12. Financial Position and Operating Performance

Summary of Auditor’s Report

  Auditor’s Office : KPMG PHOOMCHAI AUDIT LTD.

Names of Auditors: MR. WINID SILAMONGKOL Auditor Number 3378 or

  MR. VICHIEN THAMTRAKUL

 Auditor Number 3183 

From the audits carried out upon the generally accepted standards, the
auditors formed the opinion that the financial statements of the Siam
Cement Public Company Limited and subsidiaries present fairly, in all
material aspects, the financial position as at December 31, 2005, 2004,
and 2003, and the result of their operations and their cash flows for
the years the ended in conformity with generally accepted accounting
principles.

 

Consolidated Financial Statements and Financial Ratios

of

The Siam Cement Public Company Limited and Subsidiaries

[]Remark: In 2005, the Company has changed the accounting policy for
fixed asset from revalued amount to cost and the figures for the year
ended 31 December 2003 and 2004 have been adjusted accordingly.

[]

[]

[]

Financial Statements and Financial Ratios

of

The Siam Cement Public Company Limited

[]

Remark: In 2005, the Company has changed the accounting policy for fixed
asset from revalued amount to cost and the figures for the year ended 31
December 2003 and 2004 have been adjusted accordingly.

[]

[]

[][]

Management Discussion and Analysis

Operating Performances and Financial Position of The Siam Cement Public Company and Subsidiaries

Business Overviews

The Siam Cement Pcl and subsidiaries reported 2005 Net profit of Baht
32,236 million, decreased 12% y-o-y, and Operating Profit of Baht 30,713
million, decreased 9% y-o-y, primarily due to decreased performance from
the Chemicals and Paper Business. Consolidated Sales increased 13% to
Baht 218,265 million primarily on higher product prices overall.
Meanwhile, EBITDA is decreased by 2% to Baht 53,507 million, as a result
of persistently high oil price, steadily escalated energy costs.

Equity Income of the Company in 2005 totaled Baht 9,934 million,
increased 1% from previous year primarily due to a good performance of
chemicals’ associates. Moreover, the Company gained dividend from
associated companies, the Company stake of 20-50%, during 2005 which was
Baht 6,571 million, up 54% with gains coming from most of the
associates.

During 4^(th) Quarter of 2005, the Company reached an agreement with
Tata Steel Limited to sell its 41% stake in Millennium Steel Pcl.,
valued at Baht 3,000 million and pending shareholders’ approval in
1^(st) half of 2006.

In 2005, Cost of Sales increased 22% from previous year to Baht 166,848
million due to an increasing in sale for both domestic and
international. Selling and Administrative expenses increased 12% from
last year while Interest and Financial Expenses which is Baht 4,762
million declined by Baht 1,114 million or 19%. Net Debt at the end of
year 2005, decreased to Baht 100,540 million compared to Baht 100,579
Baht at the end of year 2004.

Provision for Income Tax in 2005 grew by Baht 3,105 million or 68% from
previous year to Baht 7,702 million. This was a consequence of (1)
Corporate Income Tax for the year, increasing Baht 1,671 million or 70%
to Baht 4,063 million (2) Deferred Income Tax – net, augmented Baht
1,434 million or 65% to Baht 3,639 million.

Operating Performances of Strategic Business Units

Chemicals Business

In 2005, it was marked as an extension of a profitable period for
chemical producers. The new production capacity also increased as a
result of rising in global demand. HDPE price traded between US$ 870 per
ton in 2^(nd) quarter of 2005 to US$ 1,160 per ton in 3^(rd) quarter of
2005 while the average yearly price registered at US$ 1,034 per ton.

The HDPE and Naphtha price gap declined slightly by US$ 28 per ton to
US$ 548 per ton when compared to the previous year, while Ethylene and
Naphtha price gap dropped US$ 118 per ton to US$ 425 per ton. This year
also saw continued volatility in Naphtha price as a result of the global
crude oil price closing which saw supply disruptions due to hurricanes
in the USA between August to September 2005. This leaded to Naphtha
price reaching as high as US$ 617 per ton in 4^(th) quarter of 2005 and
averaged US$ 486 per ton (up US$ 97 per ton from the previous year).
Moreover, average prices of Ethylene declined US$ 21 per ton from the
previous year to US$ 911 per ton, as a result of the 3.8 million tons in
new supply mainly from China and Iran, in addition to softer demand of
Non-PE Derivatives.

