Petrochemical

Petrochemical

  

- Olefins spread widens most among peers in past three months 

Spreads of olefins products (PTTGC and IRPC) and aromatics products (TOP, PTTGC, ESSO, and IRPC) have risen continuously; while a price of raw material, naphtha, decreased 2.9%wow to US$548/ton, overall product prices have stayed flat or weakened at a slower pace. Looking back in the past three months, spread of olefins has widened the most among peers by more than US$100/ton to above US$800/ton, both for commodity grade plastic (making up around 40% of PTTGC’s products and 10% of IRPC’s products), e.g. HDPE and LDPE, and specialty plastic (around 30% of IRPC’s products), e.g. PP and PS; this has directly benefited PTTGC and IRPC. 

 

- Profit to grow qoq in 2Q15 

We anticipate a quarter-on-quarter profit growth in 2Q15 with significantly improving spreads of olefins, aromatics, and PET as a major driving factor, particularly for PTTGC and IRPC (energy stocks) whose 75% and 65% income depends on the petrochemical business, respectively. Olefins spread has risen above US$800/ton and a further increase is foreseen. Similarly, IVL’s spread would improve from 1Q15 and the company may be able to book inventory gain again. Aromatics spread would also widen in the short term in 2Q15 from a temporary decrease in regional supply.  

 

- IRPC is top pick 

We downgrade the sector from NEUTRAL to UNDERWEIGHT. IVL(FV@B32) is the only one of petrochemical stocks under our coverage (PTTGC and IVL) that is a suitable investment choice for its upside of 23.1%, while PTTGC([email protected]) has only 2.3% upside despite benefiting from good olefins spread. If PTTGC’s share price exceeds the fair value, we are likely to downgrade our recommendation to HOLD. We recommend switching to IRPC([email protected]), which is our top pick for it has also benefited from the olefins business but is in the energy sector.