now pegged to 0.68x P/BV for FY20F (equivalent to 1.5SD

below its 5-year average mean).

Where we differ:

Our earnings projections are more conservative with respect to

oil prices, market GRM, and chemical price assumptions Key Risks to Our View:

Weaker oil and petrochemical prices. PTTGC’s refinery business

could be impacted by more stock losses if oil prices weaken

from current levels, although we expect limited downside. This

will also depress petrochemical prices and product spreads. At A Glance Issued Capital (m shrs) 4,487

Mkt. Cap (Btm/US$m) 265,828 / 8,776


PTT 47.7

Thai NVDR 6.2


Free Float (%) 51.8




27 Nov 2020


PTT Global Chemical Bloomberg: PTTGC TB | Reuters: PTTGC.BK Refer to important disclosures at the end of this report

Price Relative


FY Dec (Btm) 2018A 2019A 2020F 2021F

Revenue 518,655 412,810 380,459 414,776 EBITDA 66,541 34,098 23,217 33,893 Pre-tax Profit 43,257 12,999 (410) 11,108 Net Profit 40,069 11,682 (1,066) 9,999 Net Pft (Pre Ex.) 40,705 10,464 (1,066) 9,999 Net Pft Gth (Pre-ex) (%) 0.3 (74.3) nm nm EPS (Bt) 8.89 2.59 (0.2) 2.22 EPS Pre Ex. (Bt) 9.03 2.32 (0.2) 2.22 EPS Gth Pre Ex (%) 0 (74) nm nm Diluted EPS (Bt) 8.89 2.59 (0.2) 2.22 Net DPS (Bt) 4.00 2.00 0.0 1.00 BV Per Share (Bt) 65.7 63.4 63.5 64.7 PE (X) 6.7 22.9 nm 26.7 PE Pre Ex. (X) 6.6 25.5 nm 26.7 P/Cash Flow (X) 5.0 8.9 9.8 11.8 EV/EBITDA (X) 5.2 10.9 16.7 11.1 Net Div Yield (%) 6.7 3.4 0.0 1.7 P/Book Value (X) 0.9 0.9 0.9 0.9 Net Debt/Equity (X) 0.2 0.3 0.4 0.3 ROAE (%) 14.0 4.0 (0.4) 3.5 Earnings Rev (%): 0 0 Consensus EPS (Bt): 0.01 2.50 Other Broker Recs: B: 19 S: 2 H: 8

49

69

89

109

129

149

169

189

209

21.6

31.6

41.6

51.6

61.6

71.6

81.6

91.6

101.6

111.6


Relative IndexBt

PTT Global Chemical (LHS) Relative SET (RHS)

Page 2

Company Update

PTT Global Chemical

WHAT’S NEW

Chemical business to remain robust in 4Q20F

3Q20 performance hit by softer aromatics margin and forex

loss. 3Q20 net profit came in at Bt908m (vs. 3Q19’s Bt2.66bn,

and 2Q20’s Bt1.67bn), 42% above our estimate and 46%

below Bloomberg consensus. Its earnings were hit by: i) a

sharp decline in aromatics spreads, ii) softer refinery crack

spreads, and iii) foreign exchange loss of Bt427m. However,

this was offset by i) net inventory gain of Bt492m, and ii)

strong olefins and polymers prices and margins. Nonetheless,

normalised profit came in at Bt732m, -73% y-o-y and -55% q-

o-q.

Market gross refinery margin (GRM), excluding crude inventory

impact, stood at US$1.22/bbl (-73% y-o-y and -48%q-o-q),

and aromatics’ P2F margins came in at US$78/tonne (-56% y-

o-y and -43% q-o-q).

Financial performance (by quarter)

Source: PTTGC, DBSVTH


i) Refinery utilisation rate was at 94% (vs. 101% in 3Q19 and

102% in 2Q20). As of end-3Q20, JET/GO/FO crack spreads

stood at US$-0.78/4.14/-2.55per barrel (-780%/-28%/--

56% q-o-q. Spreads were weighed down by petroleum

demand disruption caused by the COVID-19 pandemic,

which decimated international travelling and led to

temporary business disruptions. Hence, market GRM came

in at US$1.22/bbl, -73% y-o-y and -48% q-o-q.

ii) Crude inventory impact resulted in a net stock gain of

c.Bt492m, as the average Dubai price in Jun 2020 and Sep

2020 stood at US$40.3/bbl and US$42.5/bbl respectively.

iii) Aromatics utilisation rate was at 90% (vs. 100% in 3Q19

and 99% in 2Q20), due to the 19-day plant turnaround at

Aro2 unit. Paraxylene (PX) spreads headed south as

condensate price rose in tandem with oil prices, whereas

demand for downstream businesses remained sluggish.

Benzene (BZ) spreads also headed south due to sluggish

demand from the auto industry. On a 3Q20 basis, PX and

BZ margins stood at US$190/tonne, (-34% y-o-y and -31%

q-o-q) and US$70/tonne (+34% y-o-y and -53% q-o-q).

Market P2F came in at US$78/tonne (-56% y-o-y and -43%

q-o-q).

iv) Polymer utilisation rate stood at 103% (vs. 107% in 3Q19

and 100% in 2Q20) despite the LDPE/LLDPE plant

turnaround for 24/20 days respectively – thanks to the

strong demand for packaging materials on the back of the

higher consumption of healthcare and homecare products

amid the COVID-19 pandemic. Moreover, product prices

and margins picked up momentum, supported by an oil

price recovery and strong packaging demand.

HDPE/LLDPE/LDPE/MEG prices stood at

US$919/US$884/US$980/US$450 per tonne

(+21%/+17%/+13%/+1% q-o-q).

v) Extraordinary items in 3Q20 include: i) a forex loss of

Bt427m as the Thai baht (THB) depreciated against the US

dollar (USD) c.Bt0.7 per USD.

Aromatics prices and spreads (by quarter)


4Q20F to be supported by strong polymer business, mild

aromatics margin recovery. We conservatively anticipate softer

oil prices and refinery margins in 4Q20F, no thanks to the

combined impact of weak demand and signs of increased

supply from key global producers weighing on markets,

including the unexpected return of Libyan output (c.1.3-

1.6mbd).

Page 3

Company Update

PTT Global Chemical

Moreover, we expect gasoil margins to remain under pressure

as most refineries, responding to the still-low jet oil demand, are

making more road fuel instead (gasoil and gasoline). Another

challenge, in our view, is that whether the gasoline market will

continue to hold up, as people avoid public transport by driving

their cars. However, should another lockdown be imposed, due

to the emergence of the second wave of COVID-19, gasoline

demand could be significantly impacted.

As of 6 Nov, JET/GO spread stood at US$1.99/2.75, n.a./-34%

QTD respectively.

On the chemical side, PX/BZ spreads averaged US$178/141 per

tonne, -7%/+98% QTD respectively. This was caused by i)

seasonal polyester demand for clothing during winter, ii) the

start-up of PTA plants in Asia, and iii) inventory restocking by

Asian manufactures after their inventory level breached the 5-

year average. However, we anticipate strong polymer demand,

supported by rising demand for packaging materials for

healthcare and homecare products amid the COVID-19

pandemic. HDPE/LLDPE/LDPE price averaged

US$970/US$935/US$1,155, +5%/+6%/+18% QTD

Company Background

PTT Global Chemical (PTTGC) is Thailand's largest ethane-

based petrochemical producer. The company is the core

petrochemical arm under the PTT Group. PTTGC was formed in

2012 after the amalgamation of two petrochemical companies

– PTT Chemical and PTT Aromatics and Refining.



Revenue 105,958 69,976 77,148 (27.2) 10.2


Gross Profit 5,711 3,481 4,802 (15.9) 37.9

Other Oper. (Exp)/Inc (4,039) (3,271) (3,528) (12.6) 7.8

Operating Profit 1,672 210 1,274 (23.8) 506.1

Other Non Opg (Exp)/Inc 739 965 283 (61.7) (70.6)

Associates & JV Inc 1,173 805 884 (24.6) 9.8

Net Interest (Exp)/Inc (780) (861) (909) (16.5) (5.6)


Pre-tax Profit 3,169 2,077 1,217 (61.6) (41.4)

Tax (306) (406) (235) (23.2) (42.1)

Minority Interest (200) 0.66 (73.7) 63.1 (11,335.4)

Net Profit 2,663 1,672 908 (65.9) (45.7)

Net profit bef Except. 2,299 714 1,224 (46.8) 71.4

EBITDA 8,344 6,996 7,521 (9.9) 7.5

Margins (%)




Historical PB band

PB band (x)


Avg: 1.08x

+1sd: 1.36x

+2sd: 1.65x

-1sd: 0.8x

-2sd: 0.52x

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9


(x)

Page 4

Company Update

PTT Global Chemical

Key Assumptions

FY Dec 2017A 2018A 2019A 2020F 2021F

Average polyethylene

utilization (%)

113 100 104 103 108

Market GRM (US$/bbl) 6.74 6.08 3.86 3.00 3.00

EBITDA margin - Olefins

(%)

29.0 26.0 15.0 13.0 15.0

PX-condensate spread

(US$/t)

387 461 370 250 250

HDPE price (US$/t) 1,168 1,330 991 800 850


FY Dec 2017A 2018A 2019A 2020F 2021F

Revenue 439,921 518,655 412,810 380,459 414,776



Operating Profit 43,453 37,775 5,722 (5,750) 4,768 Other Non Opg (Exp)/Inc 2,166 2,816 4,619 3,500 4,500

Associates & JV Inc 5,572 6,895 4,559 5,340 5,340


Exceptional Gain/(Loss) (1,272) (636) 1,218 0.0 0.0

Pre-tax Profit 45,983 43,257 12,999 (410) 11,108 Tax (3,863) (2,986) (649) (611) (1,033)

Minority Interest (2,822) (201) (667) (44.8) (75.8)


Net Profit 39,298 40,069 11,682 (1,066) 9,999 Net Profit before Except. 40,570 40,705 10,464 (1,066) 9,999

EBITDA 70,641 66,541 34,098 23,217 33,893 Growth

Revenue Gth (%) 26.0 17.9 (20.4) (7.8) 9.0

EBITDA Gth (%) 37.4 (5.8) (48.8) (31.9) 46.0

Opg Profit Gth (%) 42.7 (13.1) (84.9) (200.5) (182.9)

Net Profit Gth (Pre-ex) (%) 52.6 0.3 (74.3) nm nm Margins & Ratio

Gross Margins (%) 13.1 10.1 5.4 2.5 4.5

Opg Profit Margin (%) 9.9 7.3 1.4 (1.5) 1.1

Net Profit Margin (%) 8.9 7.7 2.8 (0.3) 2.4

ROAE (%) 15.1 14.0 4.0 (0.4) 3.5

ROA (%) 9.5 8.9 2.5 (0.2) 2.1

ROCE (%) 10.0 9.4 1.8 (1.1) 1.5

Div Payout Ratio (%) 48.8 45.0 77.2 N/A 45.0

Net Interest Cover (x) 11.0 10.5 1.8 (1.6) 1.4


Page 5

Company Update

PTT Global Chemical


FY Dec 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 105,958 85,765 93,806 69,976 77,148


Gross Profit 5,711 1,835 (5,558) 3,481 4,802 Other Oper. (Exp)/Inc (4,039) (4,665) (3,570) (3,271) (3,528)

Operating Profit 1,672 (2,831) (9,128) 210 1,274 Other Non Opg (Exp)/Inc 739 2,563 1,022 965 283

Associates & JV Inc 1,173 925 561 805 884

Net Interest (Exp)/Inc (780) (765) (804) (861) (909)

Exceptional Gain/(Loss) 364 605 (1,668) 958 (315)

Pre-tax Profit 3,169 497 (10,017) 2,077 1,217 Tax (306) (0.5) 1,296 (406) (235)

Minority Interest (200) (122) (62.2) 0.66 (73.7)

Net Profit 2,663 374 (8,784) 1,672 908 Net profit bef Except. 2,299 (231) (7,116) 714 1,224

EBITDA 8,344 5,425 (2,630) 6,996 7,521 Growth

Revenue Gth (%) (1.4) (19.1) 9.4 (25.4) 10.2

EBITDA Gth (%) 10.1 (35.0) nm nm 7.5

Opg Profit Gth (%) 119.1 (269.3) 222.5 (102.3) 506.1

Net Profit Gth (Pre-ex) (%) (1.2) (110.0) 2,983.6 (110.0) 71.4 Margins

Gross Margins (%) 5.4 2.1 (5.9) 5.0 6.2

Opg Profit Margins (%) 1.6 (3.3) (9.7) 0.3 1.7

Net Profit Margins (%) 2.5 0.4 (9.4) 2.4 1.2

Balance Sheet (Btm)



Other LT Assets 74,538 79,924 83,457 85,548 87,896

Cash & ST Invts 43,429 36,744 18,840 27,294 36,354

Inventory 37,755 39,366 36,252 31,705 34,565

Debtors 41,697 45,616 37,304 33,083 36,068


Total Assets 434,964 469,255 452,514 477,312 482,745

ST Debt

10,226 13,260 10,170 10,137 9,978

Creditor 44,660 50,384 39,572 40,750 41,800


LT Debt 94,387 91,915 105,886 129,402 128,664




Total Cap. & Liab. 434,963 469,255 452,514 477,312 482,745


Net Cash/(Debt) (61,183) (68,430) (97,215) (112,245) (102,288)




Asset Turnover (x) 1.1 1.1 0.9 0.8 0.9

Current Ratio (x) 2.3 2.0 2.0 1.9 2.2

Quick Ratio (x) 1.4 1.1 1.1 1.1 1.3

Net Debt/Equity (X) 0.2 0.2 0.3 0.4 0.3


Capex to Debt (%) 32.7 33.3 35.1 12.9 5.8

Z-Score (X) 3.0 3.0 2.6 2.2 2.4


Page 6

Company Update

PTT Global Chemical


FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 42,120 40,271 12,349 (1,066) 9,999

Dep. & Amort. 19,451 19,055 19,198 20,127 19,285

Tax Paid 0.0 0.0 0.0 0.0 0.0

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 2,607 (773) 4,393 9,768 (5,090)

Other Operating CF (2,222) (4,924) (5,765) (1,510) (1,540)


Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (7,334) 2,196 (996) (996) (996)

Net Investing CF (41,545) (32,842) (41,780) (18,996) (9,096) Div Paid (16,501) (19,739) (16,336) 0.0 (4,499)

Chg in Gross Debt 3,505 (81.6) 18,058 0.0 0.0

Capital Issues 3,789 0.0 (1,188) 0.0 0.0

Other Financing CF 1,083 (7,652) (6,833) 130 1.00

Net Financing CF (8,124) (27,473) (6,299) 130 (4,498) Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 12,286 (6,685) (17,904) 8,454 9,060

Opg CFPS (Bt) 13.2 12.1 5.72 3.89 6.15

Free CFPS (Bt) 6.15 4.12 (2.4) 2.07 3.23

Source: Company, DBSVTH Target Price & Ratings History

Source: DBSVTH







Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 22 Jan 20 50.25 55.00 HOLD

2: 18 Feb 20 50.00 55.00 HOLD

3: 27 Mar 20 28.25 30.00 HOLD

4: 23 Apr 20 38.25 33.00 HOLD

5: 11 May 20 40.50 33.00 HOLD

6: 08 Jun 20 51.25 50.00 HOLD

7: 29 Jul 20 47.00 50.00 HOLD

8: 10 Aug 20 50.00 49.00 HOLD

9: 12 Oct 20 41.50 44.00 HOLD

10: 10 Nov 20 49.25 44.00 HOLD


1

2

3

4

5

6

7

8

9

10

22.80

27.80

32.80

37.80

42.80

47.80

52.80

57.80


Bt

ed: CK/ sa: PY, CS


Price Target 12-mth: Bt417 (11% upside)

Analyst


What’s New • 3Q20 net profit came in at Bt9.74bn (+57% y-o-y,

+4% q-o-q), ahead of Bloomberg consensus

• Solid core earnings were supported by wider chemical

margins, operating cost reduction, higher equity

income, and inventory gain

• 4Q20F outlook – expect solid chemical performance to

persist as HDPE/PP/PBV spreads rose 6%/9%/27% QTD

• Maintain BUY rating with TP of Bt417


L.P.

