PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

First site visit to Science and Innovation Center. PTTGC arranged its first site visit
since its creation in October 2011. The company took analysts to its state-of-the-art
Research and Development Center located at its Rayong office, also known as the
“Science and Innovation Center” The company’s aim for the visit was to showcase its
strong commitment to developing emerging bio-based chemicals after its investment
in NatureWorks LLC and Myriant Corporation. These include the development of a
commercial scale bio-plastic project using local feedstock (sugar cane and tapioca) and
research on algae as a low-cost feedstock for high-value added products.

Innovation is a priority. Management confirmed its target R&D spending at 3% of
total revenue, the policy for every company under the PTT umbrella, to facilitate future
growth and increase the portion of high volume specialty products and green
chemicals. Note that PTTGC’s R&D expenditures are currently 1%, well below its target,
suggesting that this type of expenditure will continue to rise.

Update on synergy projects. Most of the synergy projects will be completed by the
end of this year but the main contributor, the off-gas project, remains in the
engineering construction stage; it will commence operations in 4Q14. Management
estimates the synergy benefit YTD at US$8.7mn, a marginal portion compared to the
full benefit of US$152mn when the whole project completes in 2014. This benefit
should increase to US$60-70mn in 2013. Management said the payback period for its
synergy projects is around two years based on current oil and product prices.

Joint investment with Indonesia’s Pertamina. PTTGC remains on the short list for
a joint investment with Indonesia's national oil company, PT Pertamina (Persero) in a
US$5bn integrated oil refinery and chemical complex on Java. This will be finalized in
1H13. We see this as a big step for PTTGC in overseas investment, putting it in the
middle of a strategic market, Indonesia, where demand remains abundant. The joint
investment with Indonesia’s oil company also assures the sustainability of feedstock
and gives the government the incentive to do what it can to provide good returns. It is
premature to estimate the impact on earnings outlook due to the limited details.

BUY rating maintained with attractive upside. Our TP of Bt78 is unchanged, based
on 1.5x PBV, offering attractive upside of 16% and yield of ~4-5% over the next three
years. We reiterate our BUY on PTTGC in view of its competitive cost. We believe the
integration of olefins and aromatics could help diversify risks. PTTGC’s valuation also
looks more attractive than local and regional peers with PE of only 10.1x (2013) vs. the
13.1x regional average. Downside risks to our forecast are weaker than expected
product spread, unplanned shutdowns and higher than expected production cost after
the business consolidation.