PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
We accompanied PTTGC’s CEO and CFO to on a non-deal roadshow to the UK and the Netherlands. In all, the fund managers we met liked PTTGC for its strong cash flows, scope for upside to its dividend payment, gas feedstock advantage and organic initiatives. But we sensed that they weren’t likely to increase exposure to the firm in the near-term, given renewed concerns over China’s economy. Furthermore, most of the investors had negative views with regard to PTTGC’s planned massive investment in Indonesia through a joint venture with PT Pertamina, citing that Indonesia’s political environment is unpredictable and there is no successful track record for any joint ventures with Indonesian SOEs.
The worst year for HDPE is now behind us; recovery in progress
The year 2012 was bad for HDPE—one of PTTGC’s main products. The petrochemical market outlook has improved since then. Assuming that the Chinese economy remains reasonably buoyant, the HDPE spread should be sustained at about US$550/t through to YE13. Management anticipates a demand improvement over the next few months, to be brought about by inventory restocking ahead of high seasonal demand.  
Short-term significant impact from shale gas unlikely
PTTGC does not expect shale gas to have a significant impact on its operation in the short-term, citing that the production cost of shale gas is less competitive compared to PTTGC and Ethylene production from shale gas will likely force out high-cost Naphtha-based crackers.
Efficiency improvements & organic expansion in the mid-term …
Incremental EBITDA from the ongoing Excellence program and synergistic projects is forecast to increase from US$177m in FY13 to $325m in FY17. Furthermore, PTTGC is currently in the preliminary stages of debottlenecking projects for the Aromatics II plant and the PTTPE cracker and polymer facilities. We preliminary estimate that the incremental EBITDA from the debottlenecking projects in the range of $160-190m per year.
..and massive investment to drive long-term growth
PTTGC is seeking further growth opportunities. The firm recently signed a Heads of Agreement (HOA) with Pertamina to build a “world class” petrochemical complex in Indonesia. A joint venture agreement should be signed by YE13, in which case COD would be expected in 2017. This investment will boost the firm’s long-term growth profile and create a footprint in Indonesia, the biggest market in ASEAN.