We attended CCM’s 1H19 briefing. Vinyl netback has resulted in softer than expected caustic soda prices. Run rates remain handsome, whilst volume growth resulted in market share increases for chlor-alkali products YoY. A 50% capacity increase slated for 4Q19 remain on the cards and will drive earnings growth moving forward. Maintain BUY and TP of RM2.58.

We attended the 1H19 briefing hosted by Pn. Nik Fazila (CEO) and team. We left feeling more upbeat despite the less sanguine results posted yesterday. The following are the major key take-away from the briefing.

Recap. CCM reported 1H 19 core PATAMI of RM8.8m (-57.3% YoY) which we were softer than expected. The deviations stems from the persistently soft ASP for caustic soda (-31% YoY) vs. our forecast assumptions. The soft caustic soda ASP is a function of (1) jitters from the trade war and (2) integrated NEA vinyl manufacturers taking advantage of the vinyl-netback.

Vinyl Netback. Currently, the price of vinyl is on upward trend but the price of ethylene is low. For an integrated vinyl chain players (i.e. both Chlor Alkali + PVC manufacturers), to take advantage of this situation, they have ramped up production of chlor-alkali as they need chlorine as a feedstock for vinyl production. This has resulted in excess caustic soda being produced - creating a long position (i.e. excess) in the near term. Note that due to this, many chlor-alkali plants in NEA are running beyond their statutory shutdown periods – which we understand has been pushed back to later in CY19.

Run rate and market share. Run rates continue to remain high across all their major plants in 1H19; (i) PGW2- Chlor Alkali 99.3%, (ii) PGW-3 Coagulant 88.2%, Polymers (coatings and cleaners) 98%-99.3%. Note that despite the softer chlor-alkali prices, volumes increased +15% to +42% across its chlor-alkali product range YoY, which has resulted in market share increasing for caustic to 43% (+7ppts YoY) and chlorine to 35% (+9ppts YoY).

PGW1. Management had earlier guided that PGW1 would have commissioned by August, however the well documented chemical accidents in Pasir Gudang and an industrial accident by their sub-contractor resulted in the city council issuing a stop work order which has delayed commissioning to end 3Q19/ early 4Q19.

Outlook. We continue expect an improved 2H19 on the back of (1) PGW1 reactivation – replacing c.28% of domestic imports (2) the commencement of contributions from RAPID, which should kick in by 4Q19 earliest and (3) higher volumes moved domestically on the anticipation of no bans on heavy vehicles due to festivities. In 2020 CCM will also be increasing its cleaner’s capacity by c.50% (to 13,500k MT/pa). Cleaners are a high margin product used to clean ceramic formers used in glove manufacturing.

Forecast. Unchanged.

Maintain BUY, TP: RM2.58. Maintain BUY and TP of RM2.58. Our TP is a function of FY20 EPS of 19.9 sen pegged to a PE multiple of 13x. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex. We advise investors to look beyond the recent set of weak results as PGW1 reactivation should drive earnings growth in late FY19 and beyond.

Source: Hong Leong Investment Bank Research - 30 Aug 2019