PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis

Even though renewed concerns about the Chinese economic slowdown may weigh on sentiment toward the stock in the short-term, we think that PTTGC’s strong HoH earnings growth outlook for 2H13, driven by sustained chemical spreads (supported by high seasonal demand and better demand-supply dynamics) and volume growth will boost the share price going forward. Moreover, there is scope for upside to earnings from potential future investments. The stock currently trades at an FY13 PER of 10.0x, a steep discount to the regional mean of 15.5x.
Expect 2Q13 earnings to jump YoY but weaken QoQ 
We expect PTTGC to post a 2Q13 net profit of Bt4,046m (up 375% YoY but down 67% QoQ) and core earnings of Bt8,246 (up 9% YoY but down 21% QoQ). The drivers the assumed YoY earnings growth were: 1) fatter aromatics (Benzene) and olefins margins, 2) greater olefins sales volume (more feedstock supplied from PTT) and 3) lower inventory losses. The key reasons behind the QoQ earnings contraction were: 1) lower sales volumes of refined petroleum and olefins products (due to planned shutdowns), 2) a lower market GRM, 3) a slimmer PX margin, 4) a bigger inventory loss and 5) an FX loss (against an FX gain booked in 1Q13). 
The refinery’s 2Q13 run rate declined to 63% from 98% in 2Q12 and 101% in 1Q13 because of a maintenance shutdown. Meanwhile, market GRM dropped by 40% YoY and 41% QoQ to US$2.6/bbl. Accounting GRM is expected to post a dive from $3.7/bbl in 1Q13 to -$1.7/bbl, due to a stock loss of $4.3/bbl. On the chemical front, PX spread fell by 19% YoY and 3% QoQ to $551/t, while BZ spread surged 130% YoY but declined 3% QoQ to $417/t. HDPE spread increased by 19% YoY and 12% QoQ to $585/t and LLDPE spread rose by 24% YoY and 11% QoQ to $575/t. In addition, LDPE spread moved up by 25% YoY and 18% QoQ to $586/t.
Volume growth & chemical high season to drive 3Q13 earnings  
PTTGC’s 3Q13 core earnings are expected to expand both YoY and QoQ, driven by greater sales volumes of petroleum products (the refinery has resumed full operations after its shutdown) and fatter chemical spreads (in tandem with high seasonal demand). However, olefins sales volumes are expected to decline QoQ, as there will be maintenance turnarounds during the quarter. Note that rising crude prices indicate scope for upside to PTTGC’s 3Q13 bottom-line, as there could be an inventory gain.
FY13 core earnings upgraded on better-than-expected HDPE spread
We have upped our FY13 core earnings forecast by 5% to Bt36,595m to factor in a 6% rise to our mean HDPE spread assumption to $540/t. But we have trimmed our FY13 net profit projection by 5% to Bt33,330m to account for expected losses on inventory and FX in 2Q13.