Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with unchanged forecasts and fair value of RM9.60/share based on FY19F EV/EBITDA of 10x — 3SDs above its 3-year average of 8x given the stock’s positive correlation to crude oil prices, which have stabilised above US$70/barrel.

• We are slightly positive on China’s imposition of anti-dumping duties for five years on ethanolamines imported from the US, Saudi Arabia, Malaysia and Thailand, beginning today.

• As the duty rates for US companies are set at 76%–97.1%, Saudi Arabian at 10.1%–27.9%, Thailand at 37.6% and Malaysian at 18.3%–20.3%, it appears that China’s tariffs are tilted against the US on the backdrop of US President Donald Trump’s initiated trade negotiations.

• As Malaysia appears to be avoiding the worst of the duties, we expect Chinese importers to shift purchases to local producers such as PChem and Lotte Chemical Titan Holding which will be bearing amongst the lowest additional duties.

• While Saudi Arabia’s duties are almost similar to Malaysia, we note that the shipping costs are higher from the more geographically distant Middle East region.

• We understand that PChem produces only 50,000 MT annually of ethanolamines – a minimal 0.5% of the group’s 10.1mil tonnes production in FY17. Hence, the new China duties are likely to have a marginal impact to the group.

• Ethanolamines are used in a wide range of applications, including acid gas purification, surfactants for soaps and detergents, and corrosion inhibitors. These are also often used for alkalinisation of water in steam cycles of power plants to control corrosion of metal components.

• As ethanolamines are commodised ethylene products, we understand that the margin is likely to be near the average for the group. Hence, we do not expect PChem to shift more of its production towards this segment even on an expected increase in demand from China, as the group’s capacity is currently earmarked for other higher margin specialised offerings, which are already contracted by clients.

• The group’s product prices tend have a strong correlation to Brent crude oil prices which have slid by 3% since 30 June this year to US$76/barrel currently. However, while naphtha has likewise dipped by 3%, product prices have yet to move in tandem as polyethylene is up 18%, polypropylene 20%, methanol 15%, granular urea 18% and paraxylene 38%.

• PChem currently trades at a pricey FY19F EV/EBITDA of 10x, which translates to a 54% premium (vs. its 3-year average premium of 29%) to Thailand’s PTT Global Chemicals’ 6.5x.

Source: AmInvest Research - 30 Oct 2018