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, 2006, 2005,
and 2004, 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

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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 2004 has been adjusted accordingly.

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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.

[]

[]

[]

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Management Discussion and Analysis

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

Business Overviews

In 2006, The Siam Cement Group’s consolidated net sales showed an
increase of 18 percent over the previous year to Baht 258,175 million,
as a result of higher product prices. However, due to increased
production costs, all businesses registered lower performances, with
exception of the chemicals business. Consolidated net profit dropped 9
percent to Baht 29,451 million, and operating profit before
non-recurring items decreased 2 percent to Baht 30,157 million while
EBITDA equaled Baht 57,151 million, rose 7 percent over the previous
year.

SCG recorded a non-recurring asset impairment of approximately Baht
3,400 million (net after tax) in the CRT business, in addition to a
non-recurring gain of approximately Baht 2,200 million (net after tax)
from the divestment of Tata Steel (Thailand) PLC (Formerly: Millennium
Steel PLC) and The Siam United Steel (1995) Co., Ltd.

In the first quarter of 2006, SCG consolidated the accounts of Thai
Plastic and Chemicals PLC and Thai British Security Printing PLC, due to
the implied management control over the companies.

Equity Income for 2006 amounted to Baht 9,096 million, down 8 percent
over the past year, with details as follows:

-   Chemicals Associates: Baht 7,216 million, an increase of 6 percent
    over the last year due to the equity accounting of Bangkok Synthetic
    Co., Ltd. (from 17 percent stake to 22 percent stake), while
    contributions from the PTA business dropped dramatically.

-   Other Associates: Baht 1,880 million, a decrease of 40 percent from
    the last year due to the absence of the income from divested
    non-core businesses in 2006.

Moreover, total dividends received in 2006 amounted to Baht 9,263
million, up 2 percent from the previous year of which a) Baht 7,771
million was from “Associated” companies (20 percent to 50 percent
stake), and b) Baht 1,492 million was from “Other” companies.

Provision for income tax in 2006 dropped Baht 3,666 million or 48
percent from previous year to Baht 4,036 million. This consisted of (1)
corporate income tax for the year, increasing Baht 681 million or 17
percent to Baht 4,744 million (2) deferred income tax – net amounted to
Baht (708) million.

Operating Performances of Strategic Business Units

Chemicals Business

In 2006, net sales improved 43 percent from the previous year to Baht
122,645 million on higher product prices, while EBITDA increased 33
percent to Baht 26,199 million on wider product price gap and the
consolidation of Thai Plastic and Chemicals PLC. Similarly, operating
profit before non-recurring items increased 8 percent to Baht 17,545
million.

In 2006 average prices were as follows: HDPE increased USD 199 per ton
from the past year to USD 1,233 per ton on continued global demand and
delayed new capacities from the Middle East, Ethylene increased USD 245
per ton from the previous year to USD 1,156 per ton on the strong
increase in utilization in second half 2006, while Naphtha increased USD
96 per ton to USD 583 per ton as it tracked the global crude oil prices.
As a result, the average price gap between Naphtha to HDPE increased USD
102 per ton from the previous year to USD 650 per ton.

Furthermore, the PTA market continue to perform poorly in 2006, as
global supply of PTA has inundated global demand, while the price of
Paraxylene (PX) is expected to remain high on tight supply.

Paper Business

Net sales in 2006 reached Baht 42,645 million, an improvement of 6
percent from the previous year, while EBITDA improved 1 percent to Baht
9,634 million, due to increased sales volume of packaging paper, the
consolidation of Thai British Security Printing PLC and the installation
of efficient boilers for Thai Cane Paper PLC in Thailand and United Pulp
and Paper Co., Inc. in the Philippines. Operating profit before
non-recurring items dropped 3 percent to Baht 3,574 million, due to
increased depreciation and tax expenses.

Printing & Writing Paper: sales volume increased 4 percent from the
previous year with export sales accounted for 17 percent of total sales
volume. The major export markets were the USA, Vietnam, Hong Kong,
Singapore, and Malaysia, while averaged prices of printing & writing
paper slightly increased to USD 820 per ton due to rising pulp price.

Packaging Paper: sales volume grew 5 percent with export sales accounted
for 24 percent of total sales volume. The major export market was the
ASEAN region with continuing demand. Realized prices of packaging paper
remained relatively unchanged at USD 410 per ton.

Corrugated Containers: sales volume rose 7 percent which was attributed
to high domestic consumption in many industries such as food, beverages,
and consumer goods. Another contributing factor was the high growth in
export business, partly due to the move of electrical appliance
production bases to Thailand.

Cement Business

Nationwide, the 2006 domestic demand for grey-cement registered 27.2
million ton, down approximately 1.7 percent from the previous year,
primarily due to the continued slow demand in the residential housing
market and infrastructure project, in addition to the heavy flooding in
central Thailand during the second half of 2006.

Domestically, domestic sales volume of grey-cement in 2006 was 10.8
million ton, down 1.3 percent from the previous year, attributed to
lower demand, with stable prices, while the realized price of grey
cement continued in the range of Baht 1,700-1,780 per ton.

Export sales volume of grey cement in 2006 reached 7.0 million ton, up 4
percent from the previous year, with average FOB price of USD 33.8 per
ton.

Net sales of ready-mixed concrete in 2006 increased 10 percent,
attributed to 5 percent increased sales volume with 28 new franchises.

In 2006, net sales rose 6 percent over the previous year to Baht 44,123
million. However, with increased energy costs, EBITDA dropped 8 percent
to Baht 12,200 million and operating profit before non-recurring items
dropped 16 percent to Baht 6,649 million.

