PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
The key messages from the analyst meeting reaffirmed our optimistic view of PTTGC’s short- and long-term growth prospects. Expectations of a core operational improvement in 4Q13, driven by greater sales volume and fatter product spreads, should catalyze the share price in the near-term. Next year, an olefins margin up-cycle will facilitate long-term stock price upside, we believe. PTTGC currently trades at an FY14 PER of 9.3x, a steep discount to the regional mean of 14.7x. Furthermore, its FY14 dividend yield of 4.9% is significantly higher than the Asian mean of 3.3%.   
Strong core earnings growth expected for 4Q13
Core earnings should expand both YoY and QoQ in 4Q13, driven by greater sales volumes of olefins products and fatter chemical spreads, particularly for olefins, in tandem with high seasonal demand. The LDPE plant is now running at full capacity (after an unplanned shutdown in 3Q13) and the mean utilization rate of PTTGC’s olefins facilities has increased to almost 90% (from 75% in 3Q13), as PTT's GSP#5 resumed supplying Ethane feedstock to them. Management guides that the olefins plants will run at full capacity in April 2014.
Olefins spreads to enter up-cycle in 2014 (not aromatics spreads)
An olefins up-cycle is expected to manifest in 2014, driven by demand expansion in the face of fewer capacity additions. Olefins prices and spreads should rise in tandem with a more favorable demand-supply balance. The HDPE-Naphtha spread is forecast to rise 4% YoY to US$580/t next year. There would be scope for upside to prices and spreads from industry-wide plant shutdowns (due to financial viability issues), project delays and stronger-than-assumed demand growth.
In contrast, aromatics margins look set to soften next year with the debut of new capacity. The PX-Naphtha spread is forecast to slip 7% to US$530/t. Nonetheless, there may be scope for upside to aromatics margins from start-up delays at new aromatics plants.  
Long-term growth plans 
PTTGC continues to pursue long-term growth opportunities and some potential projects are making progress. A JV agreement with Pertamina (Indonesia) is expected to be signed on December 10, 2013. The PTTPE debottlenecking project is back on-track. Ethylene production capacity at the PTTPE cracker will increase by 8-9% (80-90kta) from 1mta currently. The investment cost is budgeted at US$285m; completion is expected in 2016. In addition, PTTGC’s board just approved an investment in Ethylene Oxide (EO) expansion (up 27% to 426kta). The investment cost will be about US$94m with completion slated for 3Q15.