Chemical business to stay strong

Investment Thesis: LSP project in Vietnam (55% completed). SCC has invested in a

100% stake in the Long Son Petrochemicals (LSP) cracker in

Southern Vietnam. LSP is a fully flexible cracker (with propane

flex of up to 80%) with a total capacity of 1.35mta for PP

(400kta) and PE (950kta). The capex of the project is c.US$5.4bn

with a debt to equity ratio of 60:40 and will be funded by loans,

debenture and internal cash flow. The project is expected to

commence operations in 2023F.

MOC debottlenecking project is now 97% completed, with the

all equipment and piping work now installed. Such a project can

boost PE/PP sales volume by c.10%. We expect the

commercialisation of this project to take place in 2Q21F.

Maintain BUY rating on SCC with a TP of Bt417, offering c.16%

potential upside based on sum-of-the-parts valuation. Our view

is premised on i) the recovery of cement demand, driven by the

government’s megaprojects), ii) strong chemical margins on the

back of increasing demand for hygiene products, iii) expanding

packaging business in Asian regions, as demand is growing at a

robust pace, and iv) its attractive relative valuation of c.13x

FY21F PE compared to 15x for its regional peers, coupled with

its decent dividend yield of c.3.0%.

Valuation:

Our TP of Bt417 is based on DCF valuation (WACC of 8.23%,

terminal growth rate of 1%).

Where we differ:

We are more conservative than consensus with respect to oil

prices. Hence, our chemical margin assumption is slightly more

bullish.


Key risks to our forecast are slowing demand for cement and

building materials as a result of delayed investments in

infrastructure projects, weaker demand for petrochemical

products from China, and volatile oil prices. At A Glance Issued Capital (m shrs) 1,200

Mkt. Cap (Btm/US$m) 450,000 / 14,859


His Majesty King Maha Vajiralongkorn 33.6

Thai NVDR 9.6


Free Float (%) 66.1


GIC Industry : Materials / Construction & Materials


27 Nov 2020


Siam Cement Bloomberg: SCC TB | Reuters: SCC.BK Refer to important disclosures at the end of this report

Price Relative


FY Dec (Btm) 2018A 2019A 2020F 2021F

Revenue 478,438 437,980 387,920 393,641 EBITDA 90,469 74,489 75,802 77,001 Pre-tax Profit 58,396 39,363 47,286 48,146 Net Profit 43,228 32,014 34,350 34,975 Net Pft (Pre Ex.) 44,718 36,767 34,350 34,975 Net Pft Gth (Pre-ex) (%) (18.8) (17.8) (6.6) 1.8 EPS (Bt) 36.0 26.7 28.6 29.1 EPS Pre Ex. (Bt) 37.3 30.6 28.6 29.1 EPS Gth Pre Ex (%) (19) (18) (7) 2 Diluted EPS (Bt) 36.0 26.7 28.6 29.1 Net DPS (Bt) 18.0 14.0 11.5 11.7 BV Per Share (Bt) 231 234 251 268 PE (X) 10.4 14.1 13.1 12.9 PE Pre Ex. (X) 10.1 12.2 13.1 12.9 P/Cash Flow (X) 7.3 7.5 6.4 8.7 EV/EBITDA (X) 6.9 8.7 8.6 8.5 Net Div Yield (%) 4.8 3.7 3.1 3.1 P/Book Value (X) 1.6 1.6 1.5 1.4 Net Debt/Equity (X) 0.4 0.5 0.4 0.4 ROAE (%) 16.1 11.5 11.8 11.2 Earnings Rev (%): 0 0 Consensus EPS (Bt): 27.7 28.6 Other Broker Recs: B: 16 S: 2 H: 9

63

83

103

123

143

163

183

203

240.3

290.3

340.3

390.3

440.3

490.3

540.3

590.3


Relative IndexBt

Siam Cement (LHS) Relative SET (RHS)

Page 2

Company Update

Siam Cement

WHAT’S NEW

Expect solid chemical performance to continue in 4Q20F

Net earnings in 3Q20 supported by chemical business. Siam

Cement reported 3Q20 net profit of Bt9.74bn (+57% y-o-y,

+4% q-o-q). The solid performance was on the back i) wider

chemical margins, ii) higher equity income from associates of

Bt3.04bn (+50% y-o-y, +78% q-o-q), and iii) inventory gain of

Bt820m. However, this was offset by i) foreign exchange loss

of Bt111m, ii) softer cement building materials (CBM)

performance, and iii) impairment expense of Bt461m.

Stripping out extraordinary items and inventory impact,

normalised earnings in 3Q20 came in at Bt9.43bn, +20% y-o-y

and flat q-o-q.

SCC’s EBITDA breakdown (Bt m)

Source: SSC, DBSVTH

Softer CBM performance. There was weak ceramic demand in

the ASEAN markets (Cambodia, Laos, Myanmar, Vietnam, and

Indonesia) in 3Q20, weighed down by the COVID-19 pandemic

that led to the suspension of construction activities. However,

domestic cement demand increased by % y-o-y, supported by

the 1%/1% increase in cement demand from the government/

residential sector (c.40%/60% market share respectively).

However, domestic cement price moved in a range of Bt1,750-

1,800 per tonne, +3% y-o-y and flat q-o-q, on the back of

softer demand. EBITDA came in at Bt5.15bn, +14% y-o-y and -

14%q-o-q.

Petrochemical product spreads have widened. Petrochemical

spreads have, in general, widened for both polyethylene and

polypropylene chains. This was mainly thanks to the declining

feedstock cost (Naphtha), which moves in tandem with oil

prices that underwent a near collapse in 2Q20. However, overall

demand remains sluggish, dragged down by the temporary

shutdown of business and manufacturers globally arising from

the COVID-19 pandemic. On a 3Q20 basis, HDPE/PP/PVC

spreads over naphtha stood at US$522/577/455 per tonne,

+7%/-4%/+14% q-o-q respectively. However, total polymer

sales volume came in at 442,000 tonnes, -7% y-o-y and -10%

q-o-q, as SCC moved the maintenance schedule for its MOC

plant from 2Q20 to 4Q20. On the other hand, PVC sales

volume came in at 212,000 tonnes, +1% y-o-y and +4% q-o-q.

The increase in sales volume was supported by downstream

demand recovery in India and Thailand. Nonetheless, EBITDA

came in at Bt8.78bn, +51% y-o-y and -11%q-o-q.

Note that SCC booked an inventory gain of Bt820m (vs. gain of

Bt150m in 3Q19 and loss of Bt590in 2Q20), as naphtha prices

rebounded by US$123 per tonne q-o-q.

SCC’s petrochemical spreads and production volume


Solid core performance for packaging business. SCGP’s 3Q20

net profit stood at Bt1.33bn, -9% y-o-y and -30% q-o-q. Net

profit was dampened by a forex loss of Bt35 (vs. 3Q19’s gain of

Bt91m and 2Q20’s gain of Bt1.2bn). However, core earnings

remained strong with EBITDA and normalised profit coming in

at Bt3.97bn (+2% y-o-y and +5% q-o-q) and Bt1.47bn (-8% y-

o-y and +14% q-o-q). This was thanks to a nascent economic

recovery in Thailand and Vietnam, where consumer spending on

staple goods and durable goods seemed to have bottomed out.

Moreover, SCGP can maintain its EBITDA margin at a high level

of 17.1% (vs. 3Q19’s 16% and 2Q20’s 17.5%) – thanks to the

full-vertical integration of its packaging chain and its recent

mergers and acquisitions.

Note that consolidated EBITDA contribution to SCC, on a 100%

basis, came in at Bt4.12bn, -3% y-o-y and +4 % q-o-q.

4Q20F outlook: Flat performance for CBM and packaging units

(whose chemical business will remain solid) is on the cards. We

expect a flat performance for its CBM and packaging

businesses. For CBM, we anticipate the demand downtrend for

CBM to continue, especially for the commercial and residential

sectors. For the packaging business, we expect a mild recovery

for the purchase of durable goods such as electronic devices,

and auto-related products. However, this was offset by growing

Page 3

Company Update

Siam Cement

packaging demand (c.70% of sales volume) for consumer staple

goods such as food and beverages.

Additionally, we expect its chemical business to remain solid

despite rising naphtha feedstock costs, underpinned by

improving spreads with HDPE/PP/PVC spreads, on a 4Q-to-date

basis, averaging US$552/628/580 per tonne (+6%/+9%/+27%

QTD). However, this could be offset by i) a reduction of PE/PP

sales volume due to the MOC plant’s 45-day maintenance

schedule, and ii) expectations of inventory impact as raw

material prices have inched down in line with crude oil prices.

Company Background

Siam Cement Group (SCC) is Thailand’s largest conglomerate

in industrial materials, including cement and building materials,

chemicals, and paper. In addition to its operations in Thailand,

SCC also has operations in other ASEAN countries, i.e.

Indonesia, Vietnam, Cambodia, Myanmar, Lao PDR and the

Philippines, in order to optimise logistics cost and capture large

potential markets in the ASEAN Economic Community (AEC).



Revenue 110,330 96,010 100,938 (8.5) 5.1


Gross Profit 20,934 22,455 23,989 14.6 6.8

Other Oper. (Exp)/Inc (13,885) (12,451) (13,465) (3.0) 8.1

Operating Profit 7,049 10,004 10,524 49.3 5.2

Other Non Opg (Exp)/Inc 2,271 1,049 1,084 (52.3) 3.4

Associates & JV Inc 2,031 1,705 3,041 49.7 78.3

Net Interest (Exp)/Inc (1,719) (647) (2,024) (17.8) (213.0)

Exceptional Gain/(Loss) (1,683) (108) 248 nm (329.6)

Pre-tax Profit 7,949 12,004 12,873 61.9 7.2

Tax (1,910) (1,338) (1,802) (5.7) 34.7

Minority Interest 164 (1,282) (1,330) nm 3.7

Net Profit 6,204 9,384 9,741 57.0 3.8

Net profit bef Except. 7,887 9,492 9,493 20.4 0.0

EBITDA 17,399 19,587 21,538 23.8 10.0

Margins (%)







Avg: 13.1x

+1sd: 14.4x

+2sd: 15.7x

-1sd: 11.7x

-2sd: 10.4x

8.3

9.3

10.3

11.3

12.3

13.3

14.3

15.3

16.3

17.3


(x)

Avg: 1.97x

+1sd: 2.35x

+2sd: 2.73x

-1sd: 1.59x

-2sd: 1.21x

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0


(x)

Page 4

Company Update

Siam Cement

Key Assumptions

FY Dec 2017A 2018A 2019A 2020F 2021F

EBITDA margin:

Cement&Bldg Mat (%)

12.0 12.0 13.0 13.0 12.0

EBITDA margin: Chemicals

(%)

31.0 21.0 13.0 8.00 9.00

EBITDA margin: Paper (%) 15.0 17.0 17.0 17.0 17.0

HDPE margin 672 716 500 500 501

Capex (Btm) 29,769 36,370 80,000 60,000 60,000


FY Dec 2017A 2018A 2019A 2020F 2021F

Revenue 450,921 478,438 437,980 387,920 393,641



Operating Profit 49,038 41,371 27,864 24,393 24,548 Other Non Opg (Exp)/Inc 13,316 10,303 11,062 9,671 9,974



Exceptional Gain/(Loss) 0.0 (1,490) (4,753) 0.0 0.0

Pre-tax Profit 73,454 58,396 39,363 47,286 48,146 Tax (5,694) (7,269) (6,167) (4,799) (4,887)

Minority Interest (12,718) (7,899) (1,182) (8,136) (8,284)



EBITDA 103,848 90,469 74,489 75,802 77,001 Growth

Revenue Gth (%) 6.5 6.1 (8.5) (11.4) 1.5

EBITDA Gth (%) (0.2) (12.9) (17.7) 1.8 1.6

Opg Profit Gth (%) (9.5) (15.6) (32.6) (12.5) 0.6

Net Profit Gth (Pre-ex) (%) (1.9) (18.8) (17.8) (6.6) 1.8 Margins & Ratio

Gross Margins (%) 22.5 20.2 18.8 17.8 16.6



ROAE (%) 22.0 16.1 11.5 11.8 11.2

ROA (%) 9.9 7.4 5.2 5.3 5.2

ROCE (%) 10.5 7.7 5.9 5.1 5.0

Div Payout Ratio (%) 41.4 50.0 52.5 40.0 40.0



Page 5

Company Update

Siam Cement


FY Dec 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 110,330 106,177 105,741 96,010 100,938


Gross Profit 20,934 20,042 21,058 22,455 23,989 Other Oper. (Exp)/Inc (13,885) (14,593) (13,151) (12,451) (13,465)

Operating Profit 7,049 5,449 7,907 10,004 10,524 Other Non Opg (Exp)/Inc 2,271 4,024 2,236 1,049 1,084


Net Interest (Exp)/Inc (1,719) (1,521) (3,113) (647) (2,024)

Exceptional Gain/(Loss) (1,683) (1,391) (1,303) (108) 248

Pre-tax Profit 7,949 9,396 6,973 12,004 12,873 Tax (1,910) (1,907) (971) (1,338) (1,802)

Minority Interest 164 (386) 970 (1,282) (1,330)

Net Profit 6,204 7,104 6,971 9,384 9,741 Net profit bef Except. 7,887 8,495 8,274 9,492 9,493

EBITDA 17,399 18,499 18,159 19,587 21,538 Growth

Revenue Gth (%) 1.1 (3.8) (0.4) (9.2) 5.1

EBITDA Gth (%) (7.3) 6.3 (1.8) 7.9 10.0

Opg Profit Gth (%) (3.3) (22.7) 45.1 26.5 5.2

Net Profit Gth (Pre-ex) (%) (26.5) 7.7 (2.6) 14.7 0.0 Margins

Gross Margins (%) 19.0 18.9 19.9 23.4 23.8



Balance Sheet (Btm)



Other LT Assets 152,946 165,050 164,362 168,028 157,832

Cash & ST Invts 56,908 50,381 44,222 57,092 51,024

Inventory 57,650 60,817 56,411 45,836 46,512

Debtors 55,407 63,915 62,166 44,477 45,133


Total Assets 573,412 589,787 634,733 661,319 684,362

ST Debt

19,586 21,752 18,797 18,767 18,737

Creditor 46,056 48,992 55,887 46,550 47,237


LT Debt 155,580 164,118 175,485 190,423 191,381




Total Cap. & Liab. 573,412 589,787 634,733 661,319 684,362

Non-Cash Wkg. Capital 18,290 40,841 7,456 (11,873) (11,668)

Net Cash/(Debt) (118,258) (135,489) (150,060) (152,098) (159,094)




Asset Turnover (x) 0.8 0.8 0.7 0.6 0.6

Current Ratio (x) 1.5 1.6 1.3 1.2 1.2

Quick Ratio (x) 1.0 1.1 0.8 0.8 0.8

Net Debt/Equity (X) 0.4 0.4 0.5 0.4 0.4


Capex to Debt (%) 13.9 24.1 31.5 28.7 28.6

Z-Score (X) 2.9 2.9 2.4 2.3 2.3


Page 6

Company Update

Siam Cement


FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 67,760 52,647 33,197 34,350 34,975

Dep. & Amort. 23,282 23,747 23,932 21,690 22,028

Tax Paid (5,753) (6,552) (6,121) (4,799) (4,887)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (13,344) (3,982) 4,500 18,945 (627)

Other Operating CF (11,253) (4,175) 4,310 0.0 0.0


Other Invts.(net) 19,176 13,188 16,122 16,122 16,122

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CF (5,122) (31,576) (45,054) (43,878) (43,878) Div Paid (34,385) (30,225) (20,772) (13,740) (13,990)

Chg in Gross Debt (4,316) (14,760) 12,623 1.00 2.00

Capital Issues 0.0 0.0 233 0.0 0.0

Other Financing CF 0.0 0.0 (7,366) (30.1) (30.0)

Net Financing CF (38,700) (44,985) (15,282) (13,769) (14,018) Currency Adjustments (642) (273) (641) 0.0 0.0

Chg in Cash 16,227 (15,148) (1,162) 12,538 (6,407)

Opg CFPS (Bt) 61.7 54.7 46.1 42.7 43.4

Free CFPS (Bt) 30.3 14.1 (1.1) 8.49 (7.1)



Source: DBSVTH







Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 13 Jan 20 368.00 417.00 BUY

2: 30 Jan 20 356.00 417.00 BUY

3: 10 Apr 20 324.00 417.00 BUY

4: 30 Apr 20 346.00 417.00 BUY

5: 10 Jul 20 383.00 417.00 BUY

6: 26 Nov 20 375.00 417.00 BUY


1

2

3

4

5

6

253.00

273.00

293.00

313.00

333.00

353.00

373.00

393.00

413.00


Bt

ed: KK`/ sa: PY, CS

BUY (Initiating Coverage)

Last Traded Price ( 26 Nov 2020): Bt41.50 (SET : 1,433.56)


Potential catalysts: E-commerce boom, low penetration rate, uptrend

of FMCG.

