Lotte Chemical Titan (LC Titan) pared down some its core loss by 7%  QoQ to RM283mn. This was in line with our expectation at 47% of  full year estimate but exceeded street estimates at 71%. While the  company remains in negative margin operating environment, we  expect earnings to gradually improve on demand recovery  especially from China market post economic re-opening. This should  support higher utilisation rate and sales volume moving forward.  Note that the company utilisation rate was only at 70% in 1Q23 as  compared to the management’s guidance of 75-80% for FY23. We  are also optimistic on its strong long-term growth potential from  new mega Lotte Indonesia New Ethylene (LINE) project. Upgrade LC  Titan to a BUY with a DCF derived TP of RM1.56 (WACC 7.5%, TG 0%)

• Within expectation. 1Q23 core loss of RM283mn made up 47% and  71% of ours and consensus forecast. We deem this as within our  forecast in expectation of gradual earnings respite for the remainder  of the year.

• Dividend. No dividend declared during the quarter.

• QoQ. Revenue declined 5% QoQ mainly due to weaker USD. Core  losses narrowed slightly by 7% QoQ driven by improving product  spread with core LBITDA margin reduced to -8.5% from -13.2%.  However, this was partially offset by wider losses in associate  company, Lotte Chemical USA (LC USA) of RM44mn (4Q22 loss:  RM6mn). Utilisation rate was weaker at 70% (4Q22: 73%).

• YoY/YTD. Revenue plunged by 29% YoY to RM1.9bn led by a 19%  decline in sales volume to 425k MT, compounded by weaker ASP.  This was also on the back of weaker utilisation rate of 70% (1Q22:  85%). This was a hit to bottom line amid a core loss of RM283mn from  core PATAMI of RM58mn.

• Outlook. Product spread was weak amidst abundance of supply as a  result of (i) weak demand from China and (ii) new supply from  Petronas’ Pengerang Complex and other SEA countries. However, we  expect some recovery in demand to lead to improvement in product  spread and margin. This should translate into higher utilisation rate  moving forward. The company guided utilisation rate of 75-80% in  FY23. Notwithstanding, the company’s balance sheet remains solid  with net cash of RM696mn or RM0.31/share. The company has also  completed equity injection of USD1.6bn and loan facility of USD2.4bn  into LINE project which is expected to be completed by end of 2025.

• Forecast. No change to our forecast. Overall, we still expect LC Titan  to record loss of RM656mn in FY23 before returning to profit from  FY24F onwards.

• Our call. Upgrade LC Titan to a BUY with an unchanged DCF-derived  TP of RM1.56. Note that our TP still excludes potential upside from  its LINE expansion project in Indonesia which is targeted to begin  commercial operation in FY25/26F. Key risk to our earnings forecast is longer-than-expected market downturn.

Source: BIMB Securities Research - 28 Apr 2023