12. Financial Position and Operation Performance

Summary of Auditor’s Report

Auditor’s Office : KPMG PHOOMCHAI AUDIT LTD.

Names of Auditors: MR. SUPOT SINGHASANEH

  Auditor Number 2826 or

  MR. CHAROEN PHOSAMRITLERT

  Auditor Number 4068 or

MRS. SIRIPEN SUKCHAROENYINGYONG

Auditor Number 3636

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, 2010, 2009,
and 2008, the results of its operations and its cash flows for the years
then ended in accordance with generally accepted accounting principles.

 

Consolidated Financial Statements and Financial Ratios

of

The Siam Cement Public Company Limited and Subsidiaries

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 Financial Statements and Financial Ratios

of

  The Siam Cement Public Company Limited

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Management Discussion and Analysis

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

Business Overviews

In 2010, SCG’s consolidated net sales showed a decrease of 26 percent
over the previous year to 301,323 Million Baht, primarily on lower
product prices of chemicals and paper products in the global market.
Consolidated net profit increased by 54 percent to 37,382 Million Baht,
with earnings growth from most of the key business units, net profit
from sales of investment in PTT Chemical Public Company Limited (PTTCH)
amounting to 9,963 Million Baht, and increased equity income from
associated companies. Consolidated EBITDA decreased 2 percent to 45,949
Million Baht, due to lower chemicals margin.

Equity income for 2010 amounted to 8,390 Million Baht, increased 17
percent over the past year, with details as follows:

-   SCG Chemicals associates: 6,341 Million Baht, an increase of 21
    percent over the last year, as the performance of associates in PTA
    and MMA business have recorded.

-   Other associates: 2,049 Million Baht, an increase of 4 percent from
    last year.

  Moreover, total dividends received in 2010 registered 6,465 Million
  Baht, up 56 percent from last year. Detail of dividend are as follows:
  a) 4,006 Million Baht from associates (20 percent to 50 percent
  stake), and b) 2,459 Million Baht was from other companies (less than
  20 percent stake).

Operating Performances of Strategic Business Units

SCG Chemicals

In 2010, net sales increased 43 percent from last year to 144,317
Million Baht following the additional volume from the new second
chemicals complex. However, EBITDA decreased 18 percent to 16,024
Million Baht due to decreased chemicals margin, while net profit
increased 80 percent from last year to 22, 609 Million Baht from sales
of investment in PTTCH

In 2010, the petrochemicals business faced a down cycle due to capacity
addition in the Middle East and China together with an increase in main
feedstock; Naphtha, prices on the back of rising crude oil prices and US
dollar depreciation. The average Naphtha price in 2010 was 724 USD per
ton while the average HDPE price was 1,224 USD per ton, an increase of
170 USD and 90 USD per ton respectively from last year, following higher
production costs and the global economic recovery.

SCG Paper

In 2010, the paper business improved from the previous year thanks to
higher paper and packaging demand driven by the economic recovery.
Consequently, the overall paper price increased. However, the price of
raw materials, including pulp and wastepaper, also increased because of
high demand. The earthquake incident in Chile and extremely low
temperatures in America and Europe had resulted in sharp increase of
pulp price and wastepaper price at the first part of the year.

In 2010, net sales increased 21 percent from last year to 51,714 Million
Baht, attributed to higher selling prices and sales volume, following
improved economic activity and the ramp-up in capacity of SCG Paper’s
Vietnamese plant. EBITDA grew 16 percent to 9,129 Million Baht due to
the recovery of margin. Likewise, net profit was 3,490 Million Baht, up
53 percent from last year.

Pulp and Printing & Writing Paper: Sales volume rose by 3 percent from
the previous year thanks to economic recovery and the expansion of
consumer marketing efforts for photocopy paper under the “Idea” brand.
The average product price increase by 19 percent from the previous year.

Packaging Paper & Corrugated Containers: Sales volume rose by 9 percent
from the previous year on the back of the recovering economy, higher
utilization rate of packaging paper plant in Vietnam started up in 2009
and additional sales from new corrugated container plant in Vietnam,
which was acquired in the first quarter of 2010. The average product
price rose by 31 percent from the previous year.

SCG Cement

In 2010, the domestic cement business had a total production capacity of
56 million tons, whereas market demand totaled 26.5 million tons, a
demand increase of 10 percent compared to the previous year’ due mainly
to world and domestic economic recovery. Healthy growth was seen in
exports to ASEAN markets, while production and distribution in Cambodia
continued as normal. Total sales of grey cement in 2010 increased by 6
percent which reflecting a 16 percent rise in domestic sales and slight
upturn in export sales compared to the previous year. Meanwhile, total
sales of ready-mixed concrete grew by 5 percent on a rise domestic sales
volume consequent to government measures to stimulate the economy, which
brought about more property development projects. In addition, eight
plant networks were expanded, and 13 additional franchises were
appointed.

In 2010, net sales increased 5 percent from last year to 48,954 Million
Baht with increase domestic volume but lower prices. EBITDA decreased 7
percent to 10,810 Million Baht, similarly net profit decreased 3 percent
to 6,014 Million Baht from last year.

SCG Building Materials

In 2009, net sales increased by 14 percent from last year to 30,719
Million Baht with the acquisition of Quality Construction Products
Public Company Limited (Q-CON). EBITDA gained 12 percent to 5,489
Million Baht and net profit increased 16 percent to 1,872 Million Baht.

SCG Distribution

In 2010 net sales increased 12 percent from last year to 96,898 Million
Baht following the recovery of the construction sector. EBITDA decreased
9 percent from last year to 1,440 Million Baht due to increased
marketing efforts, and net profit decreased 1 percent to 1,061 Million
Baht.

