PTT Global Chemical

PTT Global Chemical

Investment thesis
In our view, the soft 4Q15 quarter is now behind us. The expectations of higher chemical prices and spreads, brought about by high seasonal demand and 1Q16 QoQ core earnings growth should catalyze the share price going forward. In addition, PTTGC’s current valuation is overly discounted—the current share price trades at a YE16 PER of 6.5x, 1SD below its long-term average of 10.5x, a deep discount to the regional mean of 13.2x and implying an HDPE spread of only US$500/t against today spread of US$782/t.
Slimmer core profit expected for 4Q15 
We expect PTTGC to report a net profit of Bt5,514m, a reversal from net loss posted for 4Q14 and up 357% QoQ. The key drivers for the bottom-line improvement were: 1) smaller inventory loss, 2) gains on oil hedging, 3) FX gains against FX losses booked in 4Q14 and 3Q15. Stripping out a Bt2.5bn inventory loss, a Bt308m FX gain, and a Bt2.2bn gain on oil hedging, 4Q15 core profit would be Bt5,517m, down 21% YoY and 7% QoQ.
The key factors behind the core profit contraction were: 1) lower olefins sales volume (on the back of planned shutdowns), 2) weaker olefins spreads (YoY and QoQ), 3) lower Benzene spread (YoY and QoQ), 4) higher SG&A expenses and 5) higher interest expenses. Note that the EBITDA margin of olefins business is expected to decline to 21% in 4Q15 from 25% in 4Q14 and 24% in 3Q15, due to lower HDPE price (down 20% YoY and 7% QoQ to US$1,153/t). However, the greater core earnings contributions from refinery and aromatics businesses should somewhat mitigate the weaker earnings of olefins business.
Chemical volume and spread gains to spur 1Q16 earnings growth  
We anticipate PTTGC’s 1Q16 core profit to increase QoQ, driven by greater aromatics sales volume (no planned shutdowns) and higher chemical spreads. The high seasonal demand for chemicals ahead of Chinese New Year coupled with the tight demand-supply balance has pushed up most chemical spreads in 1Q16 to date. The average HDPE spread over Naphtha in 1Q16 to date has risen 4% YoY and 2% QoQ to US$723/t, while the average PX spread has increased by 32% YoY and 7% QoQ to US$439/t. However, its 1Q16 core profit is expected to soften YoY, due to lower olefins sales volume (several planned shutdowns) and lower market GRM. PTTGC’s market GRM is forecast to decline 10% YoY and 14% QoQ to US$5.4/bbl, due mainly to weaker middle distillate spread.
Downside risk for 4Q15 bottom line from impairment loss; upside visible for FY16 core earnings   
As the crude prices as well as other commodity prices continued their declines last year, we think that there will be downside risk for PTTGC’s 4Q15 bottom line from impairment loss of assets invested overseas. However, the strong HDPE spread in 2016 to date provides scope for upside to the firm’s FY16 core profit forecast. The average HDPE-Naphtha spread YTD of US$723/t is surprisingly high—32% higher than the five-year average of US$549/t, driven by demand improvement and supply tightness, and higher than our assumption of US$650/t.