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Since its listing in 11th July 2017, Lotte Chemical Titan share price has dropped from RM 6.50 to its low of RM 0.975 in March 2020. Recently, it has gained traction from investors due the favourable movement in ASP of resin and a drop in their raw material prices.

Lotte Chemical Titan Summary Background
The Company mainly involved in the manufacturing and sale of raw materials of plastics. Lotte Chemicals mainly produce two types of petrochemical products known as polyolefin which are Polyethylene (PE) & Polypropylene (PP) and Olefins. Polyolefin comprise of their main bulk of the revenue (according to 2019 Annual Report, revenue contributed from polyolefin is 78.31%).

Lotte Chemical is a petrochemical company with a total of 12 plants and a land size of 222 acres with the production capacity of 3,118 killo tonnes per annum (KTA) located in Pasir Gudang and Tanjung Langsat, Malaysia and 3 plants and a land size of 320 acres and total production capacity of 450 KTA.
Lotte Chemical was listed in Bursa Malaysia on July 11, 2017. The brief information on the company listing is as follows:

How Petrochemical is being produced and what are Petrochemicals?
Petrochemicals are chemical products that derived from petroleum and substance from natural gas. The key raw materials in the petrochemical industry include products of petroleum oil refining (i.e. natural gas and crude oil).

Lotte Chemical Titan Products (PP and PE)

What created the interest among the Investors in Lotte Chemical Recently? – Double Happiness (increase in ASP and reduction in Raw Material)

As shown in the Diagram 1.2, 1.3 and 1.5, the average selling price of resin has increased tremendously. This is due to the disruption from Hurricane Laura. According to the PlasticToday News Publication, it publishes the following “Several producers declared force majeure, which will apply continued upward pricing pressure on these already rising markets. As a precautionary measure ahead of the storm, refineries, oil and gas platforms, ports, rail systems, warehouses, and dozens of petrochemical plants and resin reactors in Texas and Louisiana were shut down”

The spread between Polymers ASP and Naphtha has been trending upwards. During the end of 2018 to 2019, Lotte Chemical Titan has been facing difficulty due to the lower spread and thinner margin from both the ASP and raw material price. Based on the Diagram 1.6, the raw material price in 2020 is significantly lower as compared to 2019 (on average, of 300 USD as compared to 500 USD in 2019).

Lotte Chemical Titan Products (Olefins)
Lotte Chemical produces five (5) main types of olefin such as Ethylene, Propylene, Butadiene, tert-Butyl Alcohol, Benzene and Toluene. As shown in our first Diagram (diagram 1.1), these are considered as Olefins and Derivatives which contributes to 22% of their revenue. Butadiene average selling price has been on an uptrend trajectory for the past 3 months possibly due to the demand of glove and supply disruption around the world. Which would contribute positively to the olefin segment as well.

Challenges faced by the Group (Investors should take note)

Trade war between the United States (“US”) and China continued with China imposing further tariff hikes, leading to disruptions in existing global supply chains.

US polymer suppliers rerouted their products, mainly polyethylene (“PE”), to Southeast Asia (“SEA”) to avoid China’s tariff hikes.

The US shale revolution – the technology for extracting oil from unyielding shale rocks. Fracking shale created a whole new industry in the U.S. as many companies rushed to find — and found huge gas reserves across the country. Due to oversupply situation in U.S the PE price has been constantly decreasing for the past years.

Company Financials (Q2)

Comment:

1. The Company is currently sitting at a net cash of RM 3.8 billion with zero borrowing. Under other investment, the Group has allocated the funds with licensed financial institutions and short term deposits with licensed financial institutions with maturity more than 3 months.
2. The company price to sales is only 0.56 as compared to Petronas Chemical which has a price to sales of 2.42 (determining how much you are paying for a dollar of the company shares, hence the lower the more attractive).
3. Positive cash flow generating from operations of RM 511 million.

Projected Annual Valuations

Note: There were assumptions made and this computation was made using a more conservative approach. The potential risk could be once the demand and supply of the PE and PP normalise, the ASP for PE and PP shall normalise too. This would impact the potential valuation of the company moving forward. Another important risk factors that we should be aware of moving forward is that China is building up its own capacity as well without over-reliance on the U.S and Souteash Asia market.

Summary
1) Double happiness – favourable raw material and ASP of resin
2) Lower risk as the company IPO listing price was priced at RM6.50. Currently the share is trading at RM 2.03.
3) Demand of PE and PP continue to outstrip the global supply.
4) Risk : Demand and supply began to normalise, reduction in ASP and increase in raw material price.

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