We are long term positive on Pengerang due to its strategic location and availability of vacant land. PIPC phase 2 development which potentially involves foreign international petrochemical players could kick start by 2020. Dialog (Not-Rated) will continue to be one of the key beneficiaries of Pengerang development due to its exposure in PDT, PLNG2, EPCC and maintenance services. With PIC overall at 97% completion, we see further diversification opportunities for PCHEM (HOLD; TP: RM9.74) into derivatives and specialty chemicals. Additionally, plant maintenance jobs would be up for grab for local services players such as Dialog and Serba Dinamik in the next two years.

Petrochemical hub in the making. We recently joined a Technical Visit to Pengerang. The entire PIPC development will be split into 5 phases on 22,904 acres of land. Currently, phase 1 is in the midst of development and 10,642 acres of land have been taken up, comprising (i) Pengerang Integrated Complex (PIC) by Petronas, (ii) Pengerang Deepwater Terminals (PDT) by Dialog, (iii) Pegnerang Industrial Park (PIP) by Johor Corp, (iv) Pengerang Eco-Industrial Park (PeIP) by Serba Dinamik, (v) Sg Industrial Estate (SRIE) and (vi) Pengerang Maritime Industrial Park (PMIP) by Banelec Holdings. We understand that JPDC is in talks with different investors on phase 2 development involving 1,899 acres of land, which will likely kick start in 2020. This will provide further investment opportunities for international petrochemical players to expand their footprint in Malaysia, which is inline with PIPC’s aim to become an international petrochemical hub.

Strategically located. PIPC is strategically located adjacent to existing major international shipping lanes. The water depth of 24m enables VLCCs and ULCCs to berth at the jetties. Meanwhile, the phase 1 development will provide feedstock availability and infrastructure and utility readiness for investors, potentially lowering the cost of setting up business and operating expenses. Furthermore, pioneer status and investment tax allowance would provide additional incentives for companies investing in manufacturing in Malaysia subject to several pre-conditions.

PIC overall progress. As of 31 Dec 2018, PIC achieved overall progress of 97%. While the Petronas-Saudi Aramco jointly owned refinery has achieved crude charge-in to crude distillation unit (CDU) in Oct and the steam cracker has achieved mechanical completion, the petrochemical plants (50%-50% owned by PCHEM and Saudi Aramco) are at 93% completion and will commence its operation in 2H19. Saudi Aramco has also committed to supply 50-70% of the crude feedstock.

Higher demand in maintenance space. As PIC’s fabrication works are almost done and some are at commissioning stage, plant and facilities maintenance works will increase in the next two years. To note, Petronas has already entered interim contracts with local players on 200 packages of maintenance works even though some are still under warranty period. We reckon that Petronas will eventually award long term contracts to local services players with job prospect estimated at RM2bn- 5bn/annum in the future. Established maintenance players with business presence in Johor such as Dialog (Not-Rated) and Serba Dinamik (Not-Rated), in our view, are preferred.

Key beneficiaries. Undoubtedly, Dialog will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure in tank terminal business in PDT, PLNG2, EPCC and maintenance services. We will also see PCHEM (HOLD; TP: RM9.74) adding its existing capacity by another 1.78m mtpa or 14% by 2H19 with the completion of petrochemical plants. Further diversification opportunities into derivatives and specialty chemicals may be new catalyst to PCHEM on the back of strong balance sheet (net cash position of RM9.4bn as of 3Q18).

Source: Hong Leong Investment Bank Research - 20 Feb 2019