PTT Global Chemical

Investment thesis

We accompanied PTTGC’s CFO, Mr Patiparn Sukorndhaman, on a non-deal roadshow to the UK. In all, the investors we met appeared to fundamentally like PTTGC for its resilient Polyethylene margin and its potential for business expansion, particularly in Indonesia. Most of the fund managers appeared to view the firm positively, despite falling crude prices, as operating cost savings should outweigh the effect of a one-time inventory loss. Moreover, Thai energy reform is unlikely to impact PTTGC’s earnings, as the current market LPG price is roughly equal to the price the firm pays. We sensed that they are waiting for a good re-entry point—mostly likely when crude prices stabilize. 

However, concerns over inventory losses and diminishing cost competitiveness may weigh on sentiment toward the stock in the short-term, in our view. We have summarized the key discussion topics below:

Issue #1: Impact of falling crude prices on PTTGC’s earnings 

Falling crude prices will affect PTTGC in two respects: 1) inventory losses and 2) lower operating costs. Based on the current Dubai crude price of US$65/bbl, the inventory loss would be around Bt5bn. In contrast, the firm’s operating costs will decline (lower fuel & loss in the refinery operation and lower conversion costs at chemical plants).   

Issue #2: The effects of planned Thai energy reform

If the LPG price for the Petrochemical sector were decontrolled, the maximum impact on PTTGC would be a 15% drop in EBITDA (based on an assumed market LPG price of US$900/t). Nonetheless, the LPG market price has dived from $900/t at the start of the year to $580/t currently—roughly equal to PTTGC’s LPG cost. As such, if the govt were to let the LPG price for the Petrochemical sector float, there wouldn’t be any impact on PTTGC’s earnings in the prevailing market.

Issue #3: Will lower crude prices hurt PTTGC’s cost competitiveness over Naphtha?

PTTGC’s cost competitiveness over Naphtha would be wiped out if the price of Dubai crude price were to fall below $60/bbl, as the cost of Naphtha cost would be equal to the firm’s Ethane cost. Regardless, using Ethane as primary feedstock would still be more economic than using Naphtha, as it yields greater Ethylene output.

Issue #4: What are PTTGC’s future growth opportunities?

The firm is currently studying three major possible investment projects: 1) a JV petrochemical complex with Pertamina, 2) a gas cracker in the US and 3) a downstream petrochemical project in Asia.