This article first appeared in The Edge Financial Daily on July 12, 2018
Petrochemicals sector
Maintain neutral: We expect the second quarter of 2018 (2Q18) results season to be a lukewarm affair. Both Petronas Chemicals Group Bhd (PetChem) and Lotte Chemical Titan Holding Bhd (LCT) should enjoy stronger year-on-year (y-o-y) core net profit on higher average selling prices and capacity utilisation.
The outlook, however, is mixed, for while petrochemical prices are trending upwards, the impact may be negated in part by a more robust rise in naphtha price.
We remain “neutral” on the sector with a “buy” for LCT on cheap valuations relative to its Asian peers. PetChem is a “hold” as there is limited upside to our target price.
Naphtha price rose by 10.9% quarter-on-quarter in 2Q18, moving in tandem with crude oil prices. Most petrochemical prices also rose during the period, but at varying levels in comparison to naphtha. In this regard, PetChem being a predominantly natural gas-based producer, whereby its input costs are fixed, will fare much better against LCT, which is a naphtha-based producer.
Crude oil and naphtha prices sustained their uptrend and are above our 2018 base case forecast. Should this trend continue, it will be positive for PetChem but negative for LCT.
The escalating threat of a trade war between the US and China could potentially disrupt the global supply chain. China is avoiding petrochemical imports from the US, instead preferring to source from regional countries in support of its Belt and Road Initiative. If this situation prolongs, it could create an artificial supply crunch and push up petrochemical prices, in our view.
Both PetChem and LCT should benefit from this situation as China is a big export market for both. But as of now, both companies have stated that there has been no tangible pickup in demand from China.
We remain “neutral” on the sector on steady industry demand.
LCT is our sole “buy” on cheap valuations relative to global peers. We think the market has over-punished LCT for the naphtha price volatility and it could potentially surprise the market on its 2Q18 results. PetChem’s risk reward is at fair levels and the maintenance heavy period is just ahead of us in the second half of 2018. — Maybank IB Research, July 11