Analyst

Duladeth BIK, CFA, FRM, CAIA +66 28577833

[email protected]

Price Relative


FY Dec (Btm) 2018A 2019A 2020F 2021F

Re enue 87,255 89,070 104,270 119,470 EBITDA 14,363 14,950 17,726 19,713 Pre-tax Profit 8,094 6,940 8,981 10,251 Net Profit 6,066 5,269 6,952 7,934 Net Pft (Pre Ex.) 5,914 5,668 6,952 7,934 EPS (Bt) 3.88 1.69 1.54 1.76 EPS Pre Ex. (Bt) 3.78 1.81 1.54 1.76 EPS Gth (%) 31 (57) (8) 14 EPS Gth Pre Ex (%) 33 (52) (15) 14 Diluted EPS (Bt) 3.88 1.69 1.54 1.76 Net DPS (Bt) 1.30 1.30 0.31 0.35 BV Per Share (Bt) 25.9 13.7 20.7 22.5 PE (X) 10.7 24.6 26.9 23.5 PE Pre Ex. (X) 11.0 22.9 26.9 23.5 P/Cash Flow (X) 4.6 8.1 15.0 16.3 EV/EBITDA (X) 7.3 14.1 13.0 12.1 Net Div Yield (%) 3.1 3.1 0.7 0.8 P/Book Value (X) 1.6 3.0 2.0 1.8 Net Debt/Equity (X) 0.5 1.0 0.2 0.2 ROAE (%) 14.6 12.6 10.2 8.2 Consensus EPS (Bt): 1.93 1.80 Other Broker Recs: B: 3 S: 0 H: 0 GIC Industry : Materials GIC Sector: Containers & Packaging Principal Business: SCGP generates revenue from holding shares in other companies (Holding Company), operating core business as packaging solutions provider which are organized into two main operating segments: integrated packaging chain and fibrous chain.

Source of all data on this page: Company, DBSVTH, Bloomberg

Finance L.P.

At A Glance Issued Capital (m shrs) 4,293

Mkt. Cap (Btm/US$m) 178,156 / 5,883


Siam Cement Plc 68.8

UBS Securities PTE 1.9

CPB equity 1.6

Free Float (%) 29.5



27 Nov 2020

Thailand Company Focus

SCG Packaging Bloomberg: SCGP TB | Reuters: SCGP.BK Refer to important disclosures at the end of this report

Riding the e-commerce boom • One of the few fully-integrated packaging companies in

Asia

• Superior EBITDA margin supported by upstream and

downstream integration

• Strong packaging demand driven by e-commerce boom

and changes in consumer lifestyle

• Initiate BUY rating with FY21F TP of Bt44

Fully-integrated packaging company. SCG Packaging (SCGP) is a

holding company that invests in packaging-related businesses. It

offers full-service, fully-integrated packaging solutions in

Southeast Asia including fiber-based packaging, performance

polymers packaging (PPP) and food service products.

Net profit to grow at CAGR of 19% in 2019-2023F, supported

by; i) full-year realisation of revenue in 2020F due to

debottlenecking of paper packaging plant unit 2 in Vietnam and

food packaging plants unit 3 in Malaysia, and ii) additional

capacity of the vertical integrated packaging chain with installed

capacity of 0.62mtpa for packaging paper and 137 msqm/year

for flexible packaging

Initiate with BUY call, FY21 TP of Bt44 and 10% upside,

supported by; i) net profit CAGR of 19% during 2019-2023F, ii)

superior profitability (EBITDA margin) relative to its regional

peers, iii) cost optimisation with full integration of packaging

chain from upstream to downstream businesses, and iv)

attractive valuation with regards to PER, PBV, EV/EBITDA

multiples relative to its peers.

Valuation:

Our FY21F target price (TP) of Bt44 is based on discounted cash

flow (DCF) with weighted average cost of capital (WACC) of

8.2% and terminal growth rate of 1%.


Global economic slowdown, slower-than-expect consumer

spending recovery, raw material price volatility and foreign

exchange (forex) risk.

80

100

120

140

160

180

200

220

30.8

32.8

34.8

36.8

38.8

40.8

42.8

44.8

Oct-20

Relative IndexBt

SCG Packaging (LHS) Relative SET (RHS)

Page 2

Company Focus

SCG Packaging

Table of Contents

Investment Summary 3

Valuation & Peer Comparison 5

Company Background 7

Business Overview 9

Industry Overview 12

SWOT Analysis 16

Critical Factors 17

Key Risks 19

Financials 21

Assumption and Financial Tables 23

Page 3

Company Focus

SCG Packaging

Investment Summary

Initiate with BUY with FY21 TP of Bt44 for c.10% upside. We

initiate a BUY rating with an estimated FY21F TP of Bt44 a

share, under assumptions of; i) weighted average discount rate

and terminal growth rates of 8.2% and 1% respectively, ii)

annual capital expenditure (capex) of Bt20bn. Our

recommendation is supported by; i) net profit CAGR of 19%

during 2019-2023F, ii) superior profitability (in terms of EBITDA

margin) relative to its regional peers, iii) cost optimisation with

fully-integrated packaging chain from upstream to downstream

businesses, and iv) attractive valuation with regards to PER, PB

and EV/EBITDA multiples relative to its peers.

We have a positive view on the packaging business with ample

opportunities for growth. Over the next few years, we expect

demand for fiber-based packaging and PPP to grow at a CAGR

of 3-4% during 2019-2022F. This is supported by; i) exponential

growth in the online shopping market (e-commerce), ii) low

penetration rate in the Association of Southeast Asian Nations

(ASEAN) packaging market, iii) increasing logistics and delivery

activities, iv) concerns over the COVID-19 outbreak resulting in a

spike of demand for packaging, v) changes in family size,

population and lifestyle, vi) uptrend of fast moving consumer

goods (FMCG) consumption, vii) increasing middle class income

in Southeast Asia (Indonesia, Philippines, Vietnam and Thailand)

and, viii) increased usage of parcel and food delivery services.

Net profit to grow at CAGR of 19% during 2019-2023F. We

project net profit to grow at CAGR of 19% during 2019-2023F,

supported by; i) full-year realisation of revenue in 2020F on the

debottlenecking of its paper packaging plant unit 2 in Vietnam

and food packaging plant unit 3 in Malaysia that started

commercialisation operation date (COD) in 4Q19 and 2Q19

respectively, and ii) additional capacity of the vertical integrated

packaging chain with installed capacity of 0.62mtpa for

packaging paper and 137 msqm per year for flexible packaging

which can be divided into;

a) flexible packaging plant in Vietnam with production

capacity 84 msqm / year (expected COD in 3Q21)

b) paper mill factory in Indonesia with production

capacity of 0.4mtpa (expected COD in 1Q21)

c) local paper factory at the Philippines with

production capacity of 0.22 mtpa (expected COD in

2Q21)

d) expanded pre-packing factory in Thailand with

production capacity of 53 msqm/year, (expected

COD in 3Q21).

Net profit CAGR of 19% during 2019-2023F


Expected EBITDA margin of 16% in 2020F-2023F. In addition to

its earnings performing in tandem with the consumer business

segment, we expect EBITDA margin of at least 16% during

2020F-2023F driven by; i) synergies between its upstream and

downstream businesses (vertical integration), ii) capacity

expansion of both packaging paper and PPP with expected

gross profit margin (GPM) and EBITDA margin of 20% and 15%

respectively and, iii) potential mergers & partnerships in a

fragmented market that could create synergies and value in the

packaging chain.



Page 4

Company Focus

SCG Packaging

Solid 3Q20 core earnings. SCGP’s 3Q20 net profit was

Bt1.33bn (-9% y-o-y and -30% q-o-q) mainly caused by forex

losses of Bt35m (vs 3Q19 gains of Bt91m and 2Q20 gains of

Bt1.2bn). However, its core earnings remained strong with

EBITDA and normalised profit of Bt3.97bn (+2% y-o-y and

+5% q-o-q) and Bt1.47bn (-8% y-o-y and +14% q-o-q). This

was due to the gradual economic recovery in Thailand and

Vietnam where consumer spending on staple goods and

durable goods have bottomed out. SCGP was able to post

high EBITDA of 17.1% (vs 3Q19 16% and 2Q20 17.5%)

thanks to its fully-vertical integrated packaging chain and

recent merger and acquisition (M&A).

Booming e-commerce sector in Asia. The e-commerce market

in the ASEAN region continues to grow. Based on data

compiled by Frost & Sullivan, the e-commerce market in

ASEAN (Indonesia, Thailand, Philippines and Vietnam) in terms

of gross merchandise value (GMV) grew at a CAGR of 47.9%

during 2015-2019. In addition, Frost & Sullivan estimates the

e-commerce market value will grow from US$13bn in 2018 to

US$77.7bn in 2024F, or a CAGR of 34.7% over the same

period.

Even though the e-commerce business is growing rapidly, the

growth rate of e-commerce expenses (due to low penetration

rate) from total household expenditure was lower than in

developed countries such as Japan, the United States and

China. At the end of 2019, e-commerce expenditure from

total household expenditure and average growth rate in

ASEAN countries were 1.4% and 0.8% (compared to China

at 28.5% and 11.1% respectively).

Per capita consumption of packaging in the ASEAN region is

still low. Packaging consumption (packaging penetration rate)

calculated from the consumption kilograms (kg) per

population, particularly in Asian countries such as Indonesia,

Thailand and Vietnam, remained at low levels. According to

data compiled by Frost & Sullivan in 2019, the consumption

of paper packaging and per capita consumption of plastic

packaging in Thailand at the end of 2019 were 50 kg and 32

kg per year. The figure is considerably lower than in

developed countries such as South Korea, the US, Germany,

Japan where average consumption is over 70 kg. This is

mainly due to the growth of the e-commerce sector, higher

household income and lifestyle changes. We anticipate a

significant increase in packaging penetration rate during

2020-2022F.

Low packaging penetration rate in ASEAN (as of 2019)

Source: Frost & Sullivan, SCGP, DBSVTH

Uptrend of flexible and high-value added packaging demand.

Currently, Thailand imports plastic film packaging such as

plastic bags with aseptic aluminium lining that has high value

(due to demographics and lifestyle changes). It exports basic

plastic goods including plastic carrier bags with low added

value. Therefore, when comparing the value of plastic per

tonne against major plastic exporters in Asia (China, Korea,

Vietnam, Taiwan, Indonesia, and Japan), Thailand is severely

disadvantaged in terms of value of plastic packaging per

tonne. We believe there are opportunities for domestic

producers to develop the market for plastic film used in

flexible plastic packaging for domestic and international

markets.

Page 5

Company Focus

SCG Packaging

Valuation & Peers Comparison Initiate BUY rating with FY21F TP of Bt44. We deem SCGP as a

defensive stock in the packaging segment compared to the

commodity segment. Historically, it has grown at close to the

gross domestic product (GDP) growth rate. We have applied

the DCF model for our FY21F valuation.

We initiate a BUY rating with an estimated FY21F TP of Bt44 a

share, under assumptions of i) weighted average discount rate

and terminal growth rates of 8.2% and 1% respectively, ii)

annual capex of Bt20bn per year. Our recommendation is

supported by; i) CAGR of 19% of net profit growth during

2019-2023F, ii) superior profitability (in terms of EBITDA

margin) relative to its regional peers, iii) cost optimisation with

fully-integrated packaging chain from upstream to downstream

businesses, and iv) attractive valuation with regards to PER, PB,

EV/EBITDA multiples relative to its peers.

SCGP’s valuation

Source: DBSVTH

In addition, we have also conducted a sensitivity analysis on

shareholder value or equity value under the assumption of

change in discount rate (WACC) and terminal growth rate. The

equity value changes approximately Bt3.38 a share and Bt1.57

a share for every 0.5% change in WACC and every 0.25%

change in terminal growth rate respectively, without any

changes in other factors.

Dividend policy of not less than 20% of net profit. SCGP has a

policy of paying dividend of not less than 20% (dividend payout

ratio) of the company’s net profit (consolidated basis) after

deducting corporate income tax and all kinds of reserves as

required by law. However, the dividend yield and payment may

vary depending on its operating results, financial position,

investment demand and business expansion plans, reserve for

loan repayment, and working capital requirement.

Based on dividend payout ratio assumption of 20%, we

estimate dividend per share (DPS) for FY21/FY22F of

Bt0.35/share and Bt0.41/share respectively. This translates into

dividend yield of c.1% based on closing price of Bt39 a share

on 15 November 2020.

EPS and DPS projection


Attractive valuation; performance similar to retail and

commerce segments. SCGP has an attractive valuation

compared with its regional peers with superior gross profit

margin and EBITDA margin similar to the commerce sector. At

the end of 2019, SCGP realised an EBITDA margin of 17%,

compared to its competitors at an average of 14%. SCGP's

business is also similar to ASEAN consumer goods

manufacturers such as Vinamilk, Unilever Indonesia, BJC, CPALL

and Osotspa that are relevant to consumer spending in the

Asian region. Comparing SCGP’s EV to other regional players,

we find that SCGP's FY21F PE, PB, EV/EBITDA, multiples are

more attractive than its peers. We expect FY21F PER, PBV and

EV/EBITDA multiples at 22x / 1.7x / 11.6x respectively,

compared to its regional peers (direct competitors Amcor,

Sonoco, Huhtamaki, and SIG Combibloc) average of 19.2x /

3.2x / 11.7x respectively).

Page 6

Company Focus

SCG Packaging

Company Background Corporate History. SCGP is a holding company that invests in

packaging-related businesses. It offers a full-service, fully-

integrated packaging solution in Southeast Asia comprising

firer-based packaging, PPP and food service products. It also

provides customisable printing and packaging design as well

as after-sales services and e-commerce solutions for clients.

SCGP’s business structure

Source: Company, DBSVTH (as of 31 Dec 2019)

Management team


SCGP is the largest producer of packaging paper and

corrugated carton packaging in Southeast Asia. Data

compiled by Frost & Sullivan revealed that SCGP has an

annual production capacity of 4.0m tonnes of packaging

paper (including production capacity from the acquisition of

Fajar in Indonesia in 2019) and annual production capacity of

1.0m tonnes of corrugated carton.

