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. PISIT CHIWARUANGROCH

  Auditor Number 2803 or

  MR. SUPOT SINGHASANEH

  Auditor Number 2826 or

  MR. CHAROEN PHOSAMRITLERT

  Auditor Number 4068

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, 2008, 2007,
and 2006, 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 2008, SCG’s consolidated net sales showed an increase of 10 percent
over the previous year to 293,230 Million Baht. Consolidated net profit
decreased 45 percent to 16,771 Million Baht, due to global financial
crisis and economic recession which resulted in rapid weak demand,
decreased margins, and the approximately 5,000 Million Bath one-time
stock loss resulted from drastic plunge in global commodity prices,
mostly in the chemicals business. (SCG reported a Q4/08 Consolidated Net
Loss of 3,480 MB) Additionally, there was the approximately 4,500
Million Baht in divestment gain in 2007. Similarly, consolidated EBITDA
decreased 22 percent to 38,783 Million Baht.

Equity income for 2008 amounted to 4,669 Million Baht, down 43 percent
over the past year, with details as follows:

-   SCG Chemicals associates: 2,963 Million Baht, a decrease of 50
    percent over the last year, mainly from dropped operating results of
    PTA business and PTT Chemical Public Company Limited.

-   Other associates: 1,706 Million Baht, a decrease of 25 percent from
    last year, which stemmed from partial divestment of Siam Yamato
    Steel Co., Ltd.

Moreover, total dividends received in 2008 decreased 35 percent from
last year to Baht 6,020 million, with details as follows: a) Baht 4,577
million was from associates (20 percent to 50 percent stake), and b)
Baht 1,443 million was from other companies (less than 20 percent
stake).

The world economy and Thai economy in 2009 are expected to see further
slowdown. In order to cope with these unfavorable situations, SCG has
adjusted its strategies by focusing on solid financial status and
organizational stability as well as increase efficiency in competition.
SCG affirmatively executes the following approaches:

(1) Liquidity and working capital management for financial stability

(2) Continued efforts towards high value products and services

(3)Production efficiency and cost control

(4) Strengthen export market bases

From these executions, it can be assured that SCG will be able to firmly
progress through the economic crisis, and continue to prosper in the
future.

Operating Performances of Strategic Business Units

SCG Chemicals

In 2008, net sales improved 5 percent from the previous year to 136,527
Million Baht on higher products prices. However, EBITDA decreased 44
percent to 12,598 Million Baht, due to decreased dividend income from
associates. Similarly, net profit dropped 64 percent from last year to
6,136 Million Baht due to decreased margins, the one-time stock loss in
the forth quarter of 2008 and lower equity income from associates, while
there was the approximately 3,150 Million Baht in divestment gain of The
Aromatics (Thailand) Public Company Limited (ATC) in 2007.

In 2008, naphtha price increased by USD 134 per ton from the previous
year to an average of USD 827 per ton. Meanwhile, HDPE prices also
increased by USD 124 per ton, resulting in a similar level of
product-to-feedstock margin as the previous year.

SCG Paper

In 2008, net sales reached 47,110 Million Baht, up 7 percent from last
year, due to higher paper price in the first six months and increased
printing and writing paper sales volume. EBITDA was 6,660 Million Baht,
down 16 percent.  Likewise, net profit was 1,658 Million Baht, drop 30
percent from last year due to higher raw material costs and one-time
stock loss.

Pulp and Printing & Writing Paper: Sales volume grew 10 percent from the
previous year due to the additional capacity from newly startup Khon
Kaen plant. Export sales accounted for 22 percent of total sales volume.
Major export markets included ASEAN countries such as Vietnam, Malaysia
and Middle East countries. Average product prices increased by 15
percent from last year due to higher production costs.

Packaging Paper & Corrugated Containers: Sales volume dropped 7 percent
from the previous year due to decreasing export sales driven by the
global economy recession. Meanwhile, the domestic political turmoil
dampened consumer consumption, resulting in decreased demand for
corrugated containers. Average product prices increased by 13 percent
from last year due to higher production costs.

SCG Cement

The domestic demand of grey cement in 2008 amounted to 24 million tons,
down 6 percent from the previous year due to political turmoil and
economic slowdown. SCG’s domestic sales volume was relatively in-line
with that of the industry trend. In 2008, SCG’s export sales volume
amounted to 8.2 million tons.

Total sales of ready-mixed concrete in 2008 increased by 1 percent with
flat domestic sales volume. In 2008, fourteen franchised were enlisted.

In 2008, net sales increased 13 percent from last year to 49,999 Million
Baht on increased export prices, while EBITDA increased 11 percent to
11,272 Million Baht on energy savings from the Waste Heat Power
Generation Project, and likewise net profit increased 10 percent to
6,006 Million Baht.

SCG Building Materials

In 2008, net sales increased by 10 percent from last year to 23,351
Million Baht with the consolidation of Thai-German Ceramic Industry
Public Company Limited since the third quarter of 2008, and likewise
with EBITDA which gained 4 percent to 4,085 Million Baht. However, net
profit dropped 18 percent to 778 Million Baht from increased energy
costs during the first nine months.

SCG Distribution

In 2008 net sales increased 19 percent from last year to 102,672 Million
Baht on increased trading activities during the first nine months, while
EBITDA gained 10 percent to 1,739 Million Baht, and net profit which
increased 29 percent to 1,211 Million Baht.

Financial Status

Assets

Total assets of SCG as at December 31, 2008 valued 285,776 Million Baht
with an increase of 15 percent over the year 2007. Key components of
total assets are property, plant and equipment at 48 percent, and
investment accounted for using the equity method at 17 percent. Ranking
of asset values by business units is SCG Chemicals, SCG Cement, and SCG
Paper respectively.