The PTA market collapsed in 2^(nd) quarter of 2005, as a result of the
trade quota dispute between Chinese and US/Europe, which has gradually
recovered. However, MMA continued to experience tight supply due to no
new major capacity.

Sales in 2005 improved 15% from previous year to Baht 86,084 million on
higher product prices overall. EBITDA dropped by 17% to Baht 19,653
million as a consequence of lower product to feedstock margin and the
35-day maintenance shutdown of the Naphtha Cracker in 4^(th) quarter of
2005. However, Operating Profit dropped 10% from previous year to Baht
16,263 million with help from an increasing in Equity Income which was
increased by 22% from previous year to Baht 6,811 million.

In 2005, the Chemicals Business announced a plan to invest US$ 1.5
billion to construct a propylene-rich Naphtha Cracker which the Business
will invest US$ 1.1 billion joint venture with Dow Chemicals. Moreover,
the Business will invest US$ 400 million for a wholly owned and
integrated Polyolefins operation with emphasis on high-value
non-commoditized products. Commercial start is expected in 2010.

Paper Business

The overall business operations continued to run at full utilization in
2005. Total Sales for the Paper business registered Baht 40,306 million,
increased 5% comparing to the previous year. However, due to higher
energy costs, EDITDA dropped by 4% to Baht 9,496 million while Operating
Profit dropped by 11% from previous year to Baht 3,689 million.

Printing & Writing Paper: Sales volume was comparable to that of the
previous year. While export sales accounted for 16% of total sales
volume. The major export markets consisted of the USA, Hong Kong,
Singapore, Vietnam, and Malaysia. Realized prices of printing & writing
paper fell slightly to US$ 815 per ton due to the sluggish market for
promotional print materials in the second half of the year.

Packaging Paper: Sales volume grew 10%. Export sales accounted for 21%
of total sales volume with the major market in the fast-growing ASEAN
region. Realized prices of packaging paper remained relatively unchanged
at US$ 410 per ton.

Corrugated Containers: Sales volume rose 4% on strong growth in the
export industries, particularly food, electrical appliances, and
consumer products. This was attributed to the liberalization of the
trade regime of the major trading partners; USA and Europe and signing
of an FTA with Japan. Meanwhile, the business implemented the Product
Catalog Ordering Service System (POS) to facilitate customers. The
continued development of design and production earned the business many
domestic and international packaging design awards.

During 2005, the Paper Business announced 2 major investments. Firstly,
invest Baht 2,900 million to expand the Packaging Paper, and box
capacity by 100,000 ton and 120,000 ton, respectively. Secondly, invest
Baht 6,600 million to expand the P&W Paper capacity by 160,000 ton in
the Khon Kan area.

Cement Business

The domestic demand for grey-cement in Thailand reached 27.7 million
tons increased approximately 6% from the previous year. Domestic sales
volume of grey-cement for the Cement business in 2005 reached 10.9
million tons, a growth of 8% over the past year, driven mainly by the
growing demand in the government sector in the first half of the year.
Domestic prices averaged Baht 1,650-1,700 per ton.

In the export market, export sales volume of grey cement reached 6.7
million tons, an increase of 12% from the previous year, assisted by the
strong export in 4^(th) quarter of 2005. The FOB export prices remained
relatively unchanged, the prices averaged at the US$ 33 per ton.

As a result of increasing domestic sales volume, yearly Net Sales
reached Baht 41,630 million, rose 14% when compared to the previous
year. EBITDA remained comparable to that of last year, attributed to
higher energy costs. Operating Profit amounted to Baht 7,920 million, a
growth of 16% due to a decrease in depreciation and interest expenses.

In 2005, the Cement Business announced its plan to investment Baht 3,200
million to build an integrated cement plant in Cambodia with the
production capacity of 0.85 million tons. Production is expected to
commence by 2008.

Building Products Business and Distribution Business

The residential housing sector in 2005 experienced slower growth
compared to the previous year. Sales of the Building Product Business
increased 8% over the past year. This is attributed primarily to the
slowing sales volume of roofing products and ceramic tiles. With rising
production cost, both EBITDA and Operating Profit growth slightly
increased.