SCGP at a glance


One of Southeast Asia's largest full-service packaging

providers with a vertically integrated business model. SCGP

operates from the point of procurement of raw materials

such as recovered paper (RCP), wood and paper mills. The

company has full access to raw materials and has a recycling

centre to collect RCPs in the production process. SCGP is also

engaged in downstream segments such as container plastics,

polymers, plastic films and other materials. The corrugated

paper segment includes packaging from high performance

materials and PPP for consumer demand.

Vertical integration provides competitive advantages for

SCGP’s cost structure, operational efficiency, procurement of

raw materials and allocation of resources. Other packaging

manufacturers in the region have problems in penetrating

upstream and downstream businesses they require high

investments and large factories (large-scale requirement).

Total capacity


Page 7

Company Focus

SCG Packaging

SCGP at a glance


The company’s integrated packaging business accounts for

over 84% of its total revenue. SCGP's business consists of

two business segments: 1) an integrated packaging chain,

and 2) a fibrous chain. However, revenue from the

integrated packaging business (fiber-based packaging and

PPP will be discussed in the following section) accounts for

approximately 84% of total revenue at CAGR growth of 8%

during 2016-2019, partly driven by acquisitions of Fajar in

Indonesia and Visy in Thailand in 2019.

Revenue breakdown


Page 8

Company Focus

SCG Packaging

Business Overview SCGP is a leader in fully-integrated packaging services and

solutions in Thailand and Southeast Asia. Its business is

divided into two main business lines: integrated packaging

chain and fibrous chain.

i) Integrated packaging chain

Most of the company’s revenue is from the sales of

packaging paper. SCGP sells pulp and paper packaging

material, packaging paper, and PPP. Pulp and paper

packaging products include corrugated containers and

colour printed box packaging for retail product displays.

To achieve its aims of becoming a fully-integrated pulp

and paper packaging company, SCGP has developed its

PPP business since 2014 by offering flexible packaging and

rigid packaging as well as polymer materials to meet the

needs of customers in the FMCG industry. Note that

integrated packaging revenue for 2016-2019 and 1H20

accounted for approximately 75% / 78% / 78% / 80% /

84% of total consolidated income respectively.

Pulp and packaging paper business: About 95% of the

raw materials are from waste paper (RCP). As of June 30,

2020, there were 68 recycling centres nationwide, giving

SCGP an edge over its competitors in terms of production

reliability and cost optimisation. Corrugated containers

and retail display packaging are the two main product

lines in this business segment. Example of products

include regular slotted containers (RSC), die-cut

corrugated boxes, paper trays and logistics packaging for

consumer staple products as well as delivery services, food

and beverage, electronic device, household electrical

appliances and many more.

Revenue from the fiber-based packaging business in 2016-

2019 and 1H20 was approximately 30% / 30% / 29% /

28% / 25% of consolidated income respectively.

Corrugated containers and retail display packaging


Packaging paper business: SCGP is the largest packaging

paper producer in Southeast Asia with a total capacity of

approximately 4mtpa at the end of 2019, partly driven by

the acquisition of Fajar in 2019. Similar to pulp and paper

packaging, SCGP offers raw materials such as RCP,

woodchip and pulp which are useful for product

development to meet customer needs. Packaging paper

and other paper (non-paper-based packaging) are the two

main product lines in this category, including packaging

paper containerboard and coated white box paper. Other

examples of paper packaging include gypsum covers used

in residential construction, recycled paper bags for

consumer products, and industrial paper bags (sack kraft).

Revenue from its packaging paper businesses in 2016-

2019 and 1H20 accounted for approximately 40% / 44%

/ 44% / 47% / 51% of consolidated revenue respectively.

Packaging and non-packaging paper


PPP business: Meets the needs of many markets and

consumers on a daily basis. However, there are limitations

of pulp and paper as packaging material in meeting

specific needs, including direct food delivery that requires

contact avoidance, liquid retention capacity, air-sealed and

tight product lids. In 2014, SCGP started its PPP business

in Thailand by acquiring shares of Prepack Thailand, a soft

packaging manufacturer in Thailand. It then expanded its

overseas production base by acquiring a stake in Batico, a

Vietnam-based flexible packaging manufacturer.

In addition, SCGP decided to enter the fixed packaging

business in Thailand to offer consumers a full range of

packaging solutions and services by acquiring shares in

Conimex and Visy Packaging Thailand in 2017 and 2019

respectively. SCGP plans to further expand its PPP business

to packaging from high-performance materials and

recyclable high-value added polymers with potential

growth in areas such as rigid packaging with high barrier

and resistance quality, and high performance flexible

Page 9

Company Focus

SCG Packaging

packaging. Examples include medical products that require

high quality polymer packaging.

However, flexible packaging depends on the nature of the

products contained within, reducing storage space on

shelves and during transportation. Polymer films are an

essential component of flexible and durable packaging.

According to data collected by Frost & Sullivan, flexible

packaging accounts for approximately 54% of all plastic

packaging in Southeast Asia. It is most commonly used in

food and beverage, including consumer-care products, on-

the-go and ready-to-eat products.

Flexible packaging


In addition to flexible packaging, SCGP is also a

manufacturer of rigid packaging that is capable of

presenting products on display shelves clearly and making

them easy to handle and carry. Stable and rigid

appearance makes these types of packaging easy to pick

up and recycle. SCGP specialises in the design and

manufacture of a wide range of rigid packaging through

injection moulding or extrusion blow molding using high

density polyethylene resin ("HDPE") or polypropylene

("PP") as raw materials.

PPP revenue for in 2016-2019 and 1H20 accounted for

approximately 5% / 5% / 5% / 6% / 8% of the company’s

consolidated income.

Rigid packaging


ii) Fibrous chain business. According to Frost & Sullivan,

among the top 10 largest and leading packaging paper

operators in Thailand, Indonesia Vietnam and the

Philippines, SCGP is the most vertically integrated player. It

is also one of the few pulp and paper packaging

manufacturers in East Asia with access to wood pulp, the

primary source of raw materials.

SCGP's revenue from the pulp and paper business in

2016-2019 and 1H20 accounted for approximately 25% /

22% / 22% / 20% / 16% of its total revenue respectively.

This can be broken down in to the following sub-business

units;

Food service products: Food containers under the Fest®

brand that not only provide convenience and safety to

consumers, but are environmentally friendly compared to

foam and other plastic containers. SCGP launched the

Fest® brand in 2015. By the end of 2019, sales of food

containers grew at an average annual growth rate of

67.8% in 2017-2019. SCGP has a strong competitive

advantage in the food container market because it

produces some food contacting paper (from SCGP pulp)

which can be processed into food containers. This

differentiates it from other processors who have to

purchase food contact paper from third-party paper mills.

Fiber-based, pulp and paper products: SCGP began its

pulp and paper business in 1979, producing office paper

for printing and home use. Main products of the pulp and

paper category include graphics paper and copier paper.

Food packaging

Source: Company. DBSVTH

Page 10

Company Focus

SCG Packaging

Synergies of vertical integration for upstream and

downstream businesses. SCGP has adopted an end-to-end

optimisation model in its operations across factories in ASEAN

to increase the overall profitability of the supply chain, from

raw materials (RCP, pulp, woodchip) to finished products

(downstream business). Recent developments include various

acquisitions over the past 10 years such as Prepack Thailand,

Batico Vietnam, Indocorr, Conimex, IPP, Fajar Indonesia, Visy

Thailand. During 2014-2019, the degree of integration

averaged at 45.7% / 33.0% / 10.0% / 0% in Thailand /

Vietnam / Indonesia / Philippines respectively.

Supply chain optimisation


Page 11

Company Focus

SCG Packaging

Industry Overview Our daily activities involve the use of packaging in important

household items (tubes, toothpaste, soap, shampoo,

disinfectant and others), food packaging, knives, cutlery

(cups, straws, food and beverage containers, etc.), food, shelf

storage and product containers (cartons, parcels, shockproof

paper, etc). In general, packaging can be divided into the

following 3 types:

i) Primary packaging has direct contact with products.

Functional packing is for product storage and prevention

from damage, and extending shelf life. This may reduce

waste and greenhouse gas emissions (carbon footprint).

PPP products are considered primary packaging, consisting

of flexible packaging, rigid packaging and food packaging

with barriers. Examples of high-barrier rigid food

packaging are coffee bags, shampoo bottles or yogurt

cups.

ii) Secondary packaging combines primary packaging with

convenience for efficient transportation and distribution. It

also adds value to the product with attractive print quality

and packaging design. It is also a crucial marketing tool

for branding and promotions. An example of secondary

packaging is folding cartons such as cookie boxes,

cosmetic boxes and shoe boxes.

iii) Tertiary packaging is mainly corrugated box packaging

that is strong to support the weight of products and

protect them from damaged during storage and handling.

In addition to corrugated box packaging, tertiary

packaging also includes paper pallets and corner guards.

Packaging value chain

Source: SCC, DBSVTH

Packaging has different features and functions depending on

the nature of the products and customer requirements.

Functions of packaging can be divided into the following

categories;

i) Containment - prevents leaks (gas, air, liquids) and avoids

loss of components through bulk handling processes.

ii) Prevention - prevents physical damage over the life of the

product and protects from deformation, drops, shaking

and vibration. Maintains temperature and humidity of the

products.

iii) Storage - extends shelf life, prevents biological changes,

temperature, humidity, acidity and oxygen within the

ingredients of the package.

iv) Convenience - increases convenience of management.

Sizing and improving filling and packaging efficiency.

v) Product information - provides nutritional information,

weight, quantity, order and barcode.

vi) Branding and marketing - acting as a “silent salesman”

through colourful displays, graphics and exhibitions.

Page 12

Company Focus

SCG Packaging

Functions and properties of packaging


Booming e-commerce sector in Asia. The e-commerce market

in the ASEAN region continues to grow. Based on data

compiled by Frost & Sullivan, the e-commerce market in

ASEAN (Indonesia, Thailand, Philippines and Vietnam) in terms

of GMV), grew at a CAGR of 47.9% during 2015-2019. In

addition, Frost & Sullivan estimates that e-commerce market

value will grow from US$13bn in 2018 to US$77.7bn in

2024F, or a CAGR of 34.7% over the same period.

Even though the e-commerce business is growing rapidly, the

growth rate of e-commerce expenses (penetration rate) from

the total household expenditure was lower than in developed

countries such as Japan, the United States and China. At the

end of 2019, e-commerce expenditure from total household

expenditure and average growth rate in ASEAN countries

were 1.4% and 0.8% (compared to China at 28.5% and

11.1% respectively).

E-commerce boom in ASEAN

Source: Company, Frost & Sullivan (Feb 2020 )

According to Euromonitor, Thailand’s total e-commerce value,

which includes business-to-business (B2B) and business-to-

customer (B2C), increased from Bt17bn in 2010 to Bt155bn in

2019, or CAGR of 45.1% during the 9-year period. This rapid

growth rate was supported by; i) greater online platform

variety, ii) greater customer penetration, iii) the launch of

more reliable services, iv) greater product variety , v) changes

in consumer behaviour, and vi) the government’s backing for

services such as PromptPay (to be discussed in the following

section).

With improving internet network capacity and availability of

5G bandwidth (to be discussed in the following section), we

expect Thailand’s e-commerce value to continue its uptrend in

the next five years. Euromonitor estimates that Thailand’s e-

commerce value could hit as high as Bt461bn in 2024,

registering a CAGR of c.24% during 2019-2024F.

Consequently, demand for packaging and delivery services is

also expected to remain in an upcycle.

E-commerce value (2010-2024F)


The beauty and personal care segment is expected to enjoy

the strongest growth during 2019-2024F with a CAGR of

24.66%, followed by consumer appliances and electronics

with CAGRs of 15.23% and 13.14% respectively.

E-commerce trend (2019-2024F)


Per capita consumption of packaging in the ASEAN region is

still low. Packaging consumption (packaging penetration rate)

calculated from the consumption kilograms (kg) per

population, particularly in Asian countries such as Indonesia,

Thailand and Vietnam, remains at low levels. According to

data compiled by Frost & Sullivan in 2019, the consumption

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Company Focus

SCG Packaging

of paper packaging and per capita consumption of plastic

packaging in Thailand at the end of 2019 were 50 kg and 32

kg per year. The figure is considerably lower than in

developed countries such as South Korea, the US, Germany,

Japan where average consumption is over 70 kg. This is

mainly due to the growth of the e-commerce sector, higher

household income and lifestyle changes. We anticipate a

significant increase in packaging penetration rate during

2020-2022F.

Low packaging penetration rate (as of 2019)

Source: Frost & Sullivan, SCGP, DBSVTH

Uptrend of flexible and high-value added packaging demand.

Currently, Thailand imports plastic film packaging such as

plastic bags with aseptic aluminium lining that has high value

(due to demographics and lifestyle changes). It exports basic

plastic goods including plastic carrier bags with low added

value. Therefore, when comparing the value of plastic per

tonne against major plastic exporters in Asia (China, Korea,

Vietnam, Taiwan, Indonesia, and Japan), Thailand is severely

disadvantaged in terms of value of plastic packaging per

tonne. We believe there are opportunities for domestic

producers to develop the market for plastic film used in

flexible plastic packaging for domestic and international

markets.

Based on data collected by the Packaging Intelligence Unit,

imported and exported plastic packaging materials had

CAGRs of 7% and 4% during 2013-2019. This confirms our

view that demand for flexible, reusable and microwavable

packaging to preserve freshness and temperature of products

is on an uptrend.

Imports/exports of plastic packaging materials (2013-2019)


CAGR of c.2% for domestic packaging production during

2015-2019, driven by paper and glass-based materials. The

overall packaging business (plastic, paper, glass and metal-

based materials) enjoyed a CAGR of 2% during 2015-2019,

with glass-based materials (glass bottles) delivering the

highest CAGR of 17%, followed by paper-based materials

(primary and secondary corrugated and protective boxes) with

a CAGR of 2%. This strong growth was supported by the

increasing numbers of tourists, higher domestic consumption,

and increase in exports to Cambodia, Laos, Myanmar, and

Vietnam (CLMV). Growth of paper-based packaging was

driven by the rapid expansion of e-commerce, online

shopping and delivery services (for both food and parcels).

On the other hand, plastic-based materials such as polymers

experienced a decelerating growth rate, mainly due to rising

awareness of environmental issues. Demand for plastic bags

and cutlery also fell in line with the “no single-use plastic“

campaigns introduced by the government and many retail

establishments such as shopping malls and convenient stores.

Packaging production (2015-2019)


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Company Focus

SCG Packaging

Packaging production growth rate (2017-2019)


Page 15

Company Focus

SCG Packaging

SWOT Analysis

Strengths Weaknesses

• There are over 120,000 products (as of June 30, 2020) from

both the packaging and fiber chain (packaging paper PPP, pulp

and food packaging products), as well as a full range of services

to meet the needs of customers.

• SCGP is a major producer of packaging paper and corrugated

boxes in ASEAN.

• Own raw materials (RCP, woodchip and pulp) provide not only

cost savings but also helps maintain high product quality and

reliability for customers.

• It has a cost structural advantage as one of the largest

integrated packaging providers in ASEAN with a vertically

integrated business model, powered by synergies from vertical

integration and strategic location of its manufacturing plants.

• There are over 4,000 diverse customers without reliance on a

just a handful of big customers. Sales revenue from top 10

customers accounted for only 9.4% of total company sales

during 1H20.

• SCGP is a leader in the creation of new materials and new

products that are diverse and environmentally friendly through its

research and development team.

• Volatility in commodity prices (HDPE, PP – polymer

materials) is beyond SCGP's control. Chemical prices tend to

shift along with crude oil prices and may pose significant risk

to the PPP business.

• Risk from exchange rate fluctuation for foreign currency

sales, expenses, profits and liabilities.

