KUALA LUMPUR (July 31): Lotte Chemical Titan Holding Bhd's (LCT) net profit fell for a fourth consecutive quarter in the three months ended June 30, 2019 (2QFY19), due to margin squeeze resulting from a fall in product selling prices.

One of the world's largest polyolefin producers said the lower selling price was mainly due to a diversion of polyolefin supply from the US to Southeast Asia as a consequence of the US-China trade war, as well as softening of global economic growth.

The group's quarterly net profit declined 66.7% to RM104.85 million from RM315.03 million in 2QFY18. This resulted in a lower earnings per share of 4.61 sen for 2QFY19 compared with 13.86 sen for 2QFY18.

In a filing with Bursa Malaysia today, LCT said other factors contributing to the lower quarterly earnings included higher distribution expenses, lower foreign exchange gain by RM38.3 million and share of loss from associates.

"Share of result from associates reduced by RM 19.9 million. This is mainly due to loss on fair value changes in interest rate swap entered by Lotte Chemical USA Corp and borrowing costs incurred for project financing," it explained.

"Effective tax rate also increased from 12% to 24% as a consequence of no further reinvestment allowance claimable," it added.

Revenue for the current quarter also saw a 6.5% dip to RM2.13 billion from RM2.28 billion a year ago, which LCT blamed on the fall in average product selling price.

This was partially offset by the increase in sales volume, which was driven by improvement in production quantity compared with 2QFY18.

LCT said overall production quantity increased due to commissioning of new PP3 plant in 3QFY18, while average plant utilisation rate improved to 89% in 2QFY19 compaed with 82% a year ago.

The weak quarterly performance pulled down the group's net profit for the cumulative six months ended June 30, 2019 (1HFY19) by 71.3% to RM160.68 million from RM559.22 million a year ago, while revenue fell 4.3% to RM4.3 billion from RM4.49 billion in 1HFY18.

Going forward, LCT warned that the results of its operations for the full financial year ending Dec 31, 2019 are expected to be primarily influenced by the demand and supply balance of petrochemical products in the market, as well as its ability to maximise production outputs and operational efficiency.

Another factor is the movement of feedstock prices, which are correlated to crude oil prices.

"Crude oil price, has been very volatile since beginning of the year, as a consequence of continued production cuts by the Organization of the Petroleum Exporting Countries and Russia. This will have an impact on the price of naphtha, which is our main feedstock," said LCT.

Domestically, it noted that new additional capacities are expected to create short to medium-term supply and demand imbalances. "The additional supply is expected to be gradually absorbed by the high consumption growth in Asia."

It also expects economic environment to remain challenging with the unresolved global trade tensions.

"Despite slowing of global economic activities, emerging markets and Asia, our key sales market, are expected to sustain their growth momentum for remaining of 2019," it added. 

Nevertheless, LCT president and CEO Dr Lee Dong Woo said the petrochemical market is a long-term play.

"The industry as a whole is bracing for a very challenging period amidst various global market uncertainties. Our company is expected to ride through current market down-cycle given our healthy financial position,” he said in a separate statement.

On its expansion plan in Indonesia, Lee said its Lotte Chemical Indonesia New Ethylene (LINE) project has completed the front-end engineering design study in 4Q 2018, with a final feasibility study to be completed in 1Q 2019.

"The configuration and specification of the project have been determined. Currently, the appropriate project structure and funding are undergoing final review. Work for land preparation on project site has started and the company expects the project tendering and construction to commence by end 2019 or early 2020," he said.

The petrochemical facility with a nameplate capacity of one million tonne of ethylene per year and other value-added downstream derivatives will significantly increase LCT's production capacity upon completion by 2023.

LCT shares ended the morning session down 2 sen or 0.7% at RM2.82 today, with 286,100 shares done, bringing a market capitalisation of RM6.51 billion.