SCGP - Preview 3Q24: Short-term hiccup

We expect 3Q24 earnings to plunge 59% QoQ and 54% YoY on weaker sales due to weak product demand related to the electrical and electronic (E&E) and automotive segments, especially in China, the floods in northern Thailand, and the appreciation of the baht against the USD, which hurt exports in the fibrous chain business. We expect earnings to recover in 4Q24 on higher demand during the holiday season. We expect 3Q24 to be the bottom for earnings with growth in 4Q24 and benefits from China’s stimulus program in 2025. We maintain Outperform but roll our TP to 2025, which cuts it to Bt38 (from Bt40) based on 25.9X or -1SD of PE mean.

Expect 3Q24 core profit to fall QoQ and YoY. We expect SCGP to report a net profit of Bt548mn in 3Q24, with an estimated Bt50mn extraordinary expense related to the additional share acquisition of Fajar Paper. Core profit is expected at Bt598mn, plunging 54.3% YoY and 59.5% QoQ on low sales in 3Q24 due to flooding in northern Thailand, weak demand for products related to the E&E and automotive segments, especially in China, and the appreciation of the baht against the USD, which hurt fibrous chain exports. China’s imports of packaging paper in August remains ~20% below pre-COVID levels, making it difficult to raise selling prices to cover the price of raw materials (recovered paper), which has increased. The fibrous chain business has also been hurt by a decline in short fiber pulp prices and writing paper prices due to slowing demand in China. While dissolving pulp prices remain relatively good, they will be impacted by the significant strengthening of the baht in 3Q24.

4Q24 outlook. We expect demand to improve significantly due to the buying season in preparation for the New Year and a possible gain from Thailand’s digital wallet. RPC costs are starting to show signs of dropping, which will boost margins, as the Chinese government has implemented a major economic stimulus package. SCGP has not yet seen a positive impact, but expects to benefit in 3-6 months, in 2025.

Revisit our 2024-25 earnings forecasts. We have revised our core profit forecast for this year down by 26% and 9% in 2025 to reflect the slow demand, cutting our gross margin assumption to 16% from 17%. We expect operating performance to gradually recover next year, especially as the major economic stimulus package in China will increase the demand for paper packaging in the overall industry.

Action & Recommendation. We recommend taking an opportunity to accumulate when share price drops in response to the poor 3Q24 results. We continue to rate it Outperform for medium to long-term as we expect 2025 core earnings to benefit from China's major economic stimulus package. We roll TP to 2025 with a new TP of Bt38/share (from Bt40/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).