Opportunities Threats

• The penetration rate of the packaging market is still low

despite increasing population growth in ASEAN. This creates

investment opportunities to expand both upstream and

downstream in the packaging sector.

• Demographic changes may lead to downsizing of the family.

The number of elderly citizens is increasing. As a result, demand

for FMCG consumer products will increase including food,

beverages, consumer and health care products. Demand for

packaging with special features will also increase, for example

biodegradable, microwaveable and recyclable packaging.

• Lifestyle changes may foster the need for more convenient

products such as carry-on, on-the-go and eco-friendly packaging.

Demand for flexible and smaller size packaging is expected to be

high.

• The COVID-19 outbreak has boosted the need for safety and

cleanliness. Demand for consumer products, including homecare

and healthcare products will remain at high levels.

• The COVID-19 outbreak has caused a slowdown in the

global economy, leading to a drop in demand for consumer

products such as expensive snacks, luxury goods and

durable goods such as electronic devices and automotive

parts.

• Changes to local laws and regulations relevant to SCGP's

business, such as environmental policy could adversely affect

its operating costs.

Source: DBS Bank

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Company Focus

SCG Packaging

Critical Factors Mergers and acquisitions are key long-term drivers. One of the

most important catalysts for income growth is mergers and

acquisitions (M&As) or mergers and partnerships (M&Ps). SCGP

has been successful in enhancing its vertical and horizontal

integration. Over the past 10 years, SCGP has acquired a total

of 18 companies, strengthening its portfolio and value in the

packaging chain. This includes geographic expansion and

expanding the packaging value chain, as well as diversification

of product and customer base.

Successful M&P in past 10 years

Source: Company, Frost & Sullivan, DBSVTH (as of Feb 2020)

SCGP prioritises its M&P selection based on six key criteria: 1)

asset size, 2) geographical diversification, 3) access to new

customers, 4) product variety, 5) technology and expertise and,

6) level of integration.

Business synergies from M&P


Vertical integration is a key highlight. SCGP is a fully integrated

vertical and horizontal packaging company with better

production efficiency than its competitors. It also has higher

profit margin compared to other global players in the packaging

sector such as Amcor, Sonoco, Hutamaki and SIG. Vertical

integration is one of the most crucial advantages in the

manufacturing process. Due to the nature of the packaging

business and assets used in operations, there are differences in

operating assets of both upstream and downstream companies.

Vertical integration is also very capital intensive and this makes it

difficult for other players in the region to consolidate their

packaging businesses upstream.

Vertical integration is a key difference


Capacity expansion for flexible packaging and paper-based

packaging. SCGP is currently expanding its flexible packaging

and paper-based packaging capacities. Advances in technology,

increased consumption, environmental awareness, demographic

changes, family downsizing and urbanisation have resulted in

higher demand for flexible packaging and packaging, especially

polymer films which are a highly efficient and environmentally

friendly material. SCGP is currently in the process of expanding

its capacity for 4 projects:

i) Flexible packaging expansion project in Vietnam with

annual capacity of 84msqm and scheduled for

completion around 3Q20.

ii) Corrugated packaging paper capacity expansion project

(containerboard) and white coated paper (Duplex paper)

in Indonesia. It has an annual capacity of 0.40mtpa of

packaging paper and is expected to begin commercial

operations in 1Q21.

iii) Corrugated packaging paper capacity expansion project

(containerboard) in the Philippines with capacity of 0.22

mtpa of packaging paper. It is expected to require

approximately Bt5.4bn in investments with commercial

operations expected in 2Q21.

iv) Soft packaging capacity expansion project in Thailand

which will expand the production capacity of polymer

films by approximately 53m square meters annually. It

Page 17

Company Focus

SCG Packaging

requires investment of approximately Bt600m and is

expected to begin commercialisation in 3Q21.

Leader in Environmental, Social and Governance (ESG)

standards, focused on increasing the life cycle of packaging

materials through a circular economy. SCGP is leading the way

in replacing single-use plastics with green paper and packaging

by operating its business in line with efforts to reduce global

warming. To comply with the policies of a circular economy,

SCGP has stopped using plastics and switched to recycled raw

materials or resistant materials. As a result, more than 95% of

the raw materials used in SCGP's packaging are waste paper

(RCP). SCGP is also committed to producing 100% recyclable

plastics and plastic replacement products. It is also focused on

increasing the life cycle of materials through the following

programmes:

i) Production stages: 1) Reducing consumption of raw

materials. It also maintains the strength of its products. 2)

Improving tensile and bursting strength of its fiber

products. 3) Improving product properties. 4) Extending

shelf life and increasing recyclability of products.

ii) Manufacturing stages. 1) Creating a power source. This

represents about 10 MW of electricity capacity that may

replace 100,000 tonnes of paper per year. 2) 95% of raw

materials is from RCP. 3) 25% of raw water consumption in

the production process is from an in-house raw water

treatment system.

iii) Recovery and recycling stages. Collaborating with retailers

to promote a location for the disposal of consumer

packaging.

iv) Product usage stages. Investing in research and

development (R&D) for flexible packaging to; 1) extend

shelf life of fresh food products; 2) replace single-use plastic

and foam packaging for food containers.

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Company Focus

SCG Packaging

Key Risks COVID-19 outbreak. The overall effects of the COVID-19

outbreak are broadly negative, as evident with unemployment

and a slowdown in the global economy. Consumers have

reduced their spending during the ongoing pandemic. The

outbreak may take approximately 6 -18 months to contain

completely and this may result in lower demand for packaging

and industrial products. The pandemic has also had a negative

impact on demand in the luxury food and beverage segments,

such as expensive snacks / luxury goods and durable products

such as mobile phones. However, more than 69% of SCGP's

business is in the consumer staple segment which is expected

to see continued growth in demand. This segment includes

FMCG, hygiene, and food and beverage products.

In developed countries such as Japan, Korea, the United States

and Europe, there is high demand for flexible packaging such

as polymer films. This is to reduce the risk of contamination in

fresh food.

SCGP believes that the COVID-19 outbreak could also provide

growth opportunities for the packaging business through the

growth of e-commerce and food and parcel delivery services

driven by quarantine and work-from-home policies during the

pandemic.

Ban on seven types of single-use plastics. Seven types of single-

use plastics are banned between 2019 and 2025. In 2019, the

use of the following products is expected to be banned; i) cap

seals made from polyvinyl chloride (PVC) films, ii) products that

use oxo alcohol (OXO) which is usually found in HDPE and low-

density polyethylene (LDPE), and iii) micro-beads made from

plastic. In 2022, plastic products that may be banned include; i)

plastic carrier bags thinner than 36 microns (usually made from

linear low-density polyethylene (LLDPE)) and, ii) foam food

containers. In 2025, the plastic products targeted are; i) single-

use plastic cups and, ii) plastic straws. The majority of foam

containers, cups and plastic straws are made from polystyrene

(PS). We believe that LLDPE will be the chemical product

affected the most by these bans. It is used in manufacturing

carrier bags and packaging films, accounting for over 55% in

the production of plastic products.

Seven types of plastic bans by 2025F


However, this is expected to have limited adverse impact on

SCGP’s operations. It is the leader in replacement of single-use

plastics with green paper and packaging, with approximately

95% of recycled raw materials used in manufacturing

processes such as RCP and plastic substitute raw materials.

SCGP is also committed to producing 100% recyclable plastics

and plastic replacement products.

SCG is leading the way in replacing single-use plastics


Packaging industry is highly competitive. Entrepreneurs in the

packaging industry are competing to differentiate themselves

from other operators through a number of factors such as

innovation, design, quality, product diversity and packaging. In

addition, large companies may take advantage of economies of

scale, have greater access to financial resources, or have better

technology. This could adversely affect the sales or selling

prices of SCGP's products.

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Company Focus

SCG Packaging

Some of SCGP’s pulp products are corrugated packaging paper

(containerboard) that is easily available in the market with

selling prices dependent on commodity price cycles. There is

also the factor of increasing competition due to oversupply of

production capacity. Additionally, demand for other products,

such as SCGP's printing and writing paper, has also been

negatively impacted by disruptive technologies and new

consumer behaviour.

Raw material supply risk. SCGP’s raw materials in its integrated

packaging and pulp and paper business lines are commodities

that are volatile in supply. This is due to factors such as shifts in

supply and demand in the world market, inadequate raw

materials and energy resources, weather, natural disasters,

disease, agricultural instability, government policy and political

instability. Supply of raw materials is mostly based on spot

contracts and short-term contracts. Approximately 80% of

SCGP’s RCP volume is under spot contracts and 20% under

procurement contracts.

Raw material cost risk. SCGP relies on raw materials from

external sources and is vulnerable to price fluctuations due to

several macroeconomic factors such as economic conditions,

environmental regulations and environmental conservation,

natural disasters, weather and other factors beyond SCGP's

control. If cost of raw materials (such as RCP) increases, this

may have a significant negative impact on the company’s

business and financial performance.

RCP, wood, pulp and chemicals prices have fluctuated over the

years. In addition, there is demand volatility in Southeast Asia,

China and other countries. Changing production and storage

rates may also affect RCP prices. Import or export restrictions

of RPC may lead to changes in market prices.

The cost of RCP in 2017/2018/2019/1H20 accounted for

25.8% / 21.7% / 21.3% / 20.6% of SCGP’s total cost of sales

respectively.

Expansion and acquisition (M&P) Risk. SCGP's business growth

strategy is based on creating synergies and adding value to its

packaging chain. It is planning more joint ventures (JVs) with

other companies to strengthen its market position and expand

to new markets.

SCGP has completed M&As and investments in various

businesses in Thailand and neighbouring countries over the

past several years. In the past three years, it successfully

acquired shares in INDOCORR PPC CONIMEX and IPSB. In

2018, SCGP acquired a stake in Fajar for vertically integrated

operations in the Indonesian market. It also acquired a stake in

Visy Packaging Thailand to complement SCGP’s products line

(fixed packaging solutions)

Foreign exchange risk. Fluctuation of forex rates may affect

SCGP’s revenue from exports, long-term loan as well as cost of

some machinery and equipment. SCGP reports its financial

statements (functional currency) in Thai Baht (THB). As a result,

forex fluctuations may have a negative effect on earnings.

Regulatory risks in the country of operations. SCGP operates in

several countries in Southeast Asia. As of June 30, 2020, SCGP

had 40 plants in five countries. Any changes in laws and

regulations by local authorities could have an impact on

SCGP's operations and financial outlook.

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Company Focus

SCG Packaging

Financials

Net profit to grow at 19% CAGR during 2019-2023F. We

project net profit to grow at CAGR of 19% during 2019-

2023F, supported by; i) full-year realisation of revenue in 2020F

on the debottlenecking of its paper packaging plant unit 2 in

Vietnam and food packaging plant unit 3 in Malaysia that

started COD in 4Q19 and 2Q19 respectively, ii) additional

capacity of the vertical integrated packaging chain with

installed capacity of 0.62mtpa for packaging paper and 137

msqm per year for flexible packaging which can be divided

into; a) flexible packaging plant in Vietnam with production

capacity 84 msqm / year (expected COD in 3Q21), b) paper mill

factory in Indonesia with production capacity of 0.4mtpa

(expected COD in 1Q21), c) local paper factory at the

Philippines with production capacity of 0.22 mtpa (expected

COD in 2Q21) and, d) expanded pre-packing factory in

Thailand with production capacity of 53 msqm/year, (expected

COD in 3Q21).

Net profit CAGR of 19% in 2019-2023F


Superior EBITDA margin compared to its peers. SCGP has

competitive advantages with its upstream to downstream

business integration. This leads to a solid and stable profit

margin. At end of 2019, EBITDA margin stood at 17%

(including the acquisition of Fajar) which is approximately 14%

above the average of regional packaging manufacturers. This is

supported by, i) vertical integration, ii) direct exposure to

customers, iii) exposure to new markets and segmented

markets, iv) diverse and full-service product offerings to

customers, and v) higher net profit growth rate than

competitors.

In addition, we believe that SCGP’s profitability is comparable

to leading consumer product manufacturers in ASEAN

countries such as Vinamilk, Osotspa, Universal Robins Unilever

Indonesia BJC and CPALL with average EBITDA margin of 18%.

Key differentials against peers


Superior profitability


EBITDA margin of 16% expected in t 2020F-2023F. We expect

SCGP to post EBITDA margin of at least 16% during 2020F-

2023F driven by; i) synergies of vertical integration, ii) capacity

expansion of both packaging paper and PPP with expected

GPM and EBITDA margin of 20% and 15% respectively, and iii)

potential M&P in a fragmented market that may create

synergies and value for the packaging chain.

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Company Focus

SCG Packaging



Solid 3Q20 core earnings. SCGP’s 3Q20 net profit was

Bt1.33bn, (-9% y-o-y and -30% q-o-q), mainly due to forex

losses of Bt35m (vs 3Q19 gains of Bt91m and 2Q20 gains of

Bt1.2bn). However, its core earnings remained strong with

EBITDA and normalised profit of Bt3.97bn (+2% y-o-y and

+5% q-o-q) and Bt1.47bn (-8% y-o-y and +14% q-o-q). This is

due to the gradual economic recovery in Thailand and Vietnam

where consumer spending on staple goods and durable goods

have bottomed out. SCGP maintained EBITDA margin at a high

level of 17.1% (vs 3Q19 16% and 2Q20 17.5%) on the full

vertical integration of its packaging chain and recent M&As.

i) Integrated packaging chain (IPC) – total revenue and

EBITDA of Bt20bn (+10% y-o-y and -1% q-o-q) and

Bt3.83bn (flat y-o-y and -4% q-o-q). The declining

revenue was caused by; a) softer demand due to panic

buys in 2Q20, b) decline of agricultural demand during

rainy season, c) falling demand for durable goods.

However, this was offset by the recovery of paper

packaging demand after the economy bottomed out in

2Q20. It posted EBITDA margin of 19% (vs 3Q19 20%

and 2Q20 21%).

ii) Fibrous chain (FC) – total revenue and EBITDA of

Bt3.5bn (-5% y-o-y and -22% q-o-q) and Bt263m

(+70% y-o-y and +57% q-o-q). The decline in revenue

was a result of disease controls that caused a sharp fall

in demand for pulp and printing papers globally.

However, this was partly offset by an improvement cost

management. It posted EBITDA of 7% (vs 3Q19 4% and

2Q20 4%)

Net debt-to-equity ratio to normalise in 2021F. We expect

SCGP to post net debt-to-equity ratio of 0.17-0.21x during

2020-2023F, under the assumption of; i) loan to its parent

company and/or financial institutions at Bt6bn and, ii)

approximately Bt20bn capex annually (to be discussed in the

next section). We estimate net debt-to-equity ratio to drop y-o-

y from 2020F on the back of an initial public offering (IPO) on

the Stock Exchange of Thailand (SET); the higher-than-usual

debts in 2019 was due to the acquisition of Fajar in 3Q19. We

expect its net debt-to-equity ratio to normalise in 2021F. SCGP

is undertaking expansion, cost optimisation, greenfield

investments and debottlenecking projects. Post-IPO, we expect

net debt-to-equity and net debt-to-EBITDA ratios of 0.21x and

1.39x by 2023F respectively.

Net debt-to-equity and net debt-to-EBITDA ratios


High capex expected in FY2020-2022F. We expect SCGP to

have an annual investment budget of Bt20bn during 2020-

2022F with capex for the following projects: i) annual

maintenance capex for machinery and equipment at an

estimated 12-15% of our annual capex assumption, ii)

debottlenecking and production efficiency enhancement

projects, and iii) greenfield projects. We also expect the

company’s capex to be partly funded by its IPO.

SCGP’s acquisition of Fajar Indonesia and Visy Thailand in 2019

cost Bt20.8bn and Bt4.3bn respectively.

