This article first appeared in The Edge Financial Daily on September 4, 2018

KUALA LUMPUR: Lotte Chemical Titan Holding Bhd’s 200 kilo tonnes per annum (KTA) polypropylene production plant (PP3) in Pasir Gudang, Johor, which commenced commercial operations on Saturday, is only expected to start contributing to the group’s earnings in the next financial year ending Dec 31, 2019 (FY19).

In a filing with Bursa Malaysia yesterday, Lotte Chemical said the construction of the new PP3 plant started in March 2017, with mechanical completion achieved in June 2018. The PP3 plant will produce polypropylene for the domestic and export markets.

Polypropylene is a thermoplastic polymer used by Lotte Chemical’s customers to fabricate a wide variety of products including automotive parts, medical equipment and woven bags.

Maybank Investment Bank analyst Mohsin Aziz said the new plant is not expected to significantly impact Lotte Chemical Titan’s earnings — at least not in the near term.

“In the initial stage, the PP3 will not be producing so much; there would also be start-up costs involved. If anything, the PP3 would help Lotte’s earnings next year, when everything is up and running, and [when the plant] stabilises. We expect a small contribution to revenue from PP3, of probably 3% to 4% [for FY19],” he told The Edge Financial Daily.

Meanwhile, BIMB Securities Research analyst Azim Faris Ab Rahim estimates the PP3 plant will increase Lotte’s revenue by 5% in FY19.

“As the PP3 was constructed to complement Lotte’s TE3 plant, quite significant for the company [also in Pasir Gudang], this will give a better impact on its bottom line due to the economies of scale. Overall, we expect the PP3 to improve Lotte’s bottom line by 7% to 10%, quite significant for the company,” he told the daily.

The TE3 project, also known as its fluidised naptha cracker project, was commissioned in December 2017.

Lotte allocated RM620 million of its RM3.77 billion initial public offering (IPO) proceeds for the PP3 project. As of June 30 this year, the company had used RM510 million of the allocation.

The group has two other polypropylene plants in Malaysia, the PP1 and PP2, with a combined capacity of 440KTA.

For the first half of the financial year ending Dec 31, 2018 (1HFY18), Lotte’s net profit grew 23% to RM559.2 million from RM455.77 million in 1HFY17, on higher sales volume, as revenue grew 22% to RM4.49 billion from RM3.69 billion.

Lotte Chemical Titan shares closed at RM5.15 yesterday, with a market capitalisation of RM11.71 billion. Compared with the IPO price of RM6.50, the shares have fallen 26%, taking away some RM3.07 billion in market capitalisation.