High Conviction: SCGP – Valuation attractive, recovery in sight

Catalysts.

• On the path to recovery. We expect SCGP to post a net profit of Bt1.4bn in 2Q23, up from 1Q23 net profit of Bt1.2bn on two factors: 1) A continued fall in raw material (RCP) costs in 2Q23, as the 3-4-month lag has kicked in, plus a gradual easing in the price of coal (from US$100/ton in 1Q23 to US$85/ton in 2Q23, and currently at US$69/ton). 2) A better fibrous chain business QoQ on: a) Increased sales volume and spread for dissolving pulp, thanks to stronger textile demand in China and b) increased demand for writing paper due to the election and return to a new school term.
• Earnings bottomed in 4Q22 and continue to step up in 2Q23. Revenue is estimated at Bt33.4bn, -1.0% QoQ on a seasonal low for Thailand (Songkran) and Indonesia (Ramadan), partially offset by improvement in Vietnam, especially Duy Tan, which benefits from the resumption of plastic packaging and lower plastic resin costs. The Integrated packaging unit (83% of sales) is expected to show flat sales volume QoQ, with higher packaging paper sales volume for first-tier exporters to China like Vietnam partially offset by long holidays in Thailand and Indonesia. The fibrous chain business (17% of sales) will benefit from product mix to maximize dissolving pulp production, which has stronger spread thanks to stronger textile demand, and higher writing paper demand as students return to school. Gross margin is set to improve to 18.0% (+40bps QoQ and YoY) in 2Q23 for several reasons. First, margin in the packaging paper unit will improve from higher utilization rate, especially in Vietnam and the start of realizing low RCP cost as SCGP’s RCP costs lag the market by 3-4 months: market RCP cost was US$161/ton in 2Q23, and US$171/ton in 1Q23. Second, the cost of coal is expected to drop following the fall in market price (1Q23: US$100/ton, 2Q23: US$85/ton, current: US$69/ton).
• Outlook to continue improve in 2H23F. We expect earnings to improve further in 3Q23 on the resumption of packaging demand to a normal level as China brings packaging paper imports back to pre-COVID level and continued lower overall cost (raw materials and coal). SCGP has budgeted Bt9.0bn for M&P this year, opening the door for more earnings upside over the rest of the year.

Action & Recommendation. We see the 38% YTD fall in share price as incorporating the negatives – and core earnings will move up in the next couple of quarters, limiting downside risk. We have changed valuation methodology to PE from DCF as we see PE multiple valuation as reflecting market sentiment and investor perception. We used its PE mean of 31.6x and our new end-2023 TP of Bt52.

Key risks: A slower pace in China’s reopening and the impact of a global recession.