Annual capital expenditure


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Company Focus

SCG Packaging

Key Assumptions

FY Dec 2016A 2017A 2018A 2019A 2020F 2021F

Packaging paper (mtpa) 2.60 2.60 2.60 4.00 4.22 4.62

PPP-flexbile packaging

(m sqm/year) 817 817 817 817 901 954

PPP-rigid packaging (m

sqm/year) 2,650 2,650 2,650 2,650 2,650 2,650

Food service packaging

(m pieces/year) 400 400 1,900 1,900 1,900 1,900

CAPEX (Bt m) 7,774 5,641 7,533 32,132 20,000 20,000


FY Dec 2016A 2017A 2018A 2019A 2020F 2021F

Revenue 74,542 81,455 87,255 89,070 104,270 119,470

Cost of Goods Sold (61,499) (67,291) (69,074) (71,651) (84,779) (96,944)

Gross Profit 13,043 14,165 18,181 17,419 19,491 22,526

Other Opng (Exp)/Inc (8,388) (8,715) (9,547) (9,226) (9,384) (11,350)

Operating Profit 4,654 5,450 8,633 8,193 10,106 11,176

Other Non Opg (Exp)/Inc 447 1,249 363 714 0.0 0.0

Associates & JV Inc 4.56 4.13 (14.6) 52.7 0.0 0.0

Net Interest (Exp)/Inc (912) (883) (1,040) (1,619) (1,125) (925)

Exceptional Gain/(Loss) 139 158 152 (400) 0.0 0.0

Pre-tax Profit 4,334 5,978 8,094 6,940 8,981 10,251

Tax (483) (603) (1,268) (1,049) (1,257) (1,435)

Minority Interest (566) (949) (761) (623) (772) (882)

Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 3,285 4,425 6,066 5,269 6,952 7,934

Net Profit before Except. 3,146 4,268 5,914 5,668 6,952 7,934

EBITDA 10,408 11,893 14,363 14,950 17,726 19,713

Growth

Revenue Gth (%) 232.1 9.3 7.1 2.1 17.1 14.6

EBITDA Gth (%) 197.3 14.3 20.8 4.1 18.6 11.2

Opg Profit Gth (%) 191.6 17.1 58.4 (5.1) 23.4 10.6

Net Profit Gth (Pre-ex)

(%) 61.2 35.7 38.6 (4.1) 22.6 14.1

Margins & Ratio

Gross Margins (%) 17.5 17.4 20.8 19.6 18.7 18.9

Opg Profit Margin (%) 6.2 6.7 9.9 9.2 9.7 9.4

Net Profit Margin (%) 4.4 5.4 7.0 5.9 6.7 6.6

ROAE (%) 8.6 10.6 14.6 12.6 10.2 8.2

ROA (%) 4.7 5.0 6.6 4.5 4.3 4.2

ROCE (%) 3.4 4.3 5.9 3.8 3.9 4.1

Div Payout Ratio (%) 52.5 42.3 33.5 77.1 20.0 20.0

Net Interest Cover (x) 5.1 6.2 8.3 5.1 9.0 12.1


Margins Trend

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

2017A 2018A 2019A 2020F 2021F

Operating Margin % Net Income Margin %

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Company Focus

SCG Packaging


FY Dec 2Q2019 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 20,402 24,445 23,096 24,267 21,635 23,287

Cost of Goods Sold (17,540) (20,911) (15,333) (19,837) (18,224) (18,701)

Gross Profit 2,862 3,534 7,763 4,431 3,412 4,586

Other Oper. (Exp)/Inc (1,076) (1,207) (5,926) (1,189) (1,407) (2,419)

Operating Profit 1,786 2,327 1,837 3,241 2,005 2,168

Other Non Opg (Exp)/Inc 249 193 138 191 91.8 177

Associates & JV Inc 4.30 17.3 24.9 25.9 11.8 17.3

Net Interest (Exp)/Inc (265) (652) (446) (482) (363) (579)

Exceptional Gain/(Loss) (608) 91.2 89.1 (1,491) 1,200 (36.0)

Pre-tax Profit 1,166 1,976 1,644 1,485 2,945 1,747

Tax (108) (289) (323) 228 (459) (313)

Minority Interest (79.1) (216) (124) 19.7 (582) (99.1)

Net Profit 979 1,471 1,196 1,732 1,904 1,335

Net Profit bef Except. 1,588 1,380 1,107 3,223 704 1,371

EBITDA 3,423 4,101 3,673 5,225 3,895 4,174

Growth

Revenue Gth (%) (3.4) 19.8 (5.5) 5.1 (10.8) 7.6

EBITDA Gth (%) (8.8) 19.8 (10.4) 42.2 (25.5) 7.2

Opg Profit Gth (%) (20.3) 30.3 (21.1) 76.4 (38.1) 8.1

Net Profit Gth (Pre-ex)

(%) (0.4) (13.1) (19.8) 191.1 (78.1) 94.6

Margins

Gross Margins (%) 14.0 14.5 33.6 18.3 15.8 19.7

Opg Profit Margins (%) 8.8 9.5 8.0 13.4 9.3 9.3

Net Profit Margins (%) 4.8 6.0 5.2 7.1 8.8 5.7

Revenue Trend


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

5,000

10,000

15,000

20,000

25,000

30,000

2Q

20

18

3Q

20

18

4Q

20

18

1Q

20

19

2Q

20

19

3Q

20

19

4Q

20

19

1Q

20

20

2Q

20

20

3Q

20

20

Revenue Revenue Growth % (QoQ)

Page 24

Company Focus

SCG Packaging

Balance Sheet (Btm)

FY Dec 2016A 2017A 2018A 2019A 2020F 2021F Net Fixed Assets 56,017 57,143 58,379 82,864 95,244 106,707

Invts in Associates & JVs 880 761 730 771 778 786

Other LT Assets 3,898 4,092 4,064 20,495 21,774 24,284

Cash & ST Invts 1,571 1,632 2,991 4,960 31,267 19,336

Inventory 10,592 13,417 12,894 13,276 15,800 18,103

Debtors 12,050 13,872 13,704 15,198 16,997 19,474

Other Current Assets 361 396 485 1,950 1,950 1,950

Total Assets 85,369 91,312 93,246 139,514 183,809 190,640

ST Debt

19,536 23,026 27,894 43,230 31,000 25,000

Creditor 7,820 9,095 8,574 10,059 14,605 16,734

Other Current Liab 415 327 724 725 725 725

LT Debt 4,847 3,213 2,795 22,683 20,365 18,365

Other LT Liabilities 0.0 0.0 0.0 0.0 0.0 0.0

Shareholder’s Equity 40,402 42,891 40,441 42,952 93,278 101,212

Minority Interests 12,349 12,759 12,819 19,864 23,837 28,604

Total Cap. & Liab. 85,369 91,312 93,246 139,513 183,809 190,640

Non-Cash Wkg. Capital 14,768 18,263 17,786 19,640 19,416 22,068

Net Cash/(Debt) (22,811) (24,608) (27,698) (60,953) (20,097) (24,029)

Debtors Turn (avg days) 36.5 58.1 57.7 59.2 56.3 55.7

Creditors Turn (avg days) 34.3 49.7 50.6 51.8 58.3 64.7

Inventory Turn (avg days) 35.7 70.6 75.4 72.7 68.8 70.0

Asset Turnover (x) 1.1 0.9 0.9 0.8 0.6 0.6

Current Ratio (x) 0.9 0.9 0.8 0.7 1.4 1.4

Quick Ratio (x) 0.5 0.5 0.4 0.4 1.0 0.9

Net Debt/Equity (X) 0.4 0.4 0.5 1.0 0.2 0.2

Net Debt/Equity ex MI (X) 0.6 0.6 0.7 1.4 0.2 0.2

Capex to Debt (%) 31.9 21.5 24.5 48.7 38.9 46.1


Asset Breakdown

Net Fixed Assets -71.1%

Assocs'/JVs -0.7%

Bank, Cash and Liquid

Assets -3.8%

Inventory -11.4%

Debtors -13.0%

Page 25

Company Focus

SCG Packaging


FY Dec 2016A 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 3,851 5,374 6,826 5,891 6,952 7,934

Dep. & Amort. 5,302 5,190 5,382 5,991 7,620 8,537

Tax Paid (584) (596) (773) (1,574) (1,257) (1,435)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 249 (3,989) 125 2,602 224 (2,652)

Other Operating CF 1,702 763 2,692 3,104 (1,125) (925)

Net Operating CF 10,519 6,742 14,252 16,014 12,413 11,459

Capital Exp.(net) (7,774) (5,641) (7,533) (32,132) (20,000) (20,000)

Other Invts.(net) (30.3) (97.7) (126) 241 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 0.0 0.0 0.0 0.0 0.0

Net Investing CF (7,804) (5,739) (7,659) (31,890) (20,000) (20,000)

Div Paid (937) (967) (8,069) (1,958) (4,064) (1,390)

Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 43,374 0.0

Other Financing CF (2,031) (53.6) 2,238 20,215 (5,450) (2,000)

Net Financing CF (2,967) (1,020) (5,832) 18,257 33,860 (3,390)

Currency Adjustments (4.4) (118) (49.3) (82.3) 0.0 0.0

Chg in Cash (257) (135) 712 2,298 26,273 (11,931)

Opg CFPS (Bt) 6.85 7.16 9.04 4.29 2.71 3.14

Free CFPS (Bt) 1.83 0.73 4.30 (5.2) (1.7) (1.9)


Capital Expenditure


Corporate Governance CG Rating (as of Oct 2019) n/a




Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

2017A 2018A 2019A 2020F 2021F

Capital Expenditure (-)

Bt m

ed: CK/ sa:PY, CS



Analyst


What’s New • 3Q20 net profit came in at Bt715m, supported by

significant inventory gain; core performance hit by

weak refinery and aromatics spreads

• Mild recovery of refinery crack spreads in 4Q20F despite

the second wave of COVID-19 in many countries

• We expect net profit to improve in 4Q20F, supported

by falling OSP and gain on the sale of GPSC shares

• Maintain HOLD rating with unchanged TP of Bt41


L.P.

A mild recovery for refinery margin Investment Thesis: On-going investments. TOP’s new Clean Fuel Project (CFP) will

increase its total capacity from 275kbd to 400kbd with higher

energy efficiency and zero fuel oil products. Its total investment

is budgeted at c.US$5.0bn. The project is expected to go

onstream in early 2024 at the earliest.

PX spread remains under pressure. Our forecast PX spread for

2021F appears to be conservative at US$200/tonne compared

with US$284/tonne in 2019 and US$241/tonne in 9M20. This

was due to: i) weaker demand for the downstream business,

and ii) additional capacity coming online from China. We expect

more than c.4mtpa of PX and BZ coming online in 1H21F.

Maintain HOLD rating, with an unchanged TP of Bt41, pegged

to a P/BV of 0.76x (1.5 SD below 5-year average). Our

recommendation is underpinned by i) positive signals for

refinery crack spreads, ULG and JET oil, despite the second wave

of COVID-19 in many countries, and ii) expectations of narrower

aromatic margins (both PX and BZ), no thanks to normalising PX

demand and demand disruption for BZ that is used mostly in

the automotive industry. Valuation:

We apply a P/BV of 0.76x (1.5 SD below its 5-year average) to

derive our TP of Bt41.

Where we differ:

We remain cautious over crude prices, refinery margin

recovery, and weakening aromatics business. Key Risks to Our View:

Lower-than-expected market GRM is the key risk factor as new

capacity in the region will continue to put more pressure on

margins. This is due to the huge incoming new capacity in the

Middle East, China and India, especially for diesel and gasoline. At A Glance Issued Capital (m shrs) 2,040

Mkt. Cap (Btm/US$m) 104,551 / 3,452


PTT 45.0

Thai NVDR 6.3

State Street Bank Europe Limited 3.6

Free Float (%) 52.0


GIC Industry : Energy / Oil, Gas & Consumable Fuels


27 Nov 2020

Price Relative


FY Dec (Btm) 2018A 2019A 2020F 2021F

Revenue 389,344 364,327 252,387 257,003 EBITDA 22,946 17,201 6,427 20,638 Pre-tax Profit 12,367 7,756 (7,799) 6,742 Net Profit 10,149 6,277 (6,705) 5,599 Net Pft (Pre Ex.) 9,953 5,330 (6,705) 5,599 Net Pft Gth (Pre-ex) (%) (54.1) (46.5) nm nm EPS (Bt) 4.96 3.07 (3.3) 2.73 EPS Pre Ex. (Bt) 4.88 2.61 (3.3) 2.74 EPS Gth Pre Ex (%) (54) (46) nm nm Diluted EPS (Bt) 4.96 3.07 (3.3) 2.73 Net DPS (Bt) 2.65 1.50 0.50 1.21 BV Per Share (Bt) 59.7 58.8 55.0 56.6 PE (X) 10.3 16.7 nm 18.7 PE Pre Ex. (X) 10.5 19.6 nm 18.7 P/Cash Flow (X) 5.7 8.0 24.5 14.3 EV/EBITDA (X) 4.9 9.0 32.3 11.0 Net Div Yield (%) 5.2 2.9 1.0 2.4 P/Book Value (X) 0.9 0.9 0.9 0.9 Net Debt/Equity (X) 0.0 0.4 0.8 1.0 ROAE (%) 8.3 5.2 (5.8) 4.9 Earnings Rev (%): 0 0 Consensus EPS (Bt): (1.9) 2.52 Other Broker Recs: B: 9 S: 8 H: 11


Thai Oil PCL Bloomberg: TOP TB | Reuters: TOP.BK Refer to important disclosures at the end of this report

47

67

87

107

127

147

167

187

207

24.3

34.3

44.3

54.3

64.3

74.3

84.3

94.3

104.3

114.3


Relative IndexBt

Thai Oil PCL (LHS) Relative SET (RHS)

Page 2

Company Update

Thai Oil PCL

WHAT’S NEW

Expect refinery margin to rebound slightly in 4Q20F

3Q20 core earnings performance hit by weaker performance for

refinery and aromatic businesses, and forex loss. 3Q20 net

profit came in at Bt715m (vs. 3Q19’s net loss of Bt683m and

2Q20’s net profit of Bt2.48bn), 36% above our estimate.

However, normalised profit, excluding inventory impact,

registered a net loss of Bt2.11bn (vs. 3Q19’s profit of Bt1.1bn

and 2Q20’s loss of Bt630m). The deterioration in core

performance was due to i) softer market GRM, pressured by

softer crack spreads and a substantial rise in crude OSP, ii) softer

aromatics margins, and iii) forex loss of Bt453m. However, this

was offset by net inventory gains (including NRV reversal) of

Bt3.36bn.

Market gross integrated margin (GIM), excluding crude

inventory impact, stood at US$1.0/bbl (-80% y-o-y and -83% q-

o-q).

TOP’s GRM and GIM by quarter

Source: TOP, DBSVTH


i) Refinery utilisation rate was at 93% (vs. 97% in 3Q19

and 98% in 2Q20). On a 3Q20 basis, JET/GO/HSFO/ULG

crack spreads stood at US$-1.1/4.16/-2.58/3.93

(1000%/-27%/-59%/+54% in q-o-q). Market GRM

stood at US$-1.1/bbl (vs. 3Q19’s US$4.1/bbl and 2Q20’s

US$1.4/bbl). Refining crack spreads were weighed down

by a slower-than-expected petroleum demand recovery

on fears of a second wave of COVID-19.

ii) Crude premium cost, on average, has recovered from the

historical bottom in 2Q20 as major oil producers such as

Saudi Aramco, the UAE, Iraq, and Kuwait, revised up

their OSP in line with higher crude prices. Specifically,

Murban, Arab Light, and Arab Extra Light stood at

c.US$1.20/0.77/0.70 per barrel respectively (vs. 2Q20’s

US$-4.72/-5.43/-5.67 per barrel).

iii) Crude inventory impact, including an NRV loss reversal of

Bt378m, resulted in a net stock gain of Bt3.36bn. Note

that TOP booked a gross inventory gain of Bt2.98bn or

c.US$4.0/bbl

iv) The aromatics utilisation rate came in at 56% (vs. 54%

in 3Q19 and 75% in 2Q20). Paraxylene (PX) and

benzene (BZ) spreads headed south due to sluggish

demand and rising feedstock cost, as oil prices started to

recover since late 2Q20. On a 3Q20 basis, PX and BZ

margins stood at US$143/tonne (-26% y-o-y and -33%

q-o-q) and US$24/tonne (-60% y-o-y and -73% q-o-q).

