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Thursday, May 9, 2019

Chemical Company of Malaysia - PGW1 Reactivation Is the Real Deal

Author: HLInvest | Publish date: Thu, 9 May 2019, 9:50 AM

We spoke with management recently. PGW1 reactivation is coming along as scheduled. The additional capacity (+50% YoY) will replace c.28% of domestic imports. Moving forward, caustic soda prices are expected to have an upward bias on the back of regional statutory shutdowns and resumption of imports into India. Maintain BUY and TP of RM3.08.

We recently spoke with management to touch base on CCM; the following are some of the key takeaways.

Caustic soda. Moving forward we can expect ASP for caustic soda to have an upward bias on the back of expected (1) production moderation in China due to a recent explosion in Tianjiayi Chemical factory in eastern Jiangsu province (reported 78 casualties) resulting in greater scrutiny by Chinese authorities, (2) Japan and Korea manufacturers expected to undertake a 6 week statutory shut down for maintenance come April-May and (3) major importers have received their BIS certification signalling exports to India (c.30% of Japan’s export volumes) to resume thus diverting cargoes away from ASEAN.

PGW1. PGW1 reactivation remains on track for early 2H19. We expect a progressive ramp up in production given the new plant will take some time for testing, commissioning before it can run up to speed. Nonetheless, PGW1 will be the main driver of earnings for the group moving forward. We expect the capacity installed (20k ECU or 50% increase in total capacity) will replace c.28% of imports for caustic soda (total imports c.143,000 MT p.a.) and completely replace acids imports in the country (c.43,000 MT p.a.). PGW1 allows CCM to better position itself to take advantage of market dynamics which remains in a supply deficit whilst demand is growing.

Kleeners. CCM is also expanding their capacity for Kleeners which are essentially a cleaning solution for ceramic formers supplied to the glove makers. By 1Q20 their Bangi factory will house an additional 10,800 MT p.a (+90% YoY) in increased production capacity. The expansion will be funded internally with the bulk of the capex spent on storage tanks. In FY18 Kleeners accounted for c.RM15m in sales or 17% of total sales from the polymers division.

1Q19 expectations. Seasonally 1Q is expected to be a weaker quarter by virtue of having fewer working days. Furthermore, some of the oleo-chemical plants and clients in general would undertake their statutory shutdowns during the CNY week. Thus volumes would also be lower. We can also expect a lower YoY in 1Q19 vs 1Q18; recall that caustic soda ASP was circa USD650/MT in 1Q18 vs USD382/MT in 1Q19. On the polymers side we also expect a weaker quarter on the back of pre stocking in 4Q18.

USDMYR. The polymers segment is dollar bound and has an inverse relationship with USD. A higher USD will result in lower gross margins as c.85% of input costs are denominated in USD. For the chemicals segment, caustic soda benefits from strong USD as its input cost are denominated in RM but ASP is referenced to the USD. We estimate that a +1% change in USDMYR would result in a +0.7%-0.8% uptick in earnings for CCM.

RAPID. CCM was recently awarded a 3 year contract to supply 351,000 MT of caustic soda (contract value of RM315.9m at current prices) to Petronas. We were surprised by the timing of the announcement of the tender result as we had anticipated a delay, given the recent explosion in Pengerang. The sheer size of the volumes awarded highlights Petronas’ confidence in CCM. The contract award validates our thesis that CCM is an undervalued alternative proxy to the RAPID play relative to Dialog (TP: RM3.76 – FY19-20 PER of 42.1x-34.3x).

Source: Hong Leong Investment Bank Research - 9 May 2019

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