During 2005, the Building Products Business announced its plan to
investment Baht 1,100 million to replace and upgrade the production of
fibre-cement roofing tile, and is expected to be completed by the first
half of 2007.

The Distribution Business continued to grow, with sales expanding 11% to
Baht 76,070 million when compared to the previous year. EBITDA remained
relatively unchanged at Baht 1,546 million on higher transportation
costs while Operating Profit grew 12% or Baht 111million to reach Baht
1,079 million.

Cementhai Sales and Marketing Co., Ltd.: Sales increased by 10% as a
result of the continued expansion of construction in both the public and
private sectors.

Cementhai Logistics Co., Ltd.: Sales rose 30% which 66% was domestic
transportation related and 34% was import/export related.

SCT Co., Ltd.: Sales grew 16%. Products outside Siam Cement Group
accounted for 43% of the total sales with major markets in Indochina,
South Asia, and the USA. The import/export ratio was 31:69.

Financial Position

Assets

As of the end of 2005, the Company has changed the accounting policy for
the surplus on valuation of assets. The Company has implemented the cost
method approach instead of the surplus on valuation to booking its
assets. As a result, the asset revaluation surplus was taken out from
the consolidated equity of SCG. The change has been made retrospectively
and the comparative figures for the year ended December 31, 2004 has
been made adjusted accordingly. The change has an effect on the
consolidated balance sheet as at December 31, 2004 are to reduce asset
and equity of the Company’s shareholder by Baht 75,000 million.
Meanwhile, the changed has no effect on the consolidated statements of
income or cash flow. Total assets of the Company and subsidiaries as at
December 31, 2004 valued Baht 199,370 million, an increase of 4% over
2004. Key components of total assets are Net Plant, Property and
Equipment at 41%, and investments accounted for using the equity method
at 22%. Ranking of asset values by business units is Chemical, Cement,
and Paper Businesses respectively.

Current Assets : Equaled Baht 54,965 million as at December 31, 2005,
increased 6% over the past year. The main proportion was: Inventories
54%, and Trade and Notes Receivables 31%. The Company and subsidiaries
provided allowance for doubtful accounts-trade at Baht 1,179 million as
at December 31, 2005, complying with their accounting policy of setting
up allowance for doubtful accounts, which deemed sufficient to absorb
possible losses.

Investments Accounted for Using the Equity Method : Equaled Baht 42,885
million as at December 31, 2005, increased Baht 7,292 million or 20%.
Part resulted from an increase in investments in share on equity method,
consisting of an increasing investment of the Chemical Business to Baht
9,338 million over the past year, and a rising of gain on investments
accounted for using the equity method to Baht 6,811 million. Another
part was from the corporate restructuring plan of SCG, sold its
investments in shares of the Siam Industrial Wire Co., Ltd., Michelin
Siam Group Co., Ltd., and others, and sold portion of its investments in
shares of IT One Co., Ltd., and SIL Industrial Land Co., Ltd.

Other Long-Term Investments : Declined Baht 6,240 million or 54% from
previous year. Major component was from declining in long-term
investments at fair value of The Aromatic (Thailand) Pcl. and Thai
Olefins Pcl. by Baht 2,473 million and Baht 3,781 million respectively.

Intangible Assets : Declined Baht 3,256 million or 26% over the past
year as a main result of net deferred income tax decreased Baht 3,286
million or 42% when compare to the previous year. Moreover, net
deposits, claims and deferred charges increased Baht 503 million or 22%
while net goodwill decreased Baht 473 million or 18% from the previous
year.

Liabilities

Total liabilities as at the end of year 2005 was Baht 128,677 million
increased 2% over the past year. The current liabilities increased Baht
13,363 million, mainly contributed by increasing in trade account
payables and debenture by Baht 4,099 million and Baht 10,315 million
respectively. The Group has issued debenture as of December 31, 2005 was
Baht 86,000 million (compared to Baht 85,500 million in 2004). The Siam
Cement Pcl. issued a total of Baht 81,000 million debenture (during
2005, the Siam Cement Pcl. issued a total of Baht 20,000 million in 4
year-debenture which issued debeture in April 2005 for Baht 10,000
million at 4.75% fixed, and another Baht 10,000 million in October 2005
at 5.25% fixed to replace the Baht 19,500 million in matured debenture)
and another Baht 5,000 million of debenture issued by the Siam Pulp and
Paper Pcl.