Thus, GIM contribution is was at US$1.2/bbl (+140% y-

o-y and -25% q-o-q).

v) Lube base utilisation rate stood at 70% (vs. 81% in

3Q19 and 89% in 2Q20) Despite seeing a margin

decline with the 500SN margin falling to US$339/ton

(+20% y-o-y, -9% q-o-q), demand for lube oil has

recovered due to easing travel restrictions whereas TOP

sold its lube products at a lower discount. Hence,

market GIM contribution came in at US$0.8/bbl (+60%

y-o-y and +800% q-o-q).

vi) Accounting GIM, including crude inventory impact,

came in at US$4.9/bbl (+48% y-o-y and +308% q-o-q).

vii) Extraordinary items in 3Q20 included a forex loss of

Bt453m, as the THB depreciated against the USD by

c.Bt0.7 per USD.

4Q20F: We anticipate a mild recovery for refinery crack

spreads despite the second wave of COVID-19. Despite city

lockdown in many countries in Europe caused by the second

wave of COVID-19, overall refinery crack spreads saw a mild

recovery from the previous quarter. On a 4Q-to-date basis,

JET/GO/ULG spreads averaged US$0.96/2.73/5.31 per barrel,

n.a./-35%/+19% QTD respectively. However, we remain

cautious over gasoil margins that are now facing downward

pressure, as most refineries, responding to the collapse in jet

oil demand, are producing more road fuels instead (i.e. gasoil

and gasoline).

However, we are also seeing positive signals for the refinery

industry as crude OSP from Arab Gulf seems to be on a

downtrend. On a 4Q-to-date basis, Murban, Arab Light, and

Arab Extra Light averaged c.US$-0.43/-0.45/-0.70 per barrel

respectively. On average, OSP has decreased by c.US$1/bbl

compared with the 3Q20 average.

Page 3

Company Update

Thai Oil PCL

OSP discount/premium by month

Source: TOP, DBSVTH

Expect 4Q20F net profit to record high in 2020F supported by

extra gain from GPSC’s share divestment. In 3Q20, TOP

announced power business restructuring by selling GPSC’s

shares of 8.91% to PTT plc. The rational is to align PTT and TOP

strategic direction as GPSC is power flagship business. However,

net equity holding in GSPC will drop from 24.28% to 20.78%.

As a result, TOP will forgo a stream of equity income of Bt280m

per year in 2021F onward.

Nonetheless, we expect 4Q20F will be a record high in 2020F,

supported by gain from GSPC’s share divestment of of

c.Bt4.0bn (after-tax basis), based on assumption of i) selling

8.91% or 251.17m shares held in GSPC, ii) average cost at

Bt31.02/share, iii) assumed average selling price at Bt67/share.

Company Background

Thai Oil is Thailand's largest and most complex refinery. It is

the flagship refinery under the PTT group. Its refinery is

integrated with petrochemicals and lube base plants. TOP also

invests in other related businesses, including marine

transportation for petroleum products, ethanol and power

plants.

Page 4

Company Update

Thai Oil PCL



Revenue 83,034 50,522 58,422 (29.6) 15.6


Gross Profit (107) 1,329 1,907 nm 43.5

Other Oper. (Exp)/Inc (526) (591) (697) 32.5 17.9

Operating Profit (633) 738 1,210 (291.0) 64.0

Other Non Opg (Exp)/Inc 674 659 391 (42.0) (40.6)

Associates & JV Inc 297 699 846 185.0 21.1

Net Interest (Exp)/Inc (1,041) (1,029) (1,172) (12.5) (13.9)

Exceptional Gain/(Loss) (141) 2,045 (453) (222.1) (122.1)

Pre-tax Profit (844) 3,111 823 nm (73.5)

Tax 222 (495) (32.6) (114.7) (93.4)

Minority Interest (60.2) (136) (75.0) (24.6) (45.0)

Net Profit (683) 2,480 715 nm (71.2)

Net profit bef Except. (542) 435 1,168 nm 168.4

EBITDA 2,118 4,204 4,665 120.2 11.0

Margins (%)

Gross Margins (0.1) 2.6 3.3

Opg Profit Margins (0.8) 1.5 2.1

Net Profit Margins (0.8) 4.9 1.2

Source: TOP, DBSVTH Historical PE and PB band

PB band (x)


Avg: 1.23x

+1sd: 1.55x

+2sd: 1.86x

-1sd: 0.91x

-2sd: 0.6x

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0


(x)

Page 5

Company Update

Thai Oil PCL

Key Assumptions

FY Dec 2017A 2018A 2019A 2020F 2021F

Dubai crude oil (US$/bbl) 53.2 69.4 63.5 40.0 42.0

Avg. market GRM

(US$/bbl)

6.70 4.70 3.10 2.80 2.50

PX spread vs. ULG95

(US$/t)

276 388 300 200 200

Utilization rate - refinery

(%)

112 113 107 110 111

Utilization rate - petchem

(%)

83.0 89.0 70.0 89.0 90.0


FY Dec 2017A 2018A 2019A 2020F 2021F

Revenue 337,388 389,344 364,327 252,387 257,003


Gross Profit 32,002 16,216 8,570 (1,636) 12,575 Other Opng (Exp)/Inc (3,461) (2,782) (2,684) (3,639) (3,308)

Operating Profit 28,541 13,434 5,886 (5,275) 9,267 Other Non Opg (Exp)/Inc 1,215 1,056 2,931 1,500 1,500



Exceptional Gain/(Loss) 3,182 196 947 0.0 0.0

Pre-tax Profit 30,849 12,367 7,756 (7,799) 6,742 Tax (5,529) (1,983) (1,239) 936 (1,011)

Minority Interest (463) (235) (240) 159 (132)


Net Profit 24,856 10,149 6,277 (6,705) 5,599 Net Profit before Except. 21,675 9,953 5,330 (6,705) 5,599

EBITDA 38,594 22,946 17,201 6,427 20,638 Growth

Revenue Gth (%) 22.8 15.4 (6.4) (30.7) 1.8

EBITDA Gth (%) 11.4 (40.5) (25.0) (62.6) 221.1

Opg Profit Gth (%) 14.9 (52.9) (56.2) (189.6) (275.7)

Net Profit Gth (Pre-ex) (%) 4.3 (54.1) (46.5) nm nm Margins & Ratio

Gross Margins (%) 9.5 4.2 2.4 (0.6) 4.9

Opg Profit Margin (%) 8.5 3.5 1.6 (2.1) 3.6

Net Profit Margin (%) 7.4 2.6 1.7 (2.7) 2.2

ROAE (%) 21.7 8.3 5.2 (5.8) 4.9

ROA (%) 11.2 4.1 2.3 (2.3) 1.8

ROCE (%) 9.5 3.0 0.8 (4.6) 0.0

Div Payout Ratio (%) 43.2 53.4 48.9 N/A 44.2

Net Interest Cover (x) 8.7 3.8 1.8 (0.9) 1.6


Page 6

Company Update

Thai Oil PCL


FY Dec 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 83,034 96,940 77,831 50,522 58,422


Gross Profit (107) 2,097 (13,823) 1,329 1,907 Other Oper. (Exp)/Inc (526) (1,195) (585) (591) (697)

Operating Profit (633) 901 (14,408) 738 1,210 Other Non Opg (Exp)/Inc 674 829 17.3 659 391

Associates & JV Inc 297 300 584 699 846

Net Interest (Exp)/Inc (1,041) 144 (1,105) (1,029) (1,172)

Exceptional Gain/(Loss) (141) 226 (2,338) 2,045 (453)

Pre-tax Profit (844) 2,400 (17,250) 3,111 823 Tax 222 (345) 3,558 (495) (32.6)

Minority Interest (60.2) (71.4) (62.3) (136) (75.0)

Net Profit (683) 1,984 (13,755) 2,480 715 Net profit bef Except. (542) 1,758 (11,416) 435 1,168

EBITDA 2,118 3,759 (11,678) 4,204 4,665 Growth

Revenue Gth (%) (10.3) 16.7 (19.7) (35.1) 15.6

EBITDA Gth (%) (39.2) 77.5 nm nm 11.0

Opg Profit Gth (%) (241.5) (242.4) (1,698.3) (105.1) 64.0

Net Profit Gth (Pre-ex) (%) (251.7) (424.3) (749.4) (103.8) 168.4 Margins

Gross Margins (%) (0.1) 2.2 (17.8) 2.6 3.3

Opg Profit Margins (%) (0.8) 0.9 (18.5) 1.5 2.1

Net Profit Margins (%) (0.8) 2.0 (17.7) 4.9 1.2

Balance Sheet (Btm)



Other LT Assets 23,284 23,940 42,209 35,846 47,537

Cash & ST Invts 67,941 107,262 76,611 67,786 47,235

Inventory 32,841 28,739 30,292 22,715 23,130

Debtors 23,499 25,741 23,753 20,191 20,560


Total Assets 228,108 268,613 283,445 309,049 307,592

ST Debt

2,561 6,940 2,912 2,912 2,912

Creditor 22,439 25,716 34,121 24,407 19,634


LT Debt 67,612 104,121 120,854 163,287 163,287




Total Cap. & Liab. 228,108 268,613 283,445 309,049 307,592


Net Cash/(Debt) (2,232) (3,799) (47,155) (98,412) (118,964)




Asset Turnover (x) 1.5 1.6 1.3 0.9 0.8

Current Ratio (x) 3.8 4.3 3.5 3.9 3.9

Quick Ratio (x) 2.7 3.5 2.6 3.0 2.8

Net Debt/Equity (X) 0.0 0.0 0.4 0.8 1.0


Capex to Debt (%) 42.9 24.0 (19.0) 36.3 15.4

Z-Score (X) 3.5 3.0 2.6 1.8 1.9


Page 7

Company Update

Thai Oil PCL


FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 25,319 10,384 6,516 (6,705) 5,599

Dep. & Amort. 7,642 7,264 7,085 8,602 8,271

Tax Paid (3,141) (5,975) (1,802) 936 (1,011)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (1,010) 310 1,203 1,443 (5,540)

Other Operating CF 5,607 6,330 85.4 0.0 0.0

Net Operating CF 34,417 18,313 13,087 4,276 7,318 Capital Exp.(net) (30,096) (26,600) 23,549 (60,256) (25,600)

Other Invts.(net) 3.12 753 (206) 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CF (30,092) (25,846) 23,343 (60,256) (25,600) Div Paid (9,455) (11,006) (4,386) (1,020) (2,463)

Chg in Gross Debt (13,342) 35,067 16,828 48,000 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 2,975 1,889 (8,059) 0.0 0.0

Net Financing CF (19,822) 25,951 4,382 46,980 (2,463) Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash (15,497) 18,417 40,813 (9,001) (20,745)

Opg CFPS (Bt) 17.4 8.82 5.83 1.39 6.30

Free CFPS (Bt) 2.12 (4.1) 18.0 (27.4) (9.0)



Source: DBSVTH







Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 15 Jan 20 61.75 78.00 BUY

2: 17 Feb 20 53.50 69.00 BUY

3: 30 Mar 20 29.00 41.00 BUY

4: 09 Apr 20 35.50 41.00 BUY

5: 17 Apr 20 38.00 41.00 BUY

6: 11 May 20 43.25 41.00 HOLD

7: 01 Jun 20 44.50 54.00 BUY

8: 09 Jul 20 43.25 54.00 BUY

9: 21 Jul 20 45.00 54.00 BUY

10: 11 Aug 20 41.75 47.00 HOLD

11: 16 Oct 20 35.50 41.00 HOLD

12: 06 Nov 20 37.00 41.00 HOLD


1

2

3

45

6

7

8

9

10

11

12

25.65

30.65

35.65

40.65

45.65

50.65

55.65

60.65

65.65

70.65


Bt

ed: CK/ sa:, PY, CS



Analyst

Thailand Research Team +662 857 7838; [email protected]


What’s New • 3Q20 earnings stood at Bt240m (+10.5% y-o-y, 5.2%

q-o-q), in line with our estimate

• Outlook remains intact in FY20F-21F on healthy spread,

secure customer base and growing e-commerce trend

• Declared an interim DPS of Bt0.41, which goes XD on

25 Nov 2020

• Maintain BUY call with PE-based TP of Bt16.50


L.P.

Earnings cushioned by export sales Investment Thesis: Leading containerboard business in Thailand. UTP is in the

containerboard business for over 30 years and offers a wide

product range with different price ranges and product qualities.

Currently, UTP has a market share of 6.6% in Thailand.

Sustainable growth outlook with 3-year earnings CAGR of 7%.

The growth is underpinned by i) its ability to maintain a high

level of EBITDA margin from healthy product spreads, ii)


the Chinese government’s stricter policies on the environment,


trend , vii) its valuation discount relative to peers, and viii) its

attractive dividend yield of 5.6%-5.3% in FY20F-FY21F.

Attractive investing option for paper pulp company. UTP is

trading at a discount to its peers in terms of FY2021F PE (c.8.8x

vs. the peer average of c.13.7x) and EV/EBITDA multiples (c.6.6x

vs. the peer average of c.8.9x). Additionally, UTP’s ROE and

dividend yield are superior to the peer average (ROE in FY20F

equate to c.29.2% vs. the peer average of c.13.2%). Valuation:

Our TP of Bt16.5 is based on a PE multiple of 10.5x, 1SD above

its 5-year average.

Where we differ:

We have already factored in the impact of the Chinese

government’s stricter policies on the environment, coupled

with higher demand from the rapid growth in e-commerce

and growing environmental concerns. As a result, our earnings

forecast for FY20F/FY21F is higher than consensus. Key Risks to Our View:

i) Increasing containerboard supply in Vietnam, ii) dependency

on a few clients, and iii) fluctuating raw material prices.

At A Glance Issued Capital (m shrs) 650

Mkt. Cap (Btm/US$m) 8,775 / 290


Chinsettawong’s Family 31.0

Union Paper Cartons Co Ltd. 11.1

Mangkornkanok’s Family 6.7

Free Float (%) 39.6


GIC Industry : Materials / Containers & Packaging


27 Nov 2020


United Paper Bloomberg: UTP TB | Reuters: UTP.BK Refer to important disclosures at the end of this report

Price Relative


FY Dec (Btm) 2018A 2019A 2020F 2021F

Revenue 3,719 3,403 3,331 3,486 EBITDA 1,095 1,190 1,321 1,381 Pre-tax Profit 865 969 1,100 1,150 Net Profit 777 863 979 1,024 Net Pft (Pre Ex.) 777 863 979 1,024 Net Pft Gth (Pre-ex) (%) 146.5 11.1 13.4 4.6 EPS (Bt) 1.20 1.33 1.51 1.58 EPS Pre Ex. (Bt) 1.20 1.33 1.51 1.58 EPS Gth Pre Ex (%) 147 11 13 5 Diluted EPS (Bt) 1.20 1.33 1.51 1.58 Net DPS (Bt) 0.60 0.67 0.76 0.79 BV Per Share (Bt) 4.12 4.85 5.68 6.50 PE (X) 11.3 10.2 9.0 8.6 PE Pre Ex. (X) 11.3 10.2 9.0 8.6 P/Cash Flow (X) 9.0 7.8 7.3 7.3 EV/EBITDA (X) 8.2 7.3 6.0 5.3 Net Div Yield (%) 4.4 5.0 5.6 5.9 P/Book Value (X) 3.3 2.8 2.4 2.1 Net Debt/Equity (X) 0.1 CASH CASH CASH ROAE (%) 31.5 29.6 28.6 25.9 Earnings Rev (%): 0 0 Consensus EPS (Bt): 1.50 1.57 Other Broker Recs: B: 3 S: 0 H: 1

87

137

187

237

287

5.3

7.3

9.3

11.3

13.3

15.3


Relative IndexBt

United Paper (LHS) Relative SET (RHS)

Page 2

Company Update

United Paper

WHAT’S NEW

Earnings hit the mark

In-line 3Q20 earnings. UTP reported earnings of Bt240m

(+10.5% y-o-y, +5.2% q-o-q), in line with our estimate.

