Packaging - Growth ahead for the long term

We expect the global packaging industry to continue to exhibit steady growth in the medium to long term, driven by paper and polymer packaging demand. We expect sector earnings to decline slightly YoY in 4Q24 due to lower sales volume because of weak Chinese demand, then recover in 2025. We maintain our Outperform rating on SCGP as we believe earnings have bottomed and expect 2025 core earnings to benefit from China's major economic stimulus package.

Packaging industry to continue to grow. The global packaging industry is poised for medium to long term growth. Paper packaging demand is expected to grow by 4.8% CAGR in 2023-2028, with flexible and rigid plastic packaging expected to grow at a CAGR of 5.0% and 4.5% respectively. In the regional packaging paper industry, China is the lead importer from ASEAN, taking 50-60% of total ASEAN export volume. The Chinese government's planned stimulus package is expected to lift its packaging paper import volume back to normal pre-COVID levels of ~800,000 tons per month against the 580,000 tons in October 2024.

Recovered paper costs expected to trend sideways down. Typically, a major portion of raw materials at ~95% of total raw materials comes from recovered paper (RCP). The choice of RPC is backed by environmental concerns, cost-effectiveness and the increasing availability of recycled fiber. RCP prices are expected to move sideways down in the medium term due to the potential for lower crude oil prices and freight rates resulting from the incoming US president’s policy to boost fossil fuel production.

4Q24 earnings momentum. We expect sector earnings, led by SCGP, which dominates at ~69% of total SET packaging earnings, to decline slightly YoY due to lower sales volume in the face of weak Chinese demand. However, on a YoY basis we expect average selling prices (ASP) to be stable, with prices for the raw material, RPC, to decline slightly. We also anticipate higher loss contribution from Fajar Paper after it bumped up its stake to 99.75% in September 2024 from 55%. This, coupled with a ~Bt100mn rise in interest expense in 4Q24, will erode earnings.

Maintain our Outperform rating on SCGP. We recommend taking the opportunity to accumulate when share price drops in response to the poor 3Q24 results. We believe earnings bottomed in 3Q24 and expect 2025 core earnings to benefit from China's major economic stimulus package. Our 2025 target price is Bt38/share, based on -1SD of the 3-year PE mean.

Key risks are a continued slow pace in China’s economy and geopolitical unrest raising coal cost. Key ESG risks are energy management, sustainability products, and high greenhouse gas emissions (E).