SMPC : Sahamitr Pressure Container

The largest LPG cylinder manufacturer in the world with the plenty of growth in developing market.

Investment thesis

  • SMPC is high profile company in LPG cylinder market that always deliver world class quality product on time. SMPC is on the supplier list of major oil companies which are now penetrating into developing market such as South Asia and Africa.
  • Capture High opportunities growth of LPG consumption in South Asia and Africa.
    • LPG consumption per capita in Africa is roughly 2-5 kg/person/year vs. 20-30 kg/person/year in Thailand and other developed countries.
    • World LPG Association (WLPGA) is currently promoting LPG to replace heating with conventional method such as cutting woods or coal in developing countries due to better efficiency of heating and less pollutions.
  • New capacity investment for another 2.5 million cylinders per year in foreign country mainly focus on selling in Africa which will reduce logistic cost and tax barrier that leads to higher of cost competitive in Africa market and better margin from international sale.
  • Adjusting selling price due to higher raw material cost. We expect normalized gross profit margin at 24-25% given stable hot rolled coil price and Thai Baht currency.

Business Overview

  • SMPC is the largest LPG cylinder manufacturer for cooking in the world serving both domestic(Thailand) and global market. SMPC mainly produces Household LPG Cylinder which can be segregated into two categories of
    • 2-piece Cylinder: size 0.5 – 16 Kg. (85% of sale)
    • 3-piece Cylinder: size 18 – 200 Kg.

And other products such as Automotive LPG cylinder both Cylindrical type and Toroidal type (size: 25-133 liters), Methyl Bromide, Lubricant, Specialty gas, Air tank cylinder and etc.

Products.PNG

  • 95% of revenue comes from export and mostly focus on third world countries such as Africa (Kenya, Nigeria, South Africa etc.) South Asia (Bangladesh, Sri-Lanka and etc.) and plan to penetrate into South America in the future.

rev. structure

By region

  • Customers are major oil and gas companies such as PTT (Thailand), Worldgas (Thailand), Easigas, Exxon, bp, Oryx Energies, Shell, Vitogaz, OiLibya, Total, Caltex and etc.
    • Criteria of ordering with suppliers are competitive price, world class standard quality, punctuality, after sale services and etc.
    • In additional, Cylinder manufacturer must be approved by each country consumer product safety commission before selling to the customers due to cylinder contains flammable fluid and leakage of cylinder may cause explosive event.
    • As you can see, in 2015 the revenue from Africa dropped from 1,381 million baht in 2014 to 933 million baht because of political turmoil in Kenya that led to uncertainty of business policies in country. Therefore, most customers prefer to postpone the order to the second half of the year.

Total Capacity and Expansion

  • The factory is located at BangKhun Tien, Thailand with capacity of 8.2 million units each year that made SMPC is the largest cylinder manufacturer in the world which turn SMPC into one of the cost leader in the industry. In the first half of 2017, SMPC operated at 88% utilization rate.

largest Manufacturer.PNG

  • One of the competitive edge of SMPC is the machines was built within the factory from their engineers which lower capital expenditure relative to imported machine, more flexible to different size of productions, low cost of maintenance, and etc.
  • In the past, SMPC has been improved the capacity from 5 million units in 2013 to 8.2 million units in 2017 within current area by debottlenecking, realignment of production line and modified the machines.
  • SMPC expects last upgrade of machines will enhance the total capacity to 9.2 million units with 30-40 million baht of investment.

Total capacity.PNG

  • Establishing new manufacturing base in foreign country.
    • New capacity investment for another 2.5 million cylinders per year in foreign country mainly focus on selling in Africa which will reduce logistic cost and tax barrier that leads to higher of cost competitive in Africa market and better margin from international sale. From my point of view, South Africa and Kenya might be the best location of new factory.
    • Estimated Capital Expenditure at 3-400 million baht.
    • Construction period: 1-2 years
    • Why they have to expand?
      • SMPC expects to enjoy 15-20% growth in sales volumes in all cylinder types from the upcoming demands especially in developing countries. The company may need to make new investment during 2018 in order to support future growth. (Source: 2q17 opportunities day presentation)

