PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis: The key messages from the analyst meeting yesterday reaffirmed our optimistic view of PTTGC’s mid- to long-term prospects. Prevailing global economic uncertainty may delay the start of the up-cycle, but we think the stock has already priced in such worries. Moreover, high seasonal demand and stable high oil prices should support a rebound in chemical spreads in late 3Q12, which would boost the share price. Incipient signs of a Chinese economic recovery would also lend price support. PTTGC currently trades at an FY12 PER of 11.7x, a 16% discount to the Asian average of 13.9x.
Expect spread recovery in 2H12: Demand for chemicals is will rise 3Q12 onward, driven by peak manufacturing season, especially in China. Furthermore, crude prices are forecast to be sustained at their current high levels through to YE12, which would support chemical prices. As PTTGC is subject to a netback pricing formula, sustained strong chemical prices would imply a higher HDPE-Ethane spread than in 2Q12. Also, the HDPE-Naphtha spread is expected to improve from US$375/t currently to $450/t in 2H12. According to PTT’s marketing arm, demand in China has regained momentum.
Largely insulated from EU debt crisis fallout: Firstly, PTTGC’s key markets are Thailand, China and ASEAN countries, where demand remains strong. Furthermore, the firm has a secure financial position—its net debt/equity ratio was only 0.5x at end-June. PTTGC has a short-term committed working capital credit line of Bt10bn and a long-term committed line of Bt46bn. In addition, the firm has implemented a cost reduction program to cut OPEX by 5-10%. It looks well-prepared for unfavorable externalities. 
Future value-added projects: In the short-term, PTTGC plans to increase the efficiency of its existing assets by debottlenecking. The firm is also undertaking a feasibility study on investing in HVS products with polyurethane and polycarbonate as priorities. Moreover, PTTGC has factored in the threat posed by shale gas into its planning—it is seeking opportunities to invest in shale gas projects with PTT group. Management claims that shale gas shouldn’t squeeze its competitive advantage much within the next five years, as global demand growth should absorb the 5mt of forecast new Ethylene supply from shale gas (expected to start-up in 2016 onward).