This article first appeared in The Edge Financial Daily on February 3, 2020

Lotte Chemical Titan Holding Bhd
(Jan 31, RM2.05)
Maintain reduce with a lower target price of RM1.62: Lotte Chemical Titan Holding Bhd’s (LCT) fourth quarter of financial year 2019 (4QFY19) core net profit of RM98 million rose 11% year-on-year (y-o-y), due to the higher utilisation rate of 86% versus 81% for 4QFY18 (as a recent extension of the second naphtha cracker underwent a warranty shutdown for 4QFY18).

Also, LCT booked a share of associate profits for 4QFY19 (versus a loss for 4QFY18), as the US ethane cracker and a monoethylene glycol plant began integrated operations from late August 2019, which slightly offset the 19% y-o-y decline in selling prices.

Its reported net profit for 4QFY19 of RM188 million was due to the RM139.5 million exceptional gain from the partial sale of its stake in the US ethane cracker. For FY19, its core net profit of RM250 million was 68% lower y-o-y on the back of an 18% drop in product selling prices, higher depreciation charges as turnaround costs were depreciated over fewer years, partially offset by a five percentage-point increase in plant utilisation from 83% for FY18 to 88% for FY19, and higher share of associate profits

IHS forecasts average Chinese cost and freight linear low-density polyethylene (LLDPE) prices at US$834 (RM3,416) per tonne for 2020 and US$789 per tonne for 2021, down from US$949 per tonne in 2019. Meanwhile, average Southeast Asian polypropylene prices are forecast at US$922 per tonne for 2020 and US$890 per tonne for 2021, weaker than 2019’s US$1,058 per tonne.

IHS expects US PE capacity additions from late 2017 to early 2020, and Chinese naphtha cracker, ethane cracker and propane dehydrogenation capacity additions from 2020 to cause market oversupply lasting for at least three years.

The incoming Pengerang capacity from 2Q20 may compress selling prices in Malaysia and Indonesia. Despite the signing of the phase-one trade deal, Chinese tariffs on the vast majority of US petrochemical exports were left intact. To make matters worse, China will ban single-use plastics in stages from this year onwards, with a full ban by end-2025.

LCT will undertake a statutory turnaround for 45 days between late February and early April 2020 for all of its plants except for the first naphtha cracker and the third polypropylene plant commissioned on Sept 1, 2018. As a result, LCT guided for plant utilisation of 80%-85% for FY20 (versus 88% for FY19); we have pencilled in 80% utilisation for FY20F (forecast). The second naphtha cracker last underwent turnaround over 53 days in February and March 2017, and while crackers generally undergo turnarounds every three to five years, LCT’s naphtha crackers at Pasir Gudang are between 21 and 26 years old, hence the time lapse between turnarounds may remain short in the years to come. — CGS-CIMB Research, Jan 31