Growth Opportunities

  • Developing market opportunities
    • World LPG Association (WLPGA) is currently promoting LPG to replace heating with conventional method such as cutting woods or coal in developing countries due to better efficiency of heating and less pollution.
      • Some developing countries, such as Kenya cuts tariff to promote their citizen to use LPG as cooking gas and some governments subsidize LPG for household usage. (Source: Company report on 2q17 opportunities day)
    • LPG consumption per capita in Africa is roughly 2-5 kg/person/year vs. 20-30 kg/person/year in Thailand and other developed countries.
      • Thai population is approximately 68 million peoples in 2017 and Household LPG consumption in 2016 is roughly 2.11 tons which turn to LPG consumption per capita at 31 kg/person/years (Source: Department of Energy Business, Ministry of Energy (Thailand) http://www.doeb.go.th/2016/stat.html)
      • According to data from UN data, A world of information shows that developed countries such as South Korea, Japan, China and US have LPG consumption per capita roughly 15-40 kg/person/year while countries in Africa and South Asia (excluding Sri Lanka) have LPG consumption per capita less than 5 kg/person/year.

LPG consumption.PNG

(Note: Due to lack of information on developing countries, some of data may lost or unrecorded.)

  • Population in Africa: Abundant of growth, if LPG is fully adopted as major cooking fuel instead of firewood.
    • Let’s do the math that in Thailand we consume household LPG for 2.11 million tons in 2016 and if the average weight of cylinder that floating in the country is 15 kg and the turnover in each cylinder is 2 months a year which turn into our estimation that there are roughly 23.45 million cylinders circulated in the country in 2016. You can do the math on those countries in South Asia and Africa.
  • But in the developing countries like Bangladesh, Kenya, Nigeria etc. are in transition period. The government encourages people to use LPG for cooking instead of conventional fuel while LPG is more expensive in term of absolute amount of money than firewood. As a result, the 6kg cylinder is decent size in those countries because of affordability. I believe that in the longer term, this consumption per capita will converge to developed countries.
  • 20 largest population countries in Africa

african pop.PNG

(Source: http://www.worldometers.info/population/countries-in-africa-by-population/)

Financial Highlight

  • Revenue growth on quarter and expect to be higher

sale-q.PNG

Dom-Export sale-q.PNG

  • SMPC has shown impressive sale growth approximately 28% yoy consecutively since 4q2015. Sale growth was driven by exporting to Africa and South Asia as opportunities of structural change has presented.
  • Domestic sale dropped due to price war in bidding from local companies who only focus in domestic market. SMPC chooses not to cut the price for mass-size product (15kg) in order to win the bidding but focus on niche order that the competitors are not capable of doing such as 7kg and 48kg cylinder.

Inv

  • The indication of future growth is the company currently accumulates raw material in order to serve new order and potential order in high growth market.

FS-q.PNG

  • Gross Profit margin was suppressed by Raw material cost and fluctuation in USDTHB
    • Hot rolled coil is main raw material that accounts for 64% of total cost. In the first half of 2016, SMPC achieved the highest gross profit margin at 34% and gradually dropped to 20.4% in latest quarter (2q17) while revenue has robust growth. The reason is mismatching price contract due to hot rolled coil price declined to 330-400 USD/ton in 2015 compared to 550-600 USD/ton in 2014 and then bounced back to 475-550 USD/ton in 1H2016 that led to use cheap raw material from 2015 and selling at spot price in 2016.
    • The problem is contracts which signed in the period of low price of hot rolled coil will be set selling price as low as raw material price while using current raw material cost in production.
    • According to Investor relation, they said mismatching price orders are completely delivered in 2q17 and expect gross profit margin turn to normal at 22-24% for the new order in 3q-4q17.

HRC.PNG

  • SMPC has 90% of export revenue which is experiencing with foreign exchange risk because of too strong on Thai Baht. The fluctuation of Thai Baht currency hurts GPM and other Thai exporters but I don’t think this situation will stay for too long and it will converge back to its own value.

USDTHB.PNG

  • Solid cash flow and Healthy balance sheet

Risk Concerns

  • Deteriorating of Gross profit margin (HRC and USDTHB)
  • Political turmoil in developing countries
  • Intense competition in developing market
  • Regulatory risk
  • Low free float

 

Ticker: SMPC

Market Cap: 6,915 million Baht

Outstanding Shares: 531.95 million shares

 

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