Petrochemicals

Petrochemicals 

Although we expect much better earnings in 1Q15F, oil prices remain the key threat. This could undermine market sentiment, although seasonal demand could provide some offset. We prefer olefins producers on better balance in demand/supply and thus our sector pick remains PTTGC, with better earnings outlook and better valuation.   

4Q14 sunk by huge inventory losses. The two major petrochemical companies in SCBS’ universe reported core losses of >Bt7bn due to huge inventory loss. Excluding the impact of volatile oil price, core performances slid 8.1% QoQ but rose 68.1% YoY, mainly for PTTGC, which had a production hiccup in 4Q13 caused by unreliable gas feedstock from PTT. 1Q15 core profit is expected to soften further on weaker product spread after a nearly 20% QoQ fall in PE prices. Product spread for PET/PTA also shrank 22% QoQ. Still, without the huge inventory loss, we expect sharply better net profit.     

Olefins: still the best bet. Average olefins chain product price fell ~20% QoQ due to lower oil price, which cut key petrochemical product feedstock prices, i.e. naphtha  (-24% QoQ), which accounts for 67% of global olefins production. Product spread over naphtha fell 16.5% QoQ on average but remained above the 10-year average, except for propylene and PP. These two products will be pressured by additional capacity, especially on-purpose capacity in China. Despite lower oil prices, we see ethylene and its derivative products as in a better position on a more balanced demand/supply picture. Previously, we believed the key threat for the olefins chain was new capacity from the US from 2017, but low oil price is likely to put these on hold for a few years.  

Aromatics: still a supply glut. With more than 4mtpa of effective PX capacity entering the market throughout this year against demand growth of only 2mtpa, dimming product price outlook. The average PX price has fallen 17% QoQ in 1Q15 to a 5-year low. We expect price to continue to soften in 2Q15 on lower feedstock cost. Even worse, BZ price could be pressured by more feedstock for naphtha crackers (pyrolysis gas), which will tend to raise operating rates to capture the benefit of lower naphtha cost and strong product spread, despite some narrowing.    

PET/Polyester: seasonal demand to pump PET price. More industry consolidation is expected this year. Recently, IVL acquired a 105ktpa-polyester plant in Thailand, expanding its capacity share in Thailand to 57% from 42% - miles above the runner up. We believe this will be positive for the product price in the medium to long term. In the near term, we are also positive on product price, chiefly PET, on seasonal demand ahead of summer. The National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Center in the US issued an El Niño advisory on Mar 5, meaning this year’s weather could be abnormally hotter, which could be positive for polyester later on once lower rainfall hurts cotton output, generating more demand for polyester.   

Valuation of Thai petrochemical stocks undemanding. The petrochemical sector outperformed the SET in 1Q15 (QTD) on optimism towards 2015 earnings outlook after booking enormous inventory losses in 2014. Further, product prices have risen from end-4Q14, driven by higher oil price. We view valuation as undemanding at an average PBV/ROE of 1.7x vs. 1.9x for regional peers. Of the two stocks in SCBS universe, we choose PTTGC on its better earnings outlook and cheap valuation at P/E (2015) of 6.8x and PBV of 0.9x, vs. regional peers’ 18x and 1.5x, respectively. We feel the underperformance due to concerns over lower competitiveness of gas-based producers compared to naphtha-based is overdone. It will book the full-year benefit of lower LPG price in 2015 from the lifting of Bt1/kg contribution to the Oil Fund in 2014.