Financial Status

Assets

Total assets of SCG as at December 31, 2010 was 359,219 Million Baht
increased 14 percent from last year. Key components of total assets are
property, plant and equipment at 42 percent, and cash and cash
equivalents at 19 percent. Ranking of asset values by business units is
SCG Chemicals, SCG Cement and SCG paper, respectively.

Current assets: amounted to 141,395 Million Baht as at December 31,
2010, increased 57 percent from last year. The main proportion was: cash
and cash equivalents, inventories, and trade accounts receivable. At
December 31, 2010, SCG’s cash and cash equivalents was 69,827 Million
Baht whereas working capital was 39,365 Million Baht with working
capital days at 46 days, improved from 53 days last year, following a
result of working capital management.

Property, plant and equipment: amounted to 151,399 Million Baht as at
December 31, 2010, while depreciation amounted to 12,118 Million Baht.

Investments in associates and jointly-controlled entity: amounted to
40,708 Million Baht as at December 31, 2010, decreased 17,982 Million
Baht or 31 percent from last year, with reasons as follows:

-   Decreased from divestment of associates amounted to 19,525 Million
    Baht, which is primarily from sales of investment in PTTCH

-   Decreased in investment amounted to 5,098 Million Baht from chahged
    in investment status of PTTCH from associates to other, thus the
    investment is presented under other long-term investments.

-   Increased from Equity income amounted to 4,384 Million Baht (Net of
    dividend received).

-   Increased in investment amounted to 2,065 Million Baht, mainly from
    SCG Chemicals.

Liabilities

Total liabilities as at December 31, 2010 amounted to 199,649 Million
Baht, an increase of 8 percent from last year. The main proportion was
long-term debt of 34,854 Million Baht which was loans for the projects
such as SCG Chemicals’ second naphtha cracker. During the year, SCG
issued new debentures amounted to 15,000 Million Baht to replace 15,000
Million Baht matured debentures. Net debt (interesting-bearing debt less
cash and cash equivalent) of SCG as at December 31, 3010 decreased
38,395 Million Baht from last year to 83,624 Million Baht, while finance
costs was 4,670 Million Baht, a decrease of 979 Million Baht from last
year.

Liquidity

At the end of year 2010, SCG had cash and cash equivalents amounted
63,827 Million Baht, an increase of 34,890 Million Baht from last year.
As a consequence of cash flows provided by operation activities amounted
28,129 Million Baht. Meanwhile, cash flows provided by investing
activities amounted to 21,895 Million Baht. Moreover, cash flows used in
financing activities was 15,134 Million Baht.

Regarding the liquidity ratios, SCG earned a current ratio of 1.7 times
while the cash flow liquidity was 0.4 times. SCG’s cash Cycle was 22
days (average collection period + inventory turnover period – average
payment period). The cash flows and liquidity ratios ensured that SCG
possessed adequate liquidity for business operation, accompanying with
overdraft accounts with various banks for 5,500 Million Baht.

Financial ratios

In 2010, current ratio registered 1.7 times and net debt to EBITDA ratio
decreased to 1.8 times, compared to 2.6 times in last year. At the end
of 2010, debt to equity ration decreased to 1.3 times, compared to 1.4
times in last year, reflecting SCG’s strong financial status.

CAPEX

SCG’s 2010 CAPEX & Investment amounted to 18,378 Million Baht. Since
2006, SCG has invested approx 147,000 Million Baht or 4.9 Billion US
Dollars, which will more that doubled the capacity of SCG Chemicals,
while green-field expansion projects were accomplished in the Cement and
Paper businesses, and M&A (market consolidation) transactions were
executed in the Building Materials business.

Having considered the financial status and the operating results of
2010, the Board of Directors resolved to propose the ordinary general
meeting of shareholders for approval of 2010 dividend payment of 12.50
Baht per share, representing a dividend payout ratio of 40 percent of
consolidated net profit. SCG has already paid an interim dividend of
4.50 Baht per share on August 26, 2010. The final dividend will be paid
at the amount of 8.00 Baht per share on April 27, 2011.

In summary, SCG managed to achieve better operating results in 2010
compared to 2009, reinforce further strengthened finances as a result of
operating activities with considered and adaptive strategies to response
instability. In 2011, SCG continues to operate prudently and manage
risks carefully to achieve sustainable growth by employing and emphasis
on developing high value-added, innovative products and services.
Moreover, SCG remains to expand its business in ASEAN and conducts
business under the concept of sustainable development, focusing on
balancing economic, social and environmental considerations by deploying
modern and eco-friendly technologies to facilitate sustainable growth.

Audit fees

1. Audit fees

For the fiscal year 2010, the Siam Cement Public Company Limited and its
subsidiaries paid the audit fee of 31.72 Million Baht to KPMG Phoomchai
Audit Ltd. which the auditors have worked for, including the persons or
the businesses related to the auditors and the audit firm. This audit
fee amount excluded the remuneration paid by associates.

In this regard, KPMG Phoomchai Audit Ltd. and its auditors have no any
relationship or interests with the company, management, and major
shareholders including their related persons.

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  Audit fees for the Year 2010                       

  1. Annual audit fee for SCC’s financial statements 248,000 Baht

  2. The quarterly review fee and annual audit fee   31.47 Million Baht
  of 115 subsidiaries and consolidated financial     
  statements                                         

                                                     

  Total Audit fees                                   31.72 Million Baht
  -------------------------------------------------- --------------------

2. Non-audit fee

For this fiscal year, the subsidiaries paid a non-audit fee of 1,120,000
Baht, which was the charge for reviewing the compliance with the
condition of the BOI Promotion Certificate to the audit firm and the
persons or the businesses related to the auditors and the audit firm.