PTT Global Chemical

PTT Global Chemical Plc (PTTGC) 

 

Investment thesis

We accompanied PTTGC chief financial officer Duangkamol Setthanung on a non-deal road show for local institutional investors. In all, we sense that the firm’s strategic focus on investing in its Map Ta Phut Retrofit project is receiving a warm welcome from investors, as it wipes out overhanging concerns about the local gas supply shortage issue and about risks of making mega investments abroad. We also sense that investors are interested in increasing their exposure to the stock given its cheap valuation and high dividend yield. It is trading at a YE16 PER of 6.7x, 1SD below its long-term average of 10.5x, a deep discount to the regional mean of 13.3x and an FY16 dividend yield of 6.7%, much higher than the regional average of 3.2%. We have summarized the key discussion topics below:  

Issue #1: What is PTTGC’s strategic plan to minimize the potential local gas supply shortage?   

Management said that PTTGC had already prepared a strategic plan to mitigate risk from a local Ethane supply shortage post-2021 if the ongoing 21st petroleum concession bidding round is delayed. PTTGC will invest up to US$1bn in the Map Ta Phut Retrofit project, which will comprise the building of a new Naphtha cracker (producing 500kta Ethylene and 250kta Propylene; with a commercial operation date [COD] in 1Q20) to create incremental value from 1.5mta light Naphtha being sold to external customers. This project will minimize risks stemming from Ethane feedstock price volatility and supply availability in future. Under the worst-case scenario, the firm should therefore be able to maintain its normal olefins production volume (2.3mta). 

For the best-case scenario (in which Ethane supply availability is normal), PTTGC’s olefins production volume will increase 750kta. Meanwhile, the likely case scenario (Ethane supply from the Gulf of Thailand depletes and additional Ethane supply comes from imported LNG), the firm’s olefins production volume is expected to rise by 250kta. The olefins products from this project will also secure the firm’s downstream business.  

Issue #2: Will PTTGC invest in megaprojects abroad?   

Apart from the Map Ta Phut Retrofit, PTTGC is also focusing on investing in a PO/Polyols project (polyurethane chain), which will COD in 2Q19. PTT plans to carry out an operating asset injection within the PTT Group this year. Management said that it was likely that PTT would sell its equity stakes in HMC Polymers Co., Ltd. (PP, 41.44%) and PTT Asahi Co., Ltd. (MMA, AN, 48.50%) to PTTGC, its chemical flagship. This move would fulfill PTTGC’s downstream product portfolio. Total investment CAPEX for these three projects would not exceed US$3bn. Given that, PTTGC should be able to invest in these projects without difficulty as it has US$1.6bn cash on hand and net debt/equity of only 0.26x as of end-Sep 2015. 

Management emphasized that the Map Ta Phut Retrofit, PO/Polyols and PTT Group asset injection projects were the firm’s priority investment schemes. Meanwhile, other potential investment projects abroad, including petrochemical complexes in the US, Indonesia and Vietnam are opportunities for PTTGC’s long-term growth. Management said that the firm would invest abroad only if there were resources available, all major risks were mitigated and they were economically viable. 

Issue #3: Is gas cracker’s cost competitiveness still better than Naphtha at current low-crude prices?   

Management said that PTTGC gas cracker’s cost was still more competitive than Naphtha cracker even during the period of low crude prices due to: 1) gas-based cracker yields higher Ethylene output (78% against 31% for the Naphtha-based cracker), 2) gas-based cracker yields only 22% of by-products, the current selling prices of which have declined considerably and minimized their premiums over Naphtha, and 3) the conversion cost of Naphtha-based cracker is higher than gas-based cracker. Management guided that the Dubai crude price of early US$20/bbl would make equivalent margins for gas-based cracker and Naphtha cracker.

The falling current crude prices also raised questions about the possibility of a change in pricing formula (the profit-sharing regime between the two parties [the concept of equal IRR]) for the purchase agreements for wet gas feedstocks between the firm and PTT, as the current formula is based on the Dubai price range of $70-130/bbl. Management cited that if the pros and cons of the changes in parameters had yet to be quantified, it did not expect any change in pricing formula in the near future.  

Issue #4: Concerns about slowing chemical demand from China  

Management cited that chemical demand from China remains strong, however, Chinese buying behavior has changed to the purchase of smaller volumes but at greater frequency, as they want to keep stocks lean. Moreover, PTTGC sells its products to China through traders, of which 50% of total volume is under long-term obligations. As such, traders should be able to switch the volume to other markets in the case of a Chinese demand slowdown. 

Looking ahead, management expressed that the current demand-supply of olefins products, which had already taken into account the new supply from shale gas crackers, is in equilibrium—the additional demand is around 5-6mt/year against the additional supply of 5mt/year. Given that, the HDPE spread over Naphtha is expected to sustain at approximately US$700/t for the next few years.

Issue #5: Resilient outlook for 2016

Management expressed that PTTGC’s operational outlook is expected to be better YoY in 2016, driven by greater sales volume on the back of higher utilization rates and capacity expansion, and wider chemical margins. The firm’s olefins utilization rate is expected to increase to 95% this year from 94% in 2015, brought about by greater Ethane supply from PTT (275t/hour against 244t/hour in 2015). Greater Ethane supply will increase production volume and contribute to margin expansion, as the gas feedstock yields higher main product output. Furthermore, the average utilization rate of its Aromatics plants is expected to rise to 88% in 2016 from 74% last year, due to no major planned shutdowns. And, the product-to-feed margin of aromatics is expected to increase YoY in 2016, driven by lower fuel & loss and higher by-product value, particularly Naphtha. Moreover, the completion of two other projects—Aromatics II Debottlenecking (PX 115kta, BZ 35kta, OX 20kta) in 1Q16 and the Phenol II Expansion (250kta) in mid-2016—will also contribute to higher production volume in 2016.