• We expect a gradual recovery for Lotte Chemical Titan (LC Titan) as it boosts its sales to SEA region underpinned by its close proximity and strong economic growth in the region.

• We expect an earnings respite in upcoming 3Q23 result predominantly from (i) higher utilization rate, and (ii) positive impact from favorable product price movement. Note that its result will be released tentatively on 26th Oct 2023.

• Maintain LC Titan as a BUY with TP of RM1.56 which implies 0.3x FY24F P/B. Note that the stock currently trades at 0.2x FY24F P/B which is at discount to its peers such as Chandra Asri (1.2x FY24 P/B) and KPIC (0.5x FY24F P/B).

Boosting Sales to SEA region

We expect a gradual recovery for LC Titan in near term amidst deep downcycle in petrochemical sector. Despite the prevailing weak product spread margin, we are cautiously optimistic that it could boost its utilisation rate (UR) leveraging on its close proximity to robust economic growth region in ASEAN. Note that its sales proportion to Southeast Asia (SEA) region grew to 17% in 2022 from 10% in 2017 (Chart 1).

Expect Earnings Respite in 3Q23

To recap, LC Titan recorded a larger headline LATAMI of RM313mn in 2Q23 as compared to LATAMI RM224mn in 1Q23, driven by (i) weaker plant utilisation rate of 66% (1Q23: 70%), and (iii) higher inventories write-down to net realisable value (NRV) of RM79mn amidst lower product prices (vs gain from reversal of inventories write-down of RM51mn in 1Q23). Nonetheless, we expect an earnings respite in upcoming 3Q23 result driven by higher UR of >70% (as guided by management during previous analyst briefing). Besides that, further write-down in inventories is not likely in 3Q23 given a positive movement in product prices during the quarter. Note that polyethylene (PE) price ended higher by 8% QoQ to USD1050/mt in 3Q23 whereas polypropylene (PP) rose by 10% QoQ to USD1000/mt.

Change in Earnings Forecast

We make no changes to our forecast at this juncture. Note that the product spread currently hovers around USD300-400/mt (Chart 3). Based on our analysis, the company needs UR of 87.5-92.5% to be breakeven at prevailing product spread (Table 1).

Maintain BUY with TP RM1.56

We maintain LC Titan as a BUY with a TP of RM1.56 (Table 2). Our TP implies 0.3x FY24F P/B. 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 call is longer-than-expected market downturn.

Source: BIMB Securities Research - 25 Oct 2023