PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
The key messages from the analyst meeting reaffirmed our optimistic view of PTTGC’s mid- to long-term growth prospects. There is also scope for upside to the firm’s earnings from synergistic benefits and efficiency improvement projects. In our view, The scale of the demand improvement following Chinese New Year will be a key factor to watch. If demand is sustained strong, spreads will rally and the stock will re-rate. PTTGC currently trades at an FY13 PER of 9.9x and an EV/EBITDA of 6.1x, steep discounts to the regional means of 26.9x and 11.4x, respectively.  
Expect post-CNY demand to remain strong
Following the Chinese New Year holiday (which is long in China), demand is expected to remain strong—comparable to the pre-holiday level. Stable crude prices, higher market confidence among purchasers, together with expectations of an upcoming Chinese stimulus package should be the key supporting factors. But the second-quarter is normally a period of low seasonal demand, which may limit the scope for upside to spreads in the near-term. Within the chemical product space, PX and MEG spreads are expected to remain strong through 1H13, fueled by demand from new PTA plants and tight supply. However, PX and MEG spreads are likely to soften in 2H13, when substantial new capacity is slated to start up.              
Chemical spread improvement expected this year
The chemical market in 2013 is expected to improve from last year, driven by a demand recovery and fewer capacity additions. In the olefins chain, the HDPE spread (over Naphtha) is forecast to fatten 15% YoY to US$505/t, while the MEG spread is projected to jump 33% YoY to $379/t. In the aromatics chain, the PX spread is forecast to increase 33% YoY to $721/t, while BZ spread is projected to leap 107% YoY to $547/t. Apart from cost-push factors, sales volume growth (of at least 2% YoY, driven by greater gas flow from PTT’s GSPs and a full operational year for the 95kta MEG expansion) will be a major earnings driver for PTTGC in FY13.         
Scope for earnings upside from future investments  
Apart from ongoing synergistic projects (expected full benefits of US$149m/year, starting FY15), efficiency improvements are expected to save $176m/year during FY13-17. The firm will also debottleneck its PX capacity by another 10% to 1.31mt; completion is expected by 3Q15. So, we revised up our long-term earnings forecast by 4% and our YE13 DCF-derived target to Bt92 (from Bt90). PTTGC is currently studying the feasibility of debottlenecking its PTTPE crackers and polymer plants.
The joint-investment with Sinochem (China) is expected to start by mid 2013, while management should make final decisions over whether to take stakes in Pertamina (Indonesia) and RAPID (Malaysia) petrochem projects in March 2013 and 3Q13, respectively.