PTT Global Chemical

PTT Global Chemical Plc (PTTGC)
Investment thesis: The key messages from the analyst meeting yesterday reaffirmed our optimistic view of PTTGC’s mid- to long-term prospects. However, we think that renewed global economic uncertainty, particularly with regard to China (the key regional chemical demand driver), may cause the upcycle to be delayed from 3Q12 to 4Q12. That would cap the share price performance in the near-term. Nonetheless, renewed confidence in the global economic recovery should then trigger a share price increase. Moreover, synergistic benefits and growth enabled by future investments will make for long-term value creation and share price upside.
Upcycle ahead, but global economic uncertainty may cause a delay: The chemical market, particularly olefins, is moving toward an upcycle to be ignited by fewer capacity additions. However, uncertainty surrounding the Chinese and European economies in tandem with a falling crude price trend has made buyers hesitant to build inventories. As such, the demand recovery is proving to be slower than the market previously expected—the chemical upturn may be delayed to 4Q12 or 2013. PTTGC expects the HDPE-Naphtha spread to range $400-450/tonne in 2012, close to the 2011 level and the industry Naphtha cracking cash cost.   
But management is less bullish on the outlook for GRM and PX spreads, as industry capacity additions are likely to outpace demand growth over the next few years. In addition, unplanned shutdowns led to an exceptionally high PX spread last year. The PX spread is projected to decline 6% YoY to US$571/t this year, while GRM is forecast at $5-6/bbl, down from $6.4/bbl in 2011.
2Q12 profit to be hit hard by inventory loss: As oil prices are now on a downtrend, PTTGC’s 2Q12 bottom-line is expected to drop sharply QoQ—the 1Q12 inventory gain will almost certainly reverse into a loss. However, expected increases in sales volumes from both PTTAR’s and PTTCH’s facilities should mitigate the negative impact on core earnings resulting from weak 2Q12 chemical spreads.
Concerns on gas price adjustment are overblown: Management cited that the Ethane gas cost should remain pretty stable for the foreseeable future, as it is supplied from old gas fields under PTT’s pooled gas price I. The gas supply to power plants, in contrast, comes from newer gas fields—gas pooled price II, which may be subject to price rises, due to higher investment and production costs for the fields in that pool. As such, PTTGC’s margin shouldn’t be squeezed by a rising gas price.