Indorama Ventures

Indorama Ventures Plc (IVL)

Downcycle of polyester business, especially in Asia
According to yesterday’s analyst meeting (15 November 2012), IVL has
admitted that the polyester business (PTA and PET productions) in 4Q12
would decelerate due to overcapacity problem in Asia after China’s new more
production capacity has gradually flooded the market while the demand
remains low. Accordingly, the spread of PTA and PET products in Asia has
fallen significantly, lower than the average cash cost of other entrepreneurs
(while the spread of polyester products in Europe and the US has decelerated
only slightly). However, the company believes that the mentioned situation
would be back to recovery once again in 2013. For the investment strategy, it
still hasn’t changed as mentioned earlier, as IVL would slow down on
investment in new business and turn to enhance the efficiency of existing
plants along with controlling the production cost of purchased company
instead. Moreover, the company would aim to the portion of specialty
products to reduce risks from fluctuation of gross profit margin. For the
investment budget in the next 3 years, it would stand at US$500m (divided
in to a plan of PTA and PET production capacity expansion in Europe and
North American, and a plan of polyester production capacity expansion in
Indonesia and Thailand as illustrated on the following page).

Revise down 2012-13 forecast…. business tends to recover in 2H13
The company’s 4Q12-1Q13 operating result is projected to constantly
stabilize at a low level from 3Q12 due to the pressure from the demand for
polyester products that has yet to recover and gradually flooding of new
production capacity into Asian markers. This is evident from China’s large
PTA plants (Hengli and Yisheng) with total production capacity of 5.7 million
tons/year that would begin operation in 4Q12. Furthermore, there’s new
production capacity of 6,000,000 tons/year that would gradually flow into the
market in 2013. Accordingly, the spread of PTA products is projected not to
recover during 1H13. Overall, we revise down our 2012-13 net profit forecast
by 50% and 49% respectively due to the following reasons. 1) IVL’s total
production volume is revised down by 6.5%. 2) The average spread of PET
and PTA products in 2012-13 is revised down by 23% and 15% respectively.
In 2013, the net profit is likely to thrive by 46% YoY due to the production
volume that has risen by 18% YoY along with the company’s increase of new
production capacity. In addition, the average spread of polyester products is
likely to ascend by 10.7% YoY since it tends to recover in 2H13 after new
production capacity starts declining.

Downgrade to “HOLD” from “BUY”… new FV at B26.50
After forecast revisal, the fair value at end-2013 stands at B26.50 (from
B40.85). Although IVL’s current share price has decreased continually, we
project that the company’s 4Q12-1Q13 operating result still wouldn’t be
bright, so the share price is likely to outperform the market continuously.
Accordingly, we downgrade our recommendation to “HOLD” from “BUY”.
Investors can also switch to invest in TOP (BUY, [email protected]) and PTTGC
(BUY, [email protected]) instead, since the spread of aromatics products has risen
notably which would be beneficial for the profit of TOP and PTTGC in 4Q12.