Liquidity

At the end of year 2005, the Company and subsidiaries had cash and cash
equivalents about Baht 2,553 million, declining Baht 912 million from
last year. As a consequence of the company and subsidiaries generated
Cash Flows from Operating Activities at Baht 39,747 million, increased
Baht 2,489 million from the last year. Meanwhile, Cash Flows Used in
Investing Activities amounted to Baht 7,932 million, compared with Cash
Flows Provided by Investing Activities for Baht 5,197 million. Part
resulted from the Group acquired more plant, property, and equipment.
Moreover, Cash Flows Used in Financing Activities was Baht 32,727
million, compared with Baht 30,903 million of last year due to more
dividend payment at Baht 20,400 million.

Long outstanding Accounts Receivable as at December 31, 2005 were aged
as follows:

  Over 3 to 6 months 26 Million Baht

  Over 6 to 12 months 71 Million Baht

  Over 1 year 1,221 Million Baht

  Total 1,318 Million Baht

Regarding the liquidity ratios, the Company and subsidiaries earned a
Current Ratio of 0.86 while the Cash Flow Liquidity is 0.70. The
Company’s Cash Cycle was 28 days (Average Collection Period + Inventory
Turnover Period - Average Payment Period). The cash flows and liquidity
ratios ensured that the Company and subsidiaries possessed adequate
liquidity for business operation, accompanying with overdraft accounts
with various banks for about Baht 4,200 million. Furthermore, the
Company still earns a good profitability ratio and higher efficiency
ratio.

Source of Funds

Net Debt (Interesting-bearing debt less cash and short-term investments)
position of the Company and subsidiaries as at December 31, 2005
declined from Baht 100,579 million over the past year to Baht 100,540
million.

Debt to Equity ratio was 1.82, compared with 1.94 of last year. The
ratio remains relatively stable and low which reflects better Group
financial structure. Interest and Financial Expenses in 2005 were Baht
4,762 million, decreasing from Baht 5,876 million of the previous year.
Interest coverage ratio was 10.05, against 7.72 for 2004.

From better financial position and operating performance in 2005, the
Board of Directors seeked the approval of the Ordinary Shareholders’
meeting, regarding the dividend payment of Baht 15 per share in 2005,
totaling Baht 18,000 million. The Company paid interim dividend for Baht
7.50 per share, in total amounting to Baht 9,000 million on August 23,
2005. It would pay the final portion at Baht 7.50 per share, totaling
Baht 9,000 million on April 20, 2006. In total, the 2005 dividend
payment represents 59% of Operating Profit.

Furthurmore, beginning in 1^(st) quarter of 2006 , Thai Plastic and
Chemicals (TPC) and Thai British Security Printing (TBSP) will be
consolidated into the account of the Company, corresponding to the
Company’s management control which the Company is the major shareholder
in these companies.

In summary, the operating performance and financial position of the Siam
Cement Pcl. and subsidiaries in 2005 has been decreasing from 2004 as a
result of higher enrgy cost, contributed to rising production cost.
Moreover, the Chemical Business earned less revenue than previous year
due to the 35-day maintenance shutdown of the Naphtha Cracker in the
4^(th) quarter of 2005. Nevertheless, under efficient business strategy
and financial policy, financial instruments were appropriately practiced
to reduce interest rate and volatile foreign exchange risks, hence
diminishing financial risk. The Company has a stronger financial
position, adding value to shareholders and supporting the country’s
prosperity from now on.

Fees for auditors (As at the year ended December 31, 2005) 

1.  Audit fees

  The Company and subsidiaries pay the audit fees for the fiscal year
  for the audit firm which an auditor works for individual or related
  parties of an auditor or an audit firm which the auditor works for, in
  amount of Baht 24,440,985. This amount does not include the
  remuneration paid by associated companies.

2.  Non-audit fees

The Company and subsidiaries are not rendered non-audit fees for the
fiscal year from the audit firm which an auditor works for individual or
related parties of an auditor or an audit firm, which the auditor works
for.