Current assets: amounted to 83,826 Million Baht as at December 31, 2008,
increased by 7 percent over the past year. The main proportion was:
inventories 36 percent, cash and cash equivalents at 32 percent or
26,714 Million Baht, and trade accounts and notes receivable 23 percent.
SCG provided allowance for doubtful accounts at 1,009 Million Baht as at
December 31, 2008, 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 408 Million Baht.

Property, plant and equipment: amounted to 137,261 Million Baht as at
December 31, 2008, increased by 26 percent over the past year. This
resulted from the acquisition of property, plant and equipment of the
year amounted to 38,393 Million Baht which are mostly from under
construction projects, while depreciation amounted to 11,955 Million
Baht.

Investments accounted for using the equity method: amounted to 49,598
Million Baht as at December 31, 2008, increased 3,463 Million Baht or 8
percent from the past year, resulted from reasons as follows:

-   Investments increased 4,669 Million Baht from equity income, while
    dividends received from associates in 2008 amounted to 4,577 Million
    Baht, resulting to investments accounted for using equity method
    which was up only 92 Million Baht.

-   Increase in investments of Thai MMA Co., Ltd. amounted to 1,986
    Million Baht and Siam Synthetic Latex Co., Ltd. amounted to 1,006
    Million Baht according to SCG’s portion.

Liabilities

Total liabilities as at the end of 2008 amounted to 174,428 Million
Baht, an increase of 25 percent over the previous year which was mostly
from non-current liabilities increase of 35,723 Million Baht.
Non-current liabilities increased due to 20,278 Million Baht from
long-term debts for committed projects such as SCG Chemicals’ second
naphtha cracker and the SCG Paper’s packaging paper plant in Vietnam.
During the year SCG issued new debentures amounted to 40,000 Million
Baht to replace 25,000 Million Baht in matured debentures. Net debt
(interesting-bearing debt less cash and cash equivalent) of SCG as at
December 31, 2008 increased 20,607 Million Baht over the past year to
120,521 Million Baht, while interest and financial expenses were 6,089
Million Baht, an increase of 815 Million Baht from the previous year.

Liquidity

At the end of year 2008, SCG had cash and cash equivalents amounted Baht
26,714 million, increasing Baht 22,568 million from the last year. As a
consequence of cash flows from operating activities decreased Baht 5,216
million from the past year to Baht 30,655 million, primarily due to a
decrease in profit provided by operating activities before change in
operating assets and liabilities. Meanwhile, cash flows from investing
activities amounted to Baht 28,211 million, increased Baht 17,818
million from the past year. Part resulted from “on-going projects” that
are under construction. Moreover, cash flows from financing activities
was Baht 20,123 million.

Regarding the liquidity ratios, SCG earned a current ratio of 1.31 times
while the cash flow liquidity was 0.5 times. SCG’s Cash Cycle was 24
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 4,800 million.

Source of Funds

In 2008, net debt to EBITDA ratio was 3.1 times. Debt to equity ratio at
the end of 2008 was 1.6 times, compared with 1.3 times at the end of
2007 which increased mainly from debt of on-going projects. However, the
ratio was low and remains relatively stable, reflecting SCG’s strong
financial structure. The net debt of 120,521 Million Baht includes the
approximately 29,100 Million Baht in debt of on-going projects which are
under construction, and have yet to begin commercial operation. Without
these in progress capacity expansion projects, net debt would have
otherwise dropped to the approximately 91,400 Million Baht level, and
would have resulted in the net debt to EBITDA ratio of 2.4 times.

SCG is nearing its current CAPEX cycle with 2008 CAPEX & Investment
amounting to 42,263 Million Baht, up 15,103 Million Baht from 2007.
Estimate for 2009 is approximately 35,000–40,000 Million Baht (35,000
Million Baht for committed project such as SCG Chemicals’ second naphtha
cracker, SCG Cement’s Waste-Heat Power Generation Project, and the SCG
Paper’s packaging paper plant in Vietnam), while miscellaneous CAPEX
will account for another 5,000 Million Baht.

Having considered the financial status and the operating results of
2008, the Board of Directors resolved to propose the ordinary general
meeting of shareholders for approval of 2008 dividend payment of 7.50
Baht per share, representing a dividend payout ratio of 54 percent of
consolidated net profit. SCG has already paid an interim dividend of
5.50 Baht per share.

Audit Fees

1.  Audit fees

  For the fiscal year 2008, the Siam Cement Public Company Limited and
  its subsidiaries paid the audit fees of 29.04 Million Baht to KPMG
  Phoomchai Audit Limited 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 Limited and its auditors have no
  any relationship or interests with the company, subsidiaries,
  management, and major shareholders including their related persons.

+-------------------------------------------------+--------+----------+
| The Audit Fees for the year 2008                |        |          |
+-------------------------------------------------+--------+----------+
| 1. Annual audit fee for SCC’s financial         | 1      | Baht     |
| statements.                                     | 80,000 |          |
+-------------------------------------------------+--------+----------+
| 2. The quarterly review fees and annual audit   | 28.86  | Million  |
| fees of                                         |        | Baht     |
|                                                 |        |          |
| 131 subsidiaries and consolidated financial     |        |          |
| statements.                                     |        |          |
+-------------------------------------------------+--------+----------+
| Totaling audit fee                              | 29.04  | Million  |
|                                                 |        | Baht     |
+-------------------------------------------------+--------+----------+

2.  Non-audit fees

  For this fiscal year, the subsidiaries paid the non-audit fees for
  monitoring the performance compliance with the condition of the BOI
  Promotion Certificate in total of 940,000 Baht to the audit firm and
  the persons or the businesses related to the auditors and the audit
  firm.