• Lotte Chemical Titan (LC Titan) stock price rose sharply by c.25% over the past 1-month potentially due to speculation that it might be able to raise product prices against weaker competition from Middle East supplier amidst rising supply chain concern.

• The Red Sea attack has resulted in higher shipping cost of c.USD100/tonne particularly for export cargoes from Middle East. However, we expect this to have a limited impact to product prices. Hence, no changes is made to our earnings forecast.

• Following the sharp rise in stock price, we downgrade LC Titan to a HOLD (from BUY) with a higher TP of RM1.39 (from RM1.32). We think there’s limited catalyst to power up the stock price further, hence we advise investors to revisit at lower level.

• Key re-rating catalyst to the stock is prolong disruption to the trade route which will allow for higher export to China and potentially boost LC Titan’s plant utilization rate.

Red Sea Attack Triggered Another Supply Chain Concern

The attack on commercial vessels and the tit-for-tat action by the Western countries against the Yemen’s Houthi forces in the Red Sea has raised concern on supply chain issue for global trade that passes through Suez Canal. Several shipping companies has rerouted its vessels around the Cape of Good Hope in order to avoid the threat. Consequently, this has raised the shipping cost by USD100- 130/tonne, according to an estimate by Argus Media. For polymers market, the affected route are for export cargoes from Middle East to Europe and Asia/China.

Our View

We expect this to yield only a marginal increase in polymers prices (i.e. PE and PP) by c.USD50-100/mt. We think a more profound impact on the price is not likely given the excess capacity in the market. Notably, the market reaction remain muted with PE/PP were trading at c.USD1,000/mt in SEA region as at end 2023. However, should this prolong, it may benefit from higher export to China and improve its utilisation rate (UR). Note that Middle East is one the largest polymer exporter to China.

Change in Earnings Forecast

We make no changes to our forecast at this juncture. With polymernaphtha spread currently hovering around USD300-400/mt (Chart 3), we think the company has to boost its sales to export market to improve its financial performance. To recap, the company recorded LATAMI of RM593mn for 9M23 owing to weak demand and low UR of 67%. Based on our analysis, the company needs UR of 87.5-92.5% to be breakeven at prevailing product spread (Table 1).

Source: BIMB Securities Research - 12 Jan 2024