Building Materials Business and Distribution Business

The rate of growth in the domestic real estate market in 2006 grew at a
lower rate, affected by lower economic growth. Net sales in 2006 grew 2
percent to Baht 22,745 million. With higher production cost, EBITDA
decreased 10 percent from the previous year to Baht 4,856 million and
operating profit before non-recurring items dropped 35 percent to Baht
1,799 million.

The Distribution Business continued to grow, with 2006 net sales
expanding 7 percent from the previous year to Baht 81,519 million from
increased trading activities of steel and oil products. However, with
increased transportation costs and marketing expenses, EBITDA dropped 3
percent to Baht 1,498 million, while operating profit before
non-recurring items decreased 13 percent to Baht 944 million.

Financial Position

Assets

Total assets of SCG as at December 31, 2006 valued Baht 221,897 million,
an increase of 11 percent over 2005. Key components of total assets are
property, plant and equipment at 42 percent, and investments accounted
for using the equity method at 19 percent. Ranking of asset values by
business units is Chemical, Cement and Paper Businesses respectively.

  Current Assets: amounted to Baht 67,376 million as at December 31,
  2006, increased 23 percent over the past year. The main proportion
  was: inventories 53 percent and trade accounts and notes receivable 35
  percent. SCG provided allowance for doubtful accounts at Baht 951
  million as at December 31, 2006, complying with their accounting
  policy of setting up allowance for doubtful accounts, which deemed
  sufficient to absorb possible losses. Moreover, outstanding overdue
  amounts of accounts receivable have credit bank guarantees to Baht 242
  million.

  Property, Plant and Equipment: amounted to Baht 93,005 million as at
  December 31, 2006, increased 14 percent over the past year. This is
  resulted from the consolidation of Thai Plastic and Chemicals PLC and
  Thai British Security Printing PLC, addition to the acquisition of
  property, plant and equipment of the year amounted to Baht 16,117
  million, while depreciation and impairment amounted to Baht 15,195
  million.

  Investments Accounted for Using the Equity Method: amounted to Baht
  41,993 million as at December 31, 2006, decreased Baht 892 million or
  2 percent from the past year, resulted from reasons as follow:

Increased:

-   Investments increased Baht 9,096 million from equity income, while
    dividends received from associates in 2006 amounted to Baht 7,771
    million, resulting to Investments accounted for using equity method
    up only Baht 1,325 million.

-   An acquisition of additional share capital to be according to the
    existing proportion of the Group’s shareholding in PTT Chemical PLC
    and increased the portion of Bangkok Synthetic Co., Ltd.

Dropped:

-   A status changed of Thai Plastic and Chemicals PLC and Thai British
    Security Printing PLC from associates to subsidiaries.

-   A divestment of Tata Steel PLC and Siam Asahi Technoglass Co., Ltd.

Liabilities

Total liabilities as at the end of 2006 amounted to Baht 133,948
million, an increased of 4 percent over the previous year. Current
liabilities decreased Baht 7,497 million, while non-current liabilities
rose Baht 12,768 million contributed by the issue of new debentures
amounted to Baht 25,000 million to replace Baht 30,000 million in
matured debentures and the consolidation of debt from Thai Plastic and
Chemicals PLC and Thai British Security Printing PLC. SCG has issued
debenture as of December 31, 2006 was Baht 81,000 million compared to
Baht 86,000 million in 2005.

Liquidity

At the end of year 2006, SCG had cash and cash equivalents amounted Baht
2,435 million, declining Baht 118 million from the last year. As a
consequence of cash flows from operating activities decreased Baht 5,828
million from the past year to Baht 33,919 million, primarily due to an
increase in trade accounts and notes receivable, and inventory.
Meanwhile, cash flows used in investing activities amounted to Baht
9,055 million, compared with Baht 7,932 million of the past year. Part
resulted from the Group acquired more plant, property, and equipment.
Moreover, cash flows used in financing activities was Baht 24,982
million, compared with Baht 32,727 million of the previous year.

Regarding the liquidity ratios, SCG earned a current ratio of 1.20 times
while the cash flow liquidity was 0.57 times. SCG’s Cash Cycle was 25
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 Baht 4,600 million.

Source of Funds

Net debt (Interesting-bearing debt less cash and cash equivalent)
position of SCG as at December 31, 2006 rose Baht 2,537 million over the
past year to Baht 103,077 million, resulting from the dividend payment
amounts to Baht 18,000 million for the second half of 2005 and the first
half of 2006 performance, addition to project CAPEX and investments
worth Baht 23,574 million during the year 2006, and the consolidation of
approximately Baht 6,000 million in debt from Thai Plastic and Chemicals
PLC and Thai British Security Printing PLC.

Liabilities to equity ratio at the end of 2006 was 1.52 times, compared
with 1.82 times at the end of 2005. The ratio was low and remains
relatively stable, reflecting SCG’s strong financial structure. Interest
and financial expenses in 2006 was Baht 5,169 million, an increase of
Baht 407 million from the previous year, while interest coverage ratio
was 8.39 times.

From financial position and operating performance in 2006, the Board of
Directors recommended Baht 15 per share dividend amounts to Baht 18,000
million represents a dividend payout ratio of 61.2 percent of net
profit. (SCG has already paid an interim dividend of Baht 7.5 per
share.)

In summary, the operating performance and financial position of SCG in
2006 has remained stable from 2005 as a result of higher performance of
Chemical Business while other businesses registered lower performances
with high energy costs. Nevertheless, under efficient business strategy
and financial policy, financial instruments were appropriately practiced
to reduce interest rate and volatile foreign exchange risks. Therefore,
SCG has a strong financial position, adding value to shareholders and
supporting the country’s prosperity from now on.

Fees for auditors 

1.  Audit fees

  SCG pays 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 25.2
  million. This amount does not include the remuneration paid by
  associates.

2.  Non-audit fees

SCG did not render 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.