9M20 earnings made up 71% of our FY20F forecast of

Bt979m (13.4% y-o-y). The q-o-q improvement mainly

stemmed from higher sales volume this quarter as its

utilisation reached over 91%. Meanwhile, the y-o-y

performance improvement was due to its decent revenue

and still elevated GPM margin of 32.9% y-o-y despite the

higher costs of raw materials.

Top line growth rose by 13% y-o-y and 29% q-o-q. UTP

recorded revenue of Bt940m (+13% y-o-y, 29% q-o-q),

mainly from a higher sale volume on the back of the increase

in export volume from the normal level of 1k tons/month to

4-5k tons/month that offset the decline in domestic sales

volume. Note that UTP exports to Vietnam and China.

GPM margin remain high y-o-y but decline q-o-q. UTP’s GPM

expanded to 32.9% (vs. 32.8 % in 3Q19 and 37.4% in

2Q20). The q-o-q contraction arose from: i) the cost of waste

paper rising to 6.6/kg vs. 5.9/kg in 2Q20 due to supply

shortage and UTP’s inability to import from Europe, and ii)

the average selling price (ASP) of package paper dropping by

4% q-o-q. Note that the data is obtained from the SCGP

presentation at its 3Q20 analyst meeting.

AOCC price vs. packaging paper price in 1Q17-3Q20

Source: SCGP, DBSVTH

Outlook remains solid in FY20F-21F. UTP is one of the

leading containerboard businesses in Thailand with a market

share of 6.60%. Its fundamentals are strong with sustainable

earnings CAGR of 7% in FY20F-22F. We expect UTP’s

earnings to come in at Bt979m (+13.4% y-o-y) in FY20F and

Bt1024m (+4.6% y-o-y) in FY21F on the back of:

i) Its ability to maintain a high utilisation rate at 85-90% in

FY20F-21F, as UTP starts to export more and find new

customers.

ii) Its ability to maintain a high GPM level in FY21F-22F at

c.36%, as UTP plans to rake in higher revenue from Kraft

liner boards that yield a higher margin of 30%-40% vs. a

corrugating medium margin of 20-25%.

iii) Its ability to improve its machines to produce more Kraft

liner boards to comprise 40% of total revenue while

corrugating medium contributes 60% of total revenue.

iv) UTP being a beneficiary of the rapid growth of e-

commerce, especially in the food industry, and

environmental concerns over the use of plastic.

To pay cash dividend of Bt0.41 per share for 9M20

performance, implying 2.9% dividend yield: UTP announced

an interim cash dividend for its 9M20 performance

amounting to Bt0.41 per share, implying a dividend yield of

2.9% at its current share price. The dividend will go XD on

25 November 2020 and is payable on 11 December 2020.

Maintain BUY with TP of Bt16.50. We used PE multiple

method for valuing UTP, as its containerboard business is

cyclical in nature. Given our FY21F earnings projection of

Bt1,024m or EPS of Bt1.58, our FY21F TP works out to

Bt16.50 a share – based on a PE multiple of 10.5x or 1SD

above its 5-year average.

Our BUY rating is underpinned by i) its ability to maintain a

high level of EBITDA margin from healthy product spreads, ii)


the Chinese government’s stricter polices on the

environment, iii) its already secured customer base, vi) robust

e-commerce trend, vii) its valuation discount relative to peers,

and viii) its attractive dividend yield of 5.3%-5.6% in FY20F-

FY21F.

Company Background

United Paper PCL (UTP TB) manufactures and distributes Kraft

liner boards and corrugating medium products, or

containerboards for the packaging industry in both domestic

and international markets. Currently, UTP is ranked fourth in

terms of market share for corrugating medium products,

behind Panjapol Paper Industry’s 15.2% and Elite Kraft &

Mahachai’s 7.2%. In 2019, UTP built a new warehouse with a

capacity of 6,000 sqm. Also, UTP has already paid off all its

debt.

7.57.95

7.65

6.75

5.7

6.45 6.66

4.95

4.054.5

3.75

4.65

5.85

6.6

14.0 14.6

15.6 16.5 17.0 17.0 17.0

16.4 15.3

13.5 12.9 12.5 12.6 12.5 12.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0

1

2

3

4

5

6

7

8

9

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20

THB CIF-From US to China

THB'000 regional market based

AOCC price (THB/KG) Packaging paper price (THB'000/Ton)

Page 3

Company Update

United Paper



Revenue 830 731 940 13.2 28.7

Cost of Goods Sold (558) (457) (631) 13.2 38.0

Gross Profit 273 273 309 13.4 13.2

Other Oper. (Exp)/Inc (30.1) (27.8) (40.0) 32.9 43.7

Operating Profit 243 245 269 10.9 9.8

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc (1.7) (0.1) 0.0 99.0 83.8

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit 246 257 278 13.0 8.4

Tax (29.0) (28.6) (38.3) 32.1 33.7

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 217 228 240 10.5 5.2

Net profit bef Except. 217 228 240 10.5 5.2

EBITDA 52.6 52.5 52.9 0.6 0.9

Margins (%)







Avg: 8.3x

+1sd: 10.1x

+2sd: 11.8x

-1sd: 6.6x

-2sd: 4.8x3.9

5.9

7.9

9.9

11.9

13.9

15.9


(x)

Avg: 2.4x

+1sd: 2.79x

+2sd: 3.17x

-1sd: 2.02x

-2sd: 1.63x

1.1

1.6

2.1

2.6

3.1

3.6


(x)

Page 4

Company Update

United Paper

Key Assumptions

FY Dec 2017A 2018A 2019A 2020F 2021F

Machine 1 2 2 2 2

Full capacity (Tons/day) 300 800 800 800 800

Utilization rate 91% 75% 81% 86% 90%

Average ASP (THB/Ton) 12,888 17,393 15,916 14,700 15,200

Segmental Breakdown

FY Dec 2017A 2018A 2019A 2020F 2021F Revenues (Btm)

Kraft Liner Board 44% 33% 38% 30% 40%

Corrugating Medium 56% 67% 62% 70% 60%

Total 100% 100% 100% 100% 100% (Btm)


FY Dec 2017A 2018A 2019A 2020F 2021F

Revenue 2,552 3,719 3,403 3,331 3,486


Gross Profit 412 970 1,082 1,199 1,255 Other Opng (Exp)/Inc (93.6) (116) (130) (127) (132)

Operating Profit 318 855 952 1,073 1,123 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0


Net Interest (Exp)/Inc (34.7) (33.0) (9.3) 0.0 0.0

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 319 865 969 1,100 1,150 Tax (3.4) (88.0) (106) (121) (126)

Minority Interest 0.0 0.0 0.0 0.0 0.0


Net Profit 315 777 863 979 1,024 Net Profit before Except. 315 777 863 979 1,024

EBITDA 590 1,095 1,190 1,321 1,381 Growth

Revenue Gth (%) 37.7 45.7 (8.5) (2.1) 4.7

EBITDA Gth (%) 57.6 85.5 8.6 11.0 4.6

Opg Profit Gth (%) 46.8 168.7 11.4 12.7 4.7

Net Profit Gth (Pre-ex) (%) 64.7 146.5 11.1 13.4 4.6 Margins & Ratio

Gross Margins (%) 16.1 26.1 31.8 36.0 36.0



ROAE (%) 14.6 31.5 29.6 28.6 25.9

ROA (%) 9.0 21.4 24.6 26.0 23.6

ROCE (%) 9.9 23.7 27.1 27.7 25.0

Div Payout Ratio (%) 51.5 50.0 50.5 50.5 50.5

Net Interest Cover (x) 9.2 25.9 102.0 NM NM


Page 5

Company Update

United Paper


FY Dec 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020

Revenue 830 780 937 731 940

Cost of Goods Sold (558) (505) (560) (457) (631)

Gross Profit 273 275 377 273 309 Other Oper. (Exp)/Inc (30.1) (40.3) (34.9) (27.8) (40.0)

Operating Profit 243 235 342 245 269 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0


Net Interest (Exp)/Inc (1.7) (0.1) 0.0 (0.1) 0.0

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 246 241 348 257 278 Tax (29.0) (27.9) (42.5) (28.6) (38.3)

Minority Interest 0.0 0.0 0.0 0.0 0.0

Net Profit 217 213 306 228 240 Net profit bef Except. 217 213 306 228 240

EBITDA 52.6 53.4 51.4 52.5 52.9 Growth

Revenue Gth (%) (4.5) (6.0) 20.1 (22.1) 28.7

EBITDA Gth (%) 0.4 1.6 (3.7) 2.0 0.9

Opg Profit Gth (%) (6.2) (3.3) 45.8 (28.3) 9.8

Net Profit Gth (Pre-ex) (%) (7.7) (2.0) 43.5 (25.3) 5.2 Margins

Gross Margins (%) 32.8 35.2 40.2 37.4 32.9



Balance Sheet (Btm)



Other LT Assets 42.4 41.5 44.7 46.9 49.3

Cash & ST Invts 116 191 129 792 1,396

Inventory 423 441 311 335 351

Debtors 734 827 763 765 801

Other Current Assets 116 125 410 430 452

Total Assets 3,715 3,537 3,469 4,061 4,609

ST Debt

179 137 0.0 0.0 0.0

Creditor 310 408 232 278 294

Other Current Liab 15.6 43.9 58.0 58.6 59.2

LT Debt 877 252 0.0 0.0 0.0



Minority Interests 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 3,715 3,537 3,469 4,061 4,609

Non-Cash Wkg. Capital 948 942 1,193 1,194 1,250

Net Cash/(Debt) (939) (199) 129 792 1,396




Asset Turnover (x) 0.7 1.0 1.0 0.9 0.8

Current Ratio (x) 2.8 2.7 5.6 6.9 8.5

Quick Ratio (x) 1.7 1.7 3.1 4.6 6.2

Net Debt/Equity (X) 0.4 0.1 CASH CASH CASH

Net Debt/Equity ex MI (X) 0.4 0.1 CASH CASH CASH

Capex to Debt (%) 20.3 0.0 N/A N/A N/A

Z-Score (X) 5.5 9.3 20.2 18.0 17.3


Page 6

Company Update

United Paper


FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 319 865 969 1,100 1,150

Dep. & Amort. 237 197 211 221 231

Tax Paid 0.0 0.0 0.0 0.0 0.0

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 0.0 0.0 0.0 0.0 0.0

Other Operating CF (357) (92.2) (50.8) (121) (182)

Net Operating CF 199 970 1,130 1,199 1,199 Capital Exp.(net) (214) 0.0 (280) (100.0) (100.0)

Other Invts.(net) 3.00 (67.0) (133) 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.48 0.0 0.68 (2.2) (2.4)

Net Investing CF (211) (67.0) (412) (102) (102) Div Paid (97.5) (163) (390) (436) (494)

Chg in Gross Debt 203 (667) (389) 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 1.50 1.57

Net Financing CF 106 (829) (779) (434) (492) Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash 93.6 73.9 (61.5) 663 604

Opg CFPS (Bt) 0.31 1.49 1.74 1.84 1.84

Free CFPS (Bt) 0.0 1.49 1.31 1.69 1.69



Source: DBSVTH

Analyst: Thailand Research Team

Duladeth BIK, CFA, FRM, CAIA






Score Description












90-100

Excellent

80-89

Very Good

70-79

Good

60-69

Satisfactory

50-59

Pass


S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 03 Aug 20 12.50 13.80 BUY

2: 11 Aug 20 14.60 13.80 BUY

3: 10 Sep 20 14.60 16.50 BUY

4: 14 Oct 20 14.20 16.50 BUY


1

2

3

4

6.36

7.36

8.36

9.36

10.36

11.36

12.36

13.36

14.36

15.36


Bt




Page 38

DBSVTH recommendations are based on an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return, i.e., > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)

*Share price appreciation + dividends

Completed Date: 27 Nov 2020 06:07:27 (THA)

Dissemination Date: 27 Nov 2020 06:41:24 (THA)

Sources for all charts and tables are DBSVTH unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). This report is solely intended for the clients of DBS Bank Ltd, its

respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in

any form or by any means or (ii) redistributed without the prior written consent of DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH'').

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other

factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or

warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without

notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific

investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees

only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial

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arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not

to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons

associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may

not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to

update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.




Page 39

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public

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The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

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1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have

proprietary positions in Indorama Ventures, IRPC PCL, PTT Global Chemical, Siam Cement, Thai Oil PCL recommended in this report

as of 31 Oct 2020.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research

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Compensation for investment banking services:

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listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.




Page 40

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Page 41

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Kingdom

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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and

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form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at

persons having professional experience in matters relating to investments. Any investment activity following from this

communication will only be engaged in with such persons. Persons who do not have professional experience in matters

relating to investments should not rely on this communication.

Dubai

International

Financial

Centre

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, Gate

Precinct Building 5, PO Box 506538, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The

Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA

rulebook) and no other person may act upon it.

United Arab

Emirates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined

in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes

only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell

any financial product. It does not constitute a personal recommendation or take into account the particular investment

objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment

adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the

information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This

report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBS Vickers Securities (Thailand) Co Ltd (''DBSVTH''). DBSVUSA did not participate in its

preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not

associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst

compensation, communications with a subject company, public appearances and trading securities held by a research

analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This

report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other

institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes

to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other

jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,

professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.




Page 42

DBS Regional Research Offices

HONG KONG

DBS (Hong Kong) Ltd

Contact: Carol Wu

13th Floor One Island East,

18 Westlands Road,

Quarry Bay, Hong Kong

Tel: 852 3668 4181

Fax: 852 2521 1812

e-mail: [email protected]

MALAYSIA

AllianceDBS Research Sdn Bhd

Contact: Wong Ming Tek (128540 U)

19th Floor, Menara Multi-Purpose,

Capital Square,

8 Jalan Munshi Abdullah 50100

Kuala Lumpur, Malaysia.

Tel.: 603 2604 3333

Fax: 603 2604 3921


SINGAPORE

DBS Bank Ltd

Contact: Janice Chua

12 Marina Boulevard,

Marina Bay Financial Centre Tower 3

Singapore 018982

Tel: 65 6878 8888

Fax: 65 65353 418


Company Regn. No. 196800306E

INDONESIA

PT DBS Vickers Sekuritas (Indonesia)

Contact: Maynard Priajaya Arif

DBS Bank Tower

Ciputra World 1, 32/F

Jl. Prof. Dr. Satrio Kav. 3-5

Jakarta 12940, Indonesia

Tel: 62 21 3003 4900

Fax: 6221 3003 4943


THAILAND

DBS Vickers Securities (Thailand) Co Ltd

Contact: Chanpen Sirithanarattanakul

989 Siam Piwat Tower Building,

9th, 14th-15th Floor

Rama 1 Road, Pathumwan,

Bangkok Thailand 10330

Tel. 66 2 857 7831

Fax: 66 2 658 1269


Company Regn. No 0105539127012

Securities and Exchange Commission, Thailand

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