PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Worst quarter of 2012 should be behind us. At the analyst meeting, PTTGC said the
rest of the year should see recovery from the year’s low in 2Q12. We tend to agree and
like the fact that the overhang on feedstock pricing is also lifted. Nonetheless,
concerns on weakening demand and prolonged petrochemical industry down cycle
continue to persist particularly in view of capacity additions. We believe PTTGC will
weather this storm with its cost competitiveness and strategy to increase exposure in
high-margin specialty products. The near term catalyst is higher oil price that will help
its oil refining business and hold up petrochemical prices in 2H12. Our BUY is intact with
TP of Bt72.

Highlights from the meeting:

Management expects PTTGC’s 2H12 earnings to improve from the weak 2Q12,
backed by higher oil prices and continued favorable HDPE price, though slightly
below 2Q12’s. This will be further supported by an increase in sales volume as
operating rate goes back up after several plant shutdowns in 1H12. Management
noted that demand from China has been picking up lately to rebuild its stockpile
before production season. The recent increase in oil price also urged more buying.
HDPE price is expected to rise from current levels driven by oil price and lower
supply from naphtha-based producers as weak margins lead them to reduce
production. Management stressed that PTTGC’s performance relies on HDPE price
not product spread.
 

The recent adjustment of the netback pricing formula of gas feedstock does not
jeopardize its LT competitiveness and its cash cost should remain in the top
quartile of the global producers. Management reaffirmed that this higher
feedstock price will be offset by gas supply commitment for its de-bottlenecking
project. Note that its gas sales agreement was also extended from 2016 to 2020.
 

The de-bottlenecking of subsidiary PTTPE’s 1-mt ethylene cracker should be
finalized by the end of this year with an expected increase in capacity of 15-20%.
Other investment plans will also be concluded by 4Q12, including investment in
specialty products in Malaysia’s Rapid project. The company maintains its strategy
to add specialty products to its portfolio, mainly poly-urethane and polycarbonate,
to secure LT margin.
 

Management played down the market’s expectation of an extra dividend on first
half’s performance since 1H12 earnings were eroded so greatly by stock loss. It is
likely that the company will pay a dividend based on its historical payout ratio of
30-40%. We estimate that the ceiling is Bt3/share, based on normal profit
excluding impact from stock loss.
 

No change in BUY rating and TP of Bt72. Our TP of Bt72 is intact, based on 1.4x PBV,
offering attractive upside and yield of ~4.2-5% over the next three years. Downside
risks to our forecast are weaker than expected product spread, unplanned shutdowns
and higher than expected